FORTRESS GROUP INC
10-K/A, 1998-02-19
GENERAL BLDG CONTRACTORS - RESIDENTIAL BLDGS
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   -----------
   
                                   FORM 10-K/A
                                AMENDMENT NO. 1
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
    
    For the fiscal year ended December 31, 1996  Commission file number 0-28024

                            THE FORTRESS GROUP, INC.
             (Exact name of registrant as specified in its charter)

                                   -----------

             Delaware                                         54-1774977
  (State or other jurisdiction of                          (I.R.S. Employer
   incorporation or organization)                         Identification No.)
   
  1650 Tysons Boulevard, Suite 600, McLean, Virginia             22102
    (Address of principal executive offices)                   (Zip Code)
    
            Registrant's telephone number, including area code: (703) 442-4545

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

                                      NONE

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

                          Common Stock, par value $.01

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

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

         Aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 10, 1997 was $21,364,488.

         As of March 10, 1997, 11,746,075 shares of the Registrant's Common
Stock, $.01 par value per share, were outstanding.

                       Documents Incorporated By Reference

         Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference into Part III hereof, from the registrant's proxy
statement, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year covered by this Form 10-K,
and certain documents are incorporated by reference into Part IV hereof.



<PAGE>


                                     PART I

Item 1.  Business

Introduction

     The Fortress Group, Inc. (the "Company" or "Fortress") is a national
homebuilding company engaged in designing, building and selling single family
homes in the metropolitan areas surrounding a diversified group of cities in the
United States. The Company offers high-quality, innovative homes, targeting a
diverse range of market segments including the first-time, entry-level buyer,
move-up buyer and executive/luxury home buyer. The Company markets a wide range
of single family detached and attached homes ranging in size from 1,000 square
feet to 5,500 square feet at prices ranging generally from $70,000 to $800,000.

     The Company was formed in June 1995 to create a national homebuilding
company through the simultaneous acquisition of four homebuilding companies and
an initial public offering of the Company's equity and debt securities (the
"Offerings"). The acquisitions and the Offerings were completed in May 1996. The
acquired companies became wholly-owned subsidiaries of Fortress and as a group
are referred to as the Combined Predecessor Companies or the Founding Builders.
Substantially all of the former owners of the Founding Builders remain as senior
managers of the Company. Each of the Founding Builders continues to be operated
locally under its original name. In 1996, subsequent to closing on the
acquisitions and the Offerings, the Company acquired two additional homebuilding
companies; a third company was acquired in February 1997.

     The Company's homebuilding operations are currently conducted in the
following market areas:

STATES                                            MARKET AREAS

Arizona                                           Tucson
Colorado                                          Denver, Fort Collins
Florida                                           Jacksonville
Nevada                                            Las Vegas
North Carolina                                    Raleigh-Durham, Wilmington
South Carolina                                    Myrtle Beach
Texas                                             Austin, San Antonio
Wisconsin                                         Janesville, Madison, Milwaukee


Operating Strategy

     The Company believes it is positioned for continued success in the
homebuilding industry because of (i) its established operations in attractive
housing markets; (ii) its ability to enhance profitability through an improved
capital structure and certain operating synergies; (iii) its management
expertise both in homebuilding generally and its specific target and geographic
markets; (iv) diversification of its geographic markets and products; (v) its
conservative land acquisition policies; and (vii) its ability to expand both
within its existing markets and through acquiring other local homebuilding
companies located in other strong housing markets.

     Strong Market Positions in Attractive Housing Markets. The Company believes
that it operates in some of the most attractive housing markets in the nation.
Generally, the metropolitan areas where the Company conducts operations have
experienced unemployment rates below the national average and population growth
rates in excess of the national average for the past five years. Additionally,
the Company believes that population and employment growth, as well as housing
starts, will continue at levels above the national average through the year
1999. The Company believes that each of its local operations has developed a
reputation within its respective market as a quality homebuilder with desirable
products. Each local operation has targeted one or more specific niches within
its market and has developed products which specifically target its customers.

<PAGE>

As a result, the Company believes that each of its local operations has
established strong positions within its market.

     Reducing the Risk of Cyclicality Through Geographic and Product
Diversification. In addition to focusing on growth markets, the Company's
overall strategy also relies on the geographic diversification of its existing
markets. Since local housing markets are cyclical and cycles depend, in part, on
local and regional conditions, the Company believes that by operating in 11
distinct geographic markets it is less subject to the effects of local and
regional economic cycles than homebuilders that operate in a single geographic
market. Additionally, the Company believes that its product diversification
(which generally range in sales price from $70,000 to $800,000) and diversity of
niche markets (which range from young families to "empty-nesters") also reduce
risk in the event that existing national factors, such as interest rates,
inflation, the general state of the economy or tax legislation, detrimentally
affect particular income levels or demographic groups.

     Enhancing Profitability Through Improved Capital Structure and Operating
Synergies. Management expects that the reduced cost of capital provided by the
Offerings and future financing will directly contribute to the Company's
profitability by reducing its subsidiaries' average financing cost. The
Company believes that the financial strength of its local operations, coupled
with the application of the proceeds from the Offerings and future financing,
has enhanced the Company's competitive position, substantially reduced its
overall costs associated with land acquisition and project construction, and
provided the necessary capital to employ its strategies for expansion.

     Although the Company's most significant services and commodities are
obtained on a local level, management believes that the Company's overall size
and strength of operations will enable it to secure favorable terms from certain
suppliers by purchasing in volume such items as appliances, plumbing fixtures
and floor coverings. The Company also believes by integrating the administrative
functions of each local operation, the Company will realize both cost savings
and enhanced efficiency through the centralized management of insurance
policies, employee benefits and certain other administrative functions.
Additionally, the Company believes that each of its local operations can
significantly benefit by understanding and employing those practices, policies
and strategies, such as a market analysis, costing procedures and quality
control, that have contributed to the success of the Company's other local
operations.

     Combining Decentralized Operations with Experienced Management. The Company
was founded on the belief that the homebuilding industry is localized and
therefore homebuilders are most successful when managed by experienced and
cycle-tested local managers who have developed in-depth market knowledge and
strong local relationships. The Company believes that the senior management of
each of its local operations has in-depth knowledge of the local markets where
operations are conducted, thereby enabling the Company to better serve its
customers and maximize each local operation's profitability. The senior
management overseeing the Company's centralized corporate operations has over
100 years of combined experience in the national homebuilding industry and is
responsible for formulating and implementing the Company's policies and
procedures designed to make the operating subsidiaries achieve profitability and
growth goals. The Company has implemented centralized financial controls and
cash management policies as well as comprehensive planning and reporting systems
that require approval by the corporate senior management team of, among other
items, all projects and material capital commitments.

     Limiting the Company's Exposure to Real Estate-Related Risks. Management
attempts to minimize risks associated with land ownership and to maximize return
on invested capital by deferring, to the extent practical, substantial
investment in land until the later phases of the land development and
construction process. The Company attempts to control a two- to four-year supply
of lots based on its expected absorption rates. In some markets, the Company
generally acquires fully developed lots pursuant to options or purchase
contracts in quantities sufficient to satisfy near-term demands. In other
markets, the Company strives to control undeveloped land (through options or
contingent purchase contracts) through most of the zoning and land development
process, closing on such land as close as possible to the start of home
construction. See "Business--Land Acquisition and Development." These
acquisitions are generally limited to smaller tracts of entitled land that will
yield 25 to 100 lots when developed. By limiting its land acquisitions and

<PAGE>

development activities generally to smaller parcels of land, the Company reduces
the financial and market risks associated with owning land during the
development period.

     Increase Market Share in Existing Markets. One of the Company's goals,
subject to existing market conditions, such as the availability and cost of
developable land, is to accelerate growth in the Company's current markets
through the improved access to capital provided by the financial strength of the
Company. The Company believes that each of its current markets has a strong
economy and will provide certain opportunities for expansion. Most of the
Company's existing markets encompass broad metropolitan areas surrounding major
cities which have an extremely fragmented homebuilding industry. The Company
believes that its improved access to capital will directly enable each local
operation to pursue additional land acquisitions, have more communities under
development and increase its backlog for future home sales. The Company believes
that such internal expansion can be done conservatively while improving the
Company's financial performance.

     Growth by New Markets and Acquisitions. Depending on existing market
conditions, the Company intends to enter into one or more new markets each year.
Recognizing the highly fragmented nature of the homebuilding industry, the
Company intends to utilize an acquisition program whereby it will acquire
established, local homebuilding companies that operate in new markets. The
Company believes that it will be an attractive acquirer of other local
homebuilding companies due to (i) the benefits afforded by being a part of a
national, public homebuilding company, including an enhanced ability to compete
in the local market through the Company's financial strength and improved access
to capital; (ii) the Company's decentralized management strategy, which will
enable existing local management to continue to oversee their local operations;
and (iii) a team of senior executives with over 100 years of combined experience
in the homebuilding industry who are responsible for all centralized Company
operations and will be available to provide operational support and advice on an
as-needed basis. In most instances, the Company expects to retain the
management, employees and name of the acquired company while seeking to improve
the acquired company's profitability by implementing the Company's business
strategies and providing improved access to capital.

     In the event such new markets are in close proximity to one or more of the
Company's existing markets, the expanded operations may be conducted under the
management of the Company's existing operations currently operating in that
area. Management believes that such expansion will provide the Company with
valuable synergies and economies of scale which will increase the profitability
of the local operation overseeing operations within the new market. The Company
intends to reduce its risk when entering such new markets by thoroughly
developing a marketing and overall strategy prior to commencing operations,
acquiring land in a conservative manner and upon favorable terms and hiring
local management who has developed an expertise in the marketplace.

     While the Company intends to make acquisitions which are accretive to
earnings, there can be no assurance that any companies acquired in the future
will be beneficial to the successful implementation of the Company's overall
business strategy, or that such companies will ultimately produce returns that
justify the investment therein. In addition, there can be no assurance that the
Company will be able to profitably manage additional companies or successfully
integrate such additional companies into the Company.

     The Company currently intends to finance future acquisitions by using
available cash resources and shares of the Company's stock. The potential target
companies' willingness to accept the Company's stock as part of the purchase
price, as well as the availability of cash resources, will impact the Company's
ability to continue its acquisition program. The Company's growth through
acquisitions could be limited unless it can obtain the necessary funds through
additional equity or debt financing.


<PAGE>


Markets and Products

   Overview

     The Company's operations serve the metropolitan areas surrounding the
following cities: Raleigh-Durham and Wilmington, North Carolina; Myrtle Beach,
South Carolina; Austin and San Antonio, Texas; Las Vegas, Nevada; Denver and
Fort Collins, Colorado; Tucson, Arizona; Janesville, Madison and Milwaukee
Wisconsin, and Jacksonville Florida. The Company believes that each of these
areas represents an attractive homebuilding market with significant opportunity
for growth. The Company also believes that each of its local operations is well
established in its market and has developed a reputation for building quality
homes at competitive prices. The Company maintains the flexibility to tailor its
product mix within a given market depending upon market conditions including
demographic trends, demand for a particular type of product, margins, timing and
the economic strength of the market.

Raleigh-Durham, North Carolina

     Raleigh is the state capital of North Carolina. The state government and
the three major universities located in the area provide stable employment
throughout the region. Employment growth in the region has been fueled by the
high technology industry operating in and around the area's "Research Triangle."
The Company believes that it is well positioned in the Raleigh-Durham market as
the third largest homebuilder in the area based on number of units sold and
among the top three homebuilders in the area based on total dollar volume of
sales. The Company's North Carolina operation builds high quality, innovative,
single-family detached and attached homes that range in sales prices from
approximately $115,000 to approximately $350,000 and targets entry-level and
first- and second-time move-up buyers and retirees. Depending on the opportunity
available within each community, the Company will either develop land which it
controls under option or contract or purchase developed lots from developers or
other homebuilders. As of December 31, 1996, the Company controlled
approximately 1,900 optioned lots (including land anticipated to be subdivided
into lots) in the Raleigh-Durham area for new home construction. The Company's
Raleigh operation was named the fastest growing company in the Research Triangle
Area in November 1995 and the Triangle Sales and Marketing Council's 1990 and
1994 "Builder of the Year." The Company's North Carolina operation was also
selected as the Raleigh-Wake County Homebuilder's Association's "Builder of the
Year" in 1992 and 1995.

Austin, Texas

     Austin is the state capital of Texas. The state government and the
University of Texas provide stability to the region's employment base. Many of
the trends in employment growth in the region have been fueled by the
significant growth in the high technology industry operating in the Austin area.
The Company has offices located in Austin and San Antonio, Texas and conducts
operations in both of these metropolitan areas. As of December 31, 1995, the
Company's Texas operation was the third largest homebuilder in Austin based on
total number of permits issued. Since its inception, the Company's Texas
operation has closed the sale of over 2,500 homes in the Austin area. This local
operation offers primarily single family detached homes to entry-level and
first- and second-time move-up home buyers that generally range in sales price
from $75,000 to approximately $250,000. This operation generally controls a
significant number of lots, which it purchases after the lots are developed and
available for the commencement of home construction. As of December 31, 1996,
the Company controlled, through options, a supply of optioned lots for the
construction of 815 homes in the Austin area. The Company's Texas operation has
recently been recognized by the National Association of Home Builders,
Professional Builder magazine, and the Texas Capitol Area Builders Association
for outstanding performance in product design and construction, interior
merchandising, management, and marketing. The Company's Texas operation was
recently awarded the Diamond Builder Award by Home Buyers Warranty for
excellence in residential construction and customer satisfaction.


<PAGE>


San Antonio, Texas

     The Company entered the San Antonio market in September 1993 after
extensive market and demographic research and offers primarily the same type of
product as is sold in Austin. The Company's office in Austin handles the
administrative functions for its San Antonio operation. The Company believes
that it is well positioned to take advantage of the dynamic growth in the San
Antonio area housing market in the near and long term. As of December 31, 1996,
the Company controlled, through options, a supply of optioned lots for the
construction of 160 homes in the San Antonio area.

Las Vegas, Nevada

     Las Vegas has experienced strong growth in employment and in-migration due
to the growth in the tourism and entertainment industries fueled by the gaming
industry. The Las Vegas economy also benefits by the growth in retirement living
due to the lower cost of living, including lower housing costs and state taxes.
Based on total dollar volume of homes sold, the Company is one of the largest
homebuilders in the Las Vegas area competing in the luxury homebuilding market.
The Company's Las Vegas operation specializes in the construction of homes in
masterplanned communities which are self-contained, pre-planned communities
consisting of governmental, commercial and residential areas, schools, parks and
various other amenities such as swimming pools and golf courses. The Company
believes that such masterplanned communities will continue to gain market share.
Specifically, the Company's Las Vegas operation constructs single family
detached and attached homes (with many of its communities located on golf
courses) that range in sales price from approximately $180,000 to approximately
$800,000, and targets luxury second- and third-time (or higher) move-up and
second home buyers. The Company generally controls partially developed land
which, as part of the masterplanned community, is fully entitled, and develops
the land into finished lots ready for home construction. As of December 31,
1996, the Company controlled approximately 58 optioned lots in the Las Vegas
area for new home construction and lot sales. The Company's Las Vegas operation
has received a number of awards for excellence in the homebuilding industry
including the "Builders Spotlight Business Excellence Award" in 1993 from
Builder magazine (January 1993 issue) as one of "America's Best Builders" and a
number of national and local design awards.

Denver, Colorado

     The Denver economy is diversified and fueled by a wide range of industries
including financial services, telecommunications and technology services. The
Company believes it is well positioned in this market as one of the top fifteen
homebuilders in the Denver area based on the total dollar volume of homes built.
The Company's Colorado operation offers a wide range of affordably priced,
single family detached custom and semi-custom homes and single-family attached
homes that range in sales price from approximately $130,000 to $350,000 and
targets all move-up and custom home buyers. The Company's Colorado operation has
successfully established its reputation as a "custom builder," offering move-up
buyers an opportunity to acquire homes with features that meet their lifestyle
expectations by either customizing their home or selecting from a wide variety
of upgrades and options. The Company's Colorado operation currently conducts
homebuilding operations in the Denver area, Fort Collins, Colorado and Tucson,
Arizona and has a land development project in Oakland County, Michigan. Although
the Company generally develops land in the Denver area, it has, from time to
time, acquired developed lots in Tucson if a favorable price was obtained. As of
December 31, 1996, the Company controlled approximately optioned 121 lots in the
Denver area for new home construction and lot sales. In January 1995, the
Colorado operation was selected as the winner of the "Gold Medal" by Builder
magazine as the country's "Best Builder," constructing 100 to 500 homes. In
1996, Bob Short, President of the Company's Colorado operation, was awarded
"Builder of the Year" by the Metropolitan Denver Home Builders Association.


<PAGE>


Fort Collins, Colorado

     Fort Collins is the home of Colorado State University. The University and
the related service business provides the local economy significant stability in
employment. The Company's Fort Collins division is ranked as the number one
builder in the area based on the dollar volume of sales. This division offers
products comparable to those offered in the Denver area, selling single-family
detached homes targeting move-up and custom home buyers that range in sales
price from approximately $130,000 to approximately $350,000. As of December 31,
1996, the Company controlled approximately 107 optioned lots in the Fort Collins
area for new home construction and lot sales.

Tucson, Arizona

     This division has been recently recognized by the local Homebuilders
Association as "Custom Builder of the Year." This division also offers a wide
range of products architecturally designed in the southwestern style targeted at
all move-up and custom home buyers that range in sales price from approximately
$170,000 to approximately $350,000.

Wilmington, North Carolina

     The Wilmington economy is driven by a wide range of industry including
manufacturing, tourism, retirement living, and the University of North Carolina
at Wilmington. The Company entered the Wilmington market in August 1996 by
virtue of its acquisition of the largest homebuilding company in southeastern
North Carolina. This operating subsidiary, founded in 1988, builds single family
and attached homes, and targets entry, move-up, and luxury homebuyers. Sales
prices range from approximately $98,000 to $200,000. As of December 31, 1996,
the Company controlled approximately 549 optioned lots in the Wilmington area
for new home construction.

Myrtle Beach, South Carolina

     The Company's Wilmington-based subsidiary has recently entered the Myrtle
Beach market. The Company is currently building its first community. Myrtle
Beach has traditionally been a tourism destination due to the proximity to the
beaches along the Atlantic Ocean and numerous recreational activities including
golf, tennis, and boating. These recreational activities have also made Myrtle
Beach a desirable retirement destination. The recent growth in the entertainment
industry in Myrtle Beach, coupled with the overall growth in tourism continues
to drive the growth in employment in the area.

     New Markets for the Company:

     Janesville/Madison/Milwaukee Wisconsin subsidiary acquired December 31,
       1996.

     Jacksonville, Florida subsidiary acquired February 28, 1997.

     The following table presents information relating to the Company's new
orders, closings, and backlog at year-end for the years ending December 31, 1995
and 1996. The Wilmington market was entered into on August 31, 1996, however the
results below include activity for the entire year for the Wilmington market.


<PAGE>

<TABLE>
<CAPTION>



Market                              New Orders         Closings         Backlog
- ------                              ----------         --------         -------
                                   1995    1996     1995     1996     1995    1996
                                   ----    ----     ----     ----     ----    ----
<S>                                <C>      <C>        <C>    <C>       <C>     <C>
Raleigh-Durham, NC                   244      274      251      268     103     109
Austin, TX                           487      567      407      596     170     141
San Antonio, TX                       40       87       32       79      14      22
Las Vegas, NE                        109       80       89      121      62      21
Denver, CO                           134      225      130      198      88     111
Fort Collins, CO                      60       63       64       60      17      20
Tucson, AZ                            26       32       25       22       5      15
Wilmington, NC                       N/A      174      N/A      181     N/A      55
Janesville/Madison/Milwaukee, WI     N/A      N/A      N/A      N/A     N/A      18
                                   -----    -----      ---    -----     ---     ---
         Total                     1,100    1,502      998    1,525     459     512
                                   =====    =====      ===    =====     ===     ===

</TABLE>

Land Acquisition and Development

     The Company's policies and strategies regarding land acquisition and
development vary and are dictated by the specific market conditions where the
Company conducts its operations. Overall, the Company's land acquisition and
development practices include (i) acquiring and exercising options to purchase
finished lots; (ii) purchasing finished lots; (iii) controlling (by option or
conditional sales contract) fully entitled land; (iv) securing options to
purchase land, which options are subject to the seller obtaining required
entitlements; and (v) in some instances, controlling raw land and assuming the
cost of obtaining the necessary entitlements. Generally, the Company seeks to
minimize its overall land costs and the risks associated with developing
unentitled land by, whenever possible, using options and other financing
arrangements that allow the Company to control land through the entitlement
process but defer the payment for such land until the entitlement process has
been completed and the Company is prepared to commence construction. In these
situations, the Company strives to negotiate land purchase contracts that allow
the Company to purchase portions of a parcel as close as possible to the
commencement of construction.

     Typically, the Company purchases land only after necessary entitlements
have been obtained so that the Company has certain rights to begin development
or construction as market conditions dictate. In some instances, however, the
Company controls unentitled land where the Company perceives an opportunity to
build on such property in a manner consistent with the Company's overall
strategy. The term "entitlements" refers to development agreements, preliminary
maps or recorded plats, depending upon the jurisdiction within which the land is
located. Entitlements generally give the developer the right to obtain building
permits upon compliance with conditions that are usually within the developer's
control. Even after entitlements are obtained, the Company is still required to
obtain a variety of other governmental approvals and permits during the
development process.

     The Company selects land for development based upon a variety of factors,
including (i) internal and external demographic and marketing studies; (ii)
financial review as to the feasibility of the proposed project, including
projected profit margins, return on capital employed and the capital payback
period; (iii) competition for the proposed project; (iv) the ability to secure
governmental approvals and entitlements; (v) results of environmental and legal
due diligence; (vi) proximity to concentrated job markets, quality school
districts and local traffic corridors; (vii) infrastructure requirements for
grading, drainage, utilities and streets; and (viii) management's judgment as to
the real estate market, economic trends and the Company's experience in a
particular market.

     To control its investment in land and land acquisition costs, the Company
utilizes option arrangements or conditional purchase contracts as often as
possible. These arrangements generally provide the Company with either the right
to pursue the entitlement process directly or the right to direct the seller in
its pursuit of entitlement and obligate the Company to take title to the land
only when specified conditions relating to entitlements (such as a minimum
density) have been obtained. Once the entitled land is purchased (or
entitlements are obtained on previously unentitled land), the Company
undertakes, where required, the development activities that include site


<PAGE>


planning and engineering, as well as constructing road, sewer, water, utilities,
drainage and recreational facilities and other amenities.

     Due to the ready supply of finished lots in the Austin, San Antonio, and
Wilmington markets, the Company's home building operation purchases finished
lots from land developers using rolling options which typically require that a
specified number of lots are purchased each quarter. Failure to purchase the
specified number of lots can result in the loss of the options scheduled for
subsequent quarters. Although the Company's operations in Denver,
Raleigh-Durham, and Milwaukee-Madison also utilize rolling options on finished
land where appropriate, each of these markets also provide the Company with
significant opportunities to purchase undeveloped land and invest the time and
resources into obtaining all necessary entitlements and developing the land
itself. In these situations, the Company (i) realizes greater returns on its
investment in land due to the significant value that is added once entitlements
are obtained and the land is fully developed; (ii) is provided with a greater
degree of involvement and control over the design and development process; and
(iii) continues to minimize risk and capital investment since the purchase is
not consummated until all necessary entitlements are obtained.

     Unlike the markets that exist in Austin, San Antonio, Raleigh-Durham and
Denver, the Company's strategy in Las Vegas is to build in masterplanned
communities with homesites that are along, or close in proximity to, the major
amenity which is generally a golf course. These masterplanned communities are
designed and developed by a major land developer who develops groups of lots,
commonly referred to as "super pads," which are sold to a single homebuilder.
The Company typically purchases super pads containing between 60 and 100 fully
entitled lots which are roughly graded and have all utilities and paving brought
up to the boundaries of the super pad. The Company completes the development of
each super pad by completing paving, final grading and installing all utilities.
Similar to when the Company purchases raw land, the Company achieves enhanced
profitability while minimizing the risk of holding excess land inventory.

     The Company (through its local operations) has occasionally used
partnerships or joint ventures to purchase and develop land where such
arrangements were necessary to acquire the land or appeared to be otherwise
economically advantageous to the Company. The Company will continue to consider
such partnership, joint venture and other financing arrangements with landowners
where management perceives an opportunity to acquire land upon favorable terms,
minimize risk and exploit opportunities presented through seller financing.

     The Company strives to develop a design and marketing concept for each of
its communities based on the specific geographic and target market, which
includes determination of size, style, price range of homes, layout of streets,
size and layout of individual lots and overall community design. The development
and construction of each project are managed by the Company's local operations.
At the development stage, a project manager (who may be assigned to several
ongoing projects) supervises the development of buildable lots. In addition,
project superintendents are often utilized depending on the size of the
development, and each local operation has one or more customer service and
marketing representatives assigned to its communities.

     At December 31, 1996, the Company owned 1,173 finished lots and
undeveloped, or partially developed, land which the Company expects will be
developed into an estimated 178 additional finished lots. As of December 31,
1996, the Company also had under contract or option, subject to the satisfaction
of the Company's purchase contingencies, 4,262 finished, undeveloped or
partially developed lots. The determination of the number of lots to be
available from undeveloped land are estimates based on management's experience
within the relevant jurisdiction and the status of the entitlement process as of
December 31, 1996. The actual number of lots ultimately available may vary
materially based on a variety of factors. The following table sets forth, by
state, the Company's inventory of owned and controlled land as of December 31,
1996.


<PAGE>


                                December 31, 1996
                                -----------------

                           Land Owned  
                      ---------------------    
                               Undeveloped  Land Under
                     Finished      Lots      Contract/
                       Lots     (estimated)   Option     Total
                       ----     -----------   ------     -----
Wisconsin               227          0           552       779
Texas                   164          0           975     1,139
Nevada                  257          0            58       315
Arizona/Colorado        449         77           228       754
North Carolina           76        101         2,449     2,626
                      -----        ---         -----     -----
                      1,173        178         4,262     5,613
                      =====        ===         =====     =====

Construction

         The Company's subsidiaries act as the general contractor for the
construction of its homes and development of finished lots. The Company's
project development operations are also controlled by its local operations,
whose employees oversee the construction of each community, including
coordinating activities of subcontractors and suppliers and insuring that all
work is subject to quality and cost controls and complies with zoning and
building codes. Subcontractors typically are retained on a subdivision-by-
subdivision basis to complete construction at a fixed price. Agreements with the
Company's subcontractors and materials suppliers are generally entered into
after competitive bidding on an individual basis.

         The Company specifies that quality, durable materials be used in
constructing the Company's homes. The Company does not maintain significant
inventory of construction materials. Each of the Company's local operations
maintains close contact with its respective subcontractors and suppliers and the
Company believes that its relationship with its suppliers and subcontractors are
good. When possible, the Company negotiates price and volume discounts with
manufacturers and suppliers on behalf of subcontractors to take advantage of its
volume of production. Although the Company generally has made no long-term
purchase commitments to materials suppliers in the past, and although certain
key materials and supplies are, and will continue to be, purchased at
local/regional levels, the Company negotiates contractual terms with certain of
its vendors to provide additional cost savings on a national basis. Generally,
access to the Company's principal subcontracting trades, materials and supplies
continue to be readily available in each of its markets; however, prices for
these goods and services may fluctuate due to various factors, including supply
and demand shortages which may be beyond the control of the Company or its
vendors.

     Although policies may differ within each local operation and by project,
the Company generally provides a one-year limited warranty of workmanship and
materials with each of its homes. The Company's subcontractors generally provide
the Company with an indemnity and a certificate of insurance prior to receiving
payments for their work and therefore, claims relating to workmanship and
materials are usually the primary responsibility of the Company's
subcontractors. Historically, the Combined Predecessor Companies have not
incurred any material costs relating to any warranty claims or defects in
construction.

Sales and Marketing

     Each of the Company's subsidiaries are directly responsible for the sales
and marketing activities relating to each of their completed and planned
communities. The Company makes extensive use of advertising and other
promotional activities, including newspaper advertisements, brochures, direct
mail and the placement of strategically located sign boards in the immediate
areas of its developments. The Company believes that each of its local
operations has an established reputation for developing high quality homes in
the markets they serve, which helps generate interest in each new project.

     The Company believes that the effective use of model homes plays an
integral part in demonstrating the competitive advantages of its home designs
and features to prospective home buyers. The Company generally builds between
one and six model homes for each active community, depending upon the


<PAGE>


number of homes to be built within each community and the products to be
offered. Each of the Company's local operations generally employs, or contracts
with, interior designers who are responsible for creating an attractive model
home for each product line within a project designed to appeal to the
preferences of potential home buyers.

     The Company's objective is to enter into sales contracts for all of its
homes in advance of construction, thereby reducing the risk of unsold inventory
upon completion of a project. From time to time, depending on market conditions
and the specific project, the Company may build speculative homes in each of its
entry-level and move-up subdivisions. Speculative homes are homes which are
under construction or completed but for which the Company does not yet have
sales contracts. These homes are often sold while under construction or soon
after completion. The Company carefully reviews local market factors, such as
new employment opportunities, significant job relocations and growing housing
demand in determining how many speculative homes to build and keep in inventory.
The construction of such homes is often necessary to supply homes to individuals
who are relocating or to satisfy the requirements of independent brokers, who
often represent customers who require a completed home within a short time
period. The Company's sales contract for its homes generally provide for
mortgage approval within a specified period. The Company attempts to minimize
cancellations by requiring a nonrefundable cash deposit of on average 5% to 10%
of the purchase price for buyers using conventional financing and by training
its sales force to assess the qualification of potential home buyers.

Backlog

     The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes sold in 1996 were sold
pursuant to standard sales contracts entered into prior to commencement of
construction. Such sales contracts are usually subject to certain contingencies
such as the buyer's ability to qualify for financing. Homes covered by such
sales contracts are considered by the Company as its "backlog." As of December
31, 1996, the Company had backlog of $96 million (512 homes) and as of December
31, 1995, the Founding Builders had backlog of $97 million (459 homes). The
Company does not recognize revenue on homes covered by such contracts until the
sales are closed and the risk of ownership has been legally transferred to the
buyer.

Customer Financing

     Prior to 1997, the Company did not provide customer financing to its home
buyers. Rather, at each on-site office, sales employees provided prospective
home buyers with information as to the qualifying criteria for mortgage
financing. Either a mortgage lender was typically made available at the sales
offices to assist prospective buyers in applying for mortgage financing or the
Company acted as a mortgage broker and received a brokerage fee once the loan
was originated.

     In January 1997, the Company created a wholly-owned subsidiary, Fortress
Mortgage, Inc., for the purpose of providing decentralized mortgage origination
and centralized underwriting to the buyers of homes sold by the Company's
subsidiaries. Fortress Mortgage, Inc. is approved by the Federal Housing
Administration ("FHA") and Veterans Administration ("VA") as a qualified
mortgage lender. The Company facilitates the sale of the Company's homes through
the origination of first mortgage loans utilizing programs established by FHA,
VA, GNMA (Government National Mortgage Association) and FHLMC (Federal Home Loan
Mortgage Corporation). As a mortgage banker, this operation will complete the
processing of loan applications, perform credit checks, process applications to
underwrite loans and originate and thereafter sell the mortgage loans

     Due to the sales prices of homes, the Colorado, Arizona and Las Vegas
operations do not rely on home buyers who seek FHA and VA mortgage financing.
However, the majority of the homes sold by the Company's Texas and Wisconsin
operations and a significant number of the homes sold by the Company's North
Carolina operation met the dollar limits published in FHA and VA guidelines. FHA
and VA financing generally enables home buyers to purchase homes with lower down
payments than the down payments required by conventional mortgage lenders,
allowing a purchaser to borrow up to 90% to 95% of the value of the home. The
Company


<PAGE>


believes that, when conventional lending rates are higher, the availability of
FHA and VA financing broadens the group of potential purchasers for the
Company's homes. Substantially all home buyers 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 monthly mortgage payment
plus insurance and property taxes. As a result, economic conditions, increases
in unemployment and high mortgage interest rates can eliminate a number of
potential home buyers from the market.

Corporate Operations

     The Company's centralized corporate operations generally oversee all of the
Company's local operations. The holding company's senior management has over 100
years of combined national homebuilding experience. This senior management is
primarily responsible for formulating and implementing the Company's policies
and procedures to ensure the cohesiveness and direction of its local operations.

     Specifically, the Company's senior management (i) reviews and approves
subsidiary capital requirements and requests, short and long range plans,
project acquisition activity, and monitors all operational and financial
performance as it relates to established objectives; (ii) evaluates and selects
geographic markets; (iii) maintains relationships with various institutional
lenders; (iv) performs accounting functions, establishes financial policies and
regularly completes financial analyses both on a consolidated and
subsidiary-by-subsidiary basis; (v) reviews and approves subsidiary capital
requirements, short- and long-range plans, and land acquisition activity and
monitors performance in regard to these activities; and (vi) secures and obtains
capital resources. The corporate operations also provide for and encourage the
flow of technical information and ideas among the senior management of its local
operations.

     In fulfilling the duties set forth above, the senior management developed a
Comprehensive Planning System whereby each local operation is required, among
other things, to prepare an annual plan for the upcoming fiscal year, a
three-year plan which is updated and revised each year and a project feasibility
analysis for all land acquisitions. The annual plan includes a thorough review
and analysis of the previous fiscal year, monthly detailed projections of all
revenue and expenses, financial ratio projections such as return on assets and
inventory turnover and operational changes to be instituted in the coming year.
The three-year plan insures that the local managers continue to (i) plan for
potential changes in their respective geographic and target markets; (ii)
evaluate the present and future competition; and (iii) seek opportunities to
further improve their operations. The project feasibility analysis, which is
prepared by the local managers, is reviewed and approved before any land or lot
acquisition is consummated. This pre-designed analysis requires the local
managers to provide senior management with a myriad of information and
projections such as a subdivision plan, product type, projected absorption
rates, completion time, market analysis and rate of return ratios. The senior
management ensures that the information presented in the project feasibility
analysis satisfies the Company's established minimum criteria before a capital
investment is approved.

     The Company allocates the necessary capital resources for new communities
consistent with its overall strategy and utilizes anticipated return on capital,
return of capital and profit margins as criteria for allocating capital. In
addition to establishing certain pre-determined targets, the Company establishes
its capital allocation policies based on the existing market, results of
operations and other factors. All capital commitments are determined by the
Finance Committee and the Project and Feasibility Review Committee of the Board
of Directors.

     Structurally, the Company operates through separate subsidiaries, which are
located within the areas in which they operate. Each subsidiary is managed by
executives with substantial experience in the subsidiary's markets. Although
formal approval of new communities are determined by committees of the Board,
each subsidiary is fully equipped with the skills and resources to oversee all
local operations including land acquisition, map processing, land development,
construction, marketing, sales and product service.


<PAGE>


     The Company's corporate office handles all cash management functions for
both corporate and subsidiary funds. Each operating subsidiary provides the
corporate office with a three month cash flow projection by week updated monthly
which allows the Company to efficiently manage its cash position. The Company
utilizes a Comprehensive Reporting System (CRS) in order to ensure the timely
and accurate flow of critical information between each operating subsidiary and
the corporate office. The CRS requires preparation of periodic reports by each
operating subsidiary including weekly sales, closing, traffic and backlog
reports by subdivision. Each operating subsidiary also prepares detailed
financial statements which includes a narrative discussing trends, monthly
performance and budgets.

Customer Relations and Quality Control

     Management believes that strong customer relations and an adherence to
tough quality control standards are fundamental to the Company's continued
success. The Company believes that its commitment to customer relations and
quality control has significantly contributed to its reputation as a quality
builder in each of its local markets.

     Generally, for each development, Company representatives, who may be a
project manager or project superintendent, and a customer relations
representative, oversee compliance with the Company's quality control standards.
These representatives allocate responsibility for (i) overseeing the entire
project from land development through construction; (ii) overseeing performance
by the Company's subcontractors and suppliers; (iii) reviewing the progress of
each home and conducting formal inspections as specific stages of construction
are completed; and (iv) regularly updating each buyer on the progress of their
home.

Competition and Market Factors

     The development and sale of residential property is highly competitive and
fragmented. The Company competes for residential sales with national, regional
and local developers and homebuilders, resales of existing homes and, to a
lesser extent, condominiums and available rental housing. The Company's
competitors include a number of large national and regional homebuilding
companies and small local homebuilding companies, some of which may have greater
financial resources, easier access to capital markets and/or lower costs than
the Company. Competition among both small and large residential homebuilders is
based on a number of interrelated factors, including location, reputation,
amenities, design, quality and price. The Company believes it compares favorably
to other homebuilders in the markets in which it operates due primarily to (i)
its experience within its specific geographic markets which allows it to develop
and offer new products to potential home buyers which reflect, and adapt to,
changing market conditions; (ii) its ability, from a capital and resource
perspective, to respond to market conditions and to exploit opportunities to
acquire land upon favorable terms; and (iii) its respective subsidiaries'
reputation for outstanding service and quality products.

     The homebuilding industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions in general and by job availability and
interest rate levels in particular. A variety of other factors affect the
homebuilding 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. In addition, homebuilders are
subject to various risks often outside of their control, including weather
conditions and natural disasters, construction delays, cost overruns, changes in
governmental regulations, as well as availability and price fluctuations of
land, labor and raw materials.

     The homebuilding industry is also subject to the potential for significant
variability and fluctuations in real estate values. Although the Company
believes the real estate assets currently reflected on the Company balance sheet
are reasonable in amount given the size of the Company's business and are
reflected at or below their fair value, no assurances can be given that
write-downs to the net realizable value of some or all of the Company's assets 


<PAGE>


will not occur if market conditions deteriorate, or that such write-downs,
should they occur, will not be material in amount.

Government Regulations and Environmental Controls

     The Company is also subject to a variety of Federal, state and local
statutes, ordinances, rules and regulations concerning protection of health and
the environment. 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. Prior to purchasing a parcel
of land, the Company's local management evaluates such land for the presence of
hazardous or toxic materials, wastes or substances. The Company generally
engages independent environmental engineers to complete such an evaluation. The
Company has not been materially adversely affected to date by the presence or
potential presence of such materials. However, no assurance can be given that
such a material adverse affect will not occur in the future.

     Whether the Company controls entitled or unentitled land, certain building
and other permits, as well as approvals, are required to complete all
residential developments. The ability of the Company to obtain necessary
approvals and permits for its planned communities is often beyond the Company's
control and could restrict or prevent the development of otherwise desirable
property. The length of time necessary to obtain permits and approvals increases
the carrying costs of unimproved land acquired for the purpose of development
and construction. In addition, the continued effectiveness of permits already
granted is subject to factors such as changes in policies, rules and regulations
and their interpretation and application.

Interest Rates; Mortgage Financing

     Virtually all purchasers of the Company's homes finance their acquisitions
through third-party lenders providing mortgage financing. In general, housing
demand is adversely affected by increases in interest rates, unavailability of
mortgage financing, increasing housing costs and unemployment levels. If
mortgage interest rates increase and the ability of prospective buyers to
finance home purchases is adversely affected, the Company's sales, gross margins
and net income and the market price of the common stock may be adversely
impacted. The Company's homebuilding activities are also dependent upon the
availability and cost of mortgage financing for buyers of homes owned by
potential customers so those customers ("move-up buyers") can sell their homes
and purchase a home from the Company. In addition, the Company believes that the
availability of FHA and VA mortgage financing is an important factor in
marketing a number of its homes. Any limitation or restriction on the
availability of such financing could adversely affect the Company's sales. See
"Business--Customer Financing." Furthermore, changes in Federal income tax laws
may affect demand for new homes. Recently, proposals have been publicly
discussed to eliminate or limit the deductibility of mortgage interest for
Federal income tax purposes and to eliminate or limit tax-free rollover
treatment provided under current law where proceeds of the sale of a principal
residence are reinvested in a new principal residence. Enactment of such
proposals may have an adverse effect on the homebuilding industry in general,
and demand for the Company's products in particular. No prediction can be made
as to whether any such proposals will be enacted and, if enacted, the particular
form such laws would take.

Employees and Subcontractors

     As of December 31, 1996, the Company employed 451 (421 full-time and 30
part-time) persons, including corporate staff and other personnel involved in
sales, construction management and customer service. Although none of the
Company's employees are covered by collective bargaining agreements, many of the
subcontractors and suppliers which the Company engages in various markets are
represented by labor unions or are subject to collective bargaining agreements.
The Company believes that its relations with its employees, subcontractors and
suppliers are good.


<PAGE>


     The Company's operations are dependent on the continued efforts of its
executive officers and on senior management of the Company. In addition, the
operations of each subsidiary are dependent upon the senior management of the
acquired builders. If any of these people become unable to continue in their
present roles, or if the Company is unable to attract and retain other skilled
employees, the Company's business could be adversely affected. See "Business -
Executive Officers of the Company."

Acquisitions

Founding Builders

     Simultaneously with the closing of the Offerings, Fortress acquired each of
the Founding Builders through the merger of each Founding Builder with and into
a newly formed wholly-owned subsidiary of Fortress. The aggregate consideration
paid by Fortress in these transactions was as follows:

            (a) An aggregate of approximately $6.0 million in cash;

            (b) An aggregate of 6,233,875 shares of common stock of the Company,
                representing approximately 53% of the total shares of common
                stock outstanding after giving effect to the Offerings; and

            (c) An aggregate of 20,000 shares of Series A 11% Cumulative
                Convertible Preferred Stock of the Company.

     The consideration paid for the Founding Builders was determined through
arm's length negotiations among the Company and representatives of the Founding
Builders. See "Certain Relationships and Related Transactions."

     The agreements governing each of the acquisitions (the "Acquisition
Agreements") provide piggyback registration rights to the Founding Builders'
owners which allows them to register their shares of common stock under the
federal securities laws, on a pro rata basis, to the extent allowable by the
managing underwriter of such offering, in the event the Company consummates a
"follow-on" offering of the Company's common stock for cash. Additionally, for a
one-year period beginning November 1997, (i) the holders of at least one-third
of the common stock then held by the Founding Builders' owners or (ii) all of
the Founding Builders' owners of a particular Founding Builder who hold shares
of common stock, have a one-time right to require the Company to effectuate a
registration under the federal securities laws of the shares of common stock
held by the Founding Builders' owners which are then available for sale.

     Pursuant to each Acquisition Agreement, the Founding Builders' owners have
agreed not to compete with the Company for two years following the closing of
the acquisitions, within 100 miles of where Fortress, the particular Founding
Builder or any of the other Founding Builders conduct business. The Founding
Builders' owners who are also parties to employment agreements with the Company
have agreed to non-compete provisions which extend for a two-year period after
termination of each respective employment period. The Acquisition Agreement
provides that in the event a Founding Builder owner enters into an employment
agreement with the Company, the terms of the non-compete provisions set forth in
the applicable employment agreement shall control over the noncompetition
provisions set forth in the Acquisition Agreement.

     The acquisition transactions included the following:

          Buffington. Under an acquisition agreement with Thomas Buffington, who
     became a director of the Company upon closing of the Offerings, Edward
     Kirkpatrick and James Giddens, Fortress acquired by merger all of the
     issued and outstanding stock of Buffington. The consideration paid by
     Fortress for Buffington was approximately $1.13 million in cash and
     1,897,897 shares of Common Stock of the Company.


<PAGE>


          Christopher. Under an acquisition agreement with J. Christopher
     Stuhmer, who became a director of the Company upon closing of the
     Offerings, Fortress acquired by merger all of the issued and outstanding
     stock of Christopher. The consideration paid by Fortress for Christopher
     was approximately $179,000 in cash and 1,691,227 shares of common stock of
     the Company.

          Genesee. Under an acquisition agreement with Robert Short, who became
     a director of the Company upon closing of the Offerings, Fortress acquired
     by merger all of the issued and outstanding stock of Genesee. The
     consideration paid by Fortress for Genesee was approximately $695,000 in
     cash, 1,729,495 shares of common stock of the Company and 20,000 shares of
     the Company's Series A 11% Cumulative Convertible Preferred Stock.

          Sunstar. Under an acquisition agreement with Lawrence Witek, who
     became a director of the Company upon closing of the Offerings, Lanold
     Caldwell and David Schmidt, Fortress acquired by merger all of the issued
     and outstanding stock of Sunstar. The consideration paid by Fortress for
     Sunstar was approximately $3,876,000 in cash and 915,256 shares of common
     stock of the Company.

Subsequent Acquisitions

         During 1996, the Company acquired certain assets and assumed related
indebtedness of Landmark Homes, Inc. and Brookstone Homes, Inc. ("Acquired
Companies") on August 31, 1996 and December 31, 1996, respectively. The purchase
price for the assets of the Acquired Companies totaled $6 million in cash and
60,000 shares of common stock with a stated value of $10 per share. The excess
purchase price was allocated first to record inventory at fair value on the
acquisition date; the remaining excess purchase price was recorded as goodwill.
Cost of goods sold for the period May 21, 1996 through December 31, 1996
included $210,000 related to the allocation of the purchase price to inventory.

         In February 1997, the Company acquired the assets of D.W. Hutson
Construction Company ("Hutson"), a Jacksonville, Florida homebuilder, for
approximately $24.7 million to be paid $9.0 million in cash, $1.2 million in
Class B preferred stock and approximately $8.5 million in assumed debt.
Additional consideration of $6.0 million in Class C preferred stock is expected
to be paid over a period not to exceed six years based upon the future
performance of Hutson.

Executive Officers of the Company

         The Executive Officers of the Company are as follows:

Name                     Age    Position
J. Marshall Coleman      54     Chairman of the Board and Director
James J. Martell, Jr.    46     President, Chief Executive Officer and Director
Thomas B. Buffington     52     Chief Operating Officer and Director
Jamie M. Pirrello        38     Vice President and Chief Financial Officer


         J. Marshall Coleman has been a director of the Company since June 1995
and Chairman of the Board since May 1996. From August 1992 through April 1996,
Mr. Coleman was an attorney with Katten Muchin & Zavis, a national law firm, and
was the Managing Partner of its Washington office from 1994 until April 1996.
From 1985 until 1992, Mr. Coleman was an attorney at the Washington, D.C. firm
of Arent, Fox, Kintner, Plotkin and Kahn. Mr. Coleman was Attorney General of
Virginia from 1978 to 1982. In 1975, Mr. Coleman was elected to the Virginia
State Senate and also served as a United States Magistrate from 1970 to 1972. In
1972, Mr. Coleman was elected to the Virginia House of Delegates. From 1986 to
1993, Mr. Coleman was a director of NVR, a publicly traded homebuilding company.


<PAGE>


         James J. Martell, Jr. is a founder of the Company and has been its
President, Chief Executive Officer and a director since June 1995 and has more
than 12 years in the homebuilding industry. Since 1992, Mr. Martell has been an
advisor and consultant to various companies in the homebuilding and technology
industries, including Canuso Homes, Joe Miller Homes and n-Vision. From 1991 to
1992, Mr. Martell served as Managing Director of Investment Banking at Credit
International Bank as well as a member of its Board of Directors. From 1987 to
1991, Mr. Martell was a member of the board of directors of NVR and the Chief
Executive Officer of its subsidiary, NVR Development, responsible for
identifying new sources of capital and new business opportunities for NVR. From
1985 to 1986, Mr. Martell was the Chief Financial Officer of NVHomes which
became a public company in 1986 and merged with Ryan Homes in 1987 to become
NVR, a publicly traded national homebuilding company.

         Thomas Buffington became a director of the Company in March 1996. Prior
to becoming the Company's Chief Operating Officer in January 1997, he served as
the President of Buffington Homes, Inc. operation since 1987. Mr. Buffington
started Buffington Homes with partners Edward Kirkpatrick and James Giddens in
1987. Mr. Buffington has over 28 years of experience in the homebuilding
industry. From 1983 to 1987, he served as President of the Austin/Central Texas
division of Nash Phillips/Copus (NPC), which was one of the largest privately
owned homebuilders in the nation at the time. He began at NPC as a sales agent
and was promoted to Sales Manager and Vice President of Sales before being
appointed President.

         Jamie M. Pirrello is a founder of the Company and has been the Vice
President of Finance and Chief Financial Officer of the Company since June 1995
and has over 16 years of experience in the homebuilding industry. From November
1993 to January 1995, Mr. Pirrello was Executive Vice President of Miles Homes,
Inc., a publicly traded company, and was in charge of the operations of two of
its subsidiaries, Patwil Homes, Inc. and Miles Homes Services, Inc. From 1988 to
1993, Mr. Pirrello was Chief Executive Officer of H.R. Remington Properties,
Inc. and Vice President of Finance of H.R. Remington Properties, L.P., both
subsidiaries of NVR, a publicly traded company that is one of the largest
homebuilding companies in the United States. From 1985 to 1989, Mr. Pirrello was
the Corporate Controller of NVHomes (predecessor to NVR) and a Controller in the
Northern Virginia Division of Pulte Home Corporation.


<PAGE>


Item 2.  PROPERTIES

         The Company's principal executive offices are located at 1921 Gallows
Road, Suite 730, Vienna, VA 22182. The Company leases approximately 4,465 square
feet of office space for its corporate office in Virginia and leases an
aggregate of approximately 46,360 square feet of space in 11 locations for its
homebuilding subsidiaries.

<PAGE>


Item 3.  LEGAL PROCEEDINGS

         The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial condition, results of
operations or cash flows of the Company.


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to the Company's stockholders for
consideration during the quarter ended December 31, 1996.


                                     PART II

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

         (a) Price Range of Common Stock. The Company's common stock has traded
on the Nasdaq National Market since May 16, 1996. On March 17, 1997, the
sale price of the common stock was $5.75 per share. The following table sets
forth the range of high and low sale prices for the common stock, as reported on
the Nasdaq National Market, for the period from May 16, 1996, the date of the
Company's initial public offering, through the end of the fiscal year.

                                                          High         Low
                                                          ----         ---

                      Fiscal Year 1996
                      Second fiscal quarter (1)          $9.25         $8.75
                      Third fiscal quarter               $9.00         $7.75
                      Fourth fiscal quarter              $8.00         $4.56
 -----------
(1)  The Company's common stock commenced trading on May 16, 1996 at $9.00
     per share.

         (b) Approximate Number of Equity Security Holders. The number of record
holders of the Company's common stock as of March 10, 1997 was 83, which does
not include beneficial owners who hold the Company's stock in street name.

         (c) Dividends. In March 1997, the Company established a new dividend
policy including the initiation of a cash dividend. The initial dividend policy
is to pay a dividend of one cent per year paid quarterly. Pursuant to this
policy, the Board of Directors declared a quarterly cash dividend of one-quarter
cent per share on the Company's common stock, payable on May 1, 1997, to
shareholders of record as of the close of business on March 31, 1997. The
Company intends to increase the dividend in the future as the Company grows. The
payment of 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. In addition,
the Indenture will restrict the amount of dividends payable by the Company.

         (d) Recent Sales of Unregistered Securities. The following information
relates to securities of the Company issued or sold since June 1995 that were
not registered under the Securities Act:

          (i) Between June 1995, when the Company was formed, and the
     consummation of the Offerings, the Company issued 2,230,500 shares of
     Common Stock to the Existing Stockholders (certain directors, officers, and
     key consultants) for consideration equal to $22,305. Each of these


<PAGE>


     issuances of Common Stock was without a registration under the
     Securities Act in reliance upon the exemptions provided by Section 4(2) of
     the Securities Act.

          (ii) Simultaneous with the completion of the Offerings, the Company
     issued 6,233,875 shares of its Common Stock and 20,000 shares of its Series
     A 11% Cumulative Convertible Preferred Stock, in connection with the
     acquisitions to the prior owners and employees of the Founding Builders.
     This transaction was effected without registration of such stock under the
     Securities Act in reliance upon the exemption provided by Section 4(2) of
     the Securities Act.

          (iii) In connection with the acquisition of Brookstone Homes on
     December 31, 1996, the Company issued 60,000 shares of its common stock to
     the previous sole shareholder of Brookstone. This transaction was effected
     without registration of such stock under the Securities Act in reliance
     upon the exemption provided by Section 4(2) of the Securities Act.

     In relying on the exemption provided by Section 4(2) of the Securities Act
in connection with the private placements described above, the Company relied
upon written representations of the persons acquiring the Company's shares, that
they were acquiring the shares for investment purposes and that they had
received adequate opportunity to obtain information, and had reviewed such
information regarding the Company. Certificates representing the shares issued
to these persons contained a legend restricting transfer thereof absent
registration under the Securities Act or the availability of an exemption
therefrom.


<PAGE>
Item 6. SELECTED FINANCIAL DATA

         The selected combined financial data provided should be read in
conjunction with the Combined Predecessor Companies Financial Statements, the
individual Founding Builders Financial Statements, The Fortress Group, Inc.
Consolidated Financial Statements and the Pro Forma Combined Financial
Statements, the related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

         The Fortress Group, Inc. and Combined Predecessor Companies(1)
       (dollars in thousands, except per share amounts and operating data)

<TABLE>
<CAPTION>
   
                                                                                               Year Ended December  31, 1996
                                                                            ---------------------------------------------
                                         Year Ended December 31,            
                              -------------------------------------------   
                                     Combined Predecessor Companies                                                The
                                                                             Combined     The Fortress           Fortress
                                                                            Predecessor   Group, Inc.           Group, Inc.
                                                                             Companies      May 21-              Pro Forma
                                                                             January 1-    December                 as
                                1992         1993        1994       1995       May 20         31      Total     Adjusted(2)
                              --------   -----------   --------   --------     -------     --------  --------   -----------
<S>                           <C>        <C>           <C>        <C>          <C>         <C>       <C>        <C>
Statement of Operations
  Data:
  Revenue ................... $ 82,543   $   148,269   $174,715   $199,029     $66,119     $210,354  $276,473   $   289,571
  Gross
    profit ..................   11,060        22,124     28,431     31,595       9,694       32,967    42,661        47,361
  Operating
    income ..................    2,232         4,169      5,411      6,750       1,113       12,787    13,900        16,887

  Income before provision/
    benefit for income
    taxes....................    2,678         4,898      4,828      6,076       1,274       13,221    14,495        17,616

    Net income (3) .......... $  2,349   $     3,973   $  4,745   $  6,055     $ 1,274   $    8,208  $  9,482   $    10,916
                              ========   ===========   ========   ========     =======   ==========  ========   ===========
  Net income per share (4)...                                                            $      .69             $      1.00
                                                                                         ==========             ===========
Weighted average shares
outstanding .................                                                            11,701,587            10,819,988
    
</TABLE>

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                         --------------------------------------------------------------------------
                                                                      Combined Predecessor Companies                    The Fortress
                                                         ----------------------------------------------------------      Group, Inc.
                                                           1992             1993            1994             1995           1996
                                                         --------         -------         --------         --------       --------
<S>                                                      <C>              <C>             <C>              <C>            <C>
Balance Sheet Data:
  Cash .........................................         $  2,803         $ 2,904         $  4,866         $  2,710       $ 16,212
  Inventory ....................................           42,212          65,507          101,214          109,016        144,106
  Total assets .................................           46,495          72,855          111,403          121,666        193,733
  13.75% Senior Notes due 2003 .................                                                                           100,000
  Notes and mortgages payable ..................           43,120          52,912           83,161           87,604         40,136
  Minority interests ...........................              633             806            1,346            1,295            274
  Stockholders' equity .........................            5,640           4,374            6,018            9,836         31,986
</TABLE>

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                           ----------------------------------------------------------------
                                                                                                   The
                                                                                                Fortress
                                                                                               Group, Inc.
                                                                                                Pro Forma
                                                                                                    as
                                                   Combined Predecessor Companies               Adjusted
                                              -----------------------------------------------  -----------
                                                1992         1993         1994        1995         1996
                                                ----         ----         ----        ----         ----
<S>                                           <C>          <C>          <C>         <C>          <C>
Operating Data:
Units:
  New contracts, net of cancellations......         660          870        1,015       1,100       1,502
  Closings.................................         541          838          966         998       1,525
  Backlog(5)...............................         276          308          357         459         512
Aggregate sales value of backlog (in
  thousands)(5)............................   $  61,378    $  57,914    $  78,760   $  97,242    $ 95,992
Average sales price per home closed........   $ 152,600    $ 171,300    $ 176,400   $ 190,700    $182,800
</TABLE>

<PAGE>


(1)  As a result of the substantial continuing interests in the Company of the
     former stockholders of the Founding Builders and Fortress (the "Combined
     Predecessor Companies"), the historical financial information of the
     Combined Predecessor Companies has been combined on a historical cost basis
     for all periods presented prior to the Acquisitions as if these companies
     had always been members of the same operating group. However, during the
     periods presented prior to the Acquisitions, the Founding Builders were not
     under common control or management. Additionally, all of the Founding
     Builders were S corporations through December 31, 1995 with the exception
     of Buffington which converted to an S corporation effective January 1,
     1994. As S corporations, the Founding Builders were not subject to federal
     income tax. Accordingly, the data presented should not be viewed as
     comparable to or indicative of the post-combination results to be achieved
     by the Company. Subsequent to the Acquisitions, the information presented
     is on a consolidated basis of The Fortress Group, Inc.

   
(2)  Pro Forma As Adjusted data reflect adjustments including: (i) incremental
     selling, general and administrative expenses associated with Fortress
     corporate activities of $644,000; (ii) incremental income taxes of
     $472,000, which would have resulted if the entities had been combined and
     subject to the effective federal and state statutory income tax rates;
     (iii) reduction of interest expense of $2,053,000 resulting from the
     refinancing of the Company's average debt outstanding of $113.9 million;
     (iv) reduction in minority interest expense of $98,000 resulting from the
     repurchase of a minority interest at the Acquistions; (v) adjustments to
     reflect the results of operations of Landmark Homes, Inc. for the eight
     months ended August 31, 1996, as well as the amortization of goodwill for
     the same period; (vi) adjustments to remove the results of operations of
     the Company's Genesee Custom Home Division due to the sale of the division
     effective July 1, 1996; (vii) adjustment to reduce net income to determine
     earnings per share of $110,000 to reflect the 11% cumulative preferred
     dividend based on the net liquidation value of the 11% cumulative
     preferred, convertible preferred stock issued at $100 per share, $.01 par
     value. The net liquidation value of $1 million reflects the Company's
     approval effective July 1, 1996 to redeem 10,000 shares of the originally
     issued and authorized 20,000 shares in connection with the sale of
     Genesee's Custom Home Division.
    

(3)  Each of the Founding Builders with the exception of Buffington was an S
     corporation or partnership through May 20, 1996 and, accordingly, was not
     subject to federal income taxes. Buffington converted from a C corporation
     to an S corporation effective January 1, 1994. Except for the "Pro Forma"
     columns, net income does not give effect to the conversion from S
     corporation to C corporation status and the resulting imposition of federal
     income tax.

   
(4)  The Pro Forma As Adjusted weighted average shares outstanding of 10,819,988
     consists of: (i) 2,230,500 shares issued by Fortress prior to the Offering;
     (ii) 6,233,875 shares issued to the stockholders of the Founding Builders
     in connection with the Acquisitions; (iii) 779,708 shares being sold in the
     Common Stock Offering to pay the cash portion of the consideration for the
     Founding Builders; (iv) 169,098 shares being sold to acquire the Company's
     minority interest; (v) 1,256,807 weighted average additional shares issued
     to the public in the Offering and (vi) 150,000 weighted average shares
     issued from the Company's exercise of the overallotment.
    

(5)  At end of period and represents homes sold but not closed.


<PAGE>

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


         The Fortress Group, Inc. ("Fortress" or the "Company") was formed in
June 1995 and completed its initial public equity and senior note offerings
(collectively, the "Offerings") on May 16, 1996. Simultaneously with the closing
of the Offerings, on May 21, 1996, the Company acquired, in a series of
transactions, four homebuilding companies (collectively the "Founding Builders"
or "Combined Predecessor Companies"), which had operations in seven separate
markets. During the period prior to May 16, 1996, the Combined Predecessor
Companies were not under common control or management. The Offerings provided
the capital required to acquire the Founding Builders.

         The Company was founded on the belief that homebuilding is localized
and is most successful when managed by experienced local managers who have
developed in depth market knowledge and strong local relationships. 

         Consistent with the Company's stated strategy of growing through
acquisitions, on August 31, 1996, the Company acquired substantially all of the
assets of Landmark Homes, Inc. ("Landmark"), which has operations in Wilmington,
North Carolina and Myrtle Beach, South Carolina. On December 31, 1996, the
Company acquired substantially all of the assets of Brookstone Homes, Inc.
("Brookstone"), which has operations in the Milwaukee - Madison, Wisconsin
corridor. On February 28, 1997, the Company acquired substantially all of the
assets of D.W. Hutson Construction Company ("Hutson"), which is one of the
largest homebuilders in Jacksonville, Florida. The Pro Forma results of
operations include the operations of Landmark as if the acquisition occurred on
January 1, 1996 and the actual results of operations include the operations of
Landmark since August 31, 1996. Neither the pro forma nor the actual results of
operations include the operations of Brookstone or Hutson in any of the periods
presented.

         As a result of the substantial continuing interests in the Company of
the former stockholders of the Founding Builders and Fortress, the acquisitions
have been accounted for on a historical cost basis as of the date of the
mergers. Accordingly, no goodwill has been recorded in combining these
businesses. During 1996, goodwill of $3,724,000 has been recorded in connection
with the acquisition of Landmark.

         The Company's revenues are derived primarily from the sale of
residential homes. Revenue is recognized when construction of a home is complete
and title transfers from the Company to the buyer. Cost of sales includes all
direct and indirect construction costs such as construction supervision, land
costs, including the purchase price of land and land development costs, interest
expense on related land acquisitions, land development and construction loans,
real estate taxes, and an accrual for anticipated warranty and service costs.
All of these costs incurred prior to title transfer are capitalized into
inventory and relieved from inventory at the time of title transfer and revenue
recognition. Sales and marketing costs, such as advertising and promotion
expenses, as well as general and administrative costs, are recognized as
expenses when incurred.


<PAGE>


Acquisition of Landmark Homes, Inc.

         On August 31, 1996, the Company consummated the acquisition of
substantially all of the assets of Landmark. Landmark is the largest production
homebuilder in the Wilmington, North Carolina market and also has operations in
Myrtle Beach, South Carolina. The pro forma results of operations and the
following discussion reflect the adjustments assuming that Landmark was owned by
the Company for all 1996 periods presented.

Acquisition of Brookstone Homes, Inc.

         On December 31, 1996, the Company consummated the acquisition of
substantially all of the assets of Brookstone. Brookstone operates in the
Milwaukee - Madison, Wisconsin area and has developed strong internal systems of
control, which allows it to offer its customers the opportunity to customize
their homes in the entry level and first and second time move-up market
segments. The addition of Brookstone has increased the Company's diversification
to ten markets, nationally. The pro forma results of operations and following
discussion do not reflect the operating activity of Brookstone in the periods
presented.

Acquisition of D.W. Hutson Construction Company

         On February 28, 1997, the Company consummated the acquisition of
substantially all of the assets of Hutson. Hutson is one of the largest
homebuilders in the Jacksonville, Florida market and is engaged in the
construction and sale of homes targeted for the entry level and first-time
move-up markets. The pro forma results of operations and following discussion do
not reflect the operating activity of Hutson in the periods presented.

Results Of Operations

Overview

        The Company's philosophy of seeking to minimize investment risk in
long-term or speculative assets resulted in a 25% reduction in the number of
speculative homes owned as of December 31, 1996 compared to the end of the third
quarter, excluding speculative homes owned by Brookstone as of year end. The
Company reduced its speculative inventory in response to management's concern
with over-building by many of its competitors in a number of the Company's
markets. In addition, the Company continues to seek to minimize its investment
in land. As of December 31, 1996, the Company owned 1,351 lots, approximately a
nine month supply, which is better the Company's stated goal of owning no
more than a two year supply of lots.


<PAGE>

   
Combined Actual Results of the Company from May 21 through December 31, 1996
and the Combined Predecessors from January 1 through May 20, 1996 Compared to
the Combined Predecessor Results for the Year Ended December 31, 1995
    

         The Company's total 1996 revenues increased by $77.4 million to $276.5
million compared to the 1995 revenues of $199.0 million. The increase in revenue
is the result of the greater number of homes delivered in 1996 over 1995. In
1996, the Company delivered 405 more homes than it delivered in 1995. The
average sales price of a home delivered in 1996 fell to $189,500 from $190,700
in 1995. The decrease in average sales price reflects the strong growth in
Buffington's operations, which targets the entry level and first time move-up
markets and the acquisition of Landmark Homes, which predominately builds for
the same target markets. In addition, Genesee and Christopher introduced more
affordable product lines in 1996 which contributed to the Company's lower
average sales price during the year compared to 1995. Land sales increased by
$2.2 million in 1996 to $10.3 million compared to the Combined Predecessor
Companies total land sales of $8.1 million in 1995. As a percentage of total
revenue, land sales accounted for 3.7% of revenue in 1996 compared to 4.1% in
1995.

<PAGE>

         The Company's total gross profit increased by $11.1 million to $42.7
million in 1996 compared to $31.6 million in 1995 resulting from the 39%
increase in revenue in 1996 over 1995 partially offset by lower margins. As a
percentage of revenue, the Company's gross profit was 15.4% in 1996 compared to
15.9% in 1995. This decline was due to the Company's decision to liquidate a
significant portion of its speculative housing inventory during the fourth
quarter of 1996, accepting lower margins in order to do so, and increased
competitive pressures in the Raleigh-Durham, North Carolina market.

         The Company's total operating expenses increased by $3.9 million to
$28.8 million compared to $24.8 million in 1995. The Company incurred an
additional $3.1 million in selling expenses in 1996 compared to 1995, due to the
larger number of communities in which the Company was actively selling homes in
1996 compared to 1995. General and administrative expenses increased by $0.9
million due to the growth of the operating companies in 1996 compared to 1995
and an increase in expenses due to the creation of the Company. Even so, as a
percentage of revenue, operating expenses were significantly reduced to 10.4% of
revenue in 1996 compared to 12.5% of revenue in 1995. This decline is due to the
39% increase in revenue in 1996 over 1995 resulting in additional operating
efficiencies due to the mostly fixed nature of operating expenses.

         The Company's total pre-tax income increased by $8.4 million to $14.5
million compared to 1995 pre-tax income of $6.1 million, an increase of 139%.
Provision for income taxes increased to $5.0 million from $0 in 1995. This
increase reflects the Company's C Corporation status in 1996 compared to the
Combined Predecessor Companies status as S Corporations. Net income increased
$3.4 million to $9.5 million compared to $6.1 million in 1995.

   
         Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 46.3% to $29.4 million in 1996 compared to $20.1 million in 1995.
EBITDA is provided as a supplemental measurement of the Company's operating
performance. EBITDA does not represent cash flows from operations as defined by
GAAP and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity. In addition, EBITDA measures presented by the Company may not be
comparable to other similarly titled measures of other companies.

Combined Predecessors for the Year Ended December 31, 1995 Compared to the Year
Ended December 31, 1994
    

         Revenue increased 13.9% to $199.0 million in 1995 from $174.7 million
in 1994. The number of homes closed by the Combined Predecessor Companies
increased by 3.3% to 998 units in 1995 from 966 units in 1994. The large
increases were the result of earlier investments in new communities which
produced closings in 1995. The Company's 1995 increase in revenues was also due
in part to a 8.2% increase in the average selling price of homes closed to
$190,700 in 1995 from $176,400 in 1994. The increase was primarily to changes in
the product mix of homes closed within the Combined Predecessor Companies.

         Cost of sales increased by 14.5%, to $167.4 million in 1995 from $146.3
million in 1994. As a percentage of revenue, cost of sales increased by 0.4%, to
84.1% in 1995 from 83.7% in 1994. The increase was due primarily to an increase
in cost of sales, as a percentage of revenue at Genesee. This increase was the
result of a decision, during the first half of 1995, to discount home sale
prices in response to the prevailing higher mortgage interest rates during this
period.

         Selling, general and administrative expenses increased 7.9% to $24.8
million in 1995 from $23.0 million in 1994. As a percentage of revenue, however,
SG&A expenses in 1995 were 12.5% compared to 13.2% in 1994. The decrease in SG&A
as a percentage of revenue was due to increased efficiencies as revenue grew
between 1994 and 1995. The increase in SG&A expenses was due to the increase in
sales and construction activity required to sustain the higher levels of
revenues in 1995 as well as the increase in land acquisitions, market analysis
and marketing activity needed to add new communities in 1995 for which sales and
closings are expected in 1996 and beyond. The Combined Predecessor Companies
opened 18 new communities in 1995.


<PAGE>

         Other non-operating expenses (income) increased 15.6% to $674,000 in
1995 from $583,000 in 1994. The increase of $91,000 was due to a decrease in
other income at Christopher due to a decrease in management fee income between
1994 and 1995 of $240,000. This decrease in other income was partially offset by
a decrease in minority interest expense at Sunstar between 1994 and 1995.

Capital Resources and Liquidity

         The Company funds its residential development activities, including
land purchases and housing construction, through cash flows generated from
operations, public debt and equity markets and secured borrowings.

         In May 1996 the Company completed the Offerings, the total net proceeds
of which were used to pay the cash portion of the purchase price to the Founding
Builders in the amount of approximately $6.0 million, to refinance the
indebtedness of the Founding Builders in the amount of $89.6 million, and to pay
down $1.3 million of minority interests. The balance of $22.3 million was
invested in low risk securities for the Company's future operating and liquidity
needs.

   
         From May 21, 1996 (the time of the Offerings) through December 31,
1996, operating activities in 1996 used $6.1 million. The majority of the use of
funds included an increase in receivables of $7.6 million reflecting the
proceeds of home sale closings on December 31, 1996 which were not received
until early January 1997. The Company built up inventories in anticipation of
the higher end-of-year closings which in turn resulted in increased receivables
at December 31st. The majority of these very short-term receivables were
collected within the next month. Additionally, while the level of inventories
appears lower due to the period presented (May 21st to December 31st), the
Company has increased its inventories at December 31, 1996 compared to December
31, 1995 as part of its key growth and risk management strategies as previously
discussed. The other significant use of cash during this period was for the $5.2
million reduction in the operating subsidiaries' accounts payable. The Company,
through its subsidiaries, has been able to renegotiate many supplier and
subcontractor contracts based on quicker payment of outstanding invoices. Even
with the decrease in accounts payable, excluding the cyclical build up of
accounts receivable and the increased inventories, the Company's operating
activities provided net cash during the period.

         The majority of the Company's investing activities during the period
related to the acquisition of Landmark and Brookstone. The Company's financing
activities generated cash of $27.0 million. The Company generated $21.8 million
from its equity offering, $172.5 million from borrowings under notes and
mortgages payable and used $152.8 million for the repayment of notes and
mortgages payable. Cash and cash equivalents at December 31, 1996 were $16.2
million.
    

         As of the Offering date, the Company had existing credit facilities
through the Founding Builders which had outstanding borrowings, prior to any
repayment, of approximately $112 million. The Company has or is in the process
of re-negotiating the terms of these existing credit facilities to provide more
flexible terms and improved pricing. As of December 31, 1996, the Company,
through its subsidiaries, had entered into new credit facilities with a total
commitment of $34 million. Through February 28, 1997 the Company had entered
into additional new credit facilities with total commitments of $41 million. The
Company anticipates entering into additional credit facilities prior to the end
of the second quarter of 1997 with total commitments of $51 million. Therefore,
the Company currently has in place commitments in the amount of $75 million, and
anticipates having $126 million of credit facility commitments in place prior to
the end of the second quarter of 1997.

         The Company, through its subsidiaries, had drawn $6.8 million and $23.6
million against these credit facilities as of December 31, 1996 and February 28,
1997, respectively

         The Company plans to continue its utilization of land options as a
method of controlling and subsequently acquiring land. The Company expects to
exercise, subject to market conditions substantially all of its options
contracts. As of December 31, 1996, the Company has 4,262 lots under option.

         The Company will continue to pursue its strategy of increasing its
operations through strategic acquisitions. Such acquisitions may be funded
through a combination of cash, stock (common and preferred) and notes issued by
the Company, and any cash portion may be financed by cash on hand, credit
facilities (existing or newly negotiated) or capital markets, or any combination
thereof.

         The Company believes that funds available through existing and newly
negotiated credit facilities, coupled with cash on hand and cash generated
through operations will be adequate for its anticipated needs in the foreseeable
future. During the first quarter of 1997, the Company utilized $750,000 of cash
to capitalize Fortress Mortgage, Inc. and completed the acquisition of Hutson.
The Company believes that Fortress Mortgage will enable the Company to capture

<PAGE>



additional revenues from its order flow through the mortgage banking business.

Seasonality and Variablity of Results

         The Company experiences significant seasonality and quarterly
variability in homebuilding activity levels. The annual operating cycle
generally reflects greater home sales in the spring and autumn months and slower
sales in the winter and summer months. Closings are slowest during the first
quarter and activity increases during the second and third quarter with the
greatest level of closing activity taking place during the fourth quarter. The
Company believes that this seasonality is a reflection of the impact of winter
weather on construction activity and the preference of home buyers to close on
their new home either prior to the start of a new school year in the fall or
prior to the holiday season.

Outlook

         As of February 28, 1997, the Company, including Brookstone and Hutson,
had outstanding sales contracts of 867 units in backlog, representing $145.0
million of value. The Company has experienced a significant increase in new
order activity in all of its markets during the first two months of 1997
compared to the fourth quarter of 1996. In particular, new order activity in
Denver, Colorado and Austin, Texas has been strong during this period.

         The Company's plan for 1997 includes a number of key strategies
including (i) full implementation of the Fortress Mortgage business plan, (ii) a
company-wide program to reduce direct construction costs as a percentage of
revenue, (iii) continued controlled management of speculative inventory
including homes and land, (iv) improved return on assets at the subsidiary level
through monthly analysis and reevaluation of assets positions, and (v) continued
acquisition of well managed and successful homebuilding companies that will be
accretive to the Company's earnings.

         While the management of the Company maintains a cautious outlook for
1997, it believes the Company is well positioned for continued growth in 1997.
This belief assumes stable or improving market conditions, interest rates, job
growth and consumer confidence in its homebuilding markets. The Company believes
the anticipated increase in home deliveries, coupled with the continued
successful implementation of the Company's key strategies, should result in
improved operating income and earnings per share in 1997 compared to 1996.

         Please refer to the Statement on Forward-Looking Information.

Interest Rates and Inflation

         The Company's business performance, can be negatively affected by the
impact of inflation and the adverse effect inflation has on interest rates and
the overall economic climate nationally and in the Company's markets.

         Inflation affects the Company in a number of ways including increasing
the Company's cost of conducting business. Costs including land acquisition and
development, materials and subcontractor labor, overhead and interest rates on
floating rate credit facilities can all be adversely affected by inflation. In
addition, inflation may reduce consumers' ability to purchase a new home,
thereby adversely effecting the Company's new order flow. During 1996, inflation
has not significantly affected the performance of the Company. Only rising
lumber costs and, to a lesser degree, increases in subcontractor costs in a
number of the Company's markets due to tight labor markets had an inflationary
impact on the Company's performance.

         While inflation has not been a significant factor in 1996, rising
inflation in the future would likely have an adverse long-term impact on the
Company's business performance.


<PAGE>
Statement on Forward-Looking Information

         Certain information included within this report is forward-looking
within the meaning of the Private Litigation Reform Act of 1995, including but
not limited to, statements concerning growth, acquisitions, anticipated
operating results, and financial resources. Such forward-looking information
involves important risks and uncertainties that could significantly affect
actual results and cause them to differ materially from expectations expressed
herein. These risks and uncertainties include the competitive environment in
which the Company operates, fluctuations in interest rates, local, regional and
national economic conditions, the effect of government regulation, the
availability and cost of land, the availability of capital, the availability and
cost of labor and materials, changes in home prices and weather conditions.

<TABLE>
<CAPTION>
   
                                                                    Selected Financial Data

                                              Pro Forma             For the Period          For the Period
                                            For the Year             May 21, 1996            For the Year
                                                Ended                   Through                 Ended
                                         December 31, 1996         December 31, 1996       December 31, 1994
                                       --------------------       --------------------     -----------------
<S>                                  <C>            <C>         <C>          <C>          <C>         <C>    
Revenue                              $   289,571    00.0%       $  210,354   100.0%       $ 174,715   100.0% 
      Cost of sales                      242,210    83.6%          177,387    84.3%         146,284    83.7% 
                                         -------    ----           -------    ----          -------    ----  
          Gross profit                    47,361    16.4%           32,967    15.7%          28,431    16.3% 
                                                                                            
Operating Expenses                                                                          
      Selling                             16,221     5.6%           11,527     5.5%          11,840     6.8% 
      General & administrative            14,253     4.9%            8,653     4.1%          11,180     6.4% 
                                          ------     ---             -----     ---           ------     ---  
                                          30,474    10.5%           20,180     9.6%          23,020    13.2%
                                          ------    ----            ------     ---           ------    ----  
      Operating income                    16,887     5.8%           12,787     6.1%           5,411     3.1% 
Other Non-operating (Income)
  Expense
      Interest expense                       463     0.2%              429     0.2%             136     0.1% 
      Minority interest                       83     0.0%               92     0.0%             907     0.5% 
      Other, net                          (1,275)   -0.4%             (955)   -0.5%            (460)   -0.3% 
                                          ------     ---              ----     ---           ------     ---  
                                            (729)   -0.3%             (434)   -0.2%             583     0.3% 
                                            ----     ---              ----     ---             ----     ---  
Income Before Provision for
 Income Taxes                             17,616     6.1%           13,221     6.3%           4,828     2.8% 
                                          ------     ---            ------     ---           ------     ---  
Provision for Income Taxes                 6,700     2.3%            5,013     2.4%             83     0.0% 
                                           -----     ---             -----     ---            -----     ---  
          Net Income                 $    10,916     3.8%       $    8,208     3.9%       $   4,745     2.7% 
                                     ===========     ===        ==========     ===        =========     ===  
          Outstanding shares          10,819,988                11,701,587
          Earnings per share         $      1.00                $      .69                $     N/A
                                     ===========                ==========                =========

    
</TABLE>
<PAGE>


   
Item 8.  Financial Statements and Supplementary Data.
    

The financial statements are listed under Item 14(a)(1) and filed as part of
this report on the pages indicated and are incorporated herein by reference.


<PAGE>


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

         None.

                                    PART III

         The information required by Part III is omitted from this Annual Report
on Form 10-K and is incorporated by reference from the definitive proxy
statement with respect to the 1997 Annual Meeting of Stockholders (the "Proxy
Statement") which the Company will file with the Securities and Exchange
Commission (the "Commission") not later than 120 days after the end of the
fiscal year covered by this Report.

Item 10.  Directors and Executive Officers of the Registrant

         (a) Identification of Directors. Information required by this Item will
be set forth under the caption "Proposal 1, Election of Directors - Nominees for
Election at this Annual Meeting" in the Proxy Statement, which information is
incorporated herein by reference.

         (b) Identification of Executive Officers. Information required by this
Item is set forth under the caption "Executive Officers of the Company" under
Part I, Item 1 of this Report, which information is incorporated herein by
reference.

Item 11.  Executive Compensation

         Information required by this Item will be set forth under the captions
"Executive Compensation" and "Proposal 1, Election of Directors - Directors'
Remuneration" in the Proxy Statement, which information is incorporated herein
by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         Information required by this Item will be set forth under the caption
"Stock Ownership" in the Proxy Statement, which information is incorporated
herein by reference.

Item 13.  Certain Relationships and Related Transactions

         Information required by this Item will be set forth under the caption
"Certain Transactions" in the Proxy Statement, which information is incorporated
herein by reference.



<PAGE>

                                     PART IV

Item 14.  Exhibits, Financial Statements Schedules and Reports on Form 8-K.


 (a)  Financial Statements, Schedules and Exhibits.

         1.       Financial Statements (See Item 8 hereof.)


                                       THE FORTRESS GROUP, INC.

                                     INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                                              Page
                                                                                                                              ----
<S>                                                                                                                            <C>
   
PRO FORMA COMBINED STATEMENT OF OPERATIONS
     Introduction to Pro Forma Financial Information ..................................................................        F-1
     Pro Forma Combined Statements of Operations for the year ended December 31, 1996
        (unaudited) ...................................................................................................        F-3
     Notes to Pro Forma Combined Statements of Operations .............................................................        F-4

THE FORTRESS GROUP, INC.
     Report of Price Waterhouse LLP, Independent Accountants...........................................................        F-7
     Consolidated Balance Sheets as of December 31, 1996 and 1995 .....................................................        F-8
     Consolidated Statement of Operations for the period May 21, 1996 through
           December 31, 1996 ..........................................................................................        F-9
     Consolidated Statement of Shareholders' Equity for the period ended
           December 31, 1996 ..........................................................................................        F-10
     Consolidated Statement of Cash Flows for the period May 21, 1996 through December 31, 1996 .......................        F-11
     Notes to Consolidated Financial Statements .......................................................................        F-12

COMBINED PREDECESSOR COMPANIES
     Report of Price Waterhouse LLP, Independent Accountants ..........................................................        F-26
     Combined Balance Sheets as of December 31, 1994 and 1995 and May 20, 1996 ........................................        F-27
     Combined Statements of Operations for the years ended December 31, 1994 and 1995 and the
           period January 1, 1996 through May 20, 1996 ................................................................        F-28
     Combined Statements of Shareholders' Equity for the years ended December 31, 1994 and 1995
           and for the period January 1, 1996 through May 20, 1996 ....................................................        F-29
     Combined Statement of Cash Flows for the years ended December 31, 1994 and 1995 and the
           period January 1, 1996 through May 20,1996 .................................................................        F-30
     Notes to Combined Financial Statements ...........................................................................        F-31

BUFFINGTON HOMES, INC.
     Report of Price Waterhouse LLP, Independent Accountants ..........................................................        F-41
     Combined Balance Sheets as of December 31, 1994 and 1995 and May 20, 1996 ........................................        F-42
     Combined Statements of Operations for the years ended December 31, 1994 and 1995 and
         the period of January 1, 1996 through May 20, 1996 ...........................................................        F-43
     Combined Statements of Shareholders' Equity for the years ended December 31, 1994 and
        1995 and the period January 1, 1996 through May 20, 1996 ......................................................        F-44
     Combined Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the period
        January 1, 1996 through May 20, 1996 ..........................................................................        F-45
     Notes to Combined Financial Statements ...........................................................................        F-46

CHRISTOPHER HOMES, INC.
     Report of Price Waterhouse LLP, Independent Accountants ..........................................................        F-52
     Combined Balance Sheets as of December 31, 1994 and 1995 and May 20, 1996 ........................................        F-53
     Combined Statements of Operations for the years ended December 31, 1994 and 1995 and the period
        January 1, 1996 through May 20, 1996 ..........................................................................        F-54
     Combined Statements of Shareholders'(Deficit) Equity for the years ended
        December 31, 1994 and 1995 and the period January 1, 1996 through May 20, 1996 ................................        F-55
     Combined Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the period
        January 1, 1996 through May 20, 1996 ..........................................................................        F-56
     Notes to Combined Financial Statements ...........................................................................        F-57
    
</TABLE>


<PAGE>


<TABLE>

<S>                                                                                                                            <C>
   
THE GENESEE COMPANY
     Report of Price Waterhouse LLP, Independent Accountants ...........................................................       F-64
     Report of Hein + Associates LLP, Independent Auditors .............................................................       F-65
     Combined Balance Sheets as of December 31, 1994 and 1995 and May 20, 1996 .........................................       F-66
     Combined Statements of Operations for the years ended December 31, 1994 and 1995 and the period of
           January 1, 1996 through May 20, 1996 ........................................................................       F-67
     Combined Statements of Shareholders' Equity for the years ended December 31, 1994 and
           1995 and the period January 1, 1996 through May 20, 1996 ....................................................       F-68
     Combined Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the period
          January 1, 1996 through May 20, 1996 .........................................................................       F-69
     Notes to Combined Financial Statements ............................................................................       F-70

SOLARIS DEVELOPMENT CORPORATION
     Report of Price Waterhouse LLP, Independent Accountants ...........................................................       F-130
     Consolidated Balance Sheet as of May 20, 1996 .....................................................................       F-131
     Consolidated Statement of Income for the period January 1, 1996 through May 20, 1996 ..............................       F-132
     Consolidated Statement of Shareholders' Equity for the period January 1, 1996 through May 20, 1996 ................       F-133
     Consolidated Statement of Cash Flows for the period January 1, 1996 through May 20, 1996...........................       F-134
     Notes to Consolidated Financial Statements ........................................................................       F-135
     Report of Ernst & Young LLP, Independent Auditors .................................................................       F-140
     Consolidated Balance Sheets as of December 31, 1994 and 1995 ......................................................       F-141
     Consolidated Statements of Income for the years ended December 31, 1994 and 1995 ..................................       F-142
     Consolidated Statements of Shareholders Equity for the years ended December 31, 1994 and 1995 .....................       F-143
     Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995 ..............................       F-144
     Notes to Consolidated Financial Statements ........................................................................       F-145

SUNSTAR MORTGAGE LIMITED LIABILITY COMPANY
     Report of Ernst & Young LLP, Independent Auditors .................................................................       F-150
     Balance Sheet as of December 31, 1995 .............................................................................       F-151
     Statement of Operations for the period March 1, 1995 (inception) to December 31, 1995 .............................       F-152
     Statement of Members' Equity for the period March 1, 1995 (inception) to December 31, 1995 ........................       F-153
     Statement of Cash Flows for the period March 1, 1995 (inception) to December 31, 1995 .............................       F-154
     Notes to Financial Statements .....................................................................................       F-155
    

</TABLE>


         2.       Financial Statement Schedules
                    None.

         3.       Exhibits

                               Number Description

2.1          Agreement and Plan of Reorganization dated as of March 11, 1996 by
             and among the Company, Buffington Acquisition, Inc., Buffington
             Holdings, Inc. and the Stockholders named therein ("Buffington
             Merger Agreement"). (Exhibit 2.1 of the Registration Statement on
             Form S-1 (File No. 333-2332) effective May 16, 1996, is hereby
             incorporated by reference)

2.1(a)       First Amended to Buffington Merger Agreement, dated May 15, 1996.
             (Exhibit 2.1(a) of the Registration Statement on Form S-1 (File No.
             333-2332) effective May 16, 1996, is hereby incorporated by
             reference)

2.2          Amended and Restated Agreement and Plan of Reorganization dated as
             of March 11, 1996 by and among the Company, Christopher
             Acquisition, Inc., Christopher Homes, Custom Homes Division, Inc.
             and the Stockholders named therein ("Christopher Merger
             Agreement"). (Exhibit 2.2 of the Registration Statement on Form S-1
             (File No. 333-2332) effective May 16, 1996, is hereby incorporated
             by reference)

2.2(a)       First Amendment to Christopher Merger Agreement, dated May 15,
             1996. (Exhibit 2.2(a) of the Registration Statement on Form S-1
             (File No. 333-2332) effective May 16, 1996, is hereby incorporated
             by reference)

2.3          Amended and Restated Agreement and Plan of Reorganization dated as
             of March 11, 1996 by and among the Company, Genesee Acquisition,
             Inc., The Genesee Company, The Genesee Company/Castle Pines, Ltd.,
             The Genesee Company of Michigan, Ltd., Genesee Development Company
             and the Stockholders named therein ("Genesee Merger Agreement").
             (Exhibit 2.3 of the Registration Statement on Form S-1 (File No.
             333-2332) effective May 16, 1996, is hereby
             incorporated by reference)


<PAGE>
2.3(a)       First Amendment to Genesee Merger Agreement, dated May 15, 1996.
             (Exhibit 2.3(a) of the Registration Statement on Form S-1 (File No.
             333-2332) effective May 16, 1996, is hereby incorporated by
             reference)

2.4          Amended and Restated Agreement and Plan of Reorganization dated as
             of March 11, 1996 by and among the Company, Sunstar Acquisition,
             Inc., Solaris Development Corporation and the Stockholders named
             therein ("Sunstar Merger Agreement"). (Exhibit 2.4 of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

2.4(a)       First Amendment to Sunstar Merger Agreement, dated May 15, 1996.
             (Exhibit 2.4(a) of the Registration Statement on Form S-1 (File No.
             333-2332) effective May 16, 1996, is hereby incorporated by
             reference)

2.5          Asset Purchase Agreement, dated August 31, 1996 by and among The
             Fortress Group, Inc., Fortress Acquisition, Inc., Landmark Homes,
             Inc., B. Rex Stephens, and Bobby W. Harrelson. (Exhibit 2.1 of the
             Current Report on Form 8-K dated September 16, 1996 (File No.
             0-28024) is hereby incorporated by reference)

2.6          Asset Purchase Agreement, dated February 28, 1997 by and among The
             Fortress Group, Inc., Fortress-Florida, Inc., DW Hutson
             Construction, Inc., and David Hutson. (Exhibit 10.1 of the Current
             Report on Form 8-K dated March 17, 1997 (File No. 0-28024) is
             hereby incorporated by reference)

3.1          Amended and Restated Certificate of Incorporation of the
             Registrant. (Exhibit 3.1 of the Registration Statement on Form S-1
             (File No. 333-2332) effective May 16, 1996, is hereby incorporated
             by reference)

3.2          Amended and Restated Bylaws of the Registrant. (Exhibit 3.2 of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

4.2          Form of Indenture for Senior Notes. (Exhibit 4.2 of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference) 4.3 Form of
             Certificate for Senior Notes. (Exhibit 4.3 of the Registration
             Statement on Form S-1 (File No. 333-2332) effective May 16, 1996,
             is hereby incorporated by reference)

                  The Company is a party to a number of other instruments
             defining the rights of holders of long-term debt. No such
             instrument authorizes an amount of securities in excess of 10% of
             the total assets of the Company and its subsidiaries on a
             consolidated basis. On request, the Company agrees to furnish a
             copy of each such instrument to the Commission.

10.1         Stock Incentive Plan. (Exhibit 10.1 of the Registration Statement
             on Form S-1 (File No. 333-2332) effective May 16, 1996, is hereby
             incorporated by reference)

10.3         Incentive Compensation Plan. (Exhibit 10.3 of the Registration
             Statement on Form S-1 (File No. 333-2332) effective May 16, 1996,
             is hereby incorporated by reference)

10.4(a)      Employment Agreement between Buffington Holdings, Inc. and Thomas
             Buffington. (Exhibit 10.4(a) of the Registration Statement on Form
             S-1 (File No. 333-2332) effective May 16, 1996, is hereby
             incorporated by reference)

10.4(b)      Employment Agreement between Buffington Holdings, Inc. and Edward
             Kirkpatrick. (Exhibit 10.4(b) of the Registration Statement on Form
             S-1 (File No. 333-2332) effective May 16, 1996, is hereby
             incorporated by reference)

10.4(c)      Employment Agreement between Buffington Holdings, Inc. and James
             Giddens. (Exhibit 10.4(c) of the Registration Statement on Form S-1
             (File No. 333-2332) effective May 16, 1996, is hereby incorporated
             by reference)

10.4(d)      Employment Agreement between Christopher Homes, Custom Home
             Division, Inc. and J. Christopher Stuhmer. (Exhibit 10.4(d) of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

10.4(e)      Employment Agreement between The Genesee Company and Robert Short.
             (Exhibit 10.4(e) of the Registration Statement on Form S-1 (File
             No. 333-2332) effective May 16, 1996, is hereby incorporated by
             reference)

10.4(f)      Employment Agreement between Solaris Development Company and Lanold
             W. Caldwell. (Exhibit 10.4(f) of the Registration Statement on Form
             S-1 (File No. 333-2332) effective May 16, 1996, is hereby
             incorporated by reference)

<PAGE>

10.4(g)      Employment Agreement between Solaris Development Company and
             Lawrence J. Witek. (Exhibit 10.4(g) of the Registration Statement
             on Form S-1 (File No. 333-2 332) effective May 16, 1996, is hereby
             incorporated by reference)

10.4(h)      Employment Agreement between The Fortress Group, Inc. and James J.
             Martell, Jr. (Exhibit 10.4(h) of the Registration Statement on Form
             S-1 (File No. 333-2332) effective May 16, 1996, is hereby
             incorporated by reference)

10.4(j)      Employment Agreement between The Fortress Group, Inc. and James M.
             Pirrello. (Exhibit 10.4(j) of the Registration Statement on Form
             S-1 (File No. 333-2332) effective May 16, 1996, is hereby
             incorporated by reference)

10.5         Directors Indemnification Agreement between The Fortress Group,
             Inc. and Thomas B. Buffington, J. Marshall Coleman, Charles F.
             Smith, Mark L. Fine, Steve D. Rivers, James F. McEneaney, James J.
             Martell, Jr., J. Christopher Stuhmer, Lawrence J. Witek and Robert
             Short. (Exhibit 10.5 of the Registration Statement on Form S-1
             (File No. 333-2332) effective May 16, 1996, is hereby incorporated
             by reference)

10.6(a)      Promissory Note payable to Thomas Buffington. (Exhibit 10.6(a) of
             the Registration Statement on Form S-1 (File No. 333-2332)
             effective May 16, 1996, is hereby incorporated by reference)

10.6(b)      Promissory Note payable to Edward Kirkpatrick. (Exhibit 10.6(b) of
             the Registration Statement on Form S-1 (File No. 333-2332)
             effective May 16, 1996, is hereby incorporated by reference)

10.6(c)      Promissory Note payable to James Giddens. (Exhibit 10.6(c) of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

10.6(d)      Promissory Note payable to Lanold Caldwell. (Exhibit 10.6(d) of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

10.6(e)      Promissory Note payable to Lawrence Witek. (Exhibit 10.6(e) of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

10.6(f)      Promissory Note payable to J. Christopher Stuhmer. (Exhibit 10.6(f)
             of the Registration Statement on Form S-1 (File No. 333-2332)
             effective May 16, 1996, is hereby incorporated by reference)

10.6(g)      Promissory Note payable to Robert Short. (Exhibit 10.6(g) of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

10.7         Stockholders' Agreement between Charles F. Smith, Jr., James J.
             Martell, Jr., Patricia Donnelly, Michael P. Kahn and Pepi A. Kahn,
             Co-Trustees of Kahn Grantor Trust of 1993, James F. McEneaney, Jr.,
             James M. Pirrello, Brian McGregor, Brian Buchanan, Thomas B.
             Buffington, Edward A. Kirkpartrick, James M. Giddens, J.
             Christopher Stuhmer, Robert Short, Lanold W. Caldwell, and Lawrence
             J. Witek. (Exhibit 10.7 of the Registration Statement on Form S-1
             (File No. 333-2332) effective May 16, 1996, is hereby incorporated
             by reference)

10.8(a)      Promissory Notes payable to Charles F. Smith. (Exhibit 10.8(a) of
             the Registration Statement on Form S-1 (File No. 333-2332)
             effective May 16, 1996, is hereby incorporated by reference)

10.8(b)      Promissory Note payable to Patricia Donnelly. (Exhibit 10.8(b) of
             the Registration Statement on Form S-1 (File No. 333-2332)
             effective May 16, 1996, is hereby incorporated by reference)

10.8(c)      Promissory Note payable to James J. Martell, Jr. (Exhibit 10.8(c)
             of the Registration Statement on Form S-1 (File No. 333-2332)
             effective May 16, 1996, is hereby incorporated by reference)

10.8(d)      Promissory Note payable to Brian McGregor. (Exhibit 10.8(d) of the
             Registration Statement on Form S-1 (File No. 333-2332) effective
             May 16, 1996, is hereby incorporated by reference)

10.9         Consulting Agreement between The Fortress Group, Inc., and
             Commonwealth Homes, Inc.

10.10        Lease Agreement between Christopher Homes Custom Home Division,
             Inc., and Towne Center Limited Partnership

10.11        Lease Agreement between The Genesee Company and Genesee Holdings
             Corporation
<PAGE>

10.12        Asset Purchase Agreement, dated July 1, 1996 by and among The
             Genesee Company and Genesee Custom Homes, Inc. (Exhibit 2.1 of the
             Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
             (File No. 0-28024) is hereby incorporated by reference)

21.1         List of Subsidiaries.
27.1         Financial Data Schedule


(b) Report on Form 8-K. During the last quarter of the fiscal year covered by
this report, the Company filed only the following Current Report on Form 8-K:
Form 8-K/A dated November 15, 1996 and filed with the Commission on Novembr 15,
1996 reporting information under Item 7 as an amendment to the Form 8-K dated
September 16, 1996 and filed September 16, 1996 reporting information under Item
2.



<PAGE>




                                   SIGNATURES

   Pursuant to the requirements 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 February 19, 1998.

                THE FORTRESS GROUP, INC.


                By:   _____________________________
                Name: James J. Martell, Jr.
                Title:  President, Chief Executive Officer and Director



<PAGE>


                            THE FORTRESS GROUP, INC.
                   PRO FORMA COMBINED STATEMENT OF OPERATIONS
                                   (UNAUDITED)


Introduction

The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June 1995
and completed its initial public equity and senior note offerings (the
"Offerings") in May 1996. Simultaneous with the closing of the Offerings, the
Company acquired, in a series of transactions, four home-buildings companies
(collectively the "Founding Builders" or "Combined Predecessor Companies") which
have operations in seven separate markets (the "Acquisitions"). In August 1996,
the Company sold the Custom Home Division of the Predecessor Company, The
Genesee Company (the "Sale"), and purchased Landmark Homes, Inc. (the
"Purchase").

   
The unaudited Pro Forma Combined Statement of Operations presents the Company's
results of operations as if the Offerings, the Acquisitions, the Sale, and the
Purchase had occurred at January 1, 1996.
    

The unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions management deems appropriate. The
unaudited pro forma adjustments are not necessarily indicative of the results
Fortress would have attained had such events occurred at the beginning of the
periods presented.



                                      F-1


                                     
<PAGE>

                            THE FORTRESS GROUP, INC.
                   PRO FORMA COMBINED STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1996
           (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

<TABLE>
<CAPTION>
   
                                         Combined
                                       Predecessor      The Fortress
                                        Companies        Group, Inc.
                                     January 1, 1996 -    May 21, 1996 -                        Pro Forma
                                       May 20, 1996    December 31,1996      Total           Adjustments        Pro Forma
                                      ------------       ------------    ------------       ------------       ------------
<S>                                   <C>                <C>             <C>                      <C>          <C>
Revenue:
    Residential sales                 $     64,984       $    200,721    $    265,705             (4,964)(e)   $    278,803
                                                                                                  18,062 (i)
    Lot sales                                1,036              9,239          10,275                                10,275
    Other revenue                               99                394             493                                   493
                                      ------------       ------------    ------------       ------------       ------------
        Total revenue                       66,119            210,354         276,473             13,098            289,571
Cost of sales                               56,425            177,387         233,812             (1,982)(b)        242,210
                                                                                                  (4,928)(e)
                                                                                                  15,308 (i)
                                      ------------       ------------    ------------       ------------       ------------
Gross profit                                 9,694             32,967          42,661              4,700             47,361
Operating expenses
    Selling expenses                         4,689             11,527          16,216               (163)            16,221
                                                                                                     168 (i)
    General and administrative
      expenses                               3,892              8,653          12,545               (121)(e)         14,253
                                                                                                     644 (a)
                                                                                                   1,185 (i)
                                      ------------       ------------    ------------       ------------       ------------
    Net operating income                     1,113             12,787          13,900              2,987             16,887
Other expense (income)
    Interest                                    63                429             492                (71)(b)            463
                                                                                                      42 (i)
    Minority interests                          89                 92             181                (98)(d)             83
    Other, net                                (313)              (955)         (1,268)                (7)(i)         (1,275)
                                      ------------       ------------    ------------       ------------       ------------
Income before provision for income
    taxes                                    1,274             13,221          14,495              3,121             17,616

Provision for income taxes                                      5,013           5,013              1,215 (f)          6,700
                                                                                                     472 (c)
                                      ------------       ------------    ------------       ------------       ------------
    Net income                        $      1,274       $      8,208    $      9,482       $      1,434       $     10,916
                                      ============       ============    ============       ============       ============

Net income per share                                     $        .69                                          $       1.00(h)
                                                         ============                                          ============
Weighted average shares outstanding                        11,701,587                                           10,819,988(g)
                                                         ============                                          ============
    
</TABLE>


                                      F-2

<PAGE>


                            THE FORTRESS GROUP, INC.
               NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS


   
(a)  An adjustment of $644,000 for the year ended December 31, 1996 to reflect
     increased expenses for corporate operating activities related to the newly
     formed public entity.

(b)  Adjustments to reflect the reduction in interest expense resulting from
     refinancing of the Company's average debt outstanding of approximately
     $113.9 million for the year ended December 31, 1996. To the extent the
     average outstanding debt exceeds the Senior Notes of $95 million (Net
     Senior Note Proceeds available for refinancing), the Company has refinanced
     existing mortgage loans allowing such existing indebtedness to remain in
     place. It is assumed existing loans remain at their respective cost of
     funds.

     The interest expense adjustment was computed by comparing the actual
     interest and related fees incurred by the Company with the amount of
     interest costs related to the amount refinanced by the Senior Notes. In
     prior years, the individual Predecessor Companies incurred higher cost of
     capital in the form of stated interest rates and fees. The effective
     borrowing rate on the Senior Notes is 14.25% which reflects the assumed
     stated interest rate of 13.75% plus amortization of debt issue costs. In
     addition, this adjustment considers the effect that a portion of the
     interest capitalized prior to January 1, 1996, which was incurred at the
     Company's higher borrowing rates, would have still been in inventory as of
     December 31, 1996. This results from the fact that certain inventory,
     primarily land under development and finished lots, was acquired prior to
     January 1, 1996 and remained in inventory through the periods presented in
     the accompanying pro forma statements. Interest capitalized on this
     inventory prior to and during 1996 remains in the ending balance of
     capitalized interest presented below since this inventory has not been sold
     during the period presented. The resulting interest expense related
     adjustment for the year ended December 31, 1996 is $2,053,000 applied as a
     $1,982,000 decrease to cost of sales and a $71,000 decrease to interest
     expense.

(c)  An adjustment to calculate the provision for income taxes on the combined
     pro forma results at the effective statutory tax rates applicable for each
     of the Founding Builders as if they had been C corporations for each of the
     periods presented.
    


                                       F-3

<PAGE>


   
(d)  An adjustment to reduce minority interest expense of approximately $98,000
     for the year ended December 31, 1996, as a result of the Company's buyout
     in May 1996 of the minority interest holding in one of its consolidated
     joint venture partnerships.

(e)  An adjustment to remove the results of operations of the Company's Genesee
     Custom Home Building Division due to the sale of the division with an
     effective date of July 1, 1996.

(f)  An adjustment to reflect the calculation of a provision for income taxes
     resulting from net pre-tax income of pro forma adjustments at the effective
     statutory tax rates applicable for each adjustment.
    

(g)  The weighted average number of common shares outstanding used to calculate
     pro forma net income per share based on the estimated average number of
     shares of common stock of the pro forma combined company outstanding during
     the periods presented is as follows:

<TABLE>
<CAPTION>
   
                                              Year ended December 31,
                                                        1996
                                              -----------------------
<S>                                                  <C>
Shares issued by Fortress prior to the
   Offering                                           2,230,500

Shares issued to the stockholders of the
   Founding Builders                                  6,233,875

Shares issued in the Offering to cover
   the cash portion of the purchase
    price to be paid in connection with
    the acquisition of the Founding
    Builders                                            779,708

Shares issued in the Offering to acquire
   the Minority Interest                                169,098

Weighted average remaining shares
   issued to the public in the
   Offering                                           1,256,807

Weighted average shares issued from
    the Company's exercise of the
    overallotment                                       150,000
                                                     ----------
                                                     10,819,988
                                                     ==========
    
</TABLE>


                                      F-4

<PAGE>


(h)  An adjustment to reduce net income to determine earnings per share has been
     recorded in the amount of $110,000 for the year ended December 31, 1996 to
     reflect the 11% cumulative preferred dividend based on the net liquidation
     value of the 11% cumulative, convertible preferred stock issued at $100 per
     share ($.01 par value). The net liquidation value of $1 million reflects
     the Company's approval effective July 1, 1996 to redeem 10,000 shares of
     the originally issued and authorized 20,000 shares in connection with the
     sale of Genesee's Custom Home Division [see note (e)].

   
(i)  An adjustment to include the results of operation for the period January 1
     through August 31, 1996 for Landmark Homes, Inc. which was acquired by the
     Company on August 31, 1996. Included in the adjustment is amortization of
     goodwill totalling $157,000 for the period prior to acquisition.
    



                                      F-5

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and
Shareholders of The Fortress Group, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of The Fortress
Group, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for the period May 21, 1996 through
December 31, 1996 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.



PRICE WATERHOUSE LLP

Minneapolis, Minnesota
February 18, 1997





                                      F-6

<PAGE>


                            THE FORTRESS GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>




                                                                                    December 31,
                                                                                 1996        1995
                                                                              ---------    -------
<S>                                                                           <C>          <C>
                                        ASSETS
Cash and cash equivalents                                                     $  16,212    $    25
Accounts receivable                                                              10,700
Due from related parties                                                          5,176
Real estate inventories                                                         144,106
Property and equipment, net                                                       3,543
Prepaid expenses and other assets                                                10,355      2,121
Goodwill, net                                                                     3,641
                                                                              ---------    -------
        Total assets                                                          $ 193,733    $ 2,146
                                                                              =========    =======

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable and construction liabilities                                 $   8,526    $ 1,007
Notes and mortgages payable                                                     140,136
Due to related parties                                                               27      1,139
Accrued expenses                                                                  8,525
Customer deposits                                                                 4,259
                                                                              ---------    -------
        Total liabilities                                                       161,473      2,146
                                                                              ---------    -------
Minority interest                                                                   274
                                                                              ---------    -------
Shareholders' equity
     Preferred stock, $.01 par value, 2 million shares authorized, 10,000 
        issued and outstanding ($1 million aggregate liquidation preference)
     Common stock, $.01 par value, 50 million and 25 million authorized,
        11,762,675 and 2,230,500 issued and outstanding                             118         22
     Additional paid-in capital                                                  23,808        (22)
     Retained earnings                                                            8,072
     Treasury stock, at cost, 1,700 shares                                          (12)
                                                                              ---------    -------
        Total shareholders' equity                                               31,986
                                                                              ---------    -------
        Total liabilities and shareholders' equity                            $ 193,733    $ 2,146
                                                                              =========    =======

</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-7

<PAGE>

                            THE FORTRESS GROUP, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                 (In thousands)


   
                                                               For the Period
                                                                May 21, 1996
                                                                  through
                                                             December 31, 1996
                                                             -----------------
Revenue:
     Residential sales                                           $  200,721
     Lot sales                                                        9,239
     Other revenue                                                      394
                                                                 ----------
        Total revenue                                               210,354
Cost of sales                                                       177,387
                                                                 ----------
Gross profit                                                         32,967
Operating expenses:
     Selling expenses                                                11,527
     General and administrative expenses                              8,653
                                                                 ----------
        Net operating income                                         12,787 
Other expense (income):
     Interest                                                           429
     Minority interest                                                   92
     Other, net                                                        (955)
                                                                 ----------
Income before provision for income taxes                             13,221
Provision for income taxes                                            5,013
                                                                 ----------
        Net income                                               $    8,208
                                                                 ==========
Net income per share                                             $      .69
                                                                 ==========
Weighted average shares outstanding                              11,701,587
                                                                 ==========
    

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-8

<PAGE>

                            THE FORTRESS GROUP, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                           Shares                  Amount            Additional                           Total
                                    --------------------    --------------------      Paid-In      Retained  Treasury  Shareholders'
                                    Preferred     Common    Preferred     Common      Capital      Earnings   Stock      Equity
                                    ---------     ------    ---------     ------      -------      --------   -----      ------

<S>                                    <C>      <C>          <C>            <C>        <C>           <C>         <C>        <C>
Balance at December 31, 1995 and
  May 20, 1996 (See Note 1)                      2,231                      $ 22      $    (22)                              --
   Issuance of preferred stock          20                                                                                   --
   Issuance of common stock, net of
      related cost                               9,534                        96        21,747                              $21,843
   Acquisition of Founding                                                                                                    --
      Builders' equity                                                                   8,927                                8,927
   Distributions to Founding Builders                                                   (6,063)                              (6,063)
   Sale of Genesee Custom Division                                                         258                                  258
   Redemption of preferred stock       (10)                                             (1,000)                              (1,000)
   Preferred stock dividends                                                                         $ (136)                   (136)
   Purchase of treasury stock                      (62)                                                          $(429)        (429)
   Reissuance of  treasury stock                    60                                     (39)                    417          378
   Net income                                                                                         8,208                   8,208
                                        --      ------       --------       ----       -------       ------      -----      -------
Balance at December 31, 1996            10      11,763       $              $118       $23,808       $8,072      $ (12)     $31,986
                                        ==      ======       ========       ====       =======       ======      =====      =======
</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-9

<PAGE>

                                             THE FORTRESS GROUP, INC.
                                       CONSOLIDATED STATEMENT OF CASH FLOWS
                                                  (In thousands)
<TABLE>
<CAPTION>
                                                                                                For the Period
                                                                                                 May 21, 1996
                                                                                                   through
                                                                                               December 31, 1996
                                                                                               -----------------
<S>                                                                                                 <C>
Cash flows from operating activities
     Net income                                                                                     $   8,208
     Adjustments to reconcile net income to net cash used in
        operating activities
             Depreciation and amortization                                                                741
             Minority interest                                                                             93
             Loss on sale of property and equipment                                                        19
             Changes in operating assets and liabilities, net of effects from purchased companies
                Accounts receivable                                                                    (7,586)
                Due from related parties                                                                 (403)
                Real estate inventories                                                                   829
                Prepaid expenses and other assets                                                      (2,164)
                Accounts payable and accrued construction liabilities                                  (5,205)
                Accrued expenses                                                                        1,539
                Customer deposits                                                                      (2,123)
                                                                                                    ---------
                   Net cash used in operating activities                                               (6,052)
                                                                                                    ---------

Cash flows from investing activities
     Acquisitions, net of cash acquired                                                                (6,049)
     Cash balances of Predecessor Companies at acquisition date                                         3,013
     Sale of Genesee Custom Division                                                                      253
     Purchase of property and equipment                                                                (1,979)
     Proceeds from sale of property and equipment                                                          31
                                                                                                    ---------
                   Net cash used in investing activities                                               (4,731)
                                                                                                    ---------

Cash flows from financing activities
     Net proceeds from issuance of common stock                                                        21,843
     Capital distributions to Predecessor Companies' stockholders                                      (6,063)
     Deferred financing costs                                                                          (2,694)
     Borrowings under notes and mortgages payable                                                     172,461
     Repayment of notes and mortgages payable                                                        (152,824)
     Repayment of related party borrowings                                                             (2,941)
     Distributions to minority interest                                                                (1,274)
     Preferred stock redemption                                                                        (1,000)
     Preferred stock dividend                                                                            (109)
     Purchase of treasury stock                                                                          (429)
                                                                                                    ---------
                   Net cash provided by financing activities                                           26,970
                                                                                                    ---------

Net increase in cash and cash equivalents                                                              16,187
Cash and cash equivalents, beginning of period                                                             25
                                                                                                    ---------
Cash and cash equivalents, end of period                                                            $  16,212
                                                                                                    =========
</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-10

<PAGE>


                            THE FORTRESS GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995


NOTE  1 - BUSINESS AND ORGANIZATION

The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June 1995
to create a national homebuilding company for the acquisition and development of
land or improved lots and the construction of residential for-sale housing.

   
Four homebuilding companies were acquired by Fortress simultaneous with the
closing of its initial public offering on May 21, 1996 (the Offering) including
Buffington Homes, Inc. (Buffington), doing business in Austin and San Antonio,
Texas; Christopher Homes and Affiliates (Christopher), doing business in Las
Vegas, Nevada; The Genesee Company (Genesee), doing business in Denver and Fort
Collins, Colorado, and Tucson, Arizona; and the Solaris Development Corporation
(Sunstar), doing business in Raleigh-Durham, North Carolina. The acquired
companies as a group are referred to as the Founding Builders or, when combined
with Fortress, as the Combined Predecessor Companies. When the Company was
founded in June 1995, the Company issued 2,231,000 shares (par value of $.01 per
share) of its founding common stock to its shareholders in exchange for the
value of the intangible assets and activities of the stockholders. For financial
reporting purposes, these founder shares have been recorded at par with an
offsetting reduction to additional paid in capital.
    

Prior to the Offering, Fortress was a nonoperating entity and principally
incurred costs associated with the consummation of the Offering. Simultaneous
with the closing of the Offering, Fortress acquired by merger each of the
Predecessor Companies. The accompanying consolidated financial statements
reflect the results of Fortress and its Predecessor Companies, now referred to
as its wholly-owned subsidiaries, from May 21, 1996 through December 31, 1996.
As a result of the substantial continuing interests in the Company of the former
stockholders of the Predecessor Companies, the acquisitions have been accounted
for on a historical cost basis. The assets and liabilities of the Predecessor
Companies are reflected at their historical amounts and include joint ventures
where the Company controls the management activities and holds a significant
economic interest. In connection with the acquisition, Sunstar purchased the
minority interest position related to one of its joint ventures for
approximately $1.3 million in cash.

In August 1996, the Company sold the Custom Home Division of Genesee (Genesee
Custom) and purchased Landmark Homes, Inc., a Wilmington, North Carolina and
Myrtle Beach, South Carolina homebuilder. On December 31, 1996, the Company
purchased Brookstone Homes, Inc., a Janesville, Madison and Milwaukee, Wisconsin
homebuilder.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements include the accounts of
Fortress and its subsidiaries. All intercompany transactions have been
eliminated in consolidation.

                                      F-11

<PAGE>


Revenue recognition

Residential and lot sales are recognized when all conditions precedent to
closing have been fulfilled and title has passed to the buyer. The Company's
homes are generally sold in advance of their construction. The Company's
standard sales contract generally requires the customer to make an earnest money
deposit which is recognized as a liability until the unit closes.

Other revenue is primarily mortgage revenue. Other non-operating income includes
interest income, a legal settlement, and outsourced design services provided by
a Company subsidiary to parties unrelated to the Company and its customers.

Cash and cash equivalents

For purposes of reporting cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

Real estate inventories and cost of sales

All real estate inventories which are held for sale are carried at cost which is
less than fair value as measured in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Costs incurred which are
included in inventory consist of land, land development, direct and certain
indirect construction costs, interest and real estate taxes, and direct model
construction costs and related improvements.

At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any specifically identified estimate to
complete, plus an allocation of the total estimated cost of land and land
development, interest, real estate taxes and any other capitalizable common
costs based on the relative sales value method of accounting.

The Company generally provides a one-year limited warranty of workmanship and
materials with each of its homes. Accordingly, a warranty reserve, based on the
Company's historical experience, is provided as residential sales are closed;
this reserve is reduced by the cost of subsequent work performed.

                                      F-12

<PAGE>


Interest capitalization

Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with Statement of Financial
Accounting Standards No. 34, "Capitalization of Interest Cost," and charged to
cost of sales as revenue from residential sales is recognized. The interest and
related debt issuance costs capitalized are determined by applying a weighted
average capitalization rate to the accumulated qualified real estate
expenditures. The capitalization rate is based on the Company's outstanding
borrowings associated with the acquisition, development and construction of the
qualified real estate inventory. The amount of financing costs capitalized does
not exceed those costs incurred.

Property and equipment

Property and equipment are carried at cost less accumulated depreciation and are
depreciated using the straight line method over the estimated useful lives of
the assets which range from two to ten years. Costs incurred for common area
model improvements and certain furnishings are amortized on a per unit basis as
home sales in the related development are closed. Significant additions and
improvements are capitalized, while expenditures for repairs and maintenance are
charged to operations as incurred.

Deferred financing costs

Costs associated with the issuance of the Senior Notes are capitalized and being
amortized using the straight-line method over the seven-year term of the related
notes.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of
assets acquired and is being amortized over a 15-year period. Accumulated
amortization at December 31, 1996 and amortization expense for the period May
21, 1996 through December 31, 1996 was $82,758. In the event that facts and
circumstances indicate that the carrying value of goodwill may be impaired, an
evaluation of recoverability would be performed. If an adjustment is required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to fair
value is required.

Income taxes

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The
asset and liability approach used in SFAS 109 requires the recognition of
deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. In estimating future tax consequences,

                                      F-13

<PAGE>


SFAS 109 generally considers all expected future events other than enactments of
changes in the tax law or rates.

Fair value of financial instruments

The financial instruments of the Company consist of accounts receivable, due to
and from related parties, accounts payable and construction liabilities and
notes and mortgages payable. The fair value of the Company's Senior Notes at
December 31, 1996, which are recorded at their carrying value of $100 million,
is approximately $115 million based on quoted market prices. The fair value of
the remainder of the financial instruments is equal to the recorded amounts due
to the short-term nature of the instruments.

Use of estimates

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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

   
NOTE 3 - ACQUISITIONS

During 1996, the Company acquired certain assets and assumed related
indebtedness of Landmark Homes, Inc. and Brookstone Homes, Inc. (Acquired
Companies) on August 31, 1996 and December 31, 1996, respectively. The purchase
price for the assets of the Acquired Companies totaled $6 million in cash and
60,000 shares of common stock with a stated value of $10 per share. The excess
purchase price was allocated first to record assets and liabilities at fair
value on the acquisition date; the excess purchase price was recorded as
goodwill. Cost of goods sold for the period May 21, 1996 through December 31,
1996 included $210,000 related to the allocation of the purchase price to
inventory.
    

                                      F-14

<PAGE>


The Acquired Companies are involved in homebuilding and land development. The
Company has accounted for these acquisitions under the purchase method. The
operations of the Acquired Companies are included in the Company's accompanying
consolidated statement of operations since the acquisition date.

The Company's unaudited pro forma summary consolidated results of operations, as
if the acquisitions had occurred at January 1, 1995, are presented below. These
results include the pro forma results of Combined Predecessor Companies. The pro
forma results also include the application of the net proceeds from the Offering
to refinance debt outstanding during the period, certain administrative costs of
the Fortress corporate organization, the sale of Genesee Custom and the
increased provision for income taxes as if the Combined Predecessor Companies,
the Acquired Companies were C corporations. In preparing the pro forma
information, various assumptions were made, and the Company does not purport
this information to be indicative of what would have occurred had the
acquisitions been made as of January 1, 1995.

                                               Year Ended December 31,
                                            ---------------------------
                                              1996               1995
                                            --------           --------
                                              (unaudited, in thousands,
                                              except per share amounts)

     Revenue                                $306,974           $228,271
     Net income                             $ 11,759           $  7,709
     Net income per share                   $   1.08           $    .81

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures of cash flow information are as follows (in thousands):

                                                         May 21, 1996 through
                                                          December 31, 1996
                                                          -----------------
     Cash paid for the following:
         Interest                                               $ 11,214
         Income taxes                                           $  4,958

                                      F-15

<PAGE>


Significant non-cash transactions:

In connection with the acquisitions of the Founding Builders and Brookstone, the
Company paid the following non-cash consideration in the form of shares of the
Company's common stock (dollar amounts in thousands):

                                               Shares               Amount
                                               ------               ------
Brookstone                                      60,000             $   379
Buffington                                   1,897,897              17,081
Christopher                                  1,691,227              15,221
Genesee                                      1,729,495              15,654
Sunstar                                        915,256               8,237

Additionally, in connection with the acquisition of Genesee, the Company issued
20,000 shares of Series A 11% Cumulative Convertible Preferred Stock.

As part of the sale of the Genesee Custom, the Company received a $4.1 million
note receivable from the buyer.

NOTE 5 - REAL ESTATE INVENTORIES

Real estate inventories are summarized as follows (in thousands):

                                                                   December 31,
                                                                       1996
                                                                     --------
     Work-in-progress                                                  83,216
     Model homes                                                       11,280
     Finished lots                                                     34,671
     Land under development                                            13,930
     Unimproved land held for development                               1,009
                                                                     --------
     Total                                                           $144,106
                                                                     ========

Model homes are constructed to assist in the marketing effort of a development.
Work-in-progress includes sold homes and speculative homes, which represent
non-model, completed or substantially completed homes which are not subject to a
sales contract. In addition, model homes and work-in-progress include the
allocation of land and development and other allocable costs.

                                      F-16

<PAGE>


NOTE 6 - INTEREST

Information regarding interest is as follows (in thousands):

                                                            May 21, 1996 through
                                                              December 31, 1996
                                                              -----------------

     During the period:
        Interest incurred                                            $12,930
        Interest capitalized                                         (12,314)
        Interest amortized to cost of sales                            9,704
                                                                     -------

        Total interest expensed in statement of operations           $10,320
                                                                     =======

     At the end of the period:
        Capitalized interest in ending inventory                     $12,159
                                                                     =======


NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

                                                                 December 31,
                                                                    1996
                                                                    ----

     Model home upgrades and furnishings                          $ 1,845
     Equipment and furniture                                        2,564
     Vehicles                                                         468
     Leasehold improvements                                           725
                                                                  -------
                                                                    5,602
     Less: Accumulated depreciation and amortization               (2,059)
                                                                  -------
                                                                  $ 3,543
                                                                  =======

                                      F-17

<PAGE>


NOTE 8 - NOTES AND MORTGAGES PAYABLE

Notes and mortgages payable consist of the following (in thousands):

                                                                    December 31,
                                                                       1996
                                                                       ----
  13.75% Senior Notes due 2003                                       $ 100,000
  Project specific land, land development and construction loans        38,613
  Other loans                                                            1,523
                                                                     ---------
                                                                     $ 140,136
                                                                     =========

The Company pays interest on the Senior Notes in arrears on May 15 and November
15 of each year at the rate of 13.75% per annum. The Senior Notes may not be
redeemed, at any time prior to maturity. The Senior Notes are unsecured and rank
pari passu with, or senior in right of payment to, all other existing and future
unsecured indebtedness of the Company. The Senior Notes, however, are
effectively subordinated to secured debt of the Company to the extent of any
collateral, as well as to indebtedness of any guaranties by the Company's
subsidiaries. The Company is required to maintain a consolidated tangible net
worth of at least $15 million.

The loan agreements for project specific land, land development and construction
loans are secured by a lien on the applicable residential development project or
a specific unit under construction. Repayment of the loans are generally due
upon sale of the collateral property. The loans bear interest at annual variable
rates ranging from .5% to 2% over prime rate (8.75% to 10.25% at December 31,
1996) or at fixed rates ranging from 9.00% to 9.75%.

Other loans consist primarily of debt financed corporate insurance policies
which bear interest at 6.9%.

Principal maturities of the above indebtedness at December 31, 1996 are as
follows (in thousands):

Year Ended December 31,
- -----------------------
     1997                                                           $ 31,825
     1998                                                              5,925
     1999                                                              2,386
     Thereafter                                                      100,000
                                                                    --------
                                                                    $140,136
                                                                    ========

                                      F-18

<PAGE>


NOTE 9 - MINORITY INTEREST

The Company's Sunstar subsidiary is a participant in a real estate joint venture
in which a party unrelated to the Company owns a minority interest. Joint
venture profits are allocated to the Company and the other partners according to
their respective ownership.

NOTE 10 - RELATED PARTY TRANSACTIONS

Due from related parties consists of the following (in thousands):

                                                              December 31, 1996
                                                              -----------------
     Note receivable from sale of Genesee Custom                  $3,309
     Accounts receivable from sale of Genesee Custom                 977
     Note receivable from director                                   487
     Other                                                           403
                                                                  ------
                                                                  $5,176
                                                                  ======

In connection with the sale of Genesee Custom to a director of the Company, the
Company has a note receivable bearing interest at 12% from the director for
approximately $3.3 million at December 31, 1996. The note is due in July of 1997
and is extendable for six months at the borrower's option. The related accounts
receivable are non-interest bearing and are due on demand.

The Company also has a note receivable bearing interest at 13.75% from another
director for approximately $460,000, net of accrued interest, which is secured
by that director's shares in the Company.

Due to related parties at December 31, 1996 consists of preferred dividends of
$27,000 payable to a director of the Company.

Other Transactions

A limited liability corporation (LLC) owned by two of the Company's directors
and one of the Company's officers has provided consulting services related to
the Company's formation and subsequent acquisitions. Total capitalized costs
associated with this LLC during the period May 21, 1996 through December 31,
1996 are approximately $219,000.

Immediate family members of certain shareholders of Buffington have an interest
in a title insurance company which provides title services to Buffington's home
buyers. It has been the business practice to normally pay closing costs and
title insurance premiums to this title company on behalf of its customers as an
inducement to purchase the Buffington product. Title insurance premiums are
state regulated, and the fees charged to Buffington are consistent to those fees
paid by unrelated customers. Fees in the approximate amount of $659,500 were
paid by Buffington for the period May 21, 1996 through December 31, 1996.

                                      F-19

<PAGE>


Landmark purchases landscaping and lot improvement services from an affiliated
company. Expense related to these services was $198,740 from acquisition through
December 31, 1996. Additionally, Landmark purchases developed land from an
affiliated company at its estimated fair value. For the period from acquisition
through December 31, 1996, Landmark acquired approximately $1,119,600.

NOTE 11 - LEASES

The Company is obligated under various noncancelable operating leases for office
facilities and equipment expiring at various times through 2006. Rental expense
under these agreements amounted to approximately $757,000 for the period May 21,
1996 through December 31, 1996. Included in this amount is rent paid to
affiliated companies, under office and warehouse leases, totalling $290,000 for
the same period.

As of December 31, 1996, future minimum lease payments under noncancelable
operating lease agreements are as follows (in thousands):


             Year Ended
             December 31,
             ------------
               1997                                          $1,065
               1998                                             790
               1999                                             715
               2000                                             596
               2001                                             404
               Thereafter                                     1,285
                                                             ------
                                                             $4,855
                                                             ======

NOTE 12 - SHAREHOLDERS' EQUITY

Preferred stock

The Company has authorized 2 million shares of $.01 par value preferred stock of
which 20,000 shares were issued in 1996 as Series A 11% cumulative convertible
non-voting preferred stock. The preferred stock is restricted from converting
into common stock for the first two years that the shares are issued and
outstanding. The conversion rate of the shares is the lesser of $9.00, the price
of the common stock Offering, or 75% of the lowest closing price during the
thirty days immediately preceding the date of conversion. The Company has the
right to redeem all of the preferred stock prior to conversion at a redemption
price equal to the liquidation value plus any accrued but unpaid dividends.
Accrued dividends on the 10,000 outstanding shares at December 31, 1996 totaled
$27,000.

Common stock

In May 1996, the Company completed an offering of 3,000,000 shares of common
stock (300,000 additional shares were issued in June 1996 in the underwriter's
overallotment) for total proceeds of approximately $21.8 million. The proceeds
were used together with proceeds from the issuance of the Senior Notes (see Note
8) to retire borrowings of the subsidiaries as well as for general corporate
purposes.

In November 1996, the Company's Board of Directors approved a stock repurchase
plan authorizing the purchase of up to 350,000 shares of the Company's currently
outstanding common stock. Such repurchases, if completed, would be effected at
various prices from time to time in the open market.

                                      F-20

<PAGE>


NOTE 13 -EMPLOYEE BENEFIT AND INCENTIVE PLANS

Bonus award plan

The Company has a bonus award plan under which directors, officers, employees
and key consultants of the Company may be awarded cash or common stock based
upon the satisfaction of specific performance criteria. The plan provides for
the grant of up to 575,000 shares of common stock. No awards have been made
under the plan as of December 31, 1996.

Profit sharing plan

The Company's profit sharing plan is a defined contribution plan qualified under
the Internal Revenue Code. All employees who have completed one year of service
with the Company may participate in the plan on the next January 1. A
participant's interest in Company contributions vests 20% per year in each of
the first five years of employment and is 100% vested thereafter. Contributions
to the plan are entirely within the discretion of the Company's Board of
Directors and are determined annually. No contributions have been made to the
plan as of December 31, 1996.

Stock purchase plan

The Board of Directors of the Company has approved a stock purchase plan under
which 500,000 shares of the Company's common stock are reserved for issuance and
sale to employees of the Company at 85% of market value. The plan will be
effective January 1, 1997, subject to approval of the stockholders.

Stock incentive plan

The Company has a stock incentive plan under which non-employee directors,
officers, key employees and consultants of the Company may be granted options to
purchase up to 575,000 shares of the Company's common stock. The stock incentive
plan also allows for the award of stock appreciation rights, restricted stock
and deferred stock. As of December 31, 1996, no stock appreciation rights,
restricted stock or deferred stock were granted.

The stock options granted may be either nonqualified or incentive stock options
although only employees of the Company may be granted incentive stock options.
The option price shall not be less than the fair market value of the Common
Stock on the date of grant; options will expire ten years from the grant date.
Options granted in 1996 become 50% vested on the first grant date anniversary
and 100% vested on the second grant date anniversary.

The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
as the option price equals the market price at the date of issuance, no
compensation expense is recognized. The Company provides disclosure in
accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation."

                                      F-21

<PAGE>


The fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for stock options granted in 1996: expected volatility of 30%,
risk-free interest rate of 6.44%, and an expected life of 7.93 years. Expected
dividends were estimated at one cent per share in accordance with the Company's
dividend policy. The weighted-average fair value of the stock options granted in
1996 was approximately $548,000.

Under the model, the total value of stock options granted in 1996 was
approximately $989,000 which would be amortized ratably on a pro forma basis
over the two-year vesting period. Had the Company determined the compensation
cost for these plans in accordance with SFAS 123, the Company's pro forma net
income would have been approximately $8,039,000 for the period May 21, 1996
through December 31, 1996 and the effect on earnings per share would be
immaterial.

Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                                              Weighted
                                                         Shares                               average
                                                        available            Number           option
                                                       for options          of shares          price
                                                       -----------          ---------          -----
<S>                                                     <C>                  <C>               <C>
Balance available at May 21, 1996                         575,000
Grants                                                   (351,500)            351,500          $8.94
Exercises
Cancellations                                              34,700             (34,700)          9.00
                                                        ---------            --------          -----
Balance at December 31, 1996                              258,200             316,800          $8.92
                                                        =========            ========          =====

Options exercisable at:
December 31, 1996                                              0
December 31, 1997                                        155,050
December 31, 1998                                        316,800
</TABLE>

The following table summarizes information about options outstanding at December
31, 1996:

                              Options Outstanding
                              -------------------
                                     Number                      Remaining
                                 Outstanding at              Contractual Life
      Exercise Price            December 31, 1996               (in years)
      --------------            -----------------               ----------

         $6.00                      200,000                         9.98
         $9.00                      116,800                         9.39
                                    -------
                                    316,800
                                    =======

                                      F-22

<PAGE>


NOTE 14 - INCOME TAXES

The provision for income taxes consists of the following (in thousands):

                                                                   December 31,
                                                                       1996
                                                                       ----
     Current:
        Federal                                                        $4,840
        State                                                             847
                                                                       ------
                                                                        5,687
     Deferred:
        Federal                                                          (619)
        State                                                             (55)
                                                                       ------
                                                                         (674)
                                                                         ----

     Total                                                             $5,013
                                                                       ======

The provision for income taxes differs from the amount computed by applying the
Federal income tax statutory rate as follows:

                                                                   December 31,
                                                                       1996
                                                                       ----

     Income tax computed at statutory rate                             $4,495
     State income taxes, net of federal benefit                           523
     Other, net                                                            (5)
                                                                       ------
     Total                                                             $5,013
                                                                       ======

Deferred tax assets relate principally to warranty reserves and differences in
capitalization of inventory.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

The Company is involved in various routine legal proceedings incidental to the
conduct of its normal business operations. The Company's management believes
that none of these legal proceedings will have a material adverse impact on the
financial condition or results of operations of the Company.

                                      F-23

<PAGE>


NOTE 16 - SUBSEQUENT EVENTS (unaudited)

In January 1997, the Company created a wholly-owned subsidiary, Fortress
Mortgage, Inc. for the purpose of providing decentralized mortgage origination
and centralized underwriting to the buyers of homes sold by the Company's
subsidiary homebuilders. The Company made a capital contribution of $750,000 in
exchange for 100 shares of $.01 par value common stock in Fortress Mortgage,
Inc. In February 1997, the Company authorized 40,000 and 70,000 shares of $.01
par value, voting, noncumulative convertible Class B and Class C preferred
stock. Class B preferred stock has liquidation value of $100 per share.

   
In February 1997, the Company acquired the assets of D.W. Hutson Construction
Company (Hutson), a Jacksonville, Florida homebuilder, for approximately $24.7
million to be paid $9.0 million in cash, $1.2 million in Class B preferred stock
and approximately $8.5 million in assumed debt. Additional consideration of $6.0
million in Class C preferred stock is expected to be paid over a period not to
exceed six years based upon the future performance of Hutson. This consideration
will be accounted for as additional purchase price and, accordingly, increase
the goodwill related to the acquisition and be amortized over the remaining
amortization period.
    

                                      F-24

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of the
Combined Predecessor Companies


In our opinion, based upon our audits and the reports of other auditors, the
accompanying combined balance sheets and the related combined statements of
income, shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of the Combined Predecessor Companies (the
"Company") at May 20, 1996 and December 31, 1995 and 1994, and the results of
their operations and their cash flows for the period January 1, 1996 through May
20, 1996 and each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Companies' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the combined financial statements of The Genesee
Company as of December 31, 1994 and for the year ended December 31, 1994, the
consolidated financial statements of Solaris Development Corporation, as of
December 31, 1995 and 1994 and for the two years in the period ended December
31, 1995 and the financial statements of Sunstar Mortgage Limited Liability
Company as of December 31, 1995 and the period from March 1, 1995 (inception) to
December 31, 1995. The financial statements which we did not audit reflect total
assets of $16.4 million and $67.4 million at December 31, 1995 and 1994,
respectively, and total revenues of $42.6 million and $78.6 million and $95.8
million for the years ended December 31, 1995 and 1994, respectively. Those
statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for The Genesee Company, Solaris Development Corporation and
Sunstar Mortgage Limited Liability Company are based solely on the reports of
the other auditors. We conducted our audits 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 audits and the reports of the other auditors provide a
reasonable basis for the opinion expressed above.


PRICE WATERHOUSE LLP

Minneapolis, Minnesota
February 20, 1997

                                      F-25

<PAGE>

                         COMBINED PREDECESSOR COMPANIES

                                 BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                      --------------------------
                                                                                        1994               1995         May 20, 1996
                                                                                      --------           --------       ------------
<S>                                                                                   <C>                <C>                <C>
                          ASSETS
Cash and cash equivalents .................................................           $  4,866           $  2,710           $  3,028
Related party and other receivables .......................................                967              2,106              2,797
Real estate inventories ...................................................            101,214            109,016            133,820
Property and equipment, net ...............................................              1,774              2,099              1,713
Deferred transaction costs ................................................               --                2,121              4,282
Prepaid expenses and other assets .........................................              2,582              3,614              4,298
                                                                                      --------           --------           --------
          Total assets ....................................................           $111,403           $121,666           $149,938
                                                                                      ========           ========           ========
           LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction
   liabilities ............................................................           $  9,685           $ 10,726           $ 14,645
Notes and mortgages payable ...............................................             83,161             87,604            112,004
Due to related parties ....................................................              2,320              2,495              3,062
Accrued expenses ..........................................................              4,393              4,588              3,585
Customer deposits .........................................................              4,480              5,122              6,332
Commitments and contingencies (Note 11) ...................................
                                                                                      --------           --------           --------
          Total liabilities ...............................................            104,039            110,535            139,628
                                                                                      --------           --------           --------
Minority interests ........................................................              1,346              1,295              1,383
                                                                                      --------           --------           --------
Shareholders' equity:
     Preferred Stock ......................................................
     Common Stock .........................................................                575                599                600
     Additional paid-in capital ...........................................              1,861              2,606              3,070
     Retained earnings ....................................................              3,582              6,631              5,257
                                                                                      --------           --------           --------
          Total shareholders' equity ......................................              6,018              9,836              8,927
                                                                                      --------           --------           --------
          Total liabilities and shareholders' equity ......................           $111,403           $121,666           $149,938
                                                                                      ========           ========           ========
</TABLE>


              The accompanying notes are an integral part of these
                              financial statements.

                                      F-26

<PAGE>


                         COMBINED PREDECESSOR COMPANIES

                            STATEMENTS OF OPERATIONS
                                 (In thousands)

                                                     Year        For the Period
                                                    Ended        January 1, 1996
                                                 December 31,         through
                                           ----------------------     May 20,
                                              1994         1995        1996
                                           ---------    ---------    --------
Revenue:
     Residential sales ................... $ 170,377    $ 190,312    $ 64,984
     Lot sales ...........................     3,869        8,098       1,036
     Other revenue .......................       469          619          99
                                           ---------    ---------    --------
          Total revenue ..................   174,715      199,029      66,119
Cost of sales ............................   146,284      167,434      56,425
                                           ---------    ---------    --------
Gross profit .............................    28,431       31,595       9,694
Operating expenses:
     Selling expenses ....................    11,840       13,152       4,689
     General and administrative
        expenses .........................    11,180       11,693       3,892
                                           ---------    ---------    --------
     Net operating income ................     5,411        6,750       1,113
Other expense (income):
     Interest ............................       136          120          63
     Minority interests ..................       907          745          89
     Other, net ..........................      (460)        (191)       (313)
                                           ---------    ---------    --------
Income before provision for income
   taxes .................................     4,828        6,076       1,274
Provision for income taxes ...............        83           21
                                           ---------    ---------    --------
Net income ............................... $   4,745    $   6,055    $  1,274
                                           =========    =========    ========
Unaudited pro forma net income (Note 13)..                           $    764
                                                                     ========



              The accompanying notes are an integral part of these
                              financial statements.

                                      F-27

<PAGE>

                         COMBINED PREDECESSOR COMPANIES

                       STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)

                                                Additional
                                       Common     Paid-in    Retained
                                        Stock     Capital    Earnings    Total
                                       -------    -------    --------   -------
Balance at December 31, 1993 .......   $   575    $ 1,371    $ 2,297    $ 4,243
     Capital contributions .........        --        490         --        490
     Distributions to shareholders .        --         --     (3,074)    (3,074)
     Redemption of common stock ....        --         --       (386)      (386)
     Net income ....................        --         --      4,745      4,745
                                       -------    -------    -------    -------
Balance at December 31, 1994 .......       575      1,861      3,582      6,018
     Capital contributions .........        24        767        357      1,148
     Distributions to shareholders .        --        (22)    (3,363)    (3,385)
     Net income ....................        --         --      6,055      6,055
                                       -------    -------    -------    -------
Balance at December 31, 1995 .......       599      2,606      6,631      9,836
     Capital contributions .........         1        464         82        547
     Distributions to shareholders .                          (2,730)    (2,730)
     Net income ....................        --         --      1,274      1,274
                                       -------    -------    -------    -------
Balance at May 20, 1996 ............   $   600    $ 3,070    $ 5,257    $ 8,927
                                       =======    =======    =======    =======

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-28

<PAGE>


                         COMBINED PREDECESSOR COMPANIES

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                Year                  For the Period
                                                                                               Ended                    January 1,
                                                                                             December 31,              1996 through
                                                                                       1994               1995         May 20, 1996
                                                                                     ---------          ---------      ------------
<S>                                                                                  <C>                <C>               <C>
Cash flows from operating activities:
     Net income ............................................................         $   4,745          $   6,055         $  1,274
     Adjustments to reconcile net income to net cash
        (used in)  provided by operating activities
          Equity in income from investment partnership .....................                (4)
          Depreciation and amortization ....................................               613                621              277
          Minority interest ................................................               907                745               89
          Changes in operating assets and liabilities:
             Real estate inventories .......................................           (35,308)            (8,155)         (24,803)
             Related party and other receivables ...........................               101             (1,118)            (690)
             Prepaid expenses and other assets .............................              (974)            (1,299)            (256)
             Accounts payable and accrued construction
               liabilities .................................................             4,094                (35)           2,754
             Accrued expenses ..............................................               (94)               919             (578)
             Customer deposits .............................................               893                513              981
                                                                                     ---------          ---------         --------
               Net cash used in operating activities .......................           (25,027)            (1,754)         (20,952)
                                                                                     ---------          ---------         --------

Cash flows from investing activities:
     Purchase of property and equipment ....................................              (849)              (962)            (330)
     Proceeds from sale of property and equipment ..........................                10                 26                8
                                                                                     ---------          ---------         --------
               Net cash used in investing activities .......................              (839)              (936)            (322)
                                                                                     ---------          ---------         --------

Cash flows from financing activities:
     Borrowings under notes and mortgages payable ..........................           101,789            115,740           52,839
     Repayments of notes and mortgages payable .............................           (72,373)          (111,298)         (33,689)
        Borrowings on line of credit .......................................                                                 7,477
        Repayments on line of credit .......................................                                                (2,225)
        Repayment of bonds .................................................                                                  (236)
     Related party borrowings ..............................................             2,090              2,248            1,076
     Repayment of related party borrowings .................................            (1,013)            (2,073)            (510)
     Distributions to minority interest ....................................              (340)              (791)
     Transaction costs .....................................................                               (1,114)            (957)
     Capital contributions .................................................               490              1,123              547
     Capital distributions .................................................            (2,722)            (3,301)          (2,730)
                                                                                     ---------          ---------         --------
               Net cash provided by financing activities ...................            27,921                534           21,592
                                                                                     ---------          ---------         --------

Net increase (decrease) in cash and cash equivalents .......................             2,055             (2,156)             318
Cash and cash equivalents, beginning of period .............................             2,811              4,866            2,710
                                                                                     ---------          ---------         --------


Cash and cash equivalents, end of period ...................................         $   4,866          $   2,710         $  3,028
                                                                                     =========          =========         ========
</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-29

<PAGE>


                         COMBINED PREDECESSOR COMPANIES

                   NOTES TO THE COMBINED FINANCIAL STATEMENTS

NOTE 1 - BUSINESS ORGANIZATION

The Fortress Group, Inc. ("Fortress" or the "Company") was founded in 1995 to
create a national homebuilding company to be engaged in the acquisition and
development of land or improved lots and the construction of residential
for-sale housing.

Fortress has entered into definitive agreements to acquire, simultaneously with
the closing of an initial public offering (the Offering), four homebuilding
companies, Buffington Homes, Inc. (Buffington), Christopher Homes and Affiliates
(Christopher), The Genesee Company (Genesee), and Solaris Development
Corporation (Solaris), and one mortgage company, Sunstar Mortgage Limited
Liability Company (Sunstar) in exchange for common and preferred stock and cash.
The four homebuilders and the mortgage company to be acquired by Fortress
combined with the Fortress holding company are referred to herein as the
"Predecessor Companies."

The aggregate consideration to be paid by Fortress in these transactions is as
follows:

          (a)  An aggregate of $5,995,000 in cash;

          (b)  An aggregate of 6,233,875 shares of common stock of the Company;
               and

          (c)  An aggregate of 20,000 shares of Series A 11% Cumulative
               Convertible Preferred Stock of the Company, see Note 12.

The allocation of the above to each of the Predecessor Companies is as follows:

                                                       Common          Preferred
    Predecessor Company                                Shares           Shares
    -------------------               Cash           Allocation       Allocation
                                    ----------       ----------       ----------
Buffington ..................       $1,129,000        1,897,897               --
Christopher .................          179,000        1,691,227               --
Genesee .....................          811,000        1,729,495           20,000
Solaris/Sunstar .............        3,876,000          915,256               --
                                    ----------       ----------       ----------
                                    $5,995,000        6,233,875           20,000
                                    ==========       ==========       ==========

The consideration to be paid for the Predecessor Companies was determined
through arm's length negotiations among the Company and representatives of the
Predecessor Companies.

Fortress completed the Offering and the acquisitions on May 20, 1996.

NOTE 2 - BASIS OF PRESENTATION

Simultaneously with the closing of the Offering, Fortress will acquire by merger
each of the five operating businesses, Buffington, Christopher, Genesee, Solaris
and Sunstar (the Mergers). The accompanying combined financial statements and
related notes to the combined financial statements are presented on a combined
basis without giving effect to the Mergers or the Offering. The assets and
liabilities of the Predecessor Companies are reflected at their historical
amounts and include accounts of joint ventures where the Company controls the
management activities and holds a significant economic interest. All
inter-company transactions have been eliminated.

                                      F-30

<PAGE>


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Estimates by management

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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

   Revenue recognition

Residential and lot sales are recognized when all conditions precedent to
closing have been fulfilled and title has passed to the buyer. The Company
generally enters into contracts of sale for its houses in advance of their
construction. The Company's standard residential sales contract generally
requires the customer to make an earnest money deposit which is recognized as a
liability until the sale closes.

   Real estate inventories and cost of sales

All real estate inventories which are held for sale are carried at cost which is
less than fair value as measured in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Fair value is
measured based on the application of discounting expected future cash flows of
each of the Company's real estate developments. Costs incurred which are
included in inventory consist of land, land development, direct and certain
indirect construction costs, interest and real estate taxes, and direct model
construction costs and related improvements.

At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete (specific
identification), plus an allocation of the total estimated cost of land and land
development, interest, real estate taxes and any other capitalizable common
costs based on the relative sales value method of accounting.

The Company generally provides a one year limited warranty of workmanship and
materials with each of its homes. Accordingly, a warranty reserve, based on the
Company's historical experience, is provided as residential sales are closed;
this reserve is reduced by the cost of subsequent work performed.

   Interest capitalization

Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with SFAS No. 34, "Capitalization
of Interest Cost," and charged to cost of sales as revenue from residential
sales is recognized. The interest and related debt issuance costs capitalized
are determined by applying a weighted average capitalization rate to the
accumulated qualified real estate expenditures. The capitalization rate is based
on the Company's outstanding borrowings associated with the acquisition,
development and construction of the qualified real estate inventory. The amount
of financing costs capitalized does not exceed those costs incurred for any year
presented in the accompanying combined financial statements.

   Deferred transaction costs

Transaction costs, which consist of costs incurred in conjunction with the
Mergers and Offering, have been deferred and will be recorded as a reduction of
equity when the Offering is completed.

                                      F-31

<PAGE>


   Property and equipment

Property and equipment are carried at cost less accumulated depreciation and are
depreciated using either straight line or accelerated depreciation methods over
the estimated useful lives of the assets which range in years from 5 to 10.
Costs incurred for common area model improvements and certain furnishings are
amortized on a per unit basis as home sales in the related development are
closed. Significant additions and improvements are capitalized, while
expenditures for repairs and maintenance are charged to operations, as incurred.

   Income taxes

Each of the Predecessor Companies was either a subchapter S corporation or
partnership for income tax purposes for all periods presented and, accordingly,
any income tax liabilities are the responsibility of the Predecessor Companies'
respective shareholders or partners. The combined financial statements of
Christopher are comprised of one subchapter S corporation, one limited
partnership and two C corporations. Each of the Predecessor Companies subchapter
S corporation or partnership status will terminate on consummation of the
Merger, as disclosed in Notes 1 and 2. See Note 13 for information regarding the
pro forma income tax disclosure.

For the year ended 1994, no income tax benefit was recorded for the losses
related to the C corporations of Christopher because there was no remaining
taxable income in the three year carry back period. For 1995 and 1996, no income
tax provision was recognized because the taxable income generated by the
combined Christopher entities was primarily incurred by the S corporation. The
tax provision for the years ended December 31, 1995 and 1994 represent the
greater of income or equity component of Texas state franchise taxes.

At December 31, 1994 and 1995 and May 20, 1996, no deferred taxes have been
provided for the net operating losses and other temporary differences between
the financial reporting basis and the income tax basis because the realization
of the net deferred tax asset is unlikely. Net operating loss carry forwards
available in 1995 aggregate approximately $325,000. The fiscal tax year ends for
Christopher's C corporations are April 30 and June 30, respectively.

   Historical net income per share

Historical net income per share has not been presented as it is not deemed to be
a meaningful presentation as a result of the Mergers.

   Cash and cash equivalents

For purposes of reporting cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Supplemental disclosures of cash flow information are as follows
(in thousands):

                                             Year Ended              Period
                                            December 31,         January 1, 1996
                                       ---------------------         through
                                        1994           1995       May 20, 1996
                                       ------         ------      ------------
Cash paid for:
     Interest .....................    $6,163         $8,612         $2,826
                                       ------         ------         ------
     Income taxes .................    $  231         $   83         $    6
                                       ======         ======         ======

                                      F-32

<PAGE>


Supplemental disclosur of non-cash activities are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                                            Year Ended             Period
                                                                                            December 31,      January 1, 1996
                                                                                      ----------------------      through
                                                                                       1994            1995     May 20, 1996
                                                                                      ------          ------    ------------
<S>                                                                                   <C>             <C>           <C>
Net assumption and assignment of Special Improvement District
   Bonds .......................................................................      $  590          $  623        $  (83)
Distribution of property to owners of Predecessor Companies ....................         353              58
Redemption of common stock for notes payable ...................................         386
Other ..........................................................................          45              35
                                                                                      ------          ------        ------
          Total ................................................................      $1,374          $  716        $  (83)
                                                                                      ======          ======        ======
</TABLE>

NOTE 4 - REAL ESTATE INVENTORIES

Real estate inventories are summarized as follows (in thousands):

                                                  December 31,
                                            ----------------------       May 20,
                                              1994          1995          1996
                                            --------      --------      --------
Work-in-progress:
     Sold homes ......................      $ 38,177      $ 34,460      $ 53,355
     Speculative homes ...............        17,275        24,208        34,423
                                            --------      --------      --------

                                              55,452        58,668        87,778
                                            --------      --------      --------

Land:
     Finished lots ...................        24,496        28,219        34,029
     Land under development ..........        12,447        12,819           984
     Land and other costs ............           729           456         1,887
                                            --------      --------      --------

                                              37,672        41,494        36,900
                                            --------      --------      --------

Models ...............................         8,090         8,854         9,142
                                            --------      --------      --------

          Total ......................      $101,214      $109,016      $133,820
                                            ========      ========      ========


Models are constructed to assist in the marketing effort of a development and
speculative construction represents non-model homes either under construction or
substantially completed which are not subject to a sales contract.

                                      F-33

<PAGE>


NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows (in thousands):

                                                  December 31,
                                            ----------------------      May 20,
                                              1994          1995         1996
                                            --------      --------     --------
Model home upgrades and furnishings .....   $ 1,559        $ 1,997      $ 1,435
Equipment and furniture .................       826          1,197        1,363
Vehicles ................................       279            266          250
Leasehold improvements ..................        44             44           36
Other ...................................        67            108
                                            -------        -------      -------
                                              2,775          3,612        3,084
Less: Accumulated depreciation
   and amortization                          (1,001)        (1,513)      (1,371)
                                            -------        -------      -------
                                            $ 1,774        $ 2,099      $ 1,713
                                            =======        =======      =======

NOTE 6 - NOTES AND MORTGAGES PAYABLE

Notes and mortgages payable are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                 -------------------    May 20,
                                                                   1994       1995       1996
                                                                 --------   --------   --------
<S>                                                              <C>        <C>        <C>
Project specific land, land development and construction loans   $ 63,032   $ 66,629   $ 85,775
Demands for deed on sales-leasebacks .........................      2,370        230
Other loans ..................................................      1,272      1,149      3,254
Subordinated investor notes and equity participation loans ...     16,487     19,596     22,975
                                                                 --------   --------   --------
                                                                 $ 83,161   $ 87,604   $112,004
                                                                 ========   ========   ========
</TABLE>

The loan agreements for project specific land, land development and construction
loans are collateralized by a lien on the applicable residential development
project or a specific unit under construction. Repayment of these loans are
normally payable upon the closing of the encumbered unit. The method to
determine the repayment amount varies depending on the specific loan agreement
but is generally based on a specified per unit amount or as a percentage of the
sale price of the sold unit. In addition, the loan agreements typically include
a limitation on the total amount that can be borrowed or the amount that can be
outstanding at any time. These loans bear interest at annual variable rates
ranging from .5% to 2.0% over prime (8.75% to 10.25% at May 20, 1996) or a fixed
rate of 9.0%. The shareholders of Genesee, Christopher and Sunstar have
personally guaranteed the repayment of a significant amount of the outstanding
project specific land, land development and construction loans.

Demands for deed on sales-leaseback represent financing arrangements on certain
finished model homes which are leased by Christopher for one to two years for
marketing purposes. The demand for deed yields approximately 12% annually with a
3% commission paid upon the resale of the model home.

Other loans consist of non-recourse notes payable secured by assets of the
Company not related to its normal business operations of homebuilding. These
loans bear interest at an annual rate of 2.0% over prime (10.25% at May 20,
1996) or a fixed rate of 6.0%. Repayment of these loans varies based on the
terms of the respective loan agreements.

Subordinated investor notes and equity participation loans generally consist of
loans from third party investors which were used to facilitate the initial
purchase of residential real estate to be held for development for certain
Genesee and Christopher projects.

                                      F-34

<PAGE>


The investor loans outstanding for Christopher are secured by a deed of trust,
subordinated to the land acquisition and development loan. These notes are
payable in monthly distributions equal to a 15% annualized return and a 10% fee
due at the closing of each lot collateralized. The sole shareholder of
Christopher has personally guaranteed the repayment of these obligations which
at December 31, 1994 and 1995 and at May 20, 1996 was approximately $6.1
million, $9.2 million and $10.6 million, respectively.

Genesee's subordinated seller notes are either unsecured or collateralized by a
lien on its real estate inventories and are guaranteed by Genesee's sole
stockholder. Genesee's outstanding obligation for these loans at December 31,
1994 and 1995 and May 20, 1996 was approximately $4.3 million, $5.9 million and
$7.9 million, respectively. Generally, these loans bear interest at a fixed
annual rate of 12%, paid monthly. The unsecured notes entitle the holder to
receive an additional 6% interest per annum payable at maturity of the note.
These notes generally have maturities of six months, at which time the principal
and all unpaid interest are due.

Genesee has entered into a series of equity participation agreements and related
notes payable with one private investor. Under these agreements, Genesee has
received advances from this equity participant totaling $6.1 million, $4.6
million and $4.5 million as of December 31, 1994 and 1995 and May 20, 1996,
respectively, in the form of equity participation notes payable. The proceeds
from these notes are used to acquire and develop various predetermined real
estate properties and to construct homes in certain developments.

In general, no interest is accrued on the principal balance of these notes, but
rather, the note holder is entitled to a portion of the net profits of the
development which collateralizes the note. However, at May 20, 1996, Genesee had
two equity participation notes payable which require that the private investor
receive the greater of some minimal rate of return or a portion of the net
profits of the development. At May 20, 1996, Genesee has accrued approximately
$289,000 in interest costs, all of which has been capitalized, related to these
two notes since the developments which collateralize these notes are in the
start-up stages and net profits earned as of May 20, 1996 have been less than
the minimum rate of return guaranteed the investor. With respect to the other
equity participation agreements, in the event of default, interest would be
accrued at the rate of the greater of 3% over prime or 18%, retroactive to the
origination date of the note. As of May 20, 1996, there have been no events of a
default. Genesee periodically reviews the expected profits and cash flows of
developments with equity participation notes payable and would accrue interest
on the notes if it determined that an event of default was probable. In general,
equity participation notes payable have maturities within two years of
origination.

Based upon the equity participation agreements, net profits of the individual
developments are distributed, at Genesee's discretion, as follows: first,
distributions are to repay the principal balance and interest, if applicable, of
the equity participation note payable related to that development; and second,
once the principal balance of the equity participation note payable for a
development is repaid, net profits are distributed between the equity
participant and Genesee.

Maturities of notes and mortgages payable in future periods are as follows (in
thousands):

<TABLE>
<CAPTION>

Year Ended
December 31,
- ------------
<S>                                                               <C>
1996 ................................................             $ 87,561
1997 ................................................               20,808
1998 ................................................                3,578
1999 ................................................                   56
2000 ................................................                    1
                                                                  --------
                                                                  $112,004
                                                                  ========
</TABLE>

The timing of repayments on these notes and mortgages payable may differ from
the above schedule due to the actual closing pace of the units sold.

                                      F-35

<PAGE>

Interest and related debt issuance costs incurred and capitalized aggregated
approximately $11.7 million, $16.1 million and $5.2 million for the years ended
December 31, 1994 and 1995 and the period January 1, 1996 through to May 20,
1996, respectively.

NOTE 7 - ACCRUED EXPENSES

Included in accrued expenses are Special Improvement District assessments which
consist of special assessments issued by the city of Las Vegas to fund the
acquisition and construction of certain public improvements specially benefiting
property located in the City's Special Improvement District No. 404, the
Summerlin area. The city-issued bonds are secured by the unpaid assessments on
property within the district and are payable by the property owners. The
assessments are due on April 1 and October 1 of each year until October 1, 2009.
As property is sold, the balance of the assessment is assigned to, and the
liability assumed by, the buyer of the property. For the years ended December
31, 1994 and 1995 and the period from January 1, 1996 through May 20, 1996,
management believes that maturities of these obligations prior to buyer
assumptions will not be material to these combined financial statements of the
Predecessor Companies. The outstanding obligation for these assessments at
December 31, 1994 and 1995 and May 20, 1996 is $2.3 million, $1.5 million and
$1.3 million, respectively.

NOTE 8 - MINORITY INTERESTS

The minority interests at December 31, 1994 and 1995 and May 20, 1996 include
Solaris' Village Lakes and Park Village ventures in which these partners hold a
50% non-controlling ownership interest and 34% ownership interest, respectively.
The minority interest expense included in the accompanying combined financial
statements includes the minority partners' interest in the profits generated by
the real estate ventures based on the respective ownership interest.

NOTE 9 - RELATED PARTY TRANSACTIONS

Immediate family members of certain shareholders of Buffington have an interest
in a title insurance company which provides title services to Buffington's home
buyers. It has been the business practice to normally pay closing costs and
title insurance premiums to this title company on behalf of its customers as an
inducement to purchase the Buffington product. Title insurance premiums are
state regulated and the fees charged to Buffington are consistent to those fees
paid to unrelated customers. Fees in the approximate amount of $568,000,
$674,000 and $315,000 were paid by Buffington for the years ended December 31,
1994 and 1995, and the period from January 1, 1996 through May 20, 1996,
respectively.

The owners of Buffington held an ownership interest in a residential mortgage
origination company. Buffington paid origination fees to this affiliated company
on behalf of its customers in the amount of $447,000, and $584,000 for the years
ended December 31, 1994 and 1995. No origination fees were paid by Buffington to
this related party in the period from January 1, 1996 through May 20, 1996.

Genesee has entered into an agreement with a company (from which the sole
shareholder receives compensation for management services) to perform certain
marketing and management activities on behalf of Genesee. For the years ended
December 31, 1994 and 1995, approximately $356,000 and $98,000 has been recorded
under this agreement, respectively. This agreement was terminated as of January
1, 1996.

Genesee is involved in a limited partnership in which its sole shareholder
receives compensation for management services. The purpose of this partnership
is to acquire and develop land for sale. Genesee receives management fees from
the partners of this partnership for services performed which was approximately
$102,000 and $6,000 for the years ended December 31, 1994 and 1995,
respectively. No management fees were received in the period from January 1,
1996 through May 20, 1996. In addition, Genesee is entitled to a marketing fee,
but it has allowed a company, from which the sole shareholder receives
management compensation, to receive this fee directly from the partnership with
no financial

                                      F-36

<PAGE>


impact on these combined statements. With respect to this same partnership,
Genesee has entered into several agreements to purchase land at its estimated
fair market value. For the year ended December 31, 1994, Genesee acquired
approximately $2.7 million. No land acquisitions from this partnership were made
in 1995 or 1996.

Genesee pays a fee to an entity owned by its sole shareholder which provides
negotiation services in connection with the purchase of land. For the years
ended December 31, 1994 and 1995, Genesee recognized in cost of sales related
expense of $145,000 and $5,000, respectively. No such services were purchased
during the period from January 1, 1996 through May 20, 1996.

Genesee has made several home sales to its employees for which sales revenues
and the related cost of sales have been included in the accompanying combined
statements of income. For the year ended December 31, 1994, the sales revenue
recognized was approximately $454,000, and cost of sales of $405,000. Genesee
made no home sales to employees during the year ended December 31, 1995 or the
period from January 1, 1996 through May 20, 1996.

Christopher provides certain accounting services for related parties and in
return receives a management fee, which was approximately $343,000 and $39,000
for the years ended December 31, 1994 and 1995, respectively. No fees were
received in the period January 1, 1996 through May 20, 1996. Sales commissions
paid by related parties to Christopher amounted to approximately $108,000 and
$62,000 for the years ended December 31, 1994 and 1995, respectively. No sales
commissions were paid to related parties in the period January 1, 1996 through
May 20, 1996. In addition, Christopher paid rent during the years ended December
31, 1994 and 1995 and the period from January 1, 1996 through May 20, 1996 of
approximately $34,000, $34,000 and $14,000, respectively, for office and
warehouse space under a month-to-month lease to a related party.

Solaris entered into an office lease with an affiliated company on November 1,
1995. Rent expense related to this lease was approximately $32,500 for the
period January 1, 1996 through to May 20, 1996.

NOTE 10 - EMPLOYEE BENEFIT PLANS

Each of the Predecessor Companies excluding Christopher maintains a contributory
profit sharing plan established pursuant to the provisions of Section 401(k) of
the Internal Revenue Code which provides retirement benefits for their eligible
employees. The Predecessor Companies may make annual discretionary or matching
contributions to the respective plans. Contributions were approximately
$207,000, $156,000 and $38,000 for each of the years ended December 31, 1994 and
1995 and the period from January 1, 1996 through May 20, 1996, respectively.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

     Leases

The Predecessor Companies lease various office space, models and equipment under
noncancellable operating lease agreements which expire at various dates and on
month-to-month lease arrangements. Rent expense under such leases aggregated
approximately $673,000, $825,000 and $442,000 during the years ended December
31, 1994, 1995 and the period January 1, 1996 through May 20, 1996,
respectively. Future minimum rental payments under fixed expiration term
operating leases are as follows (in thousands):

                                      F-37

<PAGE>


<TABLE>
<CAPTION>
Year Ended
December 31,
- ------------
<S>                                                                <C>
1996 ...................................................           $     284
1997 ...................................................                 220
1998 ...................................................                 137
1999 ...................................................                 124
2000 ...................................................                  98
                                                                   ---------
                                                                   $     863
                                                                   =========
</TABLE>

Genesee leases certain office equipment classified as capital leases. These
leases have a cost of $196,000, $206,000 and $207,000 and accumulated
depreciation of approximately $52,000, $81,000 and $97,000 as of December 31,
1994 and 1995 and the period January 1, 1996 through May 20, 1996, respectively.
The scheduled future minimum lease payments are $84,000.

     Other commitments

On January 1, 1994 Solaris entered into a consulting contract with a former
shareholder which requires Solaris to pay a fee for services rendered in the
amount of $5,000 per month over a sixty month period.

The Company is involved in various routine legal proceedings incidental to the
conduct of its normal business operations. In the opinion of the Predecessor
Companies' management, these matters are not anticipated to have a material
adverse effect on the financial position or results of operations or cash flows
of the Company.

Christopher has signed a letter of intent to purchase a parcel of land for
approximately $7.7 million in a master planned development in Las Vegas, Nevada.

NOTE 12 - SHAREHOLDERS' EQUITY

The Company has authorized 2 million shares (par value of $.01) of which 20,000
shares have been authorized as Series A 11% Cumulative Convertible Non-Voting
Preferred Stock of which no shares were issued and outstanding as of May 20,
1996. The preferred stock is restricted from converting into common stock of
Fortress for the first two years that such shares are issued and outstanding.
The preferred stock has a liquidation preference of $100 per share ($2 million
in the aggregate) and other terms, as defined in the Certificate of Designation.
The conversion ratio of such shares is the lesser of the price of the common
stock Offering or 75% of the lowest closing price during the thirty days
immediately preceding the date of conversion.

Effective January 1, 1994, Solaris redeemed 1,000 shares of common stock held by
a shareholder and provided a note payable collateralized by the redeemed shares
in the amount of $386,000, this transaction resulted in a decrease in retained
earnings of $386,000 and no gain or loss. At December 31, 1994 the amount of the
note payable outstanding was approximately $318,000.

In 1995, Genesee adopted an incentive stock option plan for certain employees.
The plan allows the grant of options to purchase up to 10,000 shares of
Genesee's common stock. The exercise price is equal to the estimated fair value
of the common stock at the date of grant. The options generally vest nine years
after the date of grant, but the vesting period is accelerated upon a change of
control or the occurrence of certain other events as specified in the plan
agreement. The options are exercisable over periods of up to 10 years. During
1995, options to purchase 10,000 shares of Genesee's common stock were granted
at an exercise price of $50.15 per share. All outstanding options were exercised
on May 20, 1996.

                                      F-38

<PAGE>


NOTE 13 - UNAUDITED PRO FORMA NET INCOME

The following unaudited pro forma income tax information is presented in
accordance with SFAS No. 109,"Accounting for Income Taxes", as if the Company
had been a C Corporation subject to Federal and state income taxes for period
from January 1, 1996 through May 20, 1996.

                                                              For the
                                                      Period January 1, 1996
                                                       through May 20, 1996
                                                       --------------------
     Net income before pro forma adjustments,
        per statement of operations                             $1,274
     Pro forma adjustment:
        Provision for income taxes at estimated
           effective rate of 40%                                   510
                                                                ------

     Pro forma net income                                      $   764
                                                                ======

                                      F-39

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Shareholders of
Buffington Homes, Inc.


In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the combined financial position of
Buffington Homes, Inc. (the "Company") at May 20, 1996, December 31, 1995 and
1994, and the combined results of their operations and cash flows for the period
January 1, 1996 through May 20, 1996 and each of the two years in the period
ended December 31, 1995 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.


As discussed in Note 1, Buffington Homes, Inc. was acquired by The Fortress
Group Inc. on May 20, 1996.


PRICE WATERHOUSE LLP


Austin, Texas
November 25, 1996


                                      F-40

<PAGE>

                             BUFFINGTON HOMES, INC.

                             COMBINED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                  December 31,
                                                               -----------------   May 20,
                                                                 1994      1995     1996
                                                               -------   -------   -------
<S>                                                           <C>       <C>       <C>
                           ASSETS
Cash and cash equivalents .................................   $ 1,741   $   335   $   246
Receivables ...............................................       352       382       392
Real estate inventories ...................................    12,083    16,587    24,721
Property and equipment, net ...............................       233       425       406
Prepaid and other assets ..................................     1,355     1,547     1,899
                                                              -------   -------   -------

           Total assets ...................................   $15,764   $19,276   $27,664
                                                              =======   =======   =======

             LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities .....   $ 1,643   $ 1,677   $ 2,131
Notes payable .............................................     9,748    14,537    21,294
Other accrued expenses ....................................       809       674       485
Customer deposits .........................................        69       130       563
                                                              -------   -------   -------

           Total liabilities ..............................    12,269    17,018    24,473
                                                              -------   -------   -------

Commitments and contingencies--Note 9 Shareholders' equity:
     Common stock .........................................        22        24        25
     Additional paid-in capital ...........................       206       855       855
     Retained earnings ....................................     3,267     1,379     2,311
                                                              -------   -------   -------

           Total shareholders' equity .....................     3,495     2,258     3,191
                                                              -------   -------   -------

           Total liabilities and shareholders' equity .....   $15,764   $19,276   $27,664
                                                              =======   =======   =======
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-41

<PAGE>

                             BUFFINGTON HOMES, INC.

                        COMBINED STATEMENTS OF OPERATIONS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                                  For the Period
                                                                                                                     January 1,
                                                                                                                        1996
                                                                                   Year Ended December 31,             through
                                                                                ------------------------               May 20,
                                                                                  1994            1995                  1996
                                                                                --------        --------              --------
<S>                                                                             <C>             <C>                   <C>
Revenue:
     Sales ........................................................             $ 63,776        $ 52,488              $ 22,332
     Other revenue ................................................                  345             286                   300
                                                                                --------        --------              --------
          Total revenue ...........................................               64,121          52,774                22,632
     Cost of sales ................................................               53,523          44,186                18,063
                                                                                --------        --------              --------
          Gross profit ............................................               10,598           8,588                 4,569
Operating expenses:
     Selling expenses .............................................                3,399           3,340                 1,462
     General and administrative
        expenses ..................................................                5,246           5,401                 1,508
                                                                                --------        --------              --------
          Net operating income ....................................                1,953            (153)                1,599
Other expense (income):
     Interest expense .............................................                   94              80                    62
     Interest and other income ....................................                 (101)            (71)
                                                                                --------        --------              --------
          Income (loss) before provision for taxes ................                1,960            (162)                1,537
                                                                                --------        --------              --------
Provision for taxes ...............................................                   83              21                    --
                                                                                --------        --------              --------
Net income (loss) .................................................             $  1,877        $   (183)             $  1,537
                                                                                ========        ========              ========
Unaudited pro forma net income (Note 10) ..........................                                                   $    922
                                                                                                                      ========

</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-42

<PAGE>

                             BUFFINGTON HOMES, INC.

                   COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                 Common            Additional
                                                                 Stock              Paid-in             Retained
                                                                 Amount             Capital             Earnings             Total
                                                                -------             -------             -------             -------
<S>                                                             <C>                 <C>                 <C>                 <C>
Balance at December 31, 1993 .......................            $    22             $   106             $ 1,784             $ 1,912
   Capital contributions ...........................                 --                 100                  --                 100
   Capital distributions ...........................                 --                  --                (394)               (394)
   Net income ......................................                 --                  --               1,877               1,877
                                                                -------             -------             -------             -------

Balance at December 31, 1994 .......................                 22                 206               3,267               3,495
   Capital contributions ...........................                  2                 649                  --                 651
   Capital distributions ...........................                 --                  --              (1,705)             (1,705)
   Net loss ........................................                 --                  --                (183)               (183)
                                                                -------             -------             -------             -------
Balance at December 31, 1995 .......................                 24                 855               1,379               2,258
   Capital contributions ...........................                  1                  --                  --                   1
   Capital distributions ...........................                 --                  --                (605)               (605)
   Net income ......................................                 --                  --               1,537               1,537
                                                                -------             -------             -------             -------
Balance at May 20, 1996 ............................            $    25             $   855             $ 2,311             $ 3,191
                                                                =======             =======             =======             =======

</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-43

<PAGE>



                             BUFFINGTON HOMES, INC.

                        COMBINED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                                           For the
                                                                                                                            Period
                                                                                                                          January 1,
                                                                                                                             1996
                                                                                        Year Ended December 31,             through
                                                                                      --------------------------            May 20,
                                                                                       1994                1995              1996
                                                                                      -------            -------            -------
<S>                                                                                   <C>                <C>                <C>
Cash flows from operating activities:
     Net income (loss) ....................................................           $ 1,877            $  (183)           $ 1,537
     Adjustments to reconcile net income to net
      cash used by operating activities
        Depreciation and amortization .....................................               129                207                105
        Increase in receivables ...........................................              (176)                (9)               (10)
        Increase in real estate inventories ...............................            (1,105)            (4,482)            (8,134)
        Increase in prepaid and other assets ..............................              (861)              (293)              (352)
        (Decrease) increase in accounts payable,
          accrued construction liabilities and other ......................              (639)              (101)               265
          and accrued expenses
        Customer deposits .................................................              (105)                61                433
                                                                                      -------            -------            -------
          Net cash used by operating activities ...........................              (880)            (4,800)            (6,156)
                                                                                      -------            -------            -------
Cash flows from investing activities:
     Purchase of equipment ................................................              (210)              (399)               (86)
                                                                                      -------            -------            -------
          Net cash used in investing activities ...........................              (210)              (399)               (86)
                                                                                      -------            -------            -------
Cash flows from financing activities:
     Stock contribution ...................................................               100                651
                                                                                                                                  1
     Net increase in notes payable ........................................             1,155              4,789              6,757
     Capital distribution .................................................               (41)            (1,647)              (605)
                                                                                      -------            -------            -------
          Net cash provided by financing activities .......................             1,214              3,793              6,153
                                                                                      -------            -------            -------
Net increase (decrease) in cash ...........................................               124             (1,406)               (89)
Cash and cash equivalents, beginning of period ............................             1,617              1,741                335
                                                                                      -------            -------            -------
Cash and cash equivalents, end of period ..................................           $ 1,741            $   335            $   246
                                                                                      =======            =======            =======
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-44

<PAGE>


                             BUFFINGTON HOMES, INC.
                     NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1--BUSINESS AND ORGANIZATION

Buffington Homes, Inc. is primarily engaged in the construction of detached
single-family homes in the central Texas area.

The combined financial statements include the accounts of Buffington Homes,
Inc., Buffington San Antonio, Buffington Development, Buffington Central Texas
and Elements! which are wholly owned by the stockholders of Buffington Homes,
Inc. The combined entities are hereafter referred to as the Company. All
significant intercompany accounts and transactions have been eliminated in
combination.

Buffington Homes, Inc. is engaged in the construction of detached single family
homes in the Austin, Texas area. It had 1,000,000 shares of $1.00 par value
Common Stock authorized with 2,000 shares issued and outstanding for the years
ended December 31, 1994, 1995 and the period January 1 through May 20, 1996.
Buffington San Antonio was formed in 1993 and is engaged in the construction of
homes in the San Antonio, Texas area. It had 1,000,000 shares of $.01 par value
Common Stock authorized with 1,000,000 shares issued and outstanding for the
years ended December 31, 1994, 1995 and the period January 1 through May 20,
1996. Elements! was formed in 1993 to provide interior design services to
Buffington Homes, Inc. and unrelated buyers. Elements! had 1,000,000 shares of
$.01 par value Common Stock authorized, issued and outstanding for the years
ended December 31, 1994 and 1995 and the period January 1 through May 20, 1996.
Buffington Development was incorporated in 1994 for the purpose of holding lot
inventory in Austin, Texas. Buffington Development had 1,000,000 shares of $.01
par value Common Stock authorized with 10,000 shares issued and outstanding at
December 31, 1994 and 1995 and 11,000 shares at May 20, 1996, respectively. In
1995, Buffington Central Texas was formed to build custom homes. Buffington
Central Texas is structured as a limited partnership and was initially
capitalized with a $2,000 contribution from the owners of Buffington Homes, Inc.

Effective May 20, 1996, the Company and its shareholder executed a definitive
agreement with the Fortress Group, Inc. (Fortress) pursuant to which the Company
merged with Fortress (the Merger). All outstanding shares of the Company were
exchanged for cash and shares of Fortress's common stock concurrent with the
consummation of the initial public offering of Fortress.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Estimates by Management

The preparation of the 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

   Revenue Recognition

Residential sales are recognized when all conditions precedent to closing have
been fulfilled and title has passed to the buyer. The Company's homes are
generally sold in advance of their construction. The Company's standard sales
contract generally requires the customer to make an earnest money deposit which
is recognized as a liability until the unit closes.

                                      F-45

<PAGE>


   Real Estate Inventories and Cost of Sales

All real estate inventories, which are held for sale, are carried at cost which
is less than fair value as measured in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Fair value is measured
based on the application of discounting expected future cash flows of the
Company's real estate developments. Costs incurred which are included in
inventory consist of land, direct and certain indirect construction costs,
interest and real estate taxes, certain selling incentives and direct model
construction costs and related improvements.

At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete (specific
identification).


   Interest Capitalization

Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with SFAS No. 34, "Capitalization
of Interest Cost," and charged to cost of sales when revenue from residential
sales is recognized. The interest and related debt issuance costs capitalized
are determined by applying a weighted average capitalization rate to the
accumulated qualified real estate expenditures. The capitalization rate is based
on the Company's outstanding borrowings associated with the acquisition,
development and construction of the qualified real estate inventory. The amount
of financing costs capitalized does not exceed those costs incurred for any year
presented in the accompanying combined financial statements.

   Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and are
depreciated using the straight line method over the estimated useful lives of
the assets which is generally five years. Significant additions and improvements
are capitalized, while expenditures for repairs and maintenance are charged to
operations, as incurred.

   Selling Expenses

Selling expenses includes all sales commissions paid, salaries paid to marketing
personnel, the direct and indirect costs of sales offices and advertising
expenses.

   Income Taxes

Since January 1994, the Company has been a subchapter S corporation for income
tax purposes and, accordingly, any income tax liabilities are the responsibility
of the Company's shareholders. The Company's subchapter S corporation status
terminated on consummation of the Merger with Fortress disclosed in Note 1. The
tax provision for the years ended December 31, 1994 and 1995 represent the
greater of income or equity component of Texas state franchise taxes. See Note
10 for information regarding the pro forma income tax disclosure.

                                      F-46

<PAGE>


   Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers all highly-liquid
investments with an original maturity of three months or less to be cash
equivalents. Supplemental disclosures of cash flow information are as follows
(in thousands):

                                                                  For the
                                              Year Ended      Period January 1,
                                             December 31,          1996
                                          ------------------      through
                                           1994        1995     May 20, 1996
                                          ------      ------    ------------
Cash paid for interest ................   $  937      $1,049      $  790
                                          ------      ------      ------
Cash paid for taxes ...................   $  231      $   83      $    6
                                          ------      ------      ------
Distributions of property to owners ...   $  353      $   58      $   --
                                          ------      ------      ------

The Company secured a performance bond in the amount of $200,000 relating to one
of the Company's contracts. This amount is considered restricted cash and is
included in cash and cash equivalents at May 20, 1996.

NOTE 3--REAL ESTATE INVENTORIES

Real estate inventories are summarized as follows (in thousands):


                                                     December 31,
                                                 -------------------     May 20,
                                                   1994        1995       1996
                                                 -------     -------    -------
Work in Progress:
     Sold homes (under construction) .......     $ 6,110     $ 8,569    $13,227
     Speculative homes .....................       2,465       3,336      6,828
                                                 -------     -------    -------
                                                   8,575      11,905     20,055
                                                 -------     -------    -------
Land:
     Finished lots .........................       2,231       3,041      2,892
                                                 -------     -------    -------
Models .....................................       1,277       1,641      1,774
                                                 -------     -------    -------
Total ......................................     $12,083     $16,587    $24,721
                                                 =======     =======    =======

Models and speculative construction include both completed homes and homes in
progress. Speculative construction represents unsold homes which were built to
accelerate closing. Capitalized interest included in real estate inventories
aggregate $157,000 at December 31, 1994, $155,000 at December 31, 1995 and
$214,000 at May 20, 1996.

                                      F-47

<PAGE>


NOTE 4--PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):

                                                        December 31,
                                                       -------------    May 20,
                                                       1994     1995     1996
                                                       ----     ----     ----
Equipment and furniture .............................  $175     $425     $466
Vehicles ............................................   112      112      119
Leasehold improvements ..............................    44       44       36
                                                       ----     ----     ----
                                                        331      581      621
Less: Accumulated depreciation and amortization .....    98      156      215
                                                       ----     ----     ----
                                                       $233     $425     $406
                                                       ====     ====     ====

Depreciation expense recognized approximated $40,000, $58,000 and $41,000 for
the years ended December 31, 1994 and 1995 and for the period January 1, 1996
through May 20, 1996, respectively.

NOTE 5--OTHER ASSETS

Other assets are summarized as follows (in thousands):


                                                   December 31,
                                               -------------------       May 20,
                                                1994         1995         1996
                                               ------       ------       ------
Model home furniture (net) ..............      $  452       $  431       $  641
Lot option deposits .....................         729          892        1,067
Architectural plans .....................         138           91           83
Other ...................................          36          133          108
                                               ------       ------       ------
                                               $1,355       $1,547       $1,899
                                               ======       ======       ======

Deposits represent amounts paid to developers under lot option contracts. Option
contracts generally require the payment of a cash deposit for the right to
acquire lots during a specified period of time at a certain price. Under option
contracts without specific performance obligations, the Company's liability is
limited to forfeiture of the non-refundable deposits.

Furniture for model homes is carried at cost less accumulated depreciation and
is depreciated using the straight line method over the estimated useful life of
the assets which is generally five years. Model home furniture totaled $626,000,
$754,000 and $983,000 at December 31, 1994 and 1995 and May 20, 1996,
respectively. Accumulated depreciation totaled $174,000 and $323,000 at December
31, 1994 and 1995 and $342,000 at May 20, 1996, and depreciation expense totaled
$89,000, $149,000 and $64,000 for the years ended December 31, 1994 and 1995 and
for the period January 1, 1996 through May 20, 1996.

Architectural plans are recorded at cost and amortized evenly over twelve
months. Other assets also includes miscellaneous and prepaid expenses.

NOTE 6--NOTES PAYABLE

Notes payable are summarized as follows (in thousands):

                                                        December 31,
                                                     -----------------   May 20,
                                                       1994     1995      1996
                                                     -------   -------   -------

Conventional lot acquisition loans ...............   $ 1,947   $ 2,950   $ 2,012
Revolving project specific construction loans ....     7,801    11,587    19,282
                                                     -------   -------   -------
                                                     $ 9,748   $14,537   $21,294
                                                     =======   =======   =======

                                      F-48

<PAGE>

Conventional lot acquisition loans are secured by land and include conventional
loans totaling $653,000 and a non-recourse lot loan of $1,359,000. The
conventional loans bear interest at both fixed and variable rates with the fixed
rate being 10% per annum and variable rates ranging from 1% to 1.5% over the
prime lending rate (9.25% to 9.75% at May 20, 1996). Fixed rate debt included in
conventional loans outstanding at May 20, 1996 totaled $260,000. Conventional
loans mature in 1996. The non-recourse lot acquisition loan bears interest at a
fixed rate of 9% and matures in 1997.

Revolving project specific construction loans are secured by the related homes
and bear interest at variable rates at 1% over the prime rate as specified by
the respective lender (9.25% at May 20, 1996). Loans generally mature as the
underlying collateral project is completed. Interest incurred for the years
ended December 31, 1994 and 1995 and the period January 1, 1996 through May 20,
1996 totaled $896,000, $1,002,000 and $704,000, respectively. Interest
capitalized to the cost of homes for the years ended December 31, 1994 and 1995
and the period January 1, 1996 through May 20, 1996 totaled $802,000, $922,000
and $642,000, respectively.

NOTE 7--RELATED PARTY TRANSACTIONS

Immediate family members of certain shareholders of the Company have an interest
in a title insurance company which is not combined into Buffington Homes, Inc.
which processes loan closings and issues title insurance as an intermediary to
customers of Buffington Homes, Inc. Buffington Homes, Inc. normally pays closing
costs and title insurance premiums to the title company on behalf of
Buffington's customers. Title insurance premiums are regulated by the State of
Texas. All fees charged to Buffington by the title company are the same as fees
charged to unrelated customers. Fees in the approximate amount of $568,000,
$674,000 and $315,000 were paid by Buffington to the title company in 1994, 1995
and the period January 1, 1996 through May 20, 1996, respectively.

The owners of Buffington Homes, Inc. have an interest in Mortgage Acceptance
Corporation (MAC), which provides mortgage loan origination services to
customers of the Company. The Company pays origination fees to MAC on behalf of
customers of Buffington Homes. Fees in the amount of $447,000, and $584,000 were
paid to MAC on behalf of customers of Buffington Homes in 1994 and 1995.
Buffington Homes, Inc. discontinued its relationship with MAC at the end of
1995.

The Company had notes payable outstanding to certain owners and their immediate
family members in the amount of $166,000, $330,000 and $260,000 at December 31,
1994 and 1995 and at May 20, 1996. These notes bear interest at 10% and mature
in 1996.

NOTE 8--EMPLOYEE BENEFIT PLANS

The Company has a profit sharing plan covering substantially all employees. The
Company may contribute amounts as determined by the Board of Directors, not in
excess of the lesser of the maximum deduction allowable for income tax purposes
or a specified percentage of the operating profits of the Company, as defined in
the plan. The Company accrued contributions totaling $126,000 for the year ended
December 31, 1994. No contributions were made in 1995 or the period January 1,
1996 through May 20, 1996.

NOTE 9--COMMITMENTS AND CONTINGENCIES

The Company currently leases its office space under a five year renewable lease.
Certain equipment is also leased under non-cancelable operating leases. Rent
expense under such leases aggregated $370,000, $378,000 and $105,000 during the
years ended December 31, 1994 and 1995 and for the period from January 1, 1996
through May 20, 1996. Future minimum lease payments as of December 31, 1995 were
$139,000 and $35,000 for the remainder of 1996 and 1997.

                                      F-49

<PAGE>

The Company is involved in various routine legal proceedings incidental to the
conduct of its normal business operations. The Company's management believes
that none of these legal proceedings will have a material adverse impact on the
financial condition or results of operations of the Company.

NOTE 10 - UNAUDITED PRO FORMA NET INCOME

The following unaudited pro forma income tax information is presented in
accordance with SFAS No. 109, "Accounting for Income Taxes," as if the Company
had been a C Corporation subject to Federal and state income taxes for period
from January 1, 1996 through May 20, 1996.

                                                               For the
                                                        Period January 1, 1996
                                                         through May 20, 1996
                                                        ----------------------

     Net income before pro forma adjustments,
        per statement of operations                             $1,537
     Pro forma adjustment:
        Provision for income taxes at estimated
           effective rate of 40%                                   615
                                                                ------

     Pro forma net income                                      $   922
                                                                ======

                                      F-50

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder
of Christopher Homes, Inc.


In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, shareholder's equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of
Christopher Homes, Inc. and Affiliates (the "Company") at May 20, 1996 and
December 31, 1995 and 1994, and the results of their operations and their cash
flows for the period January 1, 1996 through May 20, 1996 and for each of the
two years in the period ended December 31, 1995 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 audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above.


As discussed in Note 1, Christopher Homes, Inc. was acquired by The Fortress
Group Inc. on May 20, 1996.


PRICE WATERHOUSE LLP

Minneapolis, Minnesota
February 11, 1997


                                      F-51

<PAGE>

                     CHRISTOPHER HOMES, INC. AND AFFILIATES
                             COMBINED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                                             December 31,
                                                                               May 20,    -------------------
                                                                                1996        1995        1994
                                                                              --------    --------   --------
<S>                                                                           <C>         <C>        <C>
                                              ASSETS
Cash                                                                          $     98    $    495   $    379
Receivables                                                                        508         710        338
Real estate inventories                                                         34,149      28,457     26,671
Property and equipment, net                                                        623         517        495
Prepaid and other assets                                                           518         706        367
                                                                              --------    --------   --------
              Total assets                                                    $ 35,896    $ 30,885   $ 28,250
                                                                              ========    ========   ========


                             LIABILITIES AND SHAREHOLDER'S EQUITY


Accounts payable and accrued construction liabilities                         $  4,950    $  3,040   $  2,885
Notes and mortgages payable                                                     24,998      20,665     21,369
Special improvement district bonds                                               1,295       1,531      2,313
Related party payable                                                               76         353        899
Other accrued expenses                                                             263         921        341
Customer deposits                                                                3,769       3,660      3,006
                                                                              --------    --------   --------
              Total liabilities                                                 35,351      30,170     30,813
                                                                              ========    ========   ========

Commitments and contingencies - Note 9
Shareholder's equity (deficit)
         Common stock                                                              550         549        549
         Retained (deficit) earnings                                                (5)        166     (3,112)
                                                                              --------    --------   --------
              Total shareholder's equity (deficit)                                 545         715     (2,563)
                                                                              --------    --------   --------
              Total liabilities and shareholder's equity                      $ 35,896    $ 30,885   $ 28,250
                                                                              ========    ========   ========
</TABLE>


              The accompanying notes are an integral part of these
                              financial statements.

                                      F-52

<PAGE>

                     CHRISTOPHER HOMES, INC. AND AFFILIATES
                        COMBINED STATEMENTS OF OPERATIONS
                                 (In thousands)


                                           For the Period
                                             January 1,
                                               1996
                                              through   Year Ended December 31,
                                              May 20,    --------------------
                                               1996        1995        1994
                                              --------   --------   --------
Revenue:
     Residential sales                        $ 15,582   $ 34,726   $ 13,864
     Lot sales                                     537      3,824        849
     Other revenue                                  --         62        108
                                              --------   --------   --------
         Total revenue                          16,119     38,612     14,821
Cost of sales                                   13,730     31,834     12,616
                                              --------   --------   --------
Gross profit                                     2,389      6,778      2,205
Operating expenses:
     Selling expenses                              850      2,008      1,512
     General and administrative expenses           759      1,504      1,550
                                              --------   --------   --------
         Net operating income (loss)               780      3,266       (857)
Other (expense) income, net                         12        120        359
                                              --------   --------   --------
Net income (loss)                             $    792   $  3,386   $   (498)
                                              ========   ========   ========
Unaudited pro forma net income (Note 10)      $    475
                                              ========

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-53

<PAGE>

                     CHRISTOPHER HOMES, INC. AND AFFILIATES
                      COMBINED STATEMENTS OF SHAREHOLDER'S
                                (DEFICIT) EQUITY
                                 (In thousands)


                                                           Retained
                                               Common     (Deficit)
                                               Stock       Earnings      Total
                                              -------      --------     -------
Balance at January 1, 1993                    $   549      $(2,134)     $(1,585)
     Distributions to shareholder                             (480)        (480)
     Net loss                                      --         (498)        (498)
                                              -------      -------      -------
Balance at December 31, 1994                      549       (3,112)      (2,563)
     Contributions by shareholder                              357          357
     Distributions to shareholder                             (465)        (465)
     Net income                                    --        3,386        3,386
                                              -------      -------      -------
Balance at December 31, 1995                      549          166          715
     Contributions by shareholder                   1           82           83
     Distributions to shareholder                           (1,045)      (1,045)
     Net income                                    --          792          792
                                              -------      -------      -------
Balance at May 20, 1996                       $   550      $    (5)     $   545
                                              =======      =======      =======

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-54

<PAGE>

                     CHRISTOPHER HOMES, INC. AND AFFILIATES
                        COMBINED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                For the Period
                                                                                January 1, 1996             Year Ended
                                                                                    through                December 31,
                                                                                  May 20, 1996         1995              1994
                                                                                  ------------       --------         --------
<S>                                                                                 <C>              <C>              <C>
Cash flows from operating activities
   Net income (loss)                                                                $    792         $  3,386         $   (498)
   Adjustments to reconcile net income to net cash
      (used in) provided by operating activities:
         Equity in income from investment partnership                                                                       (4)
         Depreciation and amortization                                                    76              182              163
         Loss on disposition of property and equipment                                                                       6
         Basis of property and equipment included in cost of sales                                                         169
         Changes in operating assets and liabilities:
             Real estate inventories                                                  (5,693)          (2,409)         (10,805)
             Receivables                                                                 203             (373)             120
             Prepaid and other assets                                                    188             (339)             (31)
             Accounts payable and accrued construction liabilities                     1,910              155            1,563
             Other accrued expenses                                                     (658)             580               61
             Customer deposits                                                           109              654              705
                                                                                    --------         --------         --------
                Net cash (used in) provided by operating activities                   (3,073)           1,836           (8,551)
                                                                                    --------         --------         --------

Cash flows from investing activities
   Proceeds from sale of land held for investment                                                                           76
   Purchase of property and equipment                                                   (182)            (203)            (384)
   Proceeds from sale of property and equipment                                                                             10
                                                                                    --------         --------         --------

                Net cash used in investing activities                                   (182)            (203)            (298)

Cash flows from financing activities
   Borrowings under notes and mortgages payable                                       15,254           37,264           20,300
   Repayments of notes and mortgage payable                                          (10,920)         (37,968)         (11,206)
Repayments of special improvement district bonds                                        (236)            (160)             (84)
   Net (repayments to) advances from  related parties                                   (278)            (545)             557
   Distributions to shareholder                                                       (1,045)            (465)            (480)
   Contributions to shareholder                                                           83              357
                                                                                    --------         --------         --------
                Net cash provided by (used in) financing activities                    2,858           (1,517)           9,087
                                                                                    --------         --------         --------

Net increase in cash and cash equivalents                                               (397)             116              238
Cash, beginning of period                                                                495              379              141
                                                                                    --------         --------         --------
Cash, end of period                                                                 $     98         $    495         $    379
                                                                                    ========         ========         ========
</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-55

<PAGE>

                     CHRISTOPHER HOMES, INC. AND AFFILIATES
                     NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1 - BUSINESS AND ORGANIZATION

Christopher Homes, Inc. and Affiliates (the Company) is a group of entities
owned or controlled by J. Christopher Stuhmer primarily engaged in the
construction of attached and detached single and multi-family homes in the Las
Vegas metropolitan area.

Effective May 20, 1996, the Company and its shareholder executed a definitive
agreement with the Fortress Group, Inc. (Fortress) pursuant to which the Company
merged with Fortress (the Merger). All outstanding shares of the Company were
exchanged for cash and shares of Fortress's common stock concurrent with the
consummation of the initial public offering of Fortress.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Principles of Combination

The combined financial statements include the accounts of Christopher Homes,
Inc. (CH), J. Christopher Stuhmer, Inc. (JCS), Christopher Homes Design Center
(DC), Christopher Homes--Custom Home Division, Inc. (CHD), all of which are
Nevada corporations, and Country Club Hills Limited Partnership (CCH), a Nevada
Limited Partnership. CH, JCS and CHD are wholly owned by J. Christopher Stuhmer.
CHD is the general partner of CCH. All significant intercompany accounts and
transactions have been eliminated in combination.

As of May 20, 1996, the following common stock was authorized, issued and
outstanding:

     CH--No par or stated value, 2,500 shares authorized, 1,000 shares issued
     and outstanding.

     JCS--No par or stated value, 2,500 shares authorized, 100 shares issued and
     outstanding.

     DC--No par or stated value, 2,500 shares authorized, 500 shares issued and
     outstanding.

     CHD--No par or stated value, 2,500 shares authorized, 1,000 shares issued
     and outstanding.

   Estimates by Management

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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

   Revenue Recognition

Residential sales are recognized when all conditions precedent to closing have
been fulfilled and title has passed to the buyer. The Company's homes are
generally sold in advance of their construction. The Company's standard sales
contract generally requires the customer to make an earnest money deposit which
is recognized as a liability until the unit closes.

                                      F-56

<PAGE>


   Real Estate Inventories and Cost of Sales

Real estate inventories are carried at cost which is less than fair value as
measured in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Fair value is measured based on the application of
discounting expected future cash flows of each of the Company's real estate
developments. Costs incurred which are included in inventory consist of land,
land development, direct and certain indirect construction costs, interest and
real estate taxes, and direct model construction costs and related improvements.
Costs incurred for common area model improvements and certain furnishings are
amortized on a per unit basis as home sales in the related development are
closed.

At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete, plus an allocation of
the development's total estimated cost of land and land development, interest,
real estate taxes and any other capitalizable common costs based on the relative
sales value method of accounting.

The Company generally provides a one or two year limited warranty of workmanship
and materials with each of its homes. Accordingly, a warranty reserve based on
the Company's historical experience is provided.

   Interest Capitalization

Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with SFAS No. 34, "Capitalization
of Interest Cost," and charged to cost of sales as revenue from residential
sales is recognized. The interest and related debt issuance costs capitalized
are determined by applying a weighted average capitalization rate to the
accumulated qualified real estate expenditures. The capitalization rate is based
on the Company's outstanding borrowings associated with the acquisition,
development and construction of the qualified real estate inventory. The amount
of financing costs capitalized does not exceed those costs incurred for any year
presented in the accompanying combined financial statements.

   Property and Equipment

Property and equipment is carried at cost less accumulated depreciation and is
depreciated using the declining balance method over the estimated useful lives
of the assets which range from five to seven years. Significant additions and
improvements are capitalized while expenditures for repairs and maintenance are
charged to operations as incurred.

   Income Taxes

Since 1987, CHD has been a subchapter S corporation and CCH has been a limited
partnership for income tax purposes and, accordingly, any income tax liabilities
were the responsibility of the respective company's shareholder or partners.

                                      F-57

<PAGE>


DC was formed as a subchapter S corporation in 1996. CHD's subschapter S
corporation status and CCH's limited partnership status will terminate on the
consummation of the Merger as disclosed in Note 1.

Both CH and JCS are subchapter C corporation for income tax purposes and had net
operating loss carryforwards available at May 20, 1996. Both CH and JCS's
subchapter C corporation status and the availability of the net operating loss
carryfowards will terminate upon the completion of the Merger as disclosed in
Note 1.

   Statement of Cash Flows

Supplemental disclosures of cash flow information are as follows (in thousands):

<TABLE>
<CAPTION>
                                                       For the Period                   Year Ended December 31,
                                                      January 1, 1996                  ------------------------
                                                    through May 20, 1996               1995               1994
                                                    --------------------               ----               ----

<S>                                                         <C>                         <C>               <C>
Cash paid for interest                                      $503                        $2,759            $1,916
Non-cash transactions:
   Net assumptions and assignment of Special
      Improvement District bonds                             (83)                          623               590
</TABLE>

NOTE 3 - REAL ESTATE INVENTORIES

Real estate inventories are summarized as follows (in thousands):

                                                                December 31,
                                                            --------------------
                                             May 20, 1996     1995         1994
                                             ------------   -------      -------
Work-in-progress
   Sold homes under construction               $20,673      $14,027      $ 9,784
   Speculative homes                             8,109        4,068        2,504
                                               -------      -------      -------
                                                28,782       18,095       12,288
                                               -------      -------      -------

Land
   Finished lots                                 4,832        7,742        6,819
   Land under development                            0          916        5,975
                                               -------      -------      -------
                                                 4,832        8,658       12,794
                                               -------      -------      -------
Models                                             535        1,704        1,589
                                               -------      -------      -------
      Total                                    $34,149      $28,457      $26,671
                                               =======      =======      =======

                                      F-58

<PAGE>


NOTE 4 - INVESTMENTS IN PARTNERSHIPS

The Company was a managing partner with a 35% ownership in two partnerships
which are accounted for under the equity method. The investment balance is
included in other assets on the combined balance sheet.

The investments in partnerships were not material to the December 31, 1994 and
1995, and May 20, 1996 combined balance sheets or to the combined statements of
operations for the years ended December 31, 1994 and 1995 and the period from
January 1, 1996 through May 20, 1996.

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows (in thousands):

                                                               December 31,
                                                            -------------------
                                              May 20, 1996    1995        1994
                                              ------------  -------     -------
Equipment and furniture                         $   330     $   226     $   223
Vehicles                                             74          98         117
Model home and sales office furnishings             707         551         450
Other                                                           107          67
                                                -------     -------     -------
                                                  1,111         982         857
Less: Accumulated depreciation and
   amortization                                    (488)       (465)       (362)
                                                -------     -------     -------
                                                $   623     $   517     $   495
                                                =======     =======     =======

NOTE 6 - NOTES AND MORTGAGES PAYABLE

Notes and mortgages payable are summarized as follows (in thousands):

                                                                 December 31,
                                                             -------------------
                                              May 20, 1996     1995        1994
                                              ------------   -------     -------
Conventional land acquisition
   and development loans                         $14,196     $11,081     $12,280
Subordinated investor notes                       10,573       9,181       6,091
Demands for deed on sales-leaseback                              230       2,370
General revolving lines of credit                    200         120         590
Other                                                 29          53          38
                                                 -------     -------     -------
                                                 $24,998     $20,665     $21,369
                                                 =======     =======     =======

Conventional land acquisition and development loans are collateralized by
property under construction, are payable in monthly interest only installments
and are due on the earlier of the close of escrow on the related collateral or

                                      F-59

<PAGE>


the due date. These loans bear interest at the prime rate plus 1.5% to 2% (9.75%
to 10.25% at May 20, 1996).

Subordinated investor notes are generally collateralized by deeds of trust
subordinate to the conventional land acquisition and development loans. The
notes are payable in monthly distributions equal to a 15% annualized return and
a 10% fee due at the closing of the loan.

Demands for deed on sales-leaseback represent financing arrangements on certain
finished model homes which are leased by the Company for up to two years for
marketing purposes. The demands for deed yield approximately 12% annually, with
a 3% commission paid upon resale of the model home.

General revolving lines of credit bear interest at the prime rate plus 2%
(10.25% at May 20, 1996) and are due on demand.

The Company's management believes that cost approximates fair value for notes
and mortgages payable at December 31, 1994 and 1995 and May 20, 1996.

Substantially all of the conventional land acquisition and development loans and
subordinated investor notes are personally guaranteed by the sole shareholder of
the Company and his spouse.

Interest incurred and capitalized totaled approximately $1,976,000, $4,421,000,
and $2,000,000 for the years ended December 31, 1994 and 1995 and for the period
January 1, 1996 through May 20, 1996, respectively.

At May 20, 1996, the Company has approximately $10,200,000 in unused lines of
credit available for construction loans, which is subject to collateral
requirements.

Maturities of notes and mortgages payable in future years are as follows (in
thousands):

Year Ended December 31,

     1996                                             $22,642
     1997                                               2,356
                                                      -------
                                                      $24,998
                                                      =======

NOTE 7 - SPECIAL IMPROVEMENTS

Special Improvement District (SID) bonds payable were $2,313,032, $1,531,267 and
$1,300,000 at December 31, 1994 and 1995 and May 20, 1996, respectively.

SID bonds consist of special assessments issued by the city of Las Vegas to fund
the acquisition and construction of certain public improvements specifically
benefiting property located in the City's Special Improvement District No. 404,

                                      F-60

<PAGE>


the Summerlin area. The City-issued bonds are secured by the unpaid assessments
on property within the district and are payable by the property owners. Interest
rate assessments are due on April 1 and October 1 of each year until October 1,
2009. The bonds are due October 1, 2009, unless assumed by buyers of homes from
the Company. Management believes that maturities of these obligations, prior to
buyer assumptions thereof, are not material to the Company's combined financial
statements.

NOTE 8 - RELATED PARTY TRANSACTIONS

Related party receivables as of December 31, 1994 and 1995 and May 20, 1996 were
$105,920, $54,269 and $177,000, respectively, and are included in receivables on
the combined balance sheets.

JCS provided certain accounting services for related parties and in return
received a management fee, which was $342,534, and $39,000 for the years ended
December 31, 1994 and 1995, respectively. There were no such services provided
or fees received in the period January 1, 1996 through May 20, 1996.

Sales commissions paid by related parties to CHD amounted to $108,079 and
$62,000 for the years ended December 31, 1994 and 1995, respectively. No sales
commissions were earned or paid by related parties for the period January 1,
1996 through May 20, 1996.

Home sales to related parties were $596,080 and $581,000 for the year ended
December 31, 1995 and the period January 1, 1996 through May 20, 1996. No
home sales were made to related parties in 1994.

The Company paid rent during the years ended December 31, 1994 and 1995 and from
January 1, 1996 through May 20, 1996 of $33,858, $34,431, and $14,000,
respectively, for office and warehouse space under a month-to-month lease to a
related party.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

The Company is involved in various routine legal proceedings incidental to the
conduct of its normal business operations. The Company's management believes
that none of those legal proceedings will have a material adverse impact on the
financial condition or results of operations of the Company.

The Company rents model homes under cancelable and non-cancelable operating
leases. All non-cancelable leases expire during 1996. Minimum lease payments on
non-cancelable leases for the period January 1, 1996 through May 20, 1996 are
approximately $65,000.

Model home lease expense for the years ended December 31, 1994 and 1995 and the
period January 1, 1996 through May 20, 1996 was $61,198, $204,365 and $175,000,
respectively.

                                      F-61

<PAGE>


The Company has signed a letter of intent to purchase a parcel of land for
$7,695,000 in a master planned development in Las Vegas, Nevada.

NOTE 10 - UNAUDITED PRO FORMA NET INCOME

The following unaudited pro forma income tax information is presented in
accordance with SFAS No. 109, "Accounting for Income Taxes," as if the Company
had been a C Corporation subject to Federal and state income taxes for period
from January 1, 1996 through May 20, 1996.

                                                                 For the
                                                          Period January 1, 1996
                                                                 through
                                                               May 20, 1996
                                                          ---------------------

     Net income before pro forma adjustments,
        per statement of operations                               $ 792
     Pro forma adjustment:
        Provision for income taxes at estimated
           effective rate of 40%                                    317
                                                                  -----

     Pro forma net income                                         $ 475
                                                                  =====

                                      F-62

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder
of The Genesee Company


In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of The Genesee
Company and Related Entities at May 20, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the period January 1, 1996
through May 20, 1996 and for the year ended December 31, 1995 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 audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above.


As discussed in Note 1, The Genesse Company and Related Entities were acquired
by The Fortress Group Inc. on May 20, 1996.


PRICE WATERHOUSE LLP

Denver, Colorado
February 20, 1997

                                      F-63

<PAGE>



                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
The Genesee Company
Golden, Colorado


     We have audited the accompanying combined balance sheet of The Genesee
Company and related entities as of December 31, 1994, and the related combined
statements of operations, shareholder's equity and cash flows for the year then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.

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

     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Genesee
Company and related entities as of December 31, 1994, and the results of their
operations and their cash flows for year then ended, in conformity with
generally accepted accounting principles.

HEIN + ASSOCIATES LLP

December 12, 1995
Denver, Colorado


                                      F-64

<PAGE>



                    THE GENESEE COMPANY AND RELATED ENTITIES

                             COMBINED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                           ------------------------          May 20,
                                                                                             1994             1995            1996
                                                                                           -------          -------          -------
<S>                                                                                        <C>              <C>              <C>
                                  ASSETS
Cash and cash equivalents .......................................................          $ 1,364          $   978          $ 1,455
Related party and other receivables .............................................              155              850            1,639
Real estate inventories .........................................................           47,676           49,673           56,232
Equipment and furniture, net of accumulated depreciation of
   $200, $215 and $227, respectively ............................................              227              241              229
Prepaid and other assets ........................................................            1,125            1,178            1,460
                                                                                           -------          -------          -------
     Total assets ...............................................................          $50,547          $52,920          $61,015
                                                                                           =======          =======          =======
                   LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued construction .......................................          $ 2,102          $ 3,409          $ 2,958
Notes payable ...................................................................           41,175           41,393           50,184
Due to related parties ..........................................................            1,422            1,003            1,382
Other accrued expenses ..........................................................              930            1,462            1,542
Customer deposits ...............................................................            1,013              872            1,311
                                                                                           -------          -------          -------
     Total liabilities ..........................................................           46,642           48,139           57,377
                                                                                           =======          =======          =======
Commitments and contingencies (Note 8) ..........................................               --               --
Shareholder's Equity:
     Common stock ...............................................................                3                3                3
     Additional paid-in capital .................................................            1,655            1,770            2,234
     Retained earnings ..........................................................            2,247            3,008            1,401
                                                                                           -------          -------          -------
          Total shareholder's equity ............................................            3,905            4,781            3,638
                                                                                           -------          -------          -------
     Total liabilities and shareholder's equity .................................          $50,547          $52,920          $61,015
                                                                                           =======          =======          =======

</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-65

<PAGE>

                    THE GENESEE COMPANY AND RELATED ENTITIES

                        COMBINED STATEMENTS OF OPERATIONS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                                          For the
                                                                                                                          Period
                                                                                                                        January 1,
                                                                                                                           1996
                                                                                    Year Ended December 31,               through
                                                                                 1994                  1995            May 20, 1996
                                                                               --------              --------          -------------
<S>                                                                            <C>                   <C>                 <C>
Revenue:
     Residential sales ...........................................             $ 59,539              $ 60,534            $ 15,323
     Lot sales ...................................................                3,020                 4,274                 499
     Other revenue ...............................................                   --                   222                  56
                                                                               --------              --------            --------
                                                                                 62,559                65,030              15,878
Cost of sales ....................................................              (53,887)              (57,620)             14,768
                                                                               --------              --------            --------
Gross profit .....................................................                8,672                 7,410               1,110
Operating expenses:
     Selling expenses ............................................                4,184                 4,451               1,379
     General and administrative expenses .........................                2,620                 2,098                 900
                                                                               --------              --------            --------
Net income (loss) ................................................             $  1,868              $    861            $ (1,169)
                                                                               ========              ========            ========
Unaudited pro forma net loss (Note 9) ............................                                                       $ (1,637)
                                                                                                                         ========

</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-66

<PAGE>


                    THE GENESEE COMPANY AND RELATED ENTITIES

                   COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                           Additional                                 Total
                                                         Common             Paid-In             Retained          Shareholder's
                                                         Stock              Capital             Earnings             Equity
                                                        -------             -------             --------            -------
<S>                                                     <C>                 <C>                 <C>                 <C>
Balance at January 1, 1994.. ...............            $     3             $ 1,265             $ 1,814             $ 3,082
Stock option exercise.......................                 --                 390                  --                 390
Distributions ..............................                 --                  --              (1,435)             (1,435)
Net income .................................                 --                  --               1,868               1,868
                                                        -------             -------             -------             -------

Balance at December 31, 1994 ...............                  3               1,655               2,247               3,905
Capital contributions ......................                 --                 115                  --                 115
Distributions ..............................                 --                  --                (100)               (100)
Net income .................................                 --                  --                 861                 861
                                                        -------             -------             -------             -------
Balance at December 31, 1995 .... ..........                  3               1,770               3,008               4,781
Capital contributions ......................                                    464                                     464
Distributions ..............................                                                      (438)                (438)
Net loss ...................................                 --                 --              (1,169)              (1,169)
                                                        -------             -------             -------             -------
Balance at May 20, 1996 ......................            $   3             $ 2,234             $ 1,401             $ 3,638
                                                        =======             =======             =======             =======
</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-67

<PAGE>

                    THE GENESEE COMPANY AND RELATED ENTITIES

                        COMBINED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                                   For the Period
                                                                                    Year Ended December 31,        January 1, 1996
                                                                                 ---------------------------           through
                                                                                   1994               1995          May 20, 1996
                                                                                 --------           --------        ------------
<S>                                                                              <C>                <C>                <C>
Cash flows from operating activities
     Net income (loss) ....................................................      $  1,868           $    861           $ (1,169)
     Adjustments to reconcile net income to net cash
        used in operating activities:
          Depreciation expense ............................................            72                 78                 23
          Changes in operating assets and liabilities:
               Decrease (increase) in:
                    Related party and other
                      receivables .........................................           252               (695)              (789)
                    Real estate inventories ...............................       (16,037)            (1,997)            (6,559)
                    Prepaid and other assets ..............................          (418)               (53)              (282)
               Increase (decrease) in:
                    Accounts payable and accrued
                      construction ........................................           301              1,307               (451)
                    Other accrued expenses ................................           (72)               497                 80
                    Customer deposits .....................................           188               (141)               439
                                                                                 --------           --------           --------
                    Net cash used in operating
                      activities ..........................................       (13,846)              (143)            (8,708)
                                                                                 --------           --------           --------
Cash flows from investing activities
     Purchases of equipment and furniture .................................           (53)               (57)               (11)
                                                                                 --------           --------           --------
                    Net cash used in investing
                      activities ..........................................           (53)               (57)               (11)
                                                                                 --------           --------           --------
Cash flows from financing activities
     Borrowings under notes payable .......................................        50,226             39,846             15,789
     Repayments of notes payable ..........................................       (34,802)           (39,628)            (6,998)
     Related party borrowings .............................................         1,533              1,109                611
     Repayments of related party borrowings ...............................        (1,013)            (1,528)              (232)
     Distributions to shareholder .........................................        (1,435)              (100)              (438)
     Stock option exercise.................................................           390                115                464
                                                                                 --------           --------           --------
                    Net cash provided by (used in)
                      financing activities ................................        14,899               (186)             9,196
                                                                                 --------           --------           --------
Increase (decrease) in cash and cash equivalents ..........................         1,000               (386)               477
Cash and cash equivalents, beginning of period ............................           364              1,364                978
                                                                                 --------           --------           --------
Cash and cash equivalents, end of period ..................................      $  1,364           $    978           $  1,455
                                                                                 ========           ========           ========
</TABLE>

              The accompanying notes are an integral part of these
                              financial statements.

                                      F-68

<PAGE>



                    THE GENESEE COMPANY AND RELATED ENTITIES

                     NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1 -   BUSINESS AND ORGANIZATION

The combined financial statements consist of the accounts of The Genesee Company
combined with those of The Genesee Company/Castle Pines, Ltd., The Genesee
Company of Michigan, Ltd., Genesee Venture Corporation (dba The Genesee Company
Building Group, Inc.) and, subsequent to December 31, 1994, those of Genesee
Communities I, Inc., Genesee Communities II, Inc. and Genesee Development
Company (collectively referred to as the Company). These entities are related
through common ownership and management.

The Company is engaged primarily in the construction and sale of single-family
residential property in Colorado and Arizona. The Company designs, builds, and
sells single-family homes on finished lots, which it purchases ready for home
construction or which it develops. The Company also purchases undeveloped land
to develop finished lots for sale to others.

Effective May 20, 1996, the Company and its shareholder executed a definitive
agreement with the Fortress Group, Inc. (Fortress) pursuant to which the Company
merged with Fortress (the Merger). All outstanding shares of the Company were
exchanged for cash and shares of Fortress's common stock concurrent with the
consummation of the initial public offering of Fortress.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Principles of Combination

The combined financial statements include the accounts of the entities described
in Note 1, all of which are 100% owned by the same shareholder. Intercompany
accounts and transactions have been eliminated in combination.

   Estimates by Management

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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

   Revenue Recognition

Revenues from residential sales are recognized when all conditions precedent to
closing have been fulfilled and title has passed to the buyer. The Company's
homes are generally sold in advance of their construction. The Company's
standard sales contract generally requires the customer to make an earnest money
deposit which is recognized as a liability until the unit closes.

   Real Estate Inventories and Cost of Sales

All real estate inventories which are held for sale are carried at cost, which
is less than fair value as measured in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Fair value is
measured based on the application of discounting expected future cash flows of
each of the Company's real estate developments. Costs incurred which are
included in inventory consist of land, land development,

                                      F-69

<PAGE>


direct and certain indirect construction costs, interest and real estate taxes,
and model construction costs and related improvements.

At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete, plus an allocation of
the total estimated cost of land and land development, interest, real estate
taxes and any other capitalizable common costs.

Interest charged to cost of sales is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                              For the
                                                                               Year Ended December 31,    Period January 1,
                                                                              -------------------------     1996 through
                                                                               1994              1995       May 20, 1996
                                                                              ------            ------      ------------
<S>                                                                           <C>               <C>            <C>
Interest on loans from financial institutions .............................   $1,848            $2,328         $  589
Profit sharing interest under equity participation
    agreements ............................................................    1,084             1,224            239
Interest on subordinated notes ............................................      926               981            534
                                                                              ------            ------         ------
                                                                              $3,858            $4,533         $1,362
                                                                              ======            ======         ======
</TABLE>

   Interest Capitalization

Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with SFAS No. 34, "Capitalization
of Interest Cost", and charged to cost of sales as revenue from residential
sales is recognized. The interest and related debt issuance costs capitalized
are determined by applying a weighted average capitalization rate to the
accumulated qualified real estate expenditures. The capitalization rate is based
on the Company's outstanding borrowings associated with the acquisition,
development and construction of the qualified real estate inventory. The amount
of financing costs capitalized does not exceed those costs incurred for any year
presented in the accompanying combined financial statements.

   Equipment and Furniture

Equipment and furniture are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range in years from five to ten. Significant
additions and improvements are capitalized, while expenditures for repairs and
maintenance are charged to operations as incurred.

   Other Assets

Other assets includes costs incurred for common area model improvements and
certain furnishings. These costs are amortized on a per unit basis as home sales
in the related development are closed.

   Concentrations of Credit Risk

The Company's operations are concentrated in the construction and sale of
single-family residential property in Colorado and Arizona. Furthermore, the
Company from time to time maintains cash balances at certain financial
institutions in excess of Federally insured limits.

                                      F-70

<PAGE>


   Income Taxes

The Company is a Subchapter S corporation for income tax purposes, and
accordingly, any income tax liabilities are the responsibility of the Company's
shareholder. The Company's Subchapter S corporation status will terminate on
consummation of the Merger as disclosed in Note 1. See Note 9 for information
regarding the unaudited pro forma net loss tax information.

   Cash and Equivalents

For purposes of reporting cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

Supplemental disclosures of cash flow information are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                             For the
                                                                                                        Period January 1,
                                                                            Year Ended December 31,           1996
                                                                          --------------------------         through
                                                                           1994                1995       May 20, 1996
                                                                          ------             -------      ------------
<S>                                                                       <C>                <C>                    <C>
Cash paid for interest:
     Related parties ...........................................          $  114             $  140                 47
     Other .....................................................           2,548              3,605              1,157
Office equipment acquired through capital leases ...............              45                 35
</TABLE>

NOTE 3 - REAL ESTATE INVENTORIES

Real estate inventories are summarized as follows (in thousands):

                                                   December  31,
                                               --------------------     May 20,
                                                1994         1995        1996
                                               -------      -------     -------
Work-in-progress:
     Sold homes under construction ......      $16,039      $ 7,507      $10,790
     Speculative homes ..................        9,863       15,627       15,447
                                               -------      -------      -------
                                                25,902       23,134       26,237
                                               -------      -------      -------
Land:
     Finished lots ......................       15,446       17,436       23,687
     Land under development .............        2,100        5,487
     Land and other costs ...............          729           --        1,403
                                               -------      -------      -------

                                                18,275       22,923       25,090
                                               -------      -------      -------
Models: .................................        3,499        3,616        4,905
                                               -------      -------      -------
          Total .........................      $47,676      $49,673      $56,232
                                               =======      =======      =======

Speculative homes and models include completed homes and homes under
construction. Speculative construction represents homes built without an advance
sales contract in order to accelerate closing. Completed homes include the
allocation of land and development and other allocable costs. At May 20, 1996,
the real estate inventories balance includes approximately $430,000 of
capitalized general and administrative costs.

                                      F-71

<PAGE>


NOTE 4 - NOTES PAYABLE

     Notes payable are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                        December  31,
                                                      -----------------
                                                        1994     1995    May 20, 1996
                                                      -------   -------  ------------
<S>                                                   <C>       <C>       <C>
Project specific construction loans ...............   $20,639   $16,685   $25,855
Conventional land acquisition and development loans    10,140    13,746    11,331
Subordinated notes and equity participation loans .    10,396    10,416    12,402
Unsecured lines of credit .........................        --       546       596
                                                      -------   -------   -------

                                                      $41,175   $41,393   $50,184
                                                      =======   =======   =======
</TABLE>

Project specific construction loans and conventional land acquisition and
development loans consist of land, land development, and construction loans
primarily from financial institutions. These loans bear interest at annual rates
ranging from 1% to 2% over prime (9.25% to 10.25% at May 20, 1996) and both
principal and interest are normally paid at the time the related real estate
properties are sold. The loan agreements include customary representations and
covenants, including limitations on the maximum principal amount that can be
outstanding at any time. All outstanding indebtedness under these facilities is
collateralized by a lien on the related real estate inventories, and all of
these loans are personally guaranteed by the Company's sole shareholder. At May
20, 1996, the Company was not in compliance with the reporting requirements of
certain loan agreements with one of their financial institutions. As a result,
this financial institution may, at its option, demand immediate payment of
amounts outstanding under the respective loan agreement. However, the financial
institution continued to advance additional funds to the Company and by December
31, 1996, the company was in compliance with these covenants.

Subordinated notes consist of notes from private investors, some of which are
unsecured and some of which are collateralized by a lien on the Company's real
estate inventories, and all of which are personally guaranteed by the Company's
sole shareholder. Generally, these loans bear interest at a fixed annual rate of
12%, paid monthly. The unsecured notes entitle the holder to receive an
additional 6% interest per annum payable at maturity of the note. These notes
generally have maturities of six months, at which time the principal and all
unpaid interest are due.

The Company has entered into a series of equity participation agreements and
related notes payable with one private investor. Under these agreements, the
Company had outstanding advances from this equity participant totaling
approximately $6,097,000, $4,559,000 and $4,479,000 as of December 31, 1994 and
1995 and May 20, 1996, respectively, in the form of equity participation notes
payable. The proceeds from these notes are used to acquire and develop various
predetermined real estate properties and to construct homes in these
developments.

In general, no interest is accrued on the principal balance of these notes, but
rather, the note holder is entitled to a portion of the net profits of the
development which collateralizes the note payable. However, at May 20, 1996, the
Company had one equity participation note payable which requires that the
private investor receive the greater of some minimal rate of return or a portion
of the net profits of the development. At May 20, 1996, the Company has accrued
approximately $289,000 in interest costs, all of which has been capitalized,
related to this note since the development is in the start-up stage and net
profits earned as of May 20, 1996 have been less than the minimum rate of return
guaranteed the investor. Other than this note, only in the event of default in
principal payment at maturity would interest be accrued at the rate of the
greater of 3% over prime or 18%, retroactive to the origination date of the
note. As of May 20, 1996, there have been no instances in which interest has
been accrued on an equity participation note payable due to an event of default.
The Company periodically reviews the expected profits and cash flows of
developments with equity participation notes payable and would accrue interest
on the notes if it determines that an event of default is probable. In general,
equity participation notes payable have maturities within two years of
origination.

                                      F-72
<PAGE>


Based upon the equity participation agreements, net profits of the individual
developments are distributed, at the Company's discretion, as follows: (i)
distributions are to repay the principal balance and interest, if applicable, of
the equity participation note payable related to that development; and (ii) once
the principal balance of the equity participation note payable for a development
is repaid, net profits are distributed between the equity participant and the
Company.

Maturities of notes payable at May 20, 1996 in future periods are as follows (in
thousands):

            Year Ended December 31,
                 1996                          $31,165
                 1997                           16,249
                 1998                            2,770
                                              --------
                                              $ 50,184
                                              ========

The timing of repayments on these notes may differ from the above schedule due
to the repayment of terms of these notes, described above, some of which may
require earlier repayment.

Interest incurred and capitalized during the years ended December 31, 1994, 1995
and the period from January 1, 1996 to May 20, 1996 aggregated approximately
$4,746,000, $6,597,000, and $2,183,000 respectively.

NOTE 5 - SHAREHOLDER'S EQUITY

The following is a summary of the authorized, issued and outstanding shares of
the combined entities:

<TABLE>
<CAPTION>
                                                                                                     Shares Issued
                                                                                                          and
                                                                                                     Outstanding
                                                                                                     December 31,
                                                                     Fair       Shares           -------------------         May 20,
                                                                     Value    Authorized         1994           1995          1996
                                                                     -----    ----------         ----           ----          ----
<S>                                                                <C>           <C>             <C>           <C>           <C>
The Genesee Company .......................................        No par        100,000         2,000         90,000        90,000
The Genesee Company/Castle Pines, Ltd. ....................        $   1.00      10,000          1,000          1,000         1,000
Genesee Company of Michigan, Ltd. .........................        No par        10,000          1,000          1,000         1,000
Genesee Venture Corporation ...............................        $   1.00      10,000            100            100           100
Genesee Communities I, Inc. ...............................        $   1.00      10,000             --             --            --
Genesee Communities II, Inc. ..............................        $   1.00      10,000             --             --            --
Genesee Development Company ...............................        $   1.00      10,000             --             --            --
</TABLE>

In 1995, the Company adopted an incentive stock option plan for certain
employees. The plan allows the grant of options to purchase up to 10,000 shares
of the Company's common stock. The exercise price is equal to the estimated fair
value of the common stock at the date of grant. The options generally vest nine
years after the date of grant, but the vesting period is accelerated upon a
change in control or the occurrence of certain other events as specified in the
plan agreement. No options were granted during the period ended May 20, 1996. Of
the 10,000 options outstanding at December 31, 1995, 9,250 options were
exercised on May 20, 1996 and 750 options were forfeited.

During 1995, options to purchase 10,000 shares of the Company's common stock
were granted at an exercise price of $50.15 per share. All outstanding options
were exercised on May 20, 1996.

SFAS No. 123, "Accounting for Stock-Based Compensation," issued in October 1995,
established financial accounting and reporting standards for stock-based
employee compensation plans. As permitted by SFAS No. 123, the Company elected
to continue to use Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations, in accounting for its
incentive stock option plan.

                                      F-73
<PAGE>

If the Company had elected to recognize compensation expense based on the fair
value of the options granted as well as the vesting provisions of the options,
net income for 1995 would have been reduced by $16,800. The fair value of the
stock options on the date of grant was estimated using the Black-Scholes option
pricing model with the following assumptions: no volatility, a risk free rate of
5.36%, an expected life of 7.5 months, and no dividend payouts.

NOTE 6 - RELATED PARTY TRANSACTIONS

The Company has entered into an agreement with a company (from which the sole
shareholder receives compensation for management services) to perform certain
marketing and management activities on behalf of the Company. The Company pays a
management fee consisting of a fixed monthly fee, plus an additional fee of 0.5%
of gross sales, as defined in the management agreement. For the years ended
December 31, 1994 and 1995 the Company has recorded approximately $356,000 and
$98,000 in management fees for services performed under this agreement. The
marketing and management services provided pursuant to the agreement were
terminated as of January 1, 1996.

The Company provides management services for three entities owned by the sole
shareholder of the Company. The Company is compensated by these related entities
based upon time spent performing services on their behalf. For the years ended
December 31, 1994 and 1995, the Company recognized management fee revenues of
approximately $13,000 and $25,000, respectively, for services provided. No such
services were provided during 1996.

In 1991, the Company became a general partner in a limited partnership to
purchase and develop land for resale. The Company had a 10% interest in the
partnership prior to the transfer of its interest in the partnership at book
value effective January 1, 1993, to a company from which the sole shareholder
receives compensation for management services. The Company receives a monthly
management fee from the partners for work performed on behalf of the
partnership. The Company recognized approximately $90,000 in 1994 in management
fees under this agreement. No fees were recognized in 1995 and 1996.

During 1993, the Company began receiving a two-part management fee from the
partnership for oversight of the development of a land parcel on behalf of the
partnership. The Company is entitled to a management fee equal to 4% of the cost
of developing the parcel, plus an additional fee equal to 1 1/2% of gross sales
of lots on this parcel. In 1994, 1995 and 1996, the Company recognized
approximately $12,000, $6,000 and $3,000, respectively, in management fee income
under these arrangements. The Company is also entitled to a marketing fee of 4%
of gross sales of lots on this parcel, but the Company has allowed a company,
which actually markets the lots and from which the sole shareholder receives
compensation for management services, to receive this fee directly from the
partnership with no impact on the combined financial statements of the Company.

The Company has also entered into several agreements to purchase land from the
limited partnership at estimated fair market value. During 1994, the Company
purchased approximately $2,702,000 in land from the partnership for future home
construction. No land was purchased under these agreements during 1995 or 1996.

The Company pays a fee to an entity owned by the sole shareholder of the Company
based on the number of homes closed in a particular development as compensation
for assistance in negotiations related to the purchase of the land for the
development. In 1994, 1995 and 1996, the Company paid approximately $145,000,
$5,000 and $0, respectively, in compensation to this entity which has been
recognized as a cost of sales in the combined financial statements of the
Company.

Receivables from related parties represent non-interest bearing advances and
notes to the shareholder and related entities. Such amounts are generally due on
demand or within one year.

                                      F-74
<PAGE>

The Company has made home sales to several employees, for which sales revenue
and the related cost of sales have been included in the accompanying combined
Statements of Operations. For the years ended December 31, 1994, 1995 and the
period January 1, 1996 through May 20, 1996, the Company has recognized revenues
of approximately $454,000, $0 and $443,000, respectively, and cost of sales of
approximately $405,000, $0 and $363,000, respectively, in connection with these
sales.

NOTE 7 - EMPLOYEE BENEFIT PLAN

The Company maintains a contributory profit sharing plan established pursuant to
the provisions of Section 401(k) of the Internal Revenue Code, which provides
retirement benefits for eligible employees of the Company. The Company may make
annual discretionary contributions to the plan. Discretionary contributions of
$150,000 were made in December 31, 1994. No discretionary contributions were
made by the Company for the year ended December 31, 1995 and the period from
January 1, 1996 through May 20, 1996.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

The Company leases office space at one of its locations on a month-to-month
basis from a company wholly-owned by the sole shareholder. Office rent expense
under this lease aggregated $94,000, $102,000 and $42,000 for the years ended
December 31, 1994, 1995 and the period from January 1, 1996 through May 20,
1996, respectively. The Company also leases office space at two other locations
from non-related parties; office rent expense under these leases aggregated
approximately $17,000, $20,000 and $10,000 for the years ended December 31,
1994, 1995 and the period from January 1, 1996 through May 20, 1996,
respectively. Total minimum rental commitments at May 20, 1996 are approximately
$78,000 and $7,000 for the remainder of 1996 and 1997, respectively.

The Company leases certain office equipment under agreements classified as
capital leases. Office equipment under these leases has a cost of $196,000,
$206,000 and $207,000 and accumulated depreciation of approximately $52,000,
$81,000 and $97,000 as of December 31, 1994 and 1995 and as of May 20, 1996,
respectively. The following is a schedule of future minimum lease payments (in
thousands) under capital leases at May 20, 1996:

Year ended December 31,
- -----------------------
                 1996..................................   $31
                 1997..................................    24
                 1998..................................     9
                                                          ---
                                                          $64
                                                          ===

The Company is involved in various routine legal proceedings incidental to the
conduct of its normal business operations. The Company's management believes
that none of these legal proceedings will have a material adverse impact on the
financial condition or results of operations of the Company.

NOTE 9 - UNAUDITED PRO FORMA NET LOSS

The following unaudited pro forma income tax information is presented in
accordance with SFAS No. 109, "Accounting for Income Taxes," as if the Company
had been a C Corporation subject to Federal and state income taxes for period
from January 1, 1996 through May 20, 1996.


                                      F-75
<PAGE>


                                                              For the
                                                       Period January 1, 1996
                                                              through
                                                           May 20, 1996
                                                       ----------------------

     Net loss before pro forma adjustments,
        per statement of operations                           $(1,169)
     Pro forma adjustment:
        Provision for income taxes at estimated
           effective rate of 40%                                  468
                                                              -------

     Pro forma net loss                                       $(1,637)
                                                              =======

                                      F-76


<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and
Shareholders of Solaris Development Corporation
 
     In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Solaris
Development Corporation at May 20, 1996 and the results of their operations and
their cash flows for the period January 1, 1996 through May 20, 1996 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
 
     As discussed in Note 1, Solaris Development Corporation was acquired by The
Fortress Group, Inc. on May 20, 1996.
 
PRICE WATERHOUSE, LLP
 
Raleigh, North Carolina
December 11, 1996
 
                                     F-77
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                           CONSOLIDATED BALANCE SHEET
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                                          MAY 20,
                                                                                                           1996
                                                                                                          -------
<S>                                                                                                       <C>
                                                ASSETS
Housing inventory (Note 3).............................................................................   $18,717
Cash...................................................................................................     1,214
Related party accounts receivable (Note 7).............................................................       241
Other assets, net of accumulated amortization of $14,207...............................................       207
Property and equipment, net............................................................................       455
                                                                                                          -------
          Total assets.................................................................................   $20,834
                                                                                                          -------
                                                                                                          -------
                                 LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities.................................................................   $ 2,395
Lines of credit (Note 5)...............................................................................     1,358
Notes payable (Note 4).................................................................................    13,457
Customer deposits......................................................................................       688
                                                                                                          -------
          Total liabilities............................................................................    17,898
Minority interest......................................................................................     1,383
 
Shareholders' equity:
     Common stock, no par value, 100,000 shares authorized, 3,000 shares issued and outstanding........         1
     Retained earnings.................................................................................     1,552
                                                                                                          -------
          Total shareholders' equity...................................................................     1,553
                                                                                                          -------
Commitments (Note 8)
          Total liabilities and shareholders' equity...................................................   $20,834
                                                                                                          -------
                                                                                                          -------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-78
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                        CONSOLIDATED STATEMENT OF INCOME
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                 FOR THE PERIOD
                                                                                 JANUARY 1, 1996
                                                                                     THROUGH
                                                                                  MAY 20, 1996
                                                                                 ---------------
<S>                                                                              <C>
Revenue:
  Residential homebuilding revenue..............................................     $11,747
  Other revenue.................................................................          43
                                                                                     -------
          Total revenue.........................................................      11,790
Cost and expenses:
  Cost of sales.................................................................       9,863
  General and administrative....................................................         725
  Selling and marketing.........................................................         999
                                                                                     -------
                                                                                      11,587
                                                                                     -------
          Income before minority interest.......................................         203
Other expenses:
  Minority interest in income of joint ventures.................................          89
                                                                                     -------
Net income......................................................................     $   114
                                                                                     -------
                                                                                     -------
Unaudited pro forma net income (Note 11)........................................     $    68
                                                                                     -------
                                                                                     -------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                     F-79
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
   
<TABLE>
<CAPTION>
                                                                                                           TOTAL
                                                                                 COMMON    RETAINED    SHAREHOLDERS'
                                                                                 STOCK     EARNING         EQUITY
                                                                                 ------    --------    --------------
<S>                                                                              <C>       <C>         <C>
Balance at December 31, 1995..................................................     $1       $2,080         $2,081
  Net income..................................................................     --          114            114
  Distributions to shareholders...............................................     --         (642)          (642)
                                                                                 ------    -------        -------
Balance at May 20, 1996.......................................................     $1       $1,552         $1,553
                                                                                 ------    -------        -------
                                                                                 ------    -------        -------
</TABLE>
    
 
   The accompanying notes are an integral part of these financial statements.
 
                                     F-80
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                                    FOR THE PERIOD
                                                                                                    JANUARY 1, 1996
                                                                                                        THROUGH
                                                                                                     MAY 20, 1996
                                                                                                    ---------------
<S>                                                                                                 <C>
Cash flows from operating activities
  Net income.....................................................................................       $   114
  Adjustments to reconcile net income to net cash used in operating activities:
     Depreciation and amortization...............................................................            73
     Minority interest...........................................................................            89
     Gain on sale of asset.......................................................................            --
     Changes in operating assets and liabilities:
       Related party accounts receivable.........................................................           (77)
       Other assets..............................................................................           404
       Land under development and improved lots..................................................         2,786
       Homes under construction..................................................................        (7,204)
       Accounts payable and other liabilities and customer deposits..............................         1,031
       Related party payables....................................................................            --
                                                                                                       ---------
     Net cash used in operating activities.......................................................        (2,784)
Cash flows from investing activities
  Purchases of property and equipment............................................................           (51)
  Proceeds from sale of property and equipment...................................................            10
                                                                                                       ---------
     Net cash used in investing activities.......................................................           (41)
Cash flows from financing activities
  Payments on bank lines of credit...............................................................        (2,225)
  Proceeds from bank lines of credit.............................................................           718
  Payments on notes payable......................................................................       (15,771)
  Proceeds from notes payable....................................................................        21,083
  Investment in mortgage company.................................................................
  Distributions to shareholders..................................................................          (642)
  Distributions to minority interest.............................................................            --
  Return of capital to minority interest.........................................................            --
                                                                                                       --------
     Net cash provided by financing activities...................................................         3,163
                                                                                                       --------
  Net increase in cash...........................................................................           338
  Cash, beginning of period......................................................................           876
                                                                                                       --------
  Cash, end of period............................................................................       $ 1,214
                                                                                                       --------
                                                                                                       ---------
Supplemental disclosure of cash flows information:
  Cash paid during the period for interest.......................................................       $   329
                                                                                                       --------
                                                                                                       --------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-81
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1--BUSINESS AND ORGANIZATION
 
   
     Solaris Development Corporation (the Company) was formed in 1985 for the
purpose of developing land and building subdivisions featuring affordable custom
built homes in the Raleigh, Durham, Chapel Hill region of North Carolina. The
consolidated financial statements include the accounts of the Company, the
Company's interest in the Village Lakes and the Park Village joint ventures.
These entities are related through common ownership and management.
    
 
     The Company and its shareholders have entered into a definitive agreement
with The Fortress Group, Inc. (Fortress) pursuant to which the Company merged
with Fortress (the Merger) on May 20, 1996. All outstanding shares of the
Company were exchanged for cash and shares of Fortress's common stock concurrent
with the consummation of the initial public offering of Fortress Group.
Subsequent to the merger, the Company purchased the remaining 34% interest in
the Park Village joint venture and repaid most outstanding notes payable and
lines of credit using proceeds received from Fortress.
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Basis of Presentation
 
     The consolidated financial statements include the accounts of entities
described in Note 1. All significant intercompany accounts and transactions have
been eliminated in consolidation. As of May 20, 1996, the Company owned a 50%
interest in the Village Lakes joint venture and a 66% interest in the Park
Village joint venture. All significant intercompany balances and transactions
have been eliminated in consolidation. The Company consolidates its 50% interest
in the Village Lakes joint venture since it is the managing partner of the
venture. Solaris has full responsibility and complete discretion in the
management and control of the business of the venture and makes all decisions
regarding the management and affairs of the venture.
 
     Minority interest as of May 20, 1996 includes the 50% interest in the
Village Lakes joint venture and the 34% interest in the Park Village joint
venture owned by various other parties.
 
  Revenue Recognition
 
     Residential home sales are recognized when all conditions precedent to
closing have been fulfilled and title has passed to the buyer. The Company
generally enters into contracts of sale for its houses in advance of their
construction. The Company's standard residential sales contract generally
requires the customer to make an earnest money deposit which is recognized as a
liability until the sale closes.
 
  Other Assets
 
     Other assets consist of earnest money deposits, land options,
organizational costs, deferred offering costs and other deposits. The
organizational costs are amortized using the straight-line method over a five
year period.
 
  Property and Equipment
 
     Property and equipment are carried at cost less accumulated depreciation
and are depreciated using the straight line method over the estimated useful
lives of the assets which range from three to five years. Significant additions
and improvements are capitalized, while expenditures for repairs and maintenance
are changed to operations as incurred.
 
                                      F-82
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

  Income Taxes
 
     The Company has elected S Corporation status. All federal and state income
tax liabilities are accordingly the responsibility of the shareholders rather
than the Company and are, therefore, not recorded at the Company level. The
Company's S Corporation status will terminate on consummation of the Merger
disclosed in Note 1. See Note 11 for information regarding the pro forma income
tax disclosure.
 
  Use of Estimates
 
     The preparation of the 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Risks and Uncertainties
 
     As of May 20, 1996, the Company had incurred and capitalized approximately
$484,000 in costs related to a planned urban development, the future development
of which is contingent upon the Company securing financing to exercise its land
purchase option and obtaining appropriate infrastructure and regulatory
approvals. These costs are recorded as 'housing inventory' in the accompanying
balance sheet. Management expects this development project to proceed as
planned. However, should financing and other contingencies not be successfully
resolved, the Company may not recover its capitalized costs.
 
  Advertising Expense
 
     The cost of advertising is expensed as incurred. The Company incurred
approximately $201,000 in advertising costs during the period from January 1
through May 20, 1996.
 
  Reclassifications
 
     Certain prior amounts in the financial statements have been reclassified to
conform with current classifications. These reclassifications did not result in
any changes in net income or shareholders' equity as previously reported.
 
NOTE 3--REAL ESTATE INVENTORIES
 
     Real estate inventories are summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                             MAY 20, 1996
                                                             ------------
<S>                                                          <C>
Work-in-progress
  Sold homes...............................................    $  8,664
  Speculative homes........................................       4,039
                                                               --------
                                                                 12,703
                                                               --------
Land
  Finished lots............................................       2,618
  Land under development...................................         984
  Land and other costs.....................................         484
                                                               --------
                                                                  4,086
Model homes................................................       1,928
                                                               --------
     Total.................................................    $ 18,717
                                                               --------
                                                               --------
</TABLE>
 
     Models are constructed to assist in the marketing effort of a development
and speculative construction represents non-model homes either under
construction or completed which are not subject to a sales contract.
 
                                      F-83
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTES 4--NOTES PAYABLE AND CONSTRUCTION LOANS
 
     Notes payable and construction and development loans consist of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                                                       MAY 20, 1996
                                                                                                       ------------
<S>                                                                                                    <C>
Construction and development payable Notes payable to financial institution collateralized by a deed
  of trust on real property with interest at prime plus 1% (9.25% at May 20, 1996). Interest and
  principal are due on demand.......................................................................     $  2,481
Notes payable to bank, collateralized by a deed of trust on real property and personal guarantees by
  the shareholders of the Company with interest at prime plus 3/4% (9% at May 20, 1996). Interest
  and principal are due on demand...................................................................        2,288
Notes payable to bank, collateralized by a deed of trust on real property and personal guarantees by
  the shareholders of the Company with interest at prime plus 1/2% (8.75% at May 20, 1996). Interest
  and principal are due on demand.
Other notes payable.................................................................................        8,331
Notes payable to former shareholder, collateralized by a 25% equity interest in the Company with
  interest at 6%, due in quarterly installments of $22,496 through January 1999.....................          227
Other notes payable.................................................................................          130
                                                                                                         --------
                                                                                                         $ 13,457
                                                                                                         --------
                                                                                                         --------
</TABLE>
 
     Principal maturities of the above indebtedness during the remainder of 1996
and subsequent years are as follows (in thousands):
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S>                                                          <C>
1996......................................................   $13,188
1997......................................................       113
1998......................................................       119
1999......................................................        36
2000......................................................         1
                                                             -------
                                                             $13,457
                                                             -------
                                                             -------
</TABLE>
 
     The Company incurred interest costs of approximately $359,099 from January
1, 1996 through May 20, 1996. Of this amount approximately $80,300 was
capitalized to land under development and improved lots and approximately
$278,800 was capitalized to homes under construction for the period January 1,
1996 through May 20, 1996, respectively.
 
NOTE 5--PROPERTY AND EQUIPMENT
 
     Property and equipment is summarized as follows (in thousands):
 
   
<TABLE>
<CAPTION>
                                                             MAY 20,
                                                              1996
                                                             -------
<S>                                                          <C>
Automobiles................................................   $  57
Computer equipment.........................................      12
Office equipment and furniture.............................      99
Model home furniture displays..............................     728
                                                              -----
                                                                896
                                                              -----
Less accumulated depreciation..............................    (441)
                                                              -----
                                                              $ 455
                                                              -----
                                                              -----
</TABLE>
    
 
                                      F-84
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 6--LINES OF CREDIT
 
     During 1994, the Company obtained a $4 million revolving line of credit
from a bank for land development in the Park Village subdivision. This line of
credit extends through the completion of the development of the entire tract,
and bears interest at a rate of the bank's prime rate plus 3/4% (9.0% at May 20,
1996). Interest is payable monthly. Under this line of credit, the Company had
outstanding at May 20, 1996, borrowings of $450,021. The line of credit is
collateralized by first and second deeds of trust on the land, guarantees of the
Company, and limited personal guarantees of the individual owners in the joint
venture.
 
     During 1995, the Company obtained two additional lines of credit for $2
million and $2.1 million from banks for land development in the Preston Oaks and
Lake Ridge Subdivisions. The lines of credit extend through the completion of
the development of these subdivisions. The Preston Oaks line bears interest at
prime plus 1/2% and the Lake Ridge line bears interest at prime plus 3/4% (9.0%
at May 20, 1996). At May 20, 1996, the Company had outstanding borrowings of
$400,900 and $507,144 for the Preston Oaks and Lake Ridge Subdivisions,
respectively. The lines of credit are collateralized by deeds of trust on the
land and personal guarantees by the shareholders of the Company.
 
NOTE 7--RELATED PARTY TRANSACTIONS
 
     The Company conducts transactions with companies affiliated through
investments in joint ventures. The Company records these related party
transactions through its due to/due from accounts, which have been eliminated in
consolidation.
 
     As of May 20, 1996, accounts receivable from related parties were $240,916.
Of this amount, $102,904, was due from a partner in one of the Company's joint
ventures. The remainder of the balance of approximately $138,012 is due from
Fortress for reimbursement of expenses incurred by the Company on their behalf.
These receivables represent verbal agreements between the entities and are
payable on demand.
 
     The Company entered into an office lease agreement with an affiliated
company on November 1, 1995. Rent expense related to this agreement was
approximately $32,500 from January 1, 1996 through May 20, 1996.
 
NOTE 8--EMPLOYEE BENEFIT PLANS
 
     The Company participates in a 401(k) plan under which employees can, after
one-half year of service, contribute a percentage of their gross salary up to a
maximum of $9,500 for 1996. The Company made a matching contribution of $37,900
to the Plan during the period January 1, 1996 through May 20, 1996. The Company
did not incur any plan administrative expenses during 1996, as these expenses
were offset against forfeitures.
 
NOTE 9--LEASES
 
     The Company rents its facilities and certain office equipment under
operating leases. Future minimum lease payments under the leases, which have
remaining terms in excess of one year, are as follows:
 
<TABLE>
<CAPTION>
MAY 21 - DECEMBER 31, 1996
YEAR ENDED DECEMBER 31,
- --------------------------
<S>                                                                <C>
1997.............................................................  $114
1998.............................................................   158
1999.............................................................   123
2000.............................................................    98
                                                                   ----
                                                                   $622
                                                                   ----
                                                                   ----
</TABLE>
 
     Total rent expense from January 1, 1996 through May 20, 1996 was $96,000.
 
                                      F-85
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 10--COMMON STOCK
 
     Effective January 1, 1994, the Company redeemed all 1,000 shares of common
stock, held by a shareholder resulting in a decrease in retained earnings of
$386,228. In conjunction with this transaction, the Company incurred a note
payable to the former shareholder collateralized by the redeemed stock in the
amount of $386,228, of which $226,560 is outstanding as of May 20, 1996,
respectively. This transaction did not result in any gain or loss for the
Company.
 
     On January 1, 1994, the Company entered into a contract with this same
former shareholder whereby the Company agreed to pay the individual a consulting
fee in the amount of $300,000 payable in sixty monthly installments of $5,000.
 
NOTE 11--UNAUDITED PRO FORMA NET INCOME
 
     The following unaudited pro forma income tax information is presented in
accordance with SFAS No. 109, 'Accounting for Income Taxes,' as if the Company
had been a C Corporation subject to Federal and state income taxes for the
period from January 1, 1996 through May 20, 1996.
 
<TABLE>
<CAPTION>
                                                                                 FOR THE PERIOD
                                                                                 JANUARY 1, 1996
                                                                                     THROUGH
                                                                                  MAY 20, 1996
                                                                                 ---------------
<S>                                                                              <C>
Net income before pro forma adjustment, per statement of income.................      $ 114
Pro forma adjustment:
  Provision for income taxes at estimated effective rate of 40%.................        (46)
                                                                                     ------
Pro forma net income............................................................      $  68
                                                                                     ------
</TABLE>
 
                                      F-86
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders of
Solaris Development Corporation
 
     We have audited the accompanying consolidated balance sheets of Solaris
Development Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Solaris Development Corporation as of December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
 
   
/s/ ERNST & YOUNG LLP
    
 
Raleigh, North Carolina
February 10, 1996
 
                                      F-87
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                          CONSOLIDATED BALANCE SHEETS
 
   
<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                      --------------------------
                                                                                         1994           1995
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
                                      ASSETS
Housing inventories:
  Homes under construction (Note 2)................................................   $10,411,366    $ 7,427,620
  Land under development and improved lots.........................................     4,372,496      6,415,701
  Land options for future development and related costs............................            --        456,084
                                                                                      -----------    -----------
                                                                                       14,783,862     14,299,405
Cash...............................................................................     1,380,851        873,686
Restricted cash....................................................................       141,860        440,366
Related party accounts receivable (Note 5).........................................       122,417        163,490
Other assets, net of accumulated amortization of $12,633 and $13,652,
  respectively.....................................................................        46,347        171,528
Property and equipment:
  Automobiles......................................................................        50,204         56,590
  Computer equipment...............................................................         4,711         12,388
  Office equipment and furniture...................................................        63,690         93,265
  Model home furniture and sales displays..........................................       483,422        691,878
                                                                                      -----------    -----------
                                                                                          602,027        854,121
  Less accumulated depreciation....................................................      (234,698)      (368,801)
                                                                                      -----------    -----------
                                                                                          367,329        485,320
                                                                                      -----------    -----------
          Total assets.............................................................   $16,842,666    $16,433,795
                                                                                      -----------    -----------
                                                                                      -----------    -----------
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities.............................................   $ 3,055,595    $ 1,591,351
Line of credit (Note 4)............................................................     1,626,199      2,863,759
Notes payable (Note 3).............................................................     9,242,932      8,145,313
Customer deposits..................................................................       391,671        460,224
                                                                                      -----------    -----------
          Total Liabilities........................................................    14,316,397     13,060,647
Minority interest..................................................................     1,346,273      1,294,632
Shareholders' equity
  Common stock, no par value, 100,000 shares authorized, 3,000 shares issued and
     outstanding December 31, 1994 and 1995........................................         1,000          1,000
  Retained earnings................................................................     1,178,996      2,077,516
                                                                                      -----------    -----------
          Total shareholders' equity...............................................     1,179,996      2,078,516
Commitments (Note 8)
          Total liabilities and shareholders' equity...............................   $16,842,666    $16,433,795
                                                                                      -----------    -----------
                                                                                      -----------    -----------
</TABLE>
    
 
                            See accompanying notes.
 
                                      F-88
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                      --------------------------
                                                                                         1994           1995
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
Revenue:
  Residential homebuilding revenue.................................................   $33,197,542    $42,563,554
  Interest income..................................................................        16,133         36,891
                                                                                      -----------    -----------
                                                                                       33,213,675     42,600,445
Costs and expenses:
  Cost of sales....................................................................    26,258,391     33,792,304
  General and administrative.......................................................     1,763,897      2,684,718
  Selling and marketing............................................................     2,744,734      3,353,012
  Interest.........................................................................        41,923         39,623
                                                                                      -----------    -----------
                                                                                       30,808,945     39,869,657
                                                                                      -----------    -----------
Income before minority interest....................................................     2,404,730      2,730,788
Minority interest in (loss) income of subsidiaries.................................       906,672        745,457
                                                                                      -----------    -----------
Net income.........................................................................   $ 1,498,058    $ 1,985,331
                                                                                      -----------    -----------
                                                                                      -----------    -----------
Unaudited pro forma net income (Note 9)............................................                  $ 1,191,199
                                                                                                     -----------
                                                                                                     -----------
</TABLE>
 
                            See accompanying notes.
 
                                      F-89
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 
   
<TABLE>
<CAPTION>
                                                                                                         TOTAL
                                                                             COMMON     RETAINED     SHAREHOLDERS'
                                                                             STOCK      EARNINGS         EQUITY
                                                                             ------    ----------    --------------
<S>                                                                          <C>       <C>           <C>
Balance at December 31, 1993..............................................   $1,000    $  832,756      $  833,756
  Net income..............................................................      --      1,498,058       1,498,058
  Distributions to shareholders...........................................      --       (765,590)       (765,590)
  Redemption of common stock (Note 8).....................................      --       (386,228)       (386,228)
                                                                             ------    ----------    --------------
Balance at December 31, 1994..............................................   1,000      1,178,996       1,179,996
  Net income..............................................................      --      1,985,331       1,985,331
  Distributions to shareholders...........................................      --     (1,086,811)     (1,086,811)
                                                                             ------    ----------    --------------
Balance at December 31, 1995..............................................   $1,000    $2,077,516      $2,078,516
                                                                             ------    ----------    --------------
                                                                             ------    ----------    --------------
</TABLE>
    
 
                            See accompanying notes.
 
                                      F-90
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                     ----------------------------
                                                                                         1994            1995
                                                                                     ------------    ------------
<S>                                                                                  <C>             <C>
OPERATING ACTIVITIES
Net income........................................................................   $  1,498,058    $  1,985,331
Adjustments to reconcile net income to net cash (used in) provided by operating
  activities:
  Depreciation and amortization...................................................         82,298         155,819
  Minority interest...............................................................        906,672         745,457
  Gain on sale of asset...........................................................             --          (2,483)
  Changes in operating assets and liabilities:
     Accounts receivable from related parties.....................................        (94,879)        (41,073)
     Other assets.................................................................         15,811        (126,200)
     Land under development and improved lots.....................................     (2,685,168)     (2,499,289)
     Homes under construction.....................................................     (4,495,241)      2,983,746
     Accounts payable and other liabilities and customer deposits.................      2,942,414      (1,395,691)
     Related party payables.......................................................        (73,105)             --
                                                                                     ------------    ------------
Net cash (used in) provided by operating activities...............................     (1,903,140)      1,805,617
INVESTING ACTIVITIES
Change in restricted cash.........................................................        165,140        (298,506)
Purchases of property and equipment...............................................       (207,964)       (302,297)
Proceeds from sale of property and equipment......................................             --          25,631
                                                                                     ------------    ------------
Net cash used in investing activities.............................................        (42,824)       (575,172)
FINANCING ACTIVITIES
Payments on bank line of credit...................................................     (1,777,400)     (2,l75,6l9)
Proceeds from bank line of credit.................................................      3,403,599       3,413,179
Payments on notes payable.........................................................    (24,587,820)    (31,525,538)
Proceeds from notes payable.......................................................     26,704,477      30,427,919
Distributions to shareholders.....................................................       (765,590)     (1,086,811)
Distributions to minority interest................................................       (339,810)       (437,140)
Return of capital to minority interest............................................             --        (353,600)
                                                                                     ------------    ------------
Net cash provided by (used in) financing activities...............................      2,637,456      (1,737,610)
                                                                                     ------------    ------------
Increase (decrease) in cash.......................................................        691,492        (507,165)
Cash at beginning of period.......................................................        689,359       1,380,851
                                                                                     ------------    ------------
Cash at end of period.............................................................   $  1,380,851    $    873,686
                                                                                     ------------    ------------
                                                                                     ------------    ------------
 
Supplemental disclosure of cash flow information
Cash paid during the period for interest..........................................   $    647,900    $  1,058,581
                                                                                     ------------    ------------
                                                                                     ------------    ------------
</TABLE>
    
 
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
 
     Excluded from the consolidated 1994 statement of cash flows was the effect
of a non-cash transaction in which the Company incurred $386,228 of notes
payable to a former shareholder in conjunction with the redemption of this
individual's 1,000 shares of common stock. (Note 8)
 
                                      F-91
<PAGE>
   
                        SOLARIS DEVELOPMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1995
 
1.  BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
    
 
  Business of the Company
 
     Solaris Development Corporation (the 'Company') was formed in 1985 for the
purpose of developing land and building subdivisions featuring affordable custom
built homes in the Raleigh, Durham, Chapel Hill region of North Carolina.
 
     The Company and its shareholders have entered into a definitive agreement
with the Fortress Group pursuant to which the Company will merge with the
Fortress Group (the 'Merger'). All outstanding shares of the Company will be
exchanged for cash and shares of The Fortress Group's common stock concurrent
with the consummation of the initial public offering of the common stock of the
Fortress Group and subordinated debt.
 
  Basis of Presentation
 
   
     The consolidated financial statements include the accounts of the Company
and joint ventures in which it was involved during the years ended December 31,
1994 and 1995. The Company owns a 50% interest in the Village Lakes joint
venture and a 66% interest in the Park Village joint venture. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company consolidates its 50% interest in the Village Lakes joint venture
since it is the managing partner of the venture. Solaris has full responsibility
and complete discretion in the management and control of the business of the
venture, and makes all decisions regarding the management and affairs of the
venture.
    
 
     Minority interest as of December 31, 1994 and 1995 includes the 50%
interest in the Village Lakes joint venture and the 34% interest in the Park
Village joint venture owned by various other parties.
 
  Residential Home-building Revenue
 
     The Company is primarily engaged in the construction and sale of
residential housing. Revenue is recognized at the time of the closing of a sale,
when title to and possession of the property transfer to the buyer.
 
  Other Assets
 
     Other assets consist of earnest money deposits, land options,
organizational costs, deferred offering costs and other deposits. The
organizational costs are amortized using the straight-line method over a five
year period.
 
  Property and Equipment
 
     Property and equipment are stated at cost. Depreciation is computed
primarily using accelerated methods with useful lives ranging from five to seven
years.
 
  Restricted Cash
 
     When a sales contract is signed, the Company receives a deposit from the
buyer which is restricted until the transaction is closed. As of December 31,
1994 and 1995, the restricted cash held in an escrow account was $141,860 and
$440,366, respectively.
 
  Income Taxes
 
     The Company has elected S Corporation status. All federal and state income
tax liabilities are accordingly the responsibility of the shareholders rather
than the Company and are therefore not recorded at the Company level. The
Company's S Corporation status will terminate on consummation of the Merger
disclosed above. See Note 9 for information regarding the pro forma income tax
disclosures.
 
                                      F-92
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
1.  BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

  Use of Estimates
 
     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
  Risks and Uncertainties
 
     As of December 31, 1995, thc Company had incurred and capitalized
approximately $456,000 in costs related to a planned urban development, the
future development of which is contingent upon the Company securing financing to
exercise its land purchase option and obtaining appropriate infrastructure and
regulatory approvals. These costs are recorded as 'land options for future
development and related costs' in the accompanying balance sheet. Management
expects this development project to proceed as planned. However, should
financing and other contingencies not be successfully resolved, the Company
would need to write-off these capitalized costs.
 
  Advertising Expense
 
     The cost of advertising is expensed as incurred. The Company incurred
approximately $242,000 and $261,000 in advertising costs during 1994 and 1995,
respectively.
 
  Reclassifications
 
     Certain 1994 amounts in the financial statements have been reclassified to
conform with 1995 classifications. These reclassifications did not result in any
changes in net income or shareholders' equity as previously reported.
 
2.  HOUSING INVENTORIES
 
   
     Housing inventories consist principally of homes under construction, land
under development, improved lots, and land options and other costs related to
future development. Inventories are stated at the lower of cost or net
realizable value. In addition to direct land acquisition, land development and
housing construction costs, inventory costs include interest, real estate taxes,
the cost of real estate options, related legal fees, and certain administrative
costs which are capitalized in inventory during the development and construction
periods. All other costs are charged to expense as incurred. Net realizable
value estimates are based on management's present plans and intentions of
undiscounted sale prices less development and disposition costs, assuming that
disposition occurs in the normal course of business.
    
 
     Homes under construction are summarized as follows:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      -------------------------
                                                         1994           1995
                                                      -----------    ----------
<S>                                                   <C>            <C>
Work in progress...................................   $ 6,243,536    $4,356,776
Models.............................................     1,725,115     1,893,560
Speculative construction...........................     2,442,715     1,177,284
                                                      -----------    ----------
                                                      $10,411,366    $7,427,620
                                                      -----------    ----------
                                                      -----------    ----------
</TABLE>
 
     Models are constructed to assist in the marketing effort of a development
and speculative construction represents non-model homes either under
construction or completed which are not subject to a sales contract.
 
                                      F-93
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
3.  NOTES PAYABLE AND CONSTRUCTION LOANS
 
     Notes payable and construction and development loans consist of the
following:
 
   
<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                     ------------------------
                                                                        1994          1995
                                                                     ----------    ----------
<S>                                                                  <C>           <C>
Construction and development loans payable:
  Notes payable to financial institution collateralized by a deed
     of trust on real property with interest at prime plus 1%
     (Prime was 8.65% at December 31, 1995). Interest and
     principal are due on demand..................................   $5,160,054    $1,513,737
  Notes payable to bank, collateralized by a deed of trust on real
     property and personal guarantees by the shareholders of the
     Company with interest at prime plus 3/4% (Prime was 8.65% at
     December 31, 1995). Interest and principal are due on
     demand.......................................................    1,743,560     2,068,096
  Notes payable to bank, collateralized by a deed of trust on real
     property and personal guarantees by the shareholders of the
     Company with interest at prime plus 1% (Prime was 8.65% at
     December 31, 1995). Interest and principal are due on
     demand.......................................................    1,695,350     3,910,096
  Notes payable to bank, collateralized by a deed of trust on real
     property and personal guarantees by the shareholders of the
     Company with interest at prime plus 1/2% (Prime was 8.65% at
     December 31, 1995). Interest and principal are due on
     demand.......................................................           --       224,390
Other notes payable:
  Notes payable to former shareholder, collateralized by a 25%
     equity interest in the Company with interest at 6%, due in
     quarterly installments of $22,496 through January 1999.......      317,898       245,376
  Other notes payable.............................................      326,070       183,618
                                                                     ----------    ----------
                                                                     $9,242,932    $8,145,313
                                                                     ----------    ----------
                                                                     ----------    ----------
</TABLE>
    
 
     Principal maturities of the above indebtedness during the years immediately
following December 31, 1995 are as follows:
 
<TABLE>
<S>                                                         <C>
1996.....................................................   $7,876,500
1997.....................................................      113,428
1998.....................................................      118,463
1999.....................................................       35,767
2000.....................................................        1,155
                                                            ----------
                                                            $8,145,313
                                                            ----------
                                                            ----------
</TABLE>
 
     The Company incurred interest costs of approximately $647,900 in 1994 and
$1,058,581 in 1995. Of these amounts approximately $77,000 and $171,503 were
capitalized to land under development and improved lots and approximately
$529,200 and $847,455 were capitalized to homes under construction for the years
ended December 31, 1994 and 1995, respectively.
 
                                      F-94
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
4.  LINE OF CREDIT
 
     During 1994, the Company obtained a $4 million revolving line of credit
from a bank for land development in the Park Village Subdivision. This line of
credit extends through the completion of the development of the entire tract,
and bears interest at a rate of the bank's prime rate plus 3/4%. Interest is
payable monthly. Under this line of credit, the Company had outstanding at
December 31, 1994 and 1995, borrowings of $1,626,199 and $1,537,964,
respectively. The line of credit is collateralized by first and second deeds of
trust on the land, guarantees of the Company, and limited personal guarantees of
the individual owners in the joint venture.
 
     During 1995, the Company obtained two additional lines of credit for $2
million and $2.1 million from banks for land development in the Preston Oaks and
Lake Ridge Subdivisions. The lines of credit extend through the completion of
the development of these subdivisions. The Preston Oaks line bears interest at
prime plus 1/2% and the Lake Ridge line bears interest at prime plus 3/4%. Under
these lines of credit, the Company had outstanding at December 31, 1995,
borrowings of $693,700 and $632,095 for the Preston Oaks and Lake Ridge
Subdivisions, respectively. The lines of credit are collateralized by deeds of
trust on the land and personal guarantees by the shareholders of the Company.
 
5.  RELATED PARTY TRANSACTIONS
 
     The Company conducts transactions with companies affiliated through
investments in joint ventures. The Company records these related party
transactions through its due to/due from accounts, which have been eliminated in
consolidation.
 
     As of December 31, 1994 and 1995, accounts receivable from related parties
were $122,417 and $163,490, respectively. Of this amount, $107,512 and $93,312
at December 31, 1994 and 1995, respectively, was due from a partner in one of
the Company's joint ventures. The remainder of the 1995 balance of approximately
$70,000 is due from an affiliated company for reimbursement of expenses incurred
by the Company on their behalf. These receivables represent verbal agreements
between the entities and are payable on demand.
 
     The Company entered into an office lease agreement with an affiliated
company on November 1, 1995. Rent expense related to this agreement was
approximately $13,000 for the year ended December 31, 1995.
 
6.  401(K) PLAN
 
     The Company participates in a 401(k) plan under which employees can, after
one half year of service, contribute a percentage of their gross salary up to a
maximum of $9,240 for 1994 and $9,500 for 1995. The Company made matching
contributions totaling $30,827 and $29,786 to the Plan during the years ended
December 31, 1994 and 1995, respectively. The Company did not incur any plan
administrative expenses during 1994 or 1995, as these expenses were offset
against forfeitures.
 
7.  LEASES
 
     The Company rents its facilities and certain office equipment under
operating leases. Future minimum lease payments under the leases, which have
remaining terms in excess of one year, are as follows:
 
<TABLE>
<S>                                                             <C>
1996.........................................................   $161,776
1997.........................................................    133,532
1998.........................................................    108,515
1999.........................................................    102,507
2000.........................................................     80,008
                                                                --------
                                                                $586,338
                                                                --------
                                                                --------
</TABLE>
 
                                      F-95
<PAGE>
                        SOLARIS DEVELOPMENT CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
7.  LEASES--(CONTINUED)

     Total rent expense for years ended December 31, 1994 and 1995 was $96,901
and $148,444, respectively.
 
8.  REDEMPTION OF COMMON STOCK
 
     Effective January 1, 1994, the Company redeemed all 1,000 shares of common
stock, held by a shareholder resulting in a decrease in retained earnings of
$386,228. In conjunction with this transaction, the Company incurred a note
payable to the former shareholder collateralized by the redeemed stock in the
amount of $386,228, of which $317,898, and $245,376 is outstanding as of
December 31, 1994 and 1995, respectively. This transaction did not result in any
gain or loss for the Company.
 
     On January 1, 1994, the Company entered into a contract with this same
former shareholder whereby the Company agreed to pay the individual a consulting
fee in the amount of $300,000 payable in sixty monthly installments of $5,000.
 
9.  UNAUDITED PRO FORMA NET INCOME
 
     The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS 109) as
if the Company had been a C Corporation subject to federal and state income
taxes for the year ended December 31, 1995.
 
<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                                                         DECEMBER 31,
                                                                             1995
                                                                         ------------
<S>                                                                      <C>
Earnings before pro forma adjustments, per statement of income........    $1,985,331
Pro forma adjustment:
  Provision for income taxes at estimated effective rate of 40%.......       794,132
                                                                          ----------
Pro forma net income..................................................    $1,191,199
                                                                          ----------
                                                                          ----------
</TABLE>
 
                                      F-96




                              CONSULTING AGREEMENT


         THIS CONSULTING AGREEMENT ("Agreement") is made effective as of the 1st
day of May, 1996 by and between The Fortress Group, Inc., a Delaware
corporation, (the "Company") and Commonwealth Homes, Inc., a Delaware
corporation (the "Consultant").

         WHEREAS, the Company's long-term strategy includes the strategic
acquisition of homebuilding companies and potentially other related businesses;

         WHEREAS, Consultant and its principals have extensive experience in
mergers and acquisitions ("M&A"), financing and strategic planning, particularly
in the homebuilding industry;

         WHEREAS, the Company desires to retain the services of Consultant and
the parties desire to enter into an Agreement to evidence the terms and
conditions of such an engagement;

         NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this Consulting Agreement, it is agreed as follows:

         Section 1. Consulting Terms and Duties.

         Upon the terms and conditions set forth herein, the Company hereby
retains and engages Consultant, and Consultant hereby accepts such retention and
engagement to render such M&A, financial advisory and strategic planning
services as shall be specified from time to time by the Company's President
and/or such other officer as the Company's Board of Directors shall designate.
Nothing in this Agreement shall prohibit the company from hiring any other third
party advisors to provide M&A, financial advisory, strategic planning or related
services and this Agreement does not create an exclusive right in favor of
Consultant to provide such services.

         Section 2. Term.

         Consultant's term of engagement under this Agreement shall be for a
period of three years commencing effective May 1, 1996 (the "Initial Engagement
Period"). This Agreement shall automatically renew for successive one-year
periods (each one-year period shall be referred to herein as a "Renewal Period")
unless either the Company or Consultant, as the case may be, provides written
notice within ninety (90) days prior to the termination of any such period,
stating its/his desire to terminate this Agreement. The Initial Engagement
Period and each successive Renewal Period shall be referred to herein together
as the "Engagement Period". Notwithstanding anything to the contrary contained
herein, the Engagement Period is subject to termination pursuant to Section 6
below.



<PAGE>



         Section 3. Compensation.

                  (a) Transaction Fees. During the Term, in consideration of the
         services rendered pursuant to this Agreement, the company will pay
         consultant a fee, contingent upon and to be paid upon consummation of
         any Transaction (as defined) by the Company for which Consultant has
         been engaged. The amount of any such fee will be (i) agreed upon by the
         Company and Consultant, (ii) approved as to fairness by a committee of
         disinterested members of the Board of Directors of the Company, and
         (iii) reasonable and customary in relation to the size and complexity
         of the Transaction and the fees customarily charged by other advisors
         for similar services. The parties anticipate that such fee will
         generally be based on a percentage of the Enterprise Value (as defined
         below)involved in the Transaction. As used herein, "Transaction" means
         (x) an acquisition, (y) joint venture, partnership, license arrangement
         or other arrangement sought by the Company ("Alliance"), or (z) a
         capital transaction whereby the Company seeks to raise funds form the
         capital markets either through a private placement or a public offering
         of securities.

                           Acquisition. With respect to an acquisition,
                  "Enterprise Value" will be determined by taking into
                  consideration, by way of example, any cash payments plus (i)
                  the face value or par value of any notes, bonds, evidences of
                  indebtedness, or preferred stock issued by the Company, (ii)
                  the higher of book or market value on the date of closing of
                  the Transaction of any shares of stock or other equity
                  securities issued by the Company, any subsidiary, or Affiliate
                  of the Company, (iii) the actual amount of any consideration
                  paid through "earn-outs" employment agreements, agreements not
                  to compete, royalties or similar arrangements as it is paid to
                  the acquired company, its shareholders, and/or top management
                  in consideration for the Transaction, (iv) any debt assumed in
                  the Transaction by the Company, and (v) the amount of any
                  additional contingent, deferred, or other form of
                  consideration paid, issued , or given by the Company, any
                  subsidiary, or Affiliate of the Company in consideration for
                  any Transaction.

                           Alliance. With respect to an Alliance, "Enterprise
                  Value" shall include the value of all assets committed by both
                  parties to the relationship.

                           Capital Transaction. With respect to a capital
                  transaction, "Enterprise Value" means the market value of the
                  securities issued by the Company.

                  (b) Reimbursement of Expenses. The Company shall reimburse
         Consultant for those reasonable and necessary out-of-pocket expenses,
         including professional, consulting, and similar acquired services,
         which are approved by the President of the Company and which have been
         incurred by Consultant in connection with the rendering of services
         hereunder. Any reimbursement to be made by the Company pursuant to this
         Section 3(b)

                                       2


<PAGE>


         shall be made following submission to the Company by Consultant of
         reasonable documentation of the expenses incurred.

                  (c) Annual Fee. In consideration of the willingness of
         Consultant to make itself available during the term of their Agreement
         and of the anticipation that Consultant will provide substantial
         services in connection with potential Transactions that will not
         ultimately be consummated, the Company agrees to pay Consultant an
         annual fee of $350,000. The Annual Fee shall be taken into account when
         fees are determined pursuant to Section 3(a) in any year.

         Section 4. Nondisclosure.

         4.1 Nondisclosure of Confidential Information.

                  (a) Consultant recognizes and acknowledges that during the
         course of its engagement it will be exposed to data and information
         concerning the business and affairs of the Company, including but not
         limited to, information relative to the Company's pro forma financial
         statements, strategies, plans, contracts, pricing programs,
         profitability analyses, and profit margin information and other related
         matters and that all of such data and information (collectively the
         "Proprietary Information") are vital, sensitive, confidential and
         proprietary to the Company.

                  (b) Consultant acknowledges that the Proprietary Information
         constitutes a protectable business interest of the Company, and it
         covenants and agrees that during the term of this engagement and after
         its termination it shall not directly or indirectly, whether
         individually, as a director, stockholder, owner, partner, employee, or
         agent of any business, or in any other capacity, make known, disclose,
         furnish, make available, or utilize any of the Proprietary Information
         , other than in the proper performance of his duties during the term of
         his engagement hereunder; Provided, however, that Proprietary
         Information shall not include (a) information which is known to the
         public or is generally known within the industry of businesses
         comparable to the Company's planned business (other than as a result of
         Consultant's violation of this covenant) or (b) information which
         Consultant is required to disclose pursuant to law or order of a court
         having jurisdiction over Consultant (provided that Consultant offers
         the Company an opportunity to obtain an appropriate protective order or
         administrative relief against disclosure of such Proprietary
         Information).

                  (c) Property of the Business. All memoranda, notes, lists,
         records and other documents or papers (and all copies thereof),
         including such items stored in computer memories, or microfiche or by
         any other means, made or compiled by or on behalf of Consultant in
         connection with the rendering by Consultant of consulting services
         hereunder, or made available by the Company to Consultant relating to
         the business of the Company,

                                       3

<PAGE>

         are and shall be the Company's property and shall be delivered to the
         Company promptly on the request of the Company.

         4.2 Rights and Remedies upon Breach. If Consultant breaches, or
threatens to commit a breach of, any of the provisions of Section 4.1 (the
"Nondisclosure Covenants"), the Company shall have the right and remedy to have
the Nondisclosure Covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any breach or threatened breach of the
Nondisclosure Covenants would cause irreparable injury to the Company and that
money damages would not provide an adequate remedy to the Company. The Company
shall also have any other rights and remedies available to it under law or in
equity.

         4.3 Severability of Covenants. Consultant acknowledges and agrees that
the Nondisclosure Covenants are reasonable and valid in scope and in all other
respects. If any court determines that any of the Nondisclosure Covenants, or
any part thereof, is invalid or unenforceable, the remainder of the
Nondisclosure Covenants shall not thereby be affected and shall be given full
effect, without regard to the invalid portions.

         Section 5. Equitable Remedies

                (a) Consultant acknowledges and agrees that the covenants set
         forth in Section 4 inclusive hereof are reasonable and necessary for
         the protection of the Company's business interests, that irreparable
         injury will result to Company if Consultant breaches any of the terms
         of said covenants, and that in the event of Consultant's actual or
         threatened breach of any such covenants, the Company will have no
         adequate remedy at law. Consultant accordingly agrees that in the event
         of any actual or threatened breach by it of any of said covenants, the
         Company shall be entitled to immediate injunctive and other equitable
         relief, without bond and without the necessity of showing actual
         monetary damages. Nothing contained herein shall be construed as
         prohibiting the Company from pursuing any other remedies available to
         it for such breach or threatened breach, including the recovery of any
         damages which it is able to prove.

                  (b) Each of the covenants in Section 4 inclusive hereof shall
         be construed as independent of any other covenants or other provisions
         of this Agreement.

                  (c) In the event of any judicial determination that any of the
         covenants set forth in Section 4 inclusive hereof are not fully
         enforceable, it is the intention and desire of the parties that the
         court treat said covenants as having been modified to the extent deemed
         necessary by the court to render them reasonable and enforceable, and
         that the court enforce them to such extent.

                                       4

<PAGE>


         Section 6. Termination

         This Agreement shall be terminate as provided in Section 2; provided,
that (a) this Agreement shall be earlier terminated in the event of Consultant's
dissolution and (b) the provisions of Sections 3(a), 3(b), 4, 5 and 8(f) shall
survive the termination of this Agreement.

         Section 7. Representations and Warranties.

         7.1 Representations and Warranties of Consultant. Consultant represents
and warrants to the Company as follows:

                  (a) Consultant is a limited liability company duly organized
         and validly existing under the laws of the State of Delaware with full
         corporate power and authority to execute and deliver this Agreement.
         Consultant has the full legal right, power and capacity, and all
         authority and approval required to execute and deliver this Agreement
         and to perform its obligations hereunder.

                  (b) This Agreement has been duly authorized, executed and
         delivered by Consultant and constitutes a valid and legally binding
         agreement of Consultant, enforceable against Consultant in accordance
         with its terms, subject to applicable bankruptcy,, insolvency and
         similar laws affecting creditors' rights generally and subject as to
         enforceability to general principles of equity 9regardless of whether
         enforcement is sought in a proceeding at law or in equity).

                  (c) The execution and delivery by Consultant of this Agreement
         and the performance of its obligations hereunder will not (i) require
         the consent, waiver, order, registration, qualification, authorization
         or approval of, from or with any governmental or regulatory authority,
         domestic or foreign, or of any other individual, partnership,
         corporation, trust or other entity (collectively, "Person"), (ii)
         conflict with or result in any breach or violation of any of the terms
         of conditions or provisions of, or constitute (or, with notice or lapse
         of time or both, constitute) a default under (1) the Articles of
         Incorporation or By-Laws of Consultant; (2) any federal, state, local
         or foreign, statute, regulation, order judgment or decree of any court,
         arbitrator or governmental or regulatory instrumentality applicable to
         Consultant or (3) any instrument, contract or other agreement to which
         Consultant is a party or by or to which Consultant is bound or subject.

         7.2 Representations and Warranties of the Company. The Company
represents and warrants to Consultant as follows:

                  (a) The Company is a corporation duly organized and validly
         existing under the laws of the State of Delaware, with full power and
         authority to execute and deliver this

                                       5

<PAGE>


         Agreement. The Company has full legal right, power and capacity, and
         all authority and approval required to execute and deliver this
         Agreement and to perform all its obligations hereunder.

                  (b) This Agreement has been duly authorized, executed and
         delivered by the Company and constitutes a valid and legally binding
         agreement of the Company enforceable against the Company in accordance
         with its terms, subject to applicable bankruptcy, insolvency and
         similar laws affecting creditors rights generally and subject as to
         enforceability to general principles of equity (regardless of whether
         enforcement is sought in a proceeding at law or in equity).

                  (c) The execution and delivery by the Company of this
         Agreement and the performance of its obligations hereunder will not (i)
         require the consent, waiver, order, registration, qualification,
         authorization or approval of, from or with any governmental or
         regulatory authority, domestic or foreign, or of any other person, (ii)
         conflict with or result in any breach or violation of the terms or
         conditions or provisions of, or constitute (or, with notice or lapse of
         time or both constitute) a default under (1) the Articles of
         Incorporation or By-laws of the Company, 92) any federal, state, local
         or foreign statute, regulation, order, judgment or decree of any court,
         arbitrator or governmental or regulatory instrumentality applicable to
         the Company, or (3) any instrument, contract or other agreement to
         which the Company is a party or by or to which the Company is bound or
         subject.

         Section 8. Miscellaneous.

                  (a) Notices. Any notice or other communication required or
         permitted hereunder shall be in writing and shall be delivered
         personally, sent by facsimile transmission (with a copy also sent by
         another means herein provided for), sent by certified, registered or
         express mail, postage prepaid or sent by reputable air courier. Any
         such notice shall be deemed given when so delivered personally or sent
         by facsimile transmission 9with issuance by the transmitting machine of
         a confirmation of successful transmission) or, if mailed, five days
         after the date of deposit in the United States mail or, if sent by
         courier, two days after the date of deposit with such courier,
         addressed as follows:

                           (i)      if to the Company to:

                                    The Fortress Group, Inc.
                                    1921 Gallows Road
                                    Vienna, VA 22182

                                    Attention: James J. Martell, Jr.


                                       6

<PAGE>

                           (ii)     if to Consultant, to:

                                    Commonwealth Home, Inc.
                                    8000 Towers Crescent Drive
                                    Vienna, VA  22182

                                    Attention:  J. Marshall Coleman


         Any party may change its address for notice hereunder by notice to the
other party hereto given in accordance herewith.

                  (b) Assignability. This Agreement shall not be assignable by
         either party hereto without the prior written consent of the other
         party, which consent, if requested of the Company by Consultant, shall
         not be unreasonably withheld, and any such purported assignment shall
         be void ab initio.

                  (c) Governing Law. The parties agree that this Agreement shall
         be construed and governed in accordance with the internal laws of the
         State of Virginia, without giving effect to principles of conflicts of
         laws.

                  (d) Binding Effect. This Agreement shall be binding upon and
         inure to the benefit of the parties hereto and their respective heirs,
         legal representatives, executors, administrators, successors and
         permitted assigns.

                  (e) Counterparts. This Agreement may be executed
         simultaneously in one or more counterparts, each of which shall be
         deemed an original but all of which together shall constitute one and
         the same instrument.

                  (f) Indemnification. The Company agrees to indemnify and hold
         harmless Consultant, the directors, officers, agents, employees, legal
         representatives and affiliates of Consultant, and each Person, if any,
         controlling Consultant or any of its affiliates within the meaning of
         Section 15 of the Securities Act of 1933 9as "Indemnified Party"), from
         and against any and all losses, claims, damages and liabilities, joint
         or several, caused by, related to or arising out of Consultant acting
         for or providing services to the Company pursuant to this Agreement,
         and to reimburse any Indemnified Party for all reasonable expenses
         (including Attorneys' fees) incurred by the Indemnified Party in
         connection with the investigation, preparation or defense of any such
         action or claim, whether or not in connection with any pending or
         threatened litigation, to which such Indemnified Party is subject;
         provided, however, that the Company shall not have any obligation for
         any losses, claims, damages, liabilities or expenses that are found, in
         a final judgment by a court of competent jurisdiction from which no
         appeal can be or has been taken, to have resulted

                                       7
<PAGE>

         principally from the Indemnified Party's gad faith, gross negligence or
         willful misconduct. The Indemnified Party agrees to notify the Company
         promptly of the assertion of any claim or the commencement of any
         action or proceeding relating to this indemnity, but the Indemnified
         Party's failure to so notify the company shall not relieve the company
         from any obligation or liability which the company may have pursuant to
         this Agreement to the extent that the Company has not been prejudiced
         in any material respect by such failure. The Indemnified Party shall
         have the right to retain counsel of its own choice to represent it and
         such counsel shall, to the fullest extent consistent with its
         professional responsibilities, cooperate with the Company and any
         counsel designated by the Company. The Company shall not be liable
         under this Agreement for any settlement of any claim against the
         Indemnified Party made without the company's written consent, which
         consent will not be unreasonably withheld. The foregoing rights are in
         addition to any rights that the Indemnified Party may have at common
         law or otherwise.

                  (g) Entire Agreement; Modification. This Agreement sets forth
         the entire understanding of the parties with respect to Consultant's
         rendering of the services which are the subject hereof. Neither this
         Agreement nor any provision hereof may be modified, waived, terminated
         or amended other than by the express written agreement of Consultant
         and the Company.

                  (h) Waivers. No delay on the part of any party in exercising
         any right, power or privilege hereunder shall operate as a waiver
         thereof. Nor shall any waiver on the part of any party of any such
         right, power or privilege hereunder, nor any single or partial exercise
         of only and are not to be considered in the interpretation or
         construction of the provisions hereof any right, power or privilege
         hereunder, preclude any other or further exercise thereof or the
         exercise of any other right, power or privilege hereunder.

                  (i) Headings. The headings in this Agreement are inserted for
         convenience.

                  (j) Definitions of "Person". As used herein, the term "Person"
         shall mean any individual, corporation, partnership, firm, joint
         venture, association, joint-stock company, trust, unincorporated
         organization, governmental or regulatory body or any political
         subdivision thereof.

                                       8


<PAGE>




         IN WITNESS WHEREOF, the Company and Consultant have signed this
Agreement as of the day and year written above.


THE  COMPANY                                     CONSULTANT

The Fortress Group, Inc.                         Commonwealth Homes, Inc.

By:  _________________________                   By:  __________________________
Its: _________________________                   Its: __________________________







                                                                   EXHIBIT 10.10

                                 LEASE AGREEMENT

         THIS LEASE AGREEMENT, made and entered into as of the 15th day of
March, 1995, by and between the Landlord and Tenant hereinafter named.

SECTION 1. DEFINITIONS AND BASIC PROVISIONS 1.01. The following definitions and
basic provisions shall be used in conjunction with and limited by the reference
thereto in the provisions of this Lease:

         A.     "Landlord":       TOWNE CENTER LIMITED PARTNERSHIP

         B.     "Tenant":         CHRISTOPHER HOMES CUSTOM HOME DIVISION, INC.

         C.     "Premises":       Suite 200  comprising  10,492 net  rentable
                                  square  feet as  generally outlined on the
                                  plan attached hereto as Exhibit "A".

         D.     "Building":       Towne Center Office Building
                                  9500 Hillwood Drive, Las Vegas, Nevada  89134

         E. "Net Useable Area", as used herein, shall refer to all rentable
         floor area subject to lease by Tenant and all tenants as determined by
         Landlord and applied on a consistent basis, excluding common areas
         devoted to corridors, elevator foyers, restrooms, mechanical rooms,
         janitor closets, vending areas and other similar facilities. No
         deductions from useable area are made for columns or projections
         necessary to the building. The useable area in the premises has been
         calculated on the basis of the foregoing definition, and is hereby
         stipulated for purposes hereof to be 10,492 square feet, whether the
         same should be more or less as a result of minor variations resulting
         from actual construction and completion of the premises for occupancy.
         The total useable area of the Building shall be acknowledged as 20,892
         square feet.

         F.       "Lease  Term":  A period of One Hundred  Twenty (120)  months,
         commencing  on March 1, 1996 (the "commencement date") or upon
         building completion and ending on June 30, 2006.

         G.       "Basic Rental":   Two hundred forty-five thousand five hundred
         twenty dollars and 00/100 ($245,520.00) per year subject to adjustment
         as provided herein.

         H.       "Monthly  Basic  Rental  Installment":  Twenty  thousand  four
         hundred  sixty  dollars and 00/100 ($20,460.00).

         I.       "Security Deposit":    Forty thousand nine hundred twenty
         dollars and 00/100 ($40,920.00).

         J.       "Permitted Use":     General office purposes and no other use.

         K.       "Development":  The property  owned by Landlord  known as
         Towne Center  Office  Building,  having a street address of 9500
         Hillwood Drive,  Las Vegas,  Nevada,  including the building,  all land
         under and surrounding the building and all other improvements
         appurtenant thereto.

         L. The term "Tenant's Percentage Share" shall mean the percentage
         figure obtained by dividing the net rented area of the Premises
         specified hereinabove by the total net useable area of the rental space
         in the Building, and by multiplying such quotient by One Hundred (100).
         In the event that either the net rented useable area of the Premises or
         the total net useable area of the Building is changed, then the
         Tenant's Percentage Share shall be appropriately adjusted. Tenant's
         Percentage Share for purposes of this Lease shall be deemed to be fifty
         percent (50%).

SECTION 2. LEASE GRANT 2.01. Landlord, in consideration of the rent to be paid
and the other covenants and agreements to be performed by Tenant and upon the
terms and conditions hereinafter stated, does hereby lease, demise and let unto
Tenant the Premises (as defined in Section 1.C. hereof) commencing on the
commencement date (as defined in Section 1.01F hereof, or as adjusted as
hereinafter provided) and ending on the last day of the lease term, unless
sooner terminated as herein provided. Landlord shall not be liable for failure
to give possession of the premises for any reason, including but not limited to
the holding over of retention of possession by the previous tenant, tenants, or
occupants of same, nor shall any such failure impair the validity of this Lease
and Tenant agrees to accept possession of the premises on such date as Landlord
is able to tender the same, and such date shall continue for the lease term
described in Section 1.01F. hereof. If Landlord for any reason cannot deliver
possession of the Premises to Tenant by the date specified for the commencement
of the lease term, this lease shall not be void or voidable. Landlord hereby


                                       2
<PAGE>


agrees to waive payment of monthly rental installments covering any period prior
to the tendering of possession of the premises to Tenant hereunder. If Tenant
occupies the premises prior to the commencement date specified in Paragraph
1.F., the commencement date shall be deemed to be changed to coincide with the
date of Tenant's occupancy; however, the expiration date of the Lease shall
remain unchanged, and the amount of the Basic rental including Tenant's share of
Operating Expenses shall be increased pro rata based upon the increased lease
term. By occupying the premises, Tenant shall be deemed to have accepted the
same as suitable for the purposes herein intended, and to have acknowledged that
the same comply fully with Landlord's covenants and obligations. Tenant shall at
its sole cost and expense promptly comply with all laws, statutes, ordinances,
zoning rules and regulations, governmental rules, regulations or requirements
now in force or which may hereafter be in force or enacted with respect to the
demised Premises, as they relate to or in any way affect the condition, use, or
occupancy of the Premises, excluding requirements pertaining to structural
changes of the Premises and excluding requirements of ADA for the building.

SECTION 3. RENT 3.01. Tenant promises and agrees to pay Landlord the Basic
Rental (as defined in Section 1.G. hereof) without deduction, counterclaim or
setoff. It is agreed that, notwithstanding anything to the contrary, the
premises herein are leased for the Basic Rental for the lease term hereof,
payable at the time of the making of this Lease, and that the provisions herein
contained for the payment of such rent in monthly installments (as defined in
Section 1.H. hereof) are for the convenience of the Tenant only, and that upon
default in the payment of any such monthly rental installment as herein provided
in Section 3.02, the whole of the rent, hereby reserved for the whole of the
lease term herein provided for and then remaining unpaid, shall at the option of
the Landlord, become due and payable upon thirty (30) days notice and an
opportunity to cure such default.

         3.02. The Basic Rental and the corresponding monthly installments of
Basic Rental shall be adjusted upward annually commencing on the Tenant's first
anniversary date and shall continue and be adjusted on the anniversary date of
each consecutive year of the Lease term. The upward adjustment of Basic Rental
shall be an amount equal to no less than three percent (3%) and no more than
five percent (5%) of the Basic Rental for the year immediately preceding the
adjustment date, or an amount equal to a percentage rental adjustment based upon
the Consumer Price Index, whichever amount is greater. The base for computing
the adjustment shall be the Consumer Price Index for all Urban Consumers,
(1982-84 = 100), for the Los Angeles--Anaheim--Riverside Metropolitan Area,
published by the United States Department of Labor, Bureau of Labor Statistics
("Index"), which is published for the month nearest the date of the commencement
of the Lease term. Upon adjustment of the basic minimum monthly rental as
provided for in this Lease Agreement, the parties shall immediately execute an
Amendment to the Lease stating the new minimum monthly rent. If the foregoing
Consumer Price Index is discounted or revised during the Lease term, then the
parties agree to use such other Government Index of computation with which it is
replaced in order to obtain substantially the same result as would be obtained
if the Index had not been discontinued or revised.

         3.03. One (1) monthly rental installment shall be payable by Tenant to
Landlord contemporaneously with the execution hereof, and a like monthly rental
installment shall be due and payable without notice or demand on or before the
first day of each succeeding calendar month during the term hereof. If
appropriate, a monthly rental installment for any fractional month at the
beginning or the end of the lease term shall be prorated.

         3.04. If the monthly rental installment is not received by the Landlord
on or before the 15th day of the month, for which said monthly rental
installment is due, a late charge of five percent (5%) of the unpaid monthly
rental installment owed shall become due and payable in addition to the monthly
rental installment owed. Said late charge is for the purpose of reimbursing
Landlord for extra costs and expenses incurred in conjunction with the handling
and processing of late monthly installment payments and for the cost and expense
which may be incurred by Landlord for the necessity of advancing funds to
Landlord's lender or Mortgagee.

SECTION 4. SERVICES 4.01. Monthly rental installment shall include reasonable
electric, water, sewer and gas service attributable to each tenant's premises .
Tenant agrees to furnish, while occupying the premises, at its sole cost and
expense janitorial service for said premises.

         4.02. In the event that the cost to Landlord for the services provided
under Section 4.01 exceeds $4.00 per square foot per year for the Towne Center
Office Building, during the Lease term hereof, then Landlord reserves the right
to charge Tenant , in addition to all other sums of rent and other charges due
hereunder, the Tenant's Percentage Share thereof, as defined in Section 1 (L).
Landlord shall make an adjustment upward to Tenant's Monthly Basis Rental
Installment to compensate the Landlord for the increased costs of such services,
and Tenant shall pay to Landlord the "Tenant's Percentage Share" with the next
installment of monthly basic rental due from Tenant.

SECTION 5. ALTERATIONS AND IMPROVEMENTS 5.01. The Premises shall be constructed
substantially in accordance with outline specifications entitled "Landlord's
Work" set forth in Exhibit "B", attached hereto. It is understood and agreed by
Tenant that reasonable changes from any plans or from said outline
specifications which may hereafter be made during construction of the building
or Premises shall at Landlord's discretion, not affect or change this Lease or
invalidate the same.

         5.02. Tenant shall not make any additions, alterations, improvements or
changes in or to the Premises without the prior written approval of Landlord. In
no event shall any consent be granted if Tenant is in default hereunder. Except
as provided in Exhibit "B" hereof, any improvements shall be at the sole cost
and expense of Tenant. Any improvements shall be made promptly and in good and
workmanlike manner and in compliance with all insurance requirements and with
all applicable permits, authorizations, building regulations, zoning laws and
all other governmental rules, regulations, ordinances, statutes and laws, now or
hereafter in effect pertaining to the Premises or Tenant's use thereof. Any
improvements made by Tenant shall, at Landlord's option, become the property of
Landlord upon the expiration or sooner termination of this Lease. However,
Landlord shall have the right to require Tenant to remove such fixtures and
improvements, at Tenants' sole cost and expense, upon such termination of this
Lease and to surrender the Premises in the same condition as it was prior to the
making of any or all such improvements, ordinary wear and tear excepted.

         5.03. Tenant will not create or permit to be created or to remain, and
will discharge, any lien, encumbrance or charge upon the Building, fixtures,
equipment, or personal property located within the Premises.

SECTION 6. USE 6.01. The Premises are leased to Tenant only for the permitted
use (as defined in Section 1.J. hereof). Tenant shall not use or suffer to be
used the Premises, or any portion thereof for any other purpose or purposes
whatsoever, without Landlord's prior written consent. Tenant shall conduct
business under the trade name of Christopher Homes and no other without prior
written consent.

         6.02. Tenant shall not, without prior written consent of Landlord and
all insurance companies which have issued any insurance of any kind whatsoever,
sell or suffer to be kept, used, stored, or sold in, upon or about the Premises
any gasoline, distillate or other petroleum products or any other substance or
material of an explosive, inflammable or radiological nature, in such quantities
as prohibited by Landlord and any such insurance policy, or which may endanger
any part of the Building or its occupants, business patrons or invitees.

         6.03. Tenant shall not, without Landlord's prior written approval,
operate or permit to be operated on the Premises any coin or token operated
vending machines or similar device for the sale or leasing to the public of any
goods, wares, merchandise, food, beverages and/or services, including without
limitation, pay telephones, pay lockers, pay toilets, scales and amusement
devices.

         6.04. Tenant shall refrain from using or permitting the use of the
Premises or any portion thereof as living quarters, sleeping quarters or lodging
rooms.

         6.05. Tenant shall not, without Landlord's prior written approval,
conduct or permit any fire, bankruptcy or auction sale in, on or about the
Premises other than in the normal course of Tenant's business.

         6.06. All fixtures, showcases and other equipment to be used by Tenant
in, about or upon the Premises shall be subject to prior written approval of
Landlord.

         6.07. Tenant shall refrain from keeping or permitting the keeping of
any animals of any kind, in, about or upon the Premises.

         6.08. Except as provided elsewhere herein, Tenant shall keep and
maintain in good order, condition and repair, (including any such replacement
and restoration as required for that purpose) the Premises and every part
thereof and any and all appurtenances thereto wherever located, including, but
without limitation, the exterior and interior portion of all doors, door checks,
windows, plate glass, store front, all plumbing and sewage facilities within the
Premises including free flow up to the main sewer line, fixtures, electrical
systems (whether or not located in the Premises), fire sprinkler system, walls,
floors and ceilings, and any other work performed by or on behalf of Tenant
hereunder. Tenant shall store all trash and garbage in metal containers located
where designated by Landlord and so as not to be visible or create a nuisance to
customers and business invitees in the Building, and so as not to create or
permit any health or fire hazard, and arrange for prompt and regular removal
thereof.

         6.09. Tenant shall at all times during the term of the Lease comply
with all governmental rules, regulations, ordinances, statutes and laws, and the
orders and regulations of the National Board of Fire Underwriters or any other
body now or hereafter exercising similar functions, now or hereafter in effect
pertaining to the Premises or Tenant's use thereof.

         6.10. Tenant hereby covenants and agrees that it, its agents,
employees, contractors, subtenants, business invitees and licensees shall abide
by the rules and regulations set forth in this Section 7 and such additional
rules and regulation hereafter adopted and amendments and modifications of any
of the foregoing as Landlord may, from time to time, adopt for the safety, care
and cleanliness of the Premises or the Building or for the preservation of good
order thereon.

         6.11. Tenant shall not do, permit or suffer anything to be done, or
kept upon the Premises which will obstruct or interfere with the rights of other
tenants, or their employees, agents, Landlord, or the patrons and customers of
any of them, or which will annoy any of them or their patrons or customers by
reason or unreasonable noise or otherwise, nor will Tenant commit or permit any
nuisance, cause disturbances, create odors which may be offensive on the
Premises or commit or suffer any immoral or illegal act to be committed thereon.

         6.12. No slot machine or other gambling game or device shall be
permitted on the Premises without the prior written consent of Landlord.

         6.13. All loading and unloading of goods shall be done only at such
times, in the areas and through the entrances designated for such purposes by
Landlord.

         6.14. The delivery or shipping of merchandise, supplies and fixtures to
and from the Premises shall be subject to such rules and regulations as, in the
judgment of Landlord, are necessary for the proper operation of the Premises or
the Building.

         6.15. No radio or television or other similar device shall be erected
on the roof or exterior walls of the Premises or in the Building. Any aerial so
installed without such written consent shall be subject to removal without
notice at any time at Tenant's expense.

         6.16. Tenant shall not, without the prior written consent of Landlord,
use in or about the Premises any advertising or promotional media such as
searchlights, loud speakers, phonographs, or other similar visual or audio media
which can be seen or heard outside the Premises.

         6.17. Tenant shall keep the Premises at a temperature sufficiently high
to prevent freezing of water in pipes and fixtures.

         6.18. The exterior areas immediately adjoining the Premises shall be
kept clean and free from dirt and rubbish by Tenant to the satisfaction of
Landlord, and Tenant shall not place or permit any obstruction or merchandise in
such areas.

         6.19. The plumbing facilities shall not be used for any other purpose
than that for which they are constructed, and no foreign substance of any kind
shall be thrown therein, and the expenses of any breakage, stoppage or damage
resulting from a violation of this provision shall be borne by the tenant who
shall, or whose employees, agents, customers or invitees shall have caused it.

         6.20. Tenant shall keep the Premises free from pests and vermin.

         6.21. Tenant shall not burn any trash or garbage of any kind in or
about the Premises or the Building.

         6.22. Tenant and Tenant's employees and agents shall not solicit
business in the parking areas or other common areas, nor shall Tenant distribute
any handbills or other advertising matter in or on automobiles parked in the
parking areas or in other common areas.

         6.23. Tenant acknowledges, represents and understands that it is
leasing the subject Premises in an existing "as is" condition. Tenant
acknowledges and represents it has inspected the Premises to confirm suitability
for Tenant's use and has entered this Lease solely on the basis of its own
investigation. Tenant further acknowledges and represents that neither Landlord,
nor its agents or brokers, have made any representations or warranties of any
kind whatsoever, express or implied, with respect to the suitability of the
Premises for Tenant's intended use. Accordingly, Tenant shall hold Landlord
harmless in the event the Premises prove unsuitable for Tenant's use.

         6.24. Tenant shall not engage in any activities on the Premises or in
the Development, nor bring onto, create, or dispose of in or about the Premises
or Development, including but not limited to its sewage or storm drain systems,
any materials, the possession or use of which requires a permit from any
Federal, State or local agency having jurisdiction over hazardous, toxic or
infectious substances. Further, Tenant shall not engage in any activity in the
Premises or Development that violates any Federal, State, or local laws, rules
or regulations pertaining to hazardous, toxic or infectious substances, now or
during the term of this Lease, and Tenant shall promptly, at Tenant's expense,
take all investigatory and/or remedial action required or ordered for clean-up
of any contamination of the Premises or Development, or the elements surrounding
the same, which are created or suffered to be in existence by Tenant. If any
hazardous substance condition was caused or materially contributed to by the
Tenant, Tenant shall be solely responsible for its remediation, and shall
indemnify Landlord from the affects thereof. This covenant shall survive the
termination of this Lease.

SECTION 7. REPAIRS AND MAINTENANCE 7.01. By Landlord: Landlord shall, at its
expense, maintain in good repair and condition, except for reasonable wear and
tear, only the roof, foundation, heating and air conditioning systems, plumbing,
the structural soundness of the exterior walls, the paving outside the building,
the landscaping and interior common areas. Landlord shall also be responsible
for replacement or repair of windows and glass damaged due only to structural
movement, weather conditions and vandalism by outside persons or Landlord's
agents. Tenant shall give immediate written notice to Landlord of the need for
repairs or corrections and Landlord shall proceed promptly to make such repairs
or corrections. Landlord's liability hereunder shall be limited to the cost of
such repairs or corrections.

         7.02. By Tenant: Tenant shall at its expense maintain all other parts
of the Premises and related facilities in good repair and condition, including
but not limited to repairs (including all necessary replacements) to the
windows, window glass, plate glass, doors and the interior of the Premises to
the extent that any damage was caused by Tenant or Tenant's agents, employees or
invitees. Tenant will not, in any manner, deface or injure the Premises and or
related facilities and will pay the cost of repairing any damage or injury done
by Tenant or Tenant's agents, employees or invitees. Tenant shall, throughout
the term of this Lease, take good care of the Premises and related facilities,
and keep them free from waste and nuisance of any kind. If Tenant shall fail to
make any repair required hereunder (including all necessary replacements), or
take steps to commence repair, within ten (10) days after written notification
to do so, Landlord may, at its option, make such repair, and Tenant shall, upon
demand therefor, pay Landlord for the cost thereof together with interest on any
such cost which remains unpaid following such demand and it is hereby agreed
that said interest shall be calculated at a rate equal to two percent (2%) above
the Bank of America prime rate.

SECTION 8. PARKING AND COMMON AREAS 8.01. Tenant, its agents, employees,
servants, contractors, subtenants, licensees, customers and invitees shall have
the nonexclusive right, in common with Landlord and all others to whom Landlord
has or may hereafter grant right, to use such common areas of the Premises
(including, but not limited to, the parking lot, walkways, and sidewalks) as
designated from time to time by Landlord, subject to such rules and regulations
as Landlord may from time to time impose.

Tenant agrees that it, its agents, employees, servants, contractors, subagents,
licensees, customers and invitees shall abide by such rules and regulations.
Landlord may at any time close any common area to make repairs or changes to the
common area, to prevent the acquisition of public rights in such areas, or to
discourage noncustomer parking. Landlord may do such other acts in and to the
common areas as in its judgment may be desirable. Tenant shall not at any time
interfere with the rights of Landlord, other tenants, its and their agents,
employees, servants, contractors, subagents, licensees, customers and invitees
to use any part of the parking lot or other common areas. All parking areas and
common areas which Tenant may be permitted to use are to be used under a
revocable license, and if any such license is revoked, or if the amount of such
area is diminished, Landlord shall not be subject to any liability, nor shall
Tenant be entitled to any compensation or diminution or abatement of rent, nor
shall such revocation of license or diminution of such areas be deemed
constructive or actual eviction.

8.02. Tenant, its agents, employees, servants, contractors, subtenants,
licensees, customers and invitees shall have the right to use 21 covered parking
stalls for an additional fee of thirty-five dollars per space ($35.00) per month
for the term of this Lease Agreement. Tenant agrees to adhere to reasonable
rules and regulations with regard to monitoring of tenant parking, including
license plate numbers, stickers and/or other reasonable means of control. Tenant
acknowledges that Landlord assumes no responsibility to enforce or monitor
Tenant's right to covered parking.

SECTION 9. ASSIGNMENT, MORTGAGE OR SUBLEASE 9.1. Neither Tenant nor his
successors or assigns shall assign, mortgage, pledge or encumber this Lease or
sublet the lease premises in whole or in part, or permit the premises to be used
or occupied by others, not shall this Lease be assigned or transferred by
operation of law, without the prior written consent in writing of Landlord in
each instance. If this Lease is assigned or transferred, or if all or any part
of the lease premises is sublet or occupied by anybody other than Tenant,
Landlord may, after default by Tenant collect rent from the assignee,
transferee, subtenant or occupant and apply the net amount collected to the rent
reserved herein, but no such assignment, subletting, occupancy or collection
shall be deemed as a waiver of any agreement or condition hereof, or the
acceptance of the assignee, transferee, subtenant or occupant as Tenant. Tenant
shall continue to be liable hereunder in accordance with the terms and
conditions of this Lease and shall not be released from the performance of the
terms and conditions hereof. The consent by Landlord to an assignment, mortgage,
pledge or transfer shall not be construed to relieve Tenant from obtaining the
express written consent of Landlord to any future transfer of interest.

         9.02. Landlord shall have the right to approve or disapprove any
proposed Assignee or Sublessee. In exercising such right of approval or
disapproval, Landlord shall be entitled to take into account any fact or factor
which Landlord reasonably deems relevant to such decision, including but not
necessarily limited to the following, all of which are agreed to be reasonable
factors for Landlord's consideration:

         a.       The financial strength of the proposed Assignee or Subtenant;
         b.       The experience of the proposed Assignee or Subtenant with
                  respect to its business operation;
         c.       The quality and the nature of the services offered by the
                  proposed Assignee or Subtenant;
         d.       The effect of the type of services which the proposed Assignee
                  or Subtenant proposes to offer in the Premises, based upon the
                  Tenant mix of the Building;
         e.       Whether there then exists any default by Tenant pursuant to
                  this Lease or any nonpayment or nonperformance by Tenant under
                  this Lease which, with the passage of time, and/or the giving
                  of notice, would constitute a default under this Lease;
         f.       Any fact or factor upon which Landlord reasonably concludes
                  that the service or business to be conducted by the proposed
                  Assignee or Subtenant will not be a financial success in the
                  Premises.

         9.03. Approval of any Assignment of Tenant's interest shall, whether or
not expressly so stated, be conditioned upon such Assignee assuming in writing
wall obligations of Tenant hereunder by a written instrument satisfactory to
Landlord. No withholding of consent by Landlord for any reason deemed sufficient
by Landlord shall give rise to any claim by Tenant or any proposed Assignee or
Subtenant or entitled Tenant to terminate this Lease or to any abatement of
rent. Under no circumstances will a Subletting or Assignment, even with the
consent of Landlord, relieve Tenant of its obligations to pay rent and perform
all of the other obligations to be performed under this Lease Agreement.

SECTION 10. INDEMNITY 10.01. Tenant hereby covenants and agrees to indemnify,
save and hold Landlord and the Premises, free, clear and harmless from any and
all liability, loss, expenses, including attorney's fees, judgments, claims,
liens and demands of any kind whatsoever in connection with, arising out of, or
by reason of any act, omission or negligence of Tenant, its agents, employees,
servants, contractors, subtenants, licensees, customers or business invitees
while in, upon, about or in any way connected with the Premises, the Building,
and the Development or arising from any accident, injury or damage, howsoever
and whomsoever caused, to any person or property whatsoever, occurring in, upon,
about or in any way connected with the Premises or any portion thereof other
than as a result of negligence of Landlord.

         10.02. Landlord shall not be liable to Tenant or to any other person
whomsoever for any damage occasioned by falling plaster, electricity, plumbing,
gas, water, steam, sprinkler or other pipe and sewage system or by the bursting,
running, or leaking of any tank, washstand, closet or waste of other pipes, nor
for any damages occasioned by water being upon or coming through the roof,
skylight, vent, trap door or otherwise or for any damage arising from any acts
or neglect of co-tenants or other occupants of the Building or of adjacent
property or of the public, nor shall Landlord be liable in damages or otherwise
for any failure to furnish, or for interruption of service of any utility.

         10.03 Landlord hereby covenants and agrees to indemnify, save and hold
Tenant and the Premises free, clear and harmless from any and all liability,
loss, expenses, including attorney's fees, judgments, claims, liens and demands
of any kind whatsoever in connection with, arising out of, or by reason of any
act, omission or negligence of Landlord, its agents, employees, servants,
contractors, subtenants, licensees, customers or business invitees while in,
upon, or about in any way connected with the Premises, the Building, and the
Development or arising from any accident, injury or damage, howsoever and
whomsoever caused, to any person or property whatsoever, occurring in, upon,
about or in any way connected with the Premises or any portion thereof other
than as a result of negligence of Tenant.

SECTION 11. MORTGAGES 11.01. Tenant accepts this Lease subject to any deeds of
trust, security interests or mortgages which might now or hereafter constitute a
lien upon the building, the Premises or the Development. Tenant further agrees
to comply with any zoning ordinances and other building and fire ordinances and
governmental regulations relating to the use of the Development. This clause
shall be self-operative and no further instrument need be required by any
mortgagee. In confirmation of such subordination, however, Tenant shall, at
Landlord's request, execute promptly an appropriate certificate or instrument
Landlord may request. Tenant hereby constitutes and appoints Landlord as
Tenant's attorney in fact to execute any such certificate or instrument for and
on behalf of Tenant.

SECTION 12. ESTOPPEL CERTIFICATE 12.01. Tenant agrees, on the Commencement Date,
and from time to time thereafter, upon not less than 5 days (5) prior written
request by Landlord, to execute, acknowledge and deliver to Landlord a statement
in writing, certifying (i) that this Lease is the entire agreement between the
Landlord and Tenant and is in full force and effect (or, if there have been any
modifications, that this Lease is in full force and effect as modified, and
setting forth such modifications); (ii) that Tenant has no defenses, offsets or
counterclaims against its obligations to pay the basic rental and adjusted
rental and its obligations to perform its other covenants under this Lease;
(iii) that there are no uncured defaults of Landlord or Tenant under this Lease;
and (iv) the dates to which the basic rental, additional rental and other
charges have been paid. Any such statement delivered pursuant to this Paragraph
13 may be relied upon by any prospective purchaser or mortgagee of the Building
or any portion thereof, or any prospective assignee of any such mortgage.

SECTION 13. INSURANCE 13.01. Landlord shall, at all times during the term of
this Lease, maintain a policy or policies of insurance naming Tenant as
additional insured with the premiums thereon fully paid in advance issued by and
binding upon a solvent insurance company, insuring the Building against loss or
damage by fire, explosion or other hazards and contingencies, for the full
insurable value thereof; provided however, that Landlord shall not be obligated
to insure any furniture, equipment, machinery, goods or supplies not covered by
this Lease which Tenant may bring upon the premises, or any additional
improvements which Tenant may construct thereon. Tenant shall maintain personal
property and liability insurance on leased space, listing landlord as additional
insured.

SECTION 14. INSPECTION 14.01. Landlord or Landlord's representatives shall have
the right to enter into and upon any and all parts of the premises at reasonable
hours (i) to inspect same or to clean or make repairs or alterations or
additions as Landlord may deem necessary (but without any obligation to do so,
except as expressly provided for herein), or (ii) to show the premises to
prospective tenants, purchasers, or lenders; and Tenant shall not be entitled to
any abatement or reduction of rent by reason thereof, nor shall such be deemed
to be actual or constructive eviction of Tenant.

SECTION 15. CONDEMNATION 15.01. If, during the term of this Lease, or any
extension or renewal thereof, all of the premises should be taken for any public
or quasi-public use under any governmental law, ordinance or regulation or by
right of eminent domain or by private purchase in lieu thereof, this Lease shall
terminate and the rent shall be abated during the unexpired portion of this
Lease effective on the date physical possession is taken by the condemning
authority, and Tenant shall have no claim against Landlord for the value of any
unexpired term of this Lease.

         15.02. In the event a portion but not all of the Premises shall be
taken for any public or quasi-public use under any governmental law, ordinance
or regulation, or by right of eminent domain or private sale in lieu thereof and
the partial taking or condemnation shall render the Premises unsuitable for
Tenant's business, then Landlord shall have the option, in its sole discretion,
of terminating this Lease, or, at Landlord's sole expense, restoring and
reconstructing the Premises to the extent necessary to make the same reasonably
tenantable. Should Landlord elect to restore the premises, this Lease shall
continue in full force and effect with the rent payable during the unexpired
portion of the lease term adjusted to such an extent as may be fair and
reasonable under the circumstances, and Tenant shall have no claim against
Landlord for the value of any interrupted portion of this Lease.

         15.03. In the event of any condemnation or taking, total or partial,
Tenant shall not be entitled to any part of the award or price paid in lieu
thereof. Tenant hereby expressly waives any right or claim to any part thereof,
and Landlord shall receive the full amount of such award or price.

SECTION 16. FIRE OR OTHER CASUALTY 16.01. In the event that the Premises should
be totally destroyed by fire, tornado or other casualty (e.g., total destruction
shall mean damage to the extent of 80% of the then replacement value), or in the
event the Premises or the Building should be so damaged that rebuilding or
repairs cannot be completed within ninety (90) days after the date of such
damage, Landlord may, at its option, terminate this Lease in which event the
rent shall be abated during the unexpired portion of this Lease effective as of
the date of such damage. In the event the premises should be damaged by fire,
tornado or other casualty covered by Landlord's insurance, and if the necessary
rebuilding or repairs can be completed within ninety (90) days after the date of
such damage, or if such rebuilding or repairs would take more than ninety (90)
days to complete but Landlord does not elect to terminate this Lease, then, in
either such event, Landlord shall, within thirty (30) days after the date of
such damage, commence to build or repair the Premises, and shall proceed with
reasonable diligence to restore the premises to substantially the same condition
in which they were immediately prior to the happening of the casualty, except
that Landlord shall not be required to rebuild, repair or replace any part of
the furniture, equipment, fixtures and other improvements which may have been
placed by Tenant or other tenants within the Building or the Premises, or
related facilities. In the event that the Premises are untenantable, Landlord
shall allow Tenant a fair diminution of rent during the time the Premises are
unfit for occupancy. In the event any mortgagee under a deed of trust, security
agreement or mortgage on the Building or the Premises should require that the
insurance proceeds be used to retire the mortgage debt, Landlord shall have no
obligation to rebuild and this Lease shall terminate upon notice of Tenant. Any
insurance which may be carried by Landlord or Tenant against loss or damage to
the Building or to the Premises shall be first for the benefit of the Landlord.

SECTION 17. HOLDING OVER 17.01. Should Tenant or any of its successors in
interest continue to hold the Premises, or any part thereof, after the
expiration or earlier termination of this Lease, unless otherwise agreed in
writing, such holding over shall constitute and be construed as a tenancy from
month to month only at a monthly rental equal to One Hundred Ten Percent (110%)
of the sum of the monthly rental installment, plus the amount of the most
current rental adjustment which may have been made thereto pursuant to Sections
4 and 9 hereof. The inclusion of the preceding sentence shall not be construed
as Landlord's consent for the Tenant to hold over.

SECTION 18. EVENT OF DEFAULT 18.01 The following events shall be deemed to be
events of default by Tenant under this Lease:

         a.       Tenant shall fail to pay (i) any monthly rental installment;
                  (ii) any portion of the basic rental hereby specified; or
                  (iii) any additional monetary obligation required to be paid
                  hereunder when due, and such failure shall continue for a
                  period of fifteen (15) days after the same shall be due;
         b.       Tenant fails to perform any other term, condition or covenant
                  to be performed by it pursuant to this Lease within ten (10)
                  days after written notice of such default shall have been sent
                  to Tenant by Landlord.
         c.       Tenant or its agent shall falsify any reports required to be
                  furnished to Landlord hereunder.
         d.       Tenant or any Guarantor of this Lease shall become bankrupt or
                  insolvent or file any debtor proceedings or shall have taken
                  against such party in any court pursuant to State or Federal
                  Statute a petition in bankruptcy or insolvency,
                  reorganization, or appointment of a receiver or trustee; or
                  Tenant petitions for or enters into an arrangement; or Tenant
                  suffers this Lease to be taken under a writ of execution.
         e.       Tenant does not execute Landlord's standard Estoppel
                  Certificate within fifteen (15) days of request by Landlord.
         f.       Tenant shall make an assignment for the benefit of creditors.
         g.       Tenant shall abandon or vacate any substantial portion of the
                  Premises for a period of five (5) or more days.

SECTION 19. REMEDIES 19.01. Upon the occurrence of any event of default
specified in Section 18 hereof, Landlord shall have the option to pursue any one
or more of the following remedies:

         a.       Terminate this Lease by written notice to Tenant. In the event
                  of such termination, Tenant agrees to immediately surrender
                  possession of the premises to the Landlord. Should Landlord
                  terminate this Lease, it may recover from Tenant all damages
                  that it may incur by reason of Tenant's breach, including the
                  cost of recovering the Premises, reasonable attorney's fees,
                  and the worth at the time of termination of the excess, if
                  any, of the amount of rent and charges equivalent to rent
                  reserved in the Lease for the remainder of the stated term
                  over the then reasonable rental value of the Premises for the
                  remainder of the stated term, all of which amount shall be
                  immediately due and payable from Tenant to Landlord.
         b.       Upon Thirty (30) day notice re-enter and remove all persons
                  and property from the premises, storing said property in a
                  warehouse or elsewhere at the cost of and for the account of
                  Tenant. No such re-entry or taking possession of the premises
                  by Landlord shall be construed as an election on Landlord's
                  part to terminate this Lease unless a specific written notice
                  of such intention is given by Landlord to Tenant. No such
                  action by Landlord shall be considered or construed to be a
                  forcible entry.

         c.       Collect by suit or otherwise each installment of rent or other
                  sum as it becomes due hereunder, or enforce, by suit or
                  otherwise, any other term or provision thereof on the part of
                  the Tenant required to be kept or performed.
         d.       Should Landlord re-enter the Premises, as provided herein, and
                  take possession pursuant to legal proceedings or notice as
                  provided for by law or as stated in this document, Landlord,
                  as additional damages, shall be entitled to recover any and
                  all costs associated with re-letting the leased property
                  including, but not limited to, reasonable attorney's fees,
                  brokerage fees, and all costs associated with restoring the
                  leased property to rentable condition including costs of
                  remodeling, renovating or otherwise preparing the Premises, or
                  any part thereof, for reletting.


         19.02. No re-entry or taking possession of the premises by Landlord
shall be construed as an election on its part to terminate this Lease unless a
written notice of such intention be given to Tenant. Notwithstanding any such
re-letting or re-entry or taking possession, Landlord may, at any time
thereafter, elect to terminate this Lease for a previous default. Landlord's
acceptance of rent following an event of default hereunder shall not be
construed as Landlord's waiver of such event of default. Waiver by Landlord of
any violation or breach of any other term, provision or covenant shall not
constitute a waiver of any other violation or default. Forbearance by Landlord
to enforce one or more of the remedies herein provide upon any event of default
shall not be deemed or construed to constitute a waiver of any other violation
or default.

         19.03. The remedies given to Landlord in this Section 21 shall be
cumulative and in addition and supplemental to all other rights or remedies
which Landlord may have under the laws of the State of Nevada then enforced.

SECTION 20. SURRENDER OF PREMISES 20.01. No act or thing done by the Landlord or
its agents during the term hereby granted shall be deemed an acceptance of a
surrender of the Premises, and no agreement to accept a surrender of the
Premises shall be valid unless the same shall be made in writing and subscribed
to by the Landlord.

SECTION 21. ATTORNEY'S FEES 21.01. Should legal action be necessary to enforce
either parties rights or obligations under this lease, the prevailing party
shall be entitled to payment of their reasonable attorney fees as determined by
the Court.

SECTION 22. MECHANIC'S LIEN 22.01. Tenant will not permit any mechanic's lien or
liens to be placed upon the Premises or the Building during the term hereof
caused by or resulting from any work performed, materials furnished or
obligations incurred by or at the request of Tenant, and in the case of the
filing of any such lien, Tenant will promptly pay same or otherwise cause the
premises to be released from the lien. If default in payment thereof shall
continue for twenty (20) days after written notice thereof from Landlord to the
Tenant, the Landlord shall have the right and privilege, at Landlord's option,
of paying the same or any portion thereof and any amounts so paid, including
expenses and interest, shall be so much additional indebtedness hereunder due
from Tenant to Landlord and shall be repaid to Landlord immediately on rendition
of a bill therefor, together with interest thereon at Eight Percent (8%).

SECTION 23. WAIVER OF SUBROGATION 23.01. Anything in this Lease to the contrary
notwithstanding, the parties hereby waive any and all rights of recovery,
claims, actions or causes of action against each other, their agents, officers
and employees for any loss or damage that may occur to the Premises hereby
demised or any improvements thereto or the Building of which the Premises are a
part by reason of fire, the elements or other cause which could be insured
against under the terms of standard fire and extended coverage insurance
policies, regardless of cause or origin, including negligence of the parties
hereto, their agents, officers and employees.

SECTION 24. NOTICES 24.01. Each provision of this Lease or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice, or with reference to the
making of any payment by Tenant to Landlord, shall be deemed to be complied with
when and if the following steps are taken:

         a.       All rent and other payment required to by made by Tenant to
                  Landlord hereunder shall be payable to Landlord in the City of
                  Las Vegas, County of Clark, State of Nevada, at the address of
                  the managing agent hereinbelow set forth, or at such other
                  address as Landlord may specify from time to time by written
                  notice deliver in accordance herewith;
         b.       Any notice or document required to be delivered hereunder
                  shall be deemed to be delivered if actually received, and
                  whether or not received when deposited in the United States
                  mail, postage pre-paid, certified or registered mail (with or
                  without return receipt requested) addressed to the parties
                  hereto at the respective addresses set out opposite their
                  names below, or at such other address as they have here
                  heretofore specified by written notice delivered in accordance
                  herewith:

         Landlord:                  Towne Center Limited Partnership
                                    9500 Hillwood Drive
Las Vegas, Nevada  89134


         Tenant:                    Christopher Homes Custom Home Division, Inc.
                                    9500 Hillwood Drive, Ste 200
                                    Las Vegas, Nevada  89134

SECTION 25. FORCE MAJEURE 25.01. Whenever a period of time is herein prescribed
for action to be taken by Landlord, the Landlord shall not be liable or
responsible for, and there shall be excluded from the computation of any such
period of time, any delays due to strikes riots, Acts of God, shortages of labor
or materials, war, governmental laws, regulations or restrictions or any other
causes of any king whatsoever which are beyond the control of Landlord.

SECTION 26. SEVERABILITY 26.01. If any clause or provisions of this Lease is
illegal, invalid or unenforceable under present or future laws effective during
the term of this Lease, then and in that event, it is the intention of the
parties hereto that the remainder of this Lease shall not be affected thereby,
and it is also the intention of the parties to this Lease that in lieu of each
clause or provision of this Lease that is illegal, invalid or unenforceable,
there be added as a part of this Lease a clause or provision as similar in terms
to such clause or provision as may be possible and be legal, valid and
enforceable.

SECTION 27. ENTIRE AGREEMENT, AMENDMENTS AND BINDING EFFECT 27.01. Landlord and
Tenant agree that this Lease Agreement including its Exhibits, Addendums and
Riders incorporated herein, and Rules and Regulations, are made a part hereof
and consist of the entire agreement between the Landlord and Tenant, and that no
changes, additions or deletions may be made to this Agreement except as set
forth in writing mutually agreed to between Landlord and Tenant. The terms,
provisions, covenants, and conditions contained in this Lease shall apply to,
inure to the benefit of and be binding upon the parties hereto, and upon their
respective successors in interest and legal representatives, except as otherwise
herein expressly provided.

SECTION 28. QUIET ENJOYMENT 28.01. Landlord represents and warrants that it has
full right and authority to enter into this Lease and that Tenant, upon paying
the rental herein set forth, shall peaceably and quietly have, hold and enjoy
the Premises for the term hereof without hindrance or molestation from Landlord,
subject to the terms and provisions of this Lease.

SECTION 29. RULES AND REGULATIONS 29.01. Tenant and Tenant's agents, employees,
servants, contractors, subtenants, licensees, customers or business invitees
will comply fully with all requirements of the rules and regulations of the
Building and related facilities which are attached hereto as Exhibit "C" and
made a part hereof as though fully set forth herein. Landlord shall, at all
times, have the right to change such rules and regulations or to promulgate
other rules and regulations in such reasonable manner as may be deemed advisable
for the safety, care or cleanliness, and for preservation of good order therein,
all of which rules and regulations, changes and amendments will be forwarded to
Tenant in writing and shall be carried out and observed by Tenant. Tenant shall
further be responsible for the compliance with such rules and regulations by the
agents, employees, servants, contractors, subtenants, licensees, customers or
business invitees of Tenant.

SECTION 30. BROKER'S OR AGENT'S COMMISSION 30.01. Tenant represents and warrants
that there are no claims for brokerage commission or finder's fees in connecting
with the execution of this Lease except as listed below, and Tenant agrees to
indemnify and hold harmless Landlord against all liabilities and costs arising
from such claims, including without limitation, attorney's fees in connecting
therewith.

SECTION 31. GENDER 31.01. Words of any gender used in this Lease shall be held
and construed to include any other gender, the words in the singular number
shall be held to include the plural, unless the context otherwise requires.

SECTION 32. GUARANTY, JOINT AND SEVERAL LIABILITY 32.01. If there be more than
one Tenant, the obligations hereunder imposed upon Tenant shall be joint and
several. If there be a guarantor of Tenant's obligations hereunder, the
obligations hereunder imposed upon Tenant shall be the joint and several
obligations of Tenant and such guarantor and Landlord need not first proceed
against the Tenant hereunder before proceeding against such guarantor, nor shall
any such guarantor be released from its guaranty for any reason whatsoever,
including, without limitation, in case of any amendments hereto, waivers hereof
or failure to give such guarantor any notices hereunder. Any guaranty hereto is
an integral part of this Lease and constitutes consideration given to Landlord
to enter into this Lease.

SECTION 33. CAPTIONS 33.01. The captions contained in this Lease are for
convenience of reference only, and in no way limits or enlarges the terms and
conditions of this Lease.

SECTION 34. NO PERSONAL LIABILITY 34.01. The obligations of the Landlord herein
are intended to be binding only upon the property in the Development, and shall
not be personally or otherwise binding upon the entity acting as Landlord, nor
shall any resort be had to the private properties of the general or limited
partners of the Landlord, or any employees or agents of Landlord.

         EXECUTED as of the date first above written.

LANDLORD:                                          TENANT:

Towne Center Limited Partnership          Christopher Homes Custom Home
                                          Division, Inc.

By:________________________________       By:___________________________________
  J. Christopher Stuhmer, President         J. Christopher Stuhmer, President
  J. Christopher Stuhmer, Inc., as
  General Partner







                              OFFICE BUILDING LEASE

         This LEASE is made and entered into this First day of January, 1994, by
and between Genesee Holdings Corporation (hereinafter "Landlord") and The
Genesee Company (hereinafter "Tenant").

         For and in consideration of the rental and of the covenants and
agreements hereinafter set forth to be kept and performed by the Tenant,
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the
Premises herein described for the term, at the rental and subject to and upon
all of the terms, covenants and agreements hereinafter set forth.

         1. PREMISES: Landlord does hereby lease to Tenant and Tenant hereby
leases from Landlord that certain office space herein called "Premises",
indicated on Exhibit "A" attached hereto and made a part hereof, together with
the non-exclusive right to use all public and common areas designated by
Landlord for the use by tenants in the Building, said Premises being agreed, for
the purpose of this Lease, to have an area of approximately 7,264 rentable
square feet ("Rentable Square Feet") and being situated on the 1,2,3 floors of
that certain Building known as 534 Commons (the "Building") located on that
certain parcel of real property also described on Exhibit A. This Lease is
subject to the terms, covenants and conditions herein set forth and the Tenant
covenants as a material part of the consideration for this Lease to keep and
perform each and all of said terms, covenants and conditions by it to be kept
and performed and that this Lease is made upon the condition of said
performance.

         2. TERM:

         2.1 TERM: The term of this Lease shall be for Thirty-six (36) months,
commencing on the First day of January 1994 (hereinafter "commencement date")
and ending on the Thirty-first day of December, 1996.

         2.2 POSSESSION: If the Landlord, for any reason whatsoever, cannot
deliver possession of the Premises to the Tenant at the commencement date, this
Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for
any loss or damage resulting therefrom, nor shall the expiration date of the
above term be in any way extended, but in that event, all rent shall be abated
during the period between the commencement date and the time when Landlord
delivers possession. In the event that Landlord shall permit Tenant to occupy
the Premises prior to the commencement date, such occupancy shall be subject to
all the provisions of this Lease. Said early possession shall not advance the
termination date hereinabove provided.

         3. RENT: Tenant agrees to pay Landlord as base rental, in advance
without prior notice or demand, for the Premises the sum of See Addendum "A" ($
_____) (the "Base Rent") on or before the first day of the first full calendar
month of the term hereof and a like sum on or before the first day of each and
every successive calendar month thereafter during the term hereof, except that
the first month's rent shall be paid upon the execution hereof. Rent for any
period during the term hereof which is for less than (1) month shall be a
prorated portion of the monthly installment herein, based upon a thirty (30) day
month. Said rental shall be paid to the Landlord, without deduction or offset in
lawful money of the United States of America, which shall be legal tender at the
time of payment at the office of the building or to such person or at such other
place as Landlord may from time to time designate in writing.

         4. SECURITY DEPOSIT: Tenant has deposited with Landlord the sum of None
Dollars ($ 0), receipt of which is hereby acknowledged. Said deposit shall be
held by Landlord without liability for interest as security for the faithful
performance by Tenant of all of the terms of this Lease by said Tenant to be
observed and performed. The security deposit shall not be mortgaged, assigned,
transferred or encumbered by Tenant without the written consent of Landlord and
any such act on the part of Tenant shall be without force and effect and shall
not be binding upon Landlord. If any of the rents herein reserved or any other
sum payable by Tenant to Landlord shall be overdue and unpaid or should Landlord
make payments on behalf of Tenant, or if Tenant shall fail to perform any of the
terms of this Lease, then Landlord may, at its option and without prejudice to
any other remedy which Landlord may have on account thereof, appropriate and
apply said entire deposit or so much thereof as may be necessary to compensate
Landlord for the payment of rental or loss or damage sustained by Landlord due
to such breach on the part of Tenant, and Tenant shall restore said deposit
within 5 days after written demand. Should Tenant comply with all of said terms
and promptly pay all of the rental as they fall due and all other sums payable
by Tenant to Landlord, and redeliver possession of the Premises to Landlord at
the expiration of the term in accordance with the provisions hereof, said
deposit shall be returned in full to Tenant within 60 days following the end of
the term. In the event of bankruptcy or other debtor-creditor proceedings
against Tenant, such security deposit shall be deemed to be applied first to the
payment of rent and other charges due Landlord for all periods prior to filing
of such proceedings. Landlord may deliver the funds deposited hereunder by
Tenant to the purchaser of Landlord's interest in the Premises in the event that
such interest be sold and thereupon Landlord shall be discharged from any
further liability with respect to such deposit and this provision shall also
apply to any subsequent transferees.

         5. USE:

         5.1 GENERAL USE: Tenant shall use the Premises for general office
purposes and shall not use or permit the Premises to be used for any other
purpose without the prior written consent of Landlord.

         Tenant shall not do or permit to be done in or about the Premises or
bring or keep anything therein which will in any way increase the existing rate
of or affect any fire or other insurance upon the Building or any of its
contents, or cause cancellation of any insurance policy covering said Building
or any part thereof or any of its contents. Tenant shall not do or permit
anything to be done in or about the Premises which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Building or
interfere or annoy them or use or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises. Tenant shall not
commit or suffer to be committed any waste in or upon the Premises. By taking
possession of the Premises Tenant shall have deemed to have accepted said
Premises as satisfactory and to have acknowledged satisfactory completion of any
work which Landlord has agreed to complete therein as hereinafter provided.

         5.2 COMPLIANCE WITH LAWS: Tenant shall not use the Premises or permit
anything to be done in or about the Premises which will in any way conflict with
any law, statute, ordinance or government rule or regulation or requirement of
duly constituted public authorities now in force or which may hereafter be
enacted or promulgated. Tenant shall, at its sole cost and expense, promptly
comply with all laws, statutes, ordinances and governmental rules, regulations
or requirements now in force or which may hereafter be in force and with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted relating to or affecting the condition, use of occupancy
of the Premises, excluding structural changes not relating to or affecting the
condition, use or occupancy of the Premises, or not related or afforded by
Tenant's improvements or acts. The judgment of any court of competent
jurisdiction or the admission of Tenant in any action against Tenant, whether
Landlord be a party thereto or not, that Tenant has violated any law, statute,
ordinance or governmental rule, regulation or requirement, shall be conclusive
of the fact as between Landlord and Tenant.

         6. SERVICES AND UTILITIES:

         6.1 LANDLORD'S OBLIGATION: Provided that Tenant is not in default
hereunder, Landlord agrees to furnish to the Premises during reasonable hours of
generally recognized business days, to be determined by Landlord at its sole
discretion, and subject to the rules and regulations of the Building, water to
those points in the Building which Landlord designates, electricity for normal
lighting and fractional horsepower office machines, air conditioning and heating
required in Landlord's judgment for the comfortable use and occupancy of the
Premises, and such janitorial services as Landlord may determine is reasonably
necessary. Landlord shall also maintain and keep lighted the common stairs,
common entries and toilet rooms in the Building. Tenant acknowledge that one (1)
year may be required after Tenant has occupied the Premises in order to adjust
and balance the climate control systems.

         6.2 NON-LIABILITY: Landlord shall not be liable for, and Tenant shall
not be entitled to, any abatement or reduction of rent by reason of Landlord's
failure to furnish any of the foregoing services, or reduction of any of such
services, when such failure or reduction is caused by accidents, breakage,
repairs, strikes, lockouts or other labor disturbances or labor disputes of any
character, laws, rules, and regulations of any governmental entity having
jurisdiction over the Building, failure of any utility company to provide the
Building with appropriate utility service, or by any other cause similar or
dissimilar, beyond the reasonable control of Landlord. Landlord shall not be
liable under any circumstances for loss of or injury to property, however
occurring, through or in connection with or incidental to failure to furnish any
of the foregoing.

         6.3 TENANT USE: Tenant will not, without written consent of Landlord,
use any apparatus or devise in the Premises, including, but not limited to,
electronic data processing machines, punch card machines, and machines using in
excess of 120 volts, which will in any way increase the amount of electricity
usually furnished or supplied for the use of the Premises as general office
space; or connect with electric current except through existing electrical
outlets in the Premises, any apparatus or device, for the purpose of using
electric current. If Tenant shall require water or electric current in excess of
that usually furnished or supplied for the use of the Premises as general office
space, Tenant shall first procure the written consent of Landlord to the use
thereof and Landlord may cause a water meter or electrical current meter to be
installed in the Premises, so as to measure the amount of water and electric
current consumed for any such use. The cost of any such meters and of
installation, maintenance and repair thereof shall be paid for by the Tenant and
Tenant agrees to pay to Landlord promptly upon demand therefor by Landlord for
all such water and electric current consumed as shown by said meters, at the
rate charged for such services by the local public utility furnishing the same,
plus any additional expense incurred in keeping account of the water and
electric current so consumed. If a separate meter is not installed, such excess
cost for such water and electric current will be established by an estimate made
by a utility company or electrical engineer.

         7. MAINTENANCE AND REPAIRS: ALTERATIONS AND ADDITIONS:

         7.1 MAINTENANCE AND REPAIRS:

         (a) LANDLORD'S OBLIGATIONS: Landlord shall keep and maintain in good
and tenantable condition and repair, the roof, exterior walls, structural parts
of the Premises and the basic plumbing, heating, ventilating, and air
conditioning systems, and electrical systems installed or furnished by Landlord
(except to the extent that the same are the obligation of the appropriate public
utility company); provided, however, that Landlord shall not be required to make
repairs necessitated by reason of the negligence of the Tenant or anyone
claiming under the Tenant, or by reason of the failure of the Tenant to perform
or observe any conditions or agreements in this Lease contained, or caused by
alterations, additions, or improvements made by the Tenant or anyone claiming
under the Tenant. Anything to the contrary notwithstanding contained in this
Lease, Landlord shall not in any way be liable to the Tenant for failure to make
repairs as herein specifically required of it unless the Tenant has previously
notified the Landlord, in writing, of the need for such repairs and the Landlord
has failed to commence and complete said repairs within a reasonable period of
time following receipt of Tenant's written notification.

         (b) TENANT'S OBLIGATIONS:

         (i) Tenant agrees at all times, from and after delivery of possession
of the Premises to Tenant, and at its own cost and expense, to repair, replace
and maintain in good and tenantable condition the Premises and every part
thereof; excluding the portion of the Premises to be maintained by Landlord as
provided in Section 7.1 (a).

         (ii) Upon the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises to Landlord in the same condition as received,
ordinary wear and tear and damage by fire, earthquake, act of God or the
elements alone excepted.

         (iii) Tenant agrees to repair any damage to the Premises or the
Building caused by or in connection with the removal of any articles of personal
property, business or trade fixtures machinery, equipment, furniture or movable
partitions, including without limitation thereto, repairing the floor and
patching and painting the walls where required by Landlord to Landlord's
reasonable satisfaction, all at Tenant's sole cost and expense. Tenant shall
indemnify Landlord against any loss or liability resulting from delay by Tenant
in so surrendering the Premises, including without limitation any claims made by
any succeeding tenant founded on such delay.

         (iv) In the event Tenant fails to maintain the Premises in good order,
condition and repair, Landlord shall give Tenant notice to do such acts as are
reasonably required to so maintain the Premises. In the event Tenant fails to
promptly commence such work and diligently prosecute it to completion, then
Landlord shall have the right to do such acts and expend such funds at the
expense of Tenant as are reasonably required to perform such work. Any amount so
expended by Landlord shall be paid by Tenant promptly after demand with interest
at eighteen percent (18%) per annum from the date of such work. Landlord shall
have no liability to Tenant for any damage, inconvenience or interference with
the use of the Premises by Tenant as a result of performing any such work.

         7.2  ALTERATIONS AND ADDITIONS:

         (a) Tenant shall make no alteration, additions or improvements to the
Premises or any part thereof without obtaining the prior written consent of
Landlord.

         (b) Landlord may impose as a condition to the aforesaid consent such
requirements as Landlord may deem necessary in its sole discretion, including
without limitation thereto, the manner in which the work is done, a right of
approval of the contractor by whom the work is to be performed, the times during
which it is to be accomplished, and the requirement that upon written request of
Landlord prior to the expiration or earlier termination of the Lease, Tenant
will remove any and all permanent improvements or additions to the Premises
installed at Tenant's expense and all movable partition, counters, personal
property, equipment, fixtures and furniture.

         (c) All such alterations, additions or improvements shall at the
expiration or earlier termination of the Lease become the property of Landlord
and remain upon and be surrendered with the Premises, unless otherwise specified
pursuant to Section 7.2 (b) above.

         (d) All articles of personal property and all business and trade
fixtures, machinery and equipment, cabinet-work, furniture and movable
partitions owned by Tenant or installed by Tenant at its expense in the Premises
shall be and remain the property of Tenant and may be removed b Tenant at any
time during the Lease term when Tenant is not in default hereunder. Tenant shall
repair any damage to the Premises caused by such removal including patching and
repainting.

         (e) If the Tenant shall fail to remove all effects from the Premises
upon the termination of this Lease for any cause whatsoever, the Landlord, at
its option, may remove the same in any manner that it shall chose, and (I) store
the said effects without liability to Tenant or loss thereof, and Tenant agrees
to pay Landlord for storage charges in such effects; or (ii) sell any of the
same, at private sale without legal process, for such prices as Landlord may
obtain, and apply the proceeds of such sale upon any amounts due under this
Lease from the Tenant to the Landlord and upon the expense incurred in the
removal and sale of said effects, returning the surplus, portion, or proceeds,
if any, to Tenant.

         8. ENTRY BY LANDLORD: Landlord reserves and shall at any and all times
have the right to enter the Premises to inspect the same, to submit said
Premises to prospective purchasers or tenants, to post notices of
non-responsibility and "for lease" signs, and to alter, improve or repair the
Premises and any portion of the Building without abatement of rent, and may for
that purpose erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, always providing that the
entrance to the Premises shall not be blocked thereby, and further providing
that the business of Tenant shall not be interfered with unreasonably. Tenant
hereby waives any claim for damages or for any injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or quiet enjoyment of
the Premises, and any other loss occasioned thereby. Landlord shall have the
right to use any and all means which Landlord may deem proper to open the doors
in, upon and about the Premises in an emergency, in order to obtain entry to the
Premises, and any entry to the Premises obtained by Landlord by any of said
means, or otherwise, shall not under any circumstances be construed or deemed to
be a forcible or unlawful entry into, or a detainer of, the Premises, or an
eviction of Tenant from the Premises or any portion thereof.

         9. LIENS: Tenant shall keep the Premises and the Building free from any
liens arising out of work performed, materials furnished, or obligations
incurred by Tenant and shall indemnify, hold harmless and defend Landlord from
any liens and encumbrances arising out of any work performed or materials
furnished by or at the direction of Tenant. In the event that Tenant shall not,
within twenty (20) days following the imposition of any such lien, cause such
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other remedies provided herein and by law, the
right, but no obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien. All
such sums paid by Landlord and all expenses incurred by it in connection
therewith including attorneys' fees and costs shall be payable to Landlord by
Tenant on demand with interest at the rate of eighteen percent (18%) per annum.
Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law, or which Landlord shall deem
proper, for the protection of Landlord and the Premises, and any other party
having an interest therein, from mechanics' and materialmen's liens, and Tenant
shall give to Landlord at least ten (10) business days prior written notice of
the expected date of commencement of any work relating to alterations or
addition to the Premises.

         10. INDEMNITY:

         10.1 INDEMNITY: Tenant shall indemnify and hold Landlord harmless from
and defend Landlord against any and all claims of liability for any injury or
damage to any person or property whatsoever (1) occurring in, on or about the
Premises or any part thereof; and/or (2) occurring in, on or about any
facilities (including, without prejudice to the generality of the term
"facilities", elevators, stairways, passageways, hallways, and common areas),
the use of which Tenant may have in conjunction with other tenants of the
Building when such injury or damage is caused in part or in whole by the act,
neglect, fault or omission of any duty with respect to the same by Tenant, its
agents, contractors, employees or invitees. Tenant shall further indemnify and
hold Landlord harmless from and against any and all claims arising from any
breach or default in the performance of any obligation on Tenant's part to be
performed under the terms of this Lease, or arising from any act or negligence
of Tenant, or any of its agents fees, expenses and liabilities incurred in the
defense of any such claim or any action or proceeding brought thereon. In the
event any action or proceeding be brought against Landlord by reason of any such
claim, Tenant, upon notice from Landlord, shall defend the Landlord; provided,
however, that Tenant shall not be liable for damage or injury occasioned by the
negligence or intentional acts of Landlord and its designated agents or
employees unless covered by insurance Tenant is required to provide.

         10.2 EXEMPTION OF LANDLORD FROM LIABILITY: Landlord shall not be liable
for injury or damage which may be sustained by the person, goods, wares,
merchandise or property of Tenant, its employees, invitees or customers, or any
other person in or about the Premises caused by or resulting from fire, steam,
electricity, gas, water or rain, which may leak or flow from or into any part of
the Premises, or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air condition or lighting
fixtures of the same, whether the damage or injury results from conditions
arising from any act or neglect of any other Tenant of the Building.

         11. INSURANCE:

         11.1 COVERAGE BY TENANT: Tenant shall, at all times during the term of
this Lease and at its own cost and expense, procure and continue in force the
following insurance coverage:

         (a) Bodily Injury and Property Damage Liability Insurance with a
combined single limit for bodily injury and property damage of not less than
$1,000,000.

         (b) Fire and All Risk Coverage Insurance, including vandalism and
malicious mischief coverage, in an amount equal to the full replacement value of
all fixtures, furniture and improvements installed by or at the expense of
Tenant.

         11.2 INSURANCE POLICIES: The aforementioned minimum limits of policies
shall in no event limit the liability of Tenant hereunder. All bodily injury
liability insurance and property damage liability insurance shall specifically
insure the performance by Tenant of the indemnity agreement at to liability for
injury to or death or persons and injury or damage to property contained in
Article 10 hereof. The aforesaid insurance shall name Landlord and Landlord's
first mortgagee, as additional insureds, and shall contain a Mortgagee's Loss
Payable Endorsement (Form 438 BFU), or equivalent. Tenant insurance required
hereunder shall be in companies rated A+AAA or better in "Best's Insurance
Guide". Tenant shall furnish from the insurance companies or cause the insurance
companies to furnish certificates of coverage. No such policy shall be
cancelable or subject to reduction of coverage or other modification or
cancellation except after thirty (30) days prior written notice to Landlord by
the insurer. All such policies shall have the Landlord as additional insured,
not contributing with and not in excess of the coverage which Landlord may
carry. Tenant shall, at least twenty (20) days prior to the expiration of such
policies, furnish Landlord with renewals or binders. Tenant agrees that if
Tenant does not take out and maintain such insurance, Landlord may (but shall
not be required to) procure said insurance on Tenant's behalf and charge Tenant
the premiums together with a fifteen percent (15%) handling charge, payable upon
demand. Tenant shall have the right to provide such insurance coverage pursuant
to blanket policies obtained by Tenant provided such blanket policies expressly
afford coverage to the Premises and to Tenant as required by this Lease.

         11.3 WAIVER OF SUBROGATION: The Landlord and Tenant hereby waive any
rights each may have against the other on account of any loss or damage
occasioned to the Landlord or the Tenant, as the case may be, their respective
property, the Premises, or its risk coverage insurance, and the parties each, on
behalf of their respective insurance companies insuring the property of either
the Landlord or the Tenant against any such loss, waive any right of subrogation
that it may have against the Landlord or the Tenant, as the case may be.

         12. DAMAGE OR DESTRUCTION:

         12.1 DAMAGE-INSURED: In the event the Premises or the Building are
damaged by any casualty which is covered under fire and all risk coverage
insurance carried by the Landlord, then Landlord shall restore such damage
provided insurance proceeds are available to pay ninety percent (90%) or more of
the cost of restoration and provided such restoration can be completed within
ninety (90) days after the commencement of the work in the opinion of a
registered architect or engineer appointed by Landlord. In such event this Lease
shall continue in full force and effect, except the Tenant shall be entitled to
proportionate reduction of the rental provided for in Article 3 hereof while
such restoration takes place, such proportionate reduction to be based upon the
extent to which the restoration efforts interfere with Tenant's business in the
Premises.

         12.2 DAMAGE-UNINSURED: In the event the Premises or the Building are
damaged by a risk not covered by Landlord's insurance or the proceeds of
available insurance are less than ninety percent (90%) of the cost of
restoration, or if the restoration cannot be completed within ninety (90) days
after the commencement of work in the opinion of the registered architect or
engineer appointed by Landlord, then Landlord shall have the option either to
(1) repair or restore such damage, this Lease continuing in full force and
effect, but the rent to be proportionately abated as hereinabove provided, or
(2) give notice to Tenant at any time within ninety (90) days after such damage
terminating this Lease as of a date to be specified in such notice, which date
shall not be less than thirty (30) nor more than sixty (60) days after giving
such notice. In the event of the giving of such notice, this Lease shall expire
and all interest of Tenant in the Premises shall terminate on such date so
specified in such notice and the rent, reduced by any proportionate reduction
based upon the extent, if any, to which said damage interfered with the use and
occupancy of Tenant, shall be paid to the date of such termination; Landlord
agrees to refund to the Tenant any rent therefore paid in advance for any period
of time subsequent to such date.

         12.3 EXTENSIVE DAMAGE: Notwithstanding anything to the contrary
contained in this Article 12, Landlord shall not have any obligation whatsoever
to repair, reconstruct or restore the Premises if the damage to the Building
through (regardless of the extent of the damages to the Premise) is so extensive
that Landlord elects not to repair and rebuild the same. In the event that
Landlord elects not to repair, reconstruct or restore, then this Lease shall
expire as provided in Section 12.2 hereof.

         12.4 LANDLORD'S OBLIGATIONS: The Landlord shall not be required to
repair any injury or damage by fire or other cause to, or to make any
restoration, or replacement of any tenant finish in excess of that which
Landlord agrees to provide at no additional cost pursuant to the work letter as
hereafter described, any Tenant fixtures, furnishings, or equipment, or any
other improvements or property installed in the Premises by Tenant or at the
direct or indirect expense of Tenant. Tenant shall be required to restore or
replace the same in the event of damage, except for abatement of rent pursuant
to Section 12.1, if any. Tenant shall have no claim against Landlord for any
damage suffered by reason of any such damage, destruction, repair or
restoration, nor shall Tenant have the right to terminate this Lease as the
result of any statutory provision now or hereafter in effect pertaining to the
damage and destruction of the Premises or the Building, except as expressly
provided herein.

         13. CONDEMNATION: If any portion of the Premises or any portion of the
Building which shall render the leased Premises untenantable shall be taken by
right of eminent domain or by condemnation or shall be conveyed in lieu of any
such taking, then the Lease, at the option of either Landlord or Tenant
exercised by either party giving notice to other of such termination within
thirty (30) days after such taking or conveyance, shall forthwith cease and
terminate and the rent shall be duly apportioned as of the date of such taking
or conveyance. Tenant thereupon shall surrender to Landlord the Premises and all
interest therein under this Lease, and Landlord may reenter and take possession
of the Premises or remove Tenant therefrom. In the event of any such taking or
conveyance Landlord shall receive the entire award or consideration for the
lands and improvement so taken.

         14. ASSIGNMENT AND SUBLETTING:

         14.1 LANDLORD'S CONSENT REQUIRED: Tenant shall not, and shall not have
the power to transfer, assign, sublet, enter into license agreements, change
ownership, mortgage or hypothecate this Lease or Tenant's interest in and to the
Premises without first procuring the written consent of Landlord, which shall
not be unreasonably withheld.

         14.2 NO RELEASES: An attempted or purported transfer, assignment,
subletting, license or concession agreement, change of ownership, mortgage or
hypothecation without Landlord's written consent shall be void and shall confer
no right upon any third person. Nothing herein contained shall relieve Tenant or
any Guarantor from its convenants and obligations for the term of this Lease.
Tenant agrees to reimburse Landlord for Landlord's reasonable attorneys' fees
incurred in conjunction with the processing and documentation of any such
requested transfer, assignment, subletting, license or concession agreement,
change of ownership, mortgage or hypothecation of this Lease or Tenant's
interest in and to the Premises.

         14.3 FORM: Each transfer, assignment, subletting, license or concession
agreement, mortgage or hypothecation to which there has been consent shall be by
an instrument in writing in form satisfactory to Landlord, with Tenant paying
all reasonable costs (including attorneys' fees) for review thereof, and shall
be executed by the transferor, assignor, sublessor, licenser, hypothecator or
mortgagor and the transferee, assignee, subleassee, licensee or mortgagee in
each instance, as the case may be, and each such transferee, assignee,
sublessee, licensee or mortgagee shall agree in writing for the benefit of the
Landlord herein to assume to be bound by and to perform the terms, convenants
and conditions of this Lease to be done, kept and performed by Tenant, including
the payment of all amounts due or to become due under this Lease directly to
Landlord. One executed copy of such written instrument shall be delivered to
Landlord. Failure to first obtain in writing Landlord's consent or failure to
comply with the provision of this Article 14 shall operate to prevent any such
transfer, assignment, subletting, license or concession agreement or
hypothecation from becoming effective.

         14.4 EXCESS RENT: In the event Landlord consents to any subletting or
assignment, and Tenant is entitled to receive rental from such sublessee or
assignee in excess of that which Tenant is obligated to pay to Landlord
hereunder, Tenant shall pay to Landlord (the "excess rent"), as and when said
amount is received by Tenant all excess rent and the failure to pay the same
shall be deemed a default hereunder.

         14.5 MISCELLANEOUS: If Tenant hereunder is a corporation which, under
the then current laws of the State where the Premises are situated, is not
deemed a public corporation, or is an unincorporated association or partnership,
the transfer, assignment or hypothecation of any stock or interest in such
corporation, association or partnership in the aggregate in excess of
twenty-five percent (25%) shall be deemed a prohibited assignment within the
meaning and provision of this Article 14. Further, if Tenant is a land trust,
any transfer of beneficial interest therein in excess of twenty-five percent
(25%) shall likewise be deemed a prohibited assignment.

         15. SUBORDINATION AND QUIET ENJOYMENT:

         15.1 SUBORDINATION: Upon written request of Landlord, or any mortgagor,
deed of trust beneficiary of Landlord, Tenant will, in writing, subordinate its
rights hereunder to the lien or any mortgage, or deed of trust and to all
advances made or hereafter to be made upon the security thereof. The provision
of this Article 15 to the contrary notwithstanding, and so long as Tenant is not
in default hereunder, this Lease shall remain in full force and effect for the
full term hereof.

         15.2 ATTORNMENT: In the event any proceedings are brought for
foreclosure, or in the event of the exercise of the power of sale under any
mortgage or deed of trust made by the Landlord covering the Premises, Tenant
shall attorn to the purchaser or lessor under said lease upon any such
foreclosure, sale and recognize such purchaser or lessor and Landlord under this
Lease, provided that the purchaser shall acquire and accept the Premises subject
to this Lease.

         15.3 QUIET ENJOYMENT: Landlord agrees that Tenant, upon paying the
rental and performing the covenants and conditions of this Lease, may quietly
have, hold and enjoy the Premises during the terms hereof or any extension
thereof; subject, however, to the provision of Article 7, and subject to any
mortgages and encumbrances to which this Lease is subordinate.

         16. DEFAULT; REMEDIES:

         16.1 DEFAULT: Should Tenant at any time be in default with respect to
any rental payments or other charges payable by Tenant, and should such default
continue for a period of three (3) days after written notice for Landlord to
Tenant or should Tenant be in default in the prompt and full performance of any
of its other promises, covenants or agreements herein contained and should such
default or breach of performance continue for more than a reasonable time (in no
event to exceed thirty (30) days) after written notice thereof from Landlord to
Tenant specifying the particulars of such default or breach of performance or
should Tenant vacate or abandon the Premises, then Landlord my treat the
occurrence of any one or more of the foregoing events as a breach of this Lease,
and in addition to any or all other rights or remedies of Landlord hereunder and
by law provided, it shall be, at the option of Landlord, without further notice
or demand of any kind to Tenant or any other person:

         (a) The right of Landlord to declare the term hereof ended and to
reenter the Premises and take possession thereof and remove all persons
therefrom, and Tenant shall have no further claim thereon or hereunder; or

         (b) The right of Landlord without declaring this Lease ended to reenter
the Premises and occupy the whole or any part thereof for and on account of
Tenant and to collect any unpaid rentals and other charges, which have become
payable, or which may thereafter become payable; or

         (c) The right of Landlord, even though it may have reentered the
Premises, to thereafter elect to terminate this Lease and all of the rights of
Tenant in and to the Premises.

         Should Landlord have reentered the Premises under the provisions of
subparagraph (b) above, Landlord shall not be deemed to have terminated this
Lease, or the liability of Tenant to pay any rental or other charges thereafter
accruing, or to have terminated Tenant's liability for damages under any of the
provision hereof, by any such reentry or by any action, in unlawful detainer or
otherwise, to obtain possession of the Premises, unless Landlord shall have
notified Tenant in writing that Landlord has so elected to terminate this Lease,
and Tenant further covenants that the service by Landlord of any notice pursuant
to the unlawful detainer statutes of Colorado and the surrender of possession
pursuant to such notice shall not (unless Landlord elects to the contrary at the
time of or at any time subsequent to the serving of such notices and such
election is evidenced by a written notice to Tenant) be deemed to be a
termination of this Lease. In the event of any entry or taking possession of the
Premises as aforesaid, Landlord shall have the right, but not the obligation, to
removed therefrom all or any part of the personal property located therein and
may place the same in storage at a public warehouse at the expense and risk of
Tenant.

         Should Landlord elect to terminate this Lease pursuant to the
provisions of subparagraph (a) or (c) above, Landlord may recover from Tenant as
damages, the following:

         (i) the worth at the time of award of any unpaid rental which had been
earned at the time of such termination; plus

         (ii) the worth at the time of award of the amount by which the unpaid
rental which would have been earned after termination until the time of award
exceeds the amount of such rental loss Tenant proves could have been reasonably
avoided; plus

         (iii) the worth at the time of award of the amount by which the unpaid
rental for the balance of the term after the time of award exceeds the amount of
such rental loss that Tenant proves could be reasonably avoided; plus

         (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligation under
this Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to any costs or expenses incurred by
Landlord in (a) retaking possession of the Premises, including reasonable
attorneys' fees therefor, (b) maintaining or preserving the Premises after such
default, (c) preparing the Premises for reletting to a new tenant, including
repairs or alterations to the Premises for such reletting, (d) leasing
commissions, or (e) any other costs necessary or appropriate to relet the
Premises; plus

         (v) at Landlord's election, such other amount in addition to or in lieu
of the foregoing as may be permitted from time to time by the laws of the State
of Colorado.

         As used in subparagraphs (i) and (ii) above, the "worth at the time of
award" is computed by allowing interest at the rate of eighteen percent (18%)
per annum. As used in subparagraph (iii) above, the "worth at the time of award"
is computed by discounting such amount at the discount rate of the Federal
Reserve Bank situated nearest to the location of the Building at the time of
award plus one percent (1%).

         In the event of default, all of Tenant's fixtures, furniture,
equipment, improvements, additions, alterations, and other personal property
shall remain on the Premises and in that event, and continuing during the length
of said default, Landlord shall have the right to take the exclusive possession
of same and to use same, rent or charge free, until all defaults are cured or,
at its option, at any time during the term of this Lease, to require Tenant to
forthwith remove same.

         Notwithstanding any other provisions of this Article 16, Landlord
agrees that if the default complained of, other than for the payment of monies,
is of such a nature that the same cannot be rectified or cured within the period
requiring such rectification or curing as specified in the written notice
relating thereto, then such default shall be deemed to be rectified or cured if
Tenant within such period shall have commenced the rectification and curing
thereof and shall continue thereafter with all due diligence to cause such
rectification and curing and does so complete the same with the use of such
diligence as aforesaid.

         The remedies given to Landlord in this Article 16 shall be in addition
and supplemental to all other rights or remedies which Landlord may have under
laws then in force.

         The waiver by Landlord of any breach of any term, convenant or
condition herein contained shall not be deemed to be a waiver of such term,
convenant or condition or of any subsequent breach of the same or any other
term, convenant or condition herein contained. The subsequent acceptance of
rental hereunder by Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rental. No covenant, term or condition of his Lease shall be deemed to have been
waived by Landlord unless such waiver be in writing signed by Landlord.

         16.2 LATE CHARGES: If the Tenant shall fail to pay, when the same is
due and payable, any rent, or amounts or charges required to be paid pursuant to
this Lease, such unpaid amounts shall bear interest at the rate of eighteen
percent (18%) per annum from the date due to the date of payment. In addition to
such interest, Tenant acknowledges that the late payment by Tenant of any
monthly installment of rental or additional charges will cause Landlord to incur
certain costs and expenses not contemplated under this Lease, the exact amount
of which costs being extremely difficult or impractical to fix. Such costs and
expenses will include, without limitation, administrative and collection costs,
and processing and accounting expenses. Therefore, if any such installment is
not received by Landlord from Tenant by the fifth (5th) day of the month for
which such installment is due, Tenant shall immediately pay to Landlord a late
charge equal to ten percent (10%) of such installment. Landlord and Tenant agree
that this late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for its loss suffered by such
nonpayment by Tenant. Acceptance of this late charge shall not constitute a
waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent
Landlord from exercising all other rights and remedies available to Landlord
under this Lease.

         16.3 BANKRUPTCY: Tenant agrees that in the event (a) all or
substantially all of Tenant's assets are placed in the hands of a receiver or
trustee, and such receivership or trusteeship continues for a period of thirty
(30) days, or (b) Tenant makes an assignment for the benefit of creditors or is
finally adjudicated a bankrupt, as the same now exists or under any amendment
thereto which may hereafter be enacted, or under any other act relating to the
subject of bankruptcy, including but not limited to any proceeding wherein
Tenant seeks to be adjudicated a bankrupt, or to be discharged of its debts, or
to effect a plan of liquidation, composition, extension or reorganization, or
(d) any involuntary proceeding is filed against Tenant under any such bankruptcy
laws and such proceeding not be removed within ninety (90) days thereafter, then
this Lease and any interest of Tenant in and to the Premises shall not become an
asset in any of such proceedings and, in any such events and in addition to any
and all rights or remedies of Landlord hereunder or by law provided, it shall be
lawful for Landlord to declare the term hereof ended and to reenter the Premises
and take possession thereof and remove all person therefrom, and Tenant shall
have no further claim thereon or herder. The provisions of this Section 16.3
shall also apply to any Guarantor of this Lease.

         16.4  DEFAULT BY LANDLORD:

         (a) In the event Landlord shall neglect or fail to perform or observe
any of the convenants, provisions or conditions contained in this Lease on its
part to be performed or observed within thirty (30) days after written notice of
default (or if more than thirty (30) days shall be required because of the
nature of the default, if Landlord shall fail to proceed diligently to cure such
default after written notice thereof), then in that event Landlord shall be
responsible to Tenant for any and all damages sustained by Tenant as a result of
Landlord's breach. Tenant agrees, however, that any damages arising out of a
money judgment against Landlord or any other liability hereunder of Landlord's
shall be satisfied only out of Landlord's estate in the Building, and neither
Landlord nor any partners of Landlord nor any officers or directors of such
partner shall have any personal liability whatsoever with respect to any such
liability of Landlord. Tenant hereby waives, to the extent waivable by law, any
right to satisfy said money judgment against Landlord except from Landlord's
estate in the Building.

         (b) If the Premises or any part thereof are at any time subject to a
first mortgage or a first deed of trust and this Lease or the rentals due from
Tenant hereunder are assigned to such mortgagee, trustee or beneficiary (called
Assignee for purposes of this Section only) and Tenant is given written notice
thereof, including the post office address of such Assignee, then Tenant shall
give written notice to such Assignee, specifying the default in reasonable
detail, and affording such Assignee a reasonable opportunity to make performance
for and on behalf of Landlord. If and when the said Assignee has made
performance on behalf of Landlord, such default shall be deemed cured. If, after
such notice to Landlord and the Assignee has made performance on behalf of
Landlord, such default shall be deemed cured. If, after such notice to Landlord
and the Assignee, if any, the Assignee or Landlord shall fail to cure such
default as provided herein, Tenant shall have the right to cure any such default
at Landlord's expense including in such expenditure all reasonable costs and
attorneys' fees incurred to cure such default or breach of Lease. Tenant shall
have no right to terminate this Lease except as herein otherwise specifically
provided.

         17. OPERATING COSTS:

         17.1 BASE YEAR, COMPARISON: It is further agreed that Tenant shall pay,
as hereafter provided, as additional rent, its pro rata share of any increase in
"Operating Cost", as hereafter defined, over and above "Base Operating Costs",
within thirty (30) days after billing therefor. Base Operating Costs are hereby
defined as Base Year 1994 per Rentable Square Foot. Tenant's pro rata share of
increases in Operating Costs shall be computed by multiplying the increase, if
any, in the actual Operating Costs computed on a Rentable Square Footage basis
above the Base Operating Costs times the number of Rentable Square Feet in the
Premises.

         17.2 DEFINITION: "Operating Costs" are defined as any and all
expenditures incurred by the Landlord in connection with the ownership,
maintenance and operation of the Building. These costs may include but are not
limited to, real property taxes on the Building and the real property on which
the same and all appurtenances are constructed, maintenance, and repair costs
for the Building, insurance premiums (including costs of loss of rent
endorsement) all labor costs, legal and accounting expenses, equipment,
landscaping, care of adjacent walks, care of parking areas, all charges for
electricity, gas, sewer and water and all other utilities furnished to the
Building. Other charges may include costs of janitorial services and supplies,
security, management services and overhead expenses and any and all additional
expenses that may be required from time to time in order to maintain a
first-class office building.

         17.3 PAYMENT: Not less frequently than once each calendar year,
commencing with the first calendar year immediately following the year in which
the term hereof commenced, Landlord shall notify Tenant of the actual amount of
Operating Costs per Rentable Square Foot, the increase, if any, in said amount
over the Base Operating Costs and Tenant's pro rata share thereof (after giving
Tenant credit for any amounts paid during such calendar year as an estimate of
its pro rata share of such increase, as hereafter provided). Within thirty (30)
days after receipt of such notice Tenant shall pay to Landlord it pro rata
share. In addition, Tenant shall pay to Landlord each month until the next such
notice is received one-twelfth (1/12) of Landlord's estimate of the amount of
Tenant's pro rata share of such increases in Operating Costs for the succeeding
calendar year. If such notice is receive on other than January 1, of any year,
Tenant's first such payment shall include one-twelfth (1/12) of such estimated
increases for each month in the current calendar year which has elapsed prior to
the making of such payment. Landlord shall have the right to from time to time
during said year if Landlord determines that the prior estimate on which Tenant
is then paying additional rent was incorrect. If the first year of term hereof
is less than a full calendar year, Tenant's obligation to pay its pro rata share
of increases in Operating Costs for such year shall be pro rated, based upon the
number of months during such year that the Lease was in effect.

         17.4 PERSONAL PROPERTY TAXES: Tenant shall pay, or cause to be paid,
before delinquency, any and all taxes levied or assessed and which become
payable during the term hereof upon all Tenant's leasehold improvements,
equipment, furniture, fixtures and personal property located in the Premises,
except that which has been paid for by Landlord, and is the standard of the
Building. In the event any or all of the Tenant's leasehold improvements, shall
be assessed and taxed with the Building, Tenant shall pay to Landlord its share
of such taxes within ten (10) days after delivery to Tenant by Landlord of a
statement in writing setting forth the amount of such taxes applicable to
Tenant's property.

         17.5 PARKING: Tenant shall have the right to use in common with other
tenants or occupants of the Building the parking facilities of the building, if
any.

         18. TITLE OF LANDLORD: The Landlord covenants that as of the date
hereof there are no liens upon its estate other than (a) the effect of
covenants, conditions restrictions, easements, mortgages or deeds of trust, any
rights of way of record, and any other matters or documents or record, (b) the
effect of any zoning laws of Jefferson County and the State of Colorado, and (c)
general and special taxes not delinquent. Tenant agrees that as to its leasehold
estate it, and all persons in possession or holding under it, will conform to
and will not violate the terms of any of said documents.

         19.  MISCELLANEOUS

         19.1 ESTOPPEL CERTIFICATE: Tenant shall at any time and from time to
time, upon not less than ten (10) days prior written notice from Landlord
execute, acknowledge and deliver to Landlord a statement in writing (i)
certifying that this Lease represents the entire agreement between Landlord and
Tenant, and is modified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect) and the dates to which the rental and other charges
are paid in advance, if any (ii) certifying the commencement and termination
dates of the Lease term, (iii) certifying that there has been no assignment or
other transfer by Tenant of this Lease, or any interest therein, (iv)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder and that Tenant has no right to offset,
counterclaim or deduction alleged by Tenant and (v) certifying such other
matters as Landlord may request. Any such statement may be relied upon by any
existing owner or prospective purchaser or any present or prospective lender
upon the security of the real property of which the Building and the Premises
are a part. Tenant's failure to deliver such statement within such time shall be
conclusive and bind upon Tenant (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance and that Tenant has no right
of offset, counterclaim or deduction against rental, and (iii) that no more than
one month's rental has been paid in advance.

         19.2 TRANSFER OF LANDLORD'S INTEREST: In the event of any sale or
exchange of the Premises by Landlord and assignment by Landlord of this Lease,
Landlord shall be and is hereby entirely freed and relived of all liability
under any and all of its covenants and obligations contained in or derived from
this Lease arising out of any act, occurrence or omission relating to the
Premises or this Lease occurring after the consummation of such sale or exchange
and assignment, provided such purchaser or assignee shall expressly assume said
covenants and obligations of Landlord.

         19.3 CAPTIONS, ATTACHMENTS, DEFINED TERMS:

         (a) The captions of Articles of this Lease are for convenience only,
are not a part of this Lease and do not in any way limit or amplify the terms
and provisions of this Lease.

         (b) Exhibits, addendums and schedules attached hereto, are deemed by
attachment to constitute part of this Lease and are incorporated herein.

         (c) The word "landlord" and "Tenant", as used herein, shall include the
plural as well as the singular. Words used in neuter gender include the
masculine and feminine and words in the masculine or feminine gender include the
neuter. If there be more than one Landlord or Tenant, the obligations hereunder
imposed upon Landlord or Tenant shall be joint and several; as to a Tenant which
consists of husband and wife, the obligations shall extend individually to their
sole and separate property as well as all property owned in common. The term
"Landlord" shall mean only the owner or owners at the time in question of the
fee title of this land underlying the Building. The obligations contained in
this Lease to be performed by Landlord shall be binding on Landlord's successors
and assigns only during their respective periods of ownership. Except as
otherwise specifically provided herein, "the term" shall include the initial
term and any extension, renewal or holdover thereof.

         19.4 ENTIRE AGREEMENT: It is understood that there are no oral
agreements between the parties hereto affecting this Lease, and this Lease
supersedes and cancels any and all previous negotiations, arrangements,
brochures, agreements and understandings, if any, between the parties hereto or
displayed by Landlord to Tenant with respect to the subject matter thereof, and
none thereof shall be used to interpret or construe this Lease.

         19.5 SEVERABILITY: It is agreed that if any provision of this Lease
shall be determined to be void by any court of competent jurisdiction, then such
determination shall not affect any other provision of this Lease and all such
other provisions shall remain in full force and effect. It is the intention of
the parties hereto that if any provision of this Lease is capable of two
constructions, one of which would render the provision void and the other of
which would render the provision valid, then the provision shall have the
meaning which renders it valid.

         19.6 ATTORNEYS' FEES: In the event that at any time during the term of
this Lease either Landlord or Tenant shall institute any action or proceeding
against the other relating to the provisions of this Lease, or any default
hereunder, then, and in that event, the unsuccessful party in such action or
proceeding shall reimburse the successful party for the reasonable expenses of
attorney's fees and disbursements incurred therein by the successful party.

         19.7 TIME, JOINT AND SEVERAL LIABILITY: Time is of the essence of this
Lease and each and every provision hereof, except as to the conditions relating
to the delivery of possession of the Premises to Tenant. All of the terms,
convenants and conditions contained in this Lease to be performed by either
party, if such party shall consist of more than one person or organization,
shall be deemed to be joint and several, and all rights and remedies of the
parties shall be cumulative and nonexclusive of any other remedy at law or in
equity.

         19.8 BINDING EFFECT, CHOICE OF LAW: The parties hereto agree that all
the provisions hereof are to be construed as covenants and agreements as though
the words importing such covenants and agreements were used in each separate
paragraph hereof, and that all of the provisions hereof shall bind and inure to
the benefit of representatives, successors and assigns. The laws of Colorado
shall govern the validity, performance and enforcement of this Lease. Although
the printed provisions of this Lease were drawn by Landlord, this Lease shall
not be construed either for or against Landlord or Tenant, but this Lease shall
be interpreted in accordance with the general tenor of the language in an effort
to reach an equitable result.

         19.9 WAIVER: A waiver of any breach or default shall not be a waiver of
any other breach or default. Landlord's consent to, or approval of, any act by
Tenant requiring Landlord's consent or approval shall not be deemed to waive or
render unnecessary Landlord's consent to or approval or any subsequent similar
act by Tenant.

         19.10 SURRENDER OF PREMISES: The voluntary or other surrender of this
Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and
shall, at the option of the Landlord, terminate all or any existing subleases or
subtenancies, or may, at the option of Landlord, operate as an assignment to it
of any or all such subleases or subtenancies.

         19.11 HOLDING OVER: If Tenant remains in possession of all or any part
of the Premises after the expiration of the term hereof, with or without the
express or implied consent of Landlord, such tenancy shall be from month to
month only, and not a renewal hereof or an extension for any further term, and
in such case, Tenant shall be liable for monthly rent equivalent to 150% of the
rental paid by Tenant immediately prior to the expiration of the term and all
other monetary sums due hereunder shall be payable in the amount and in the time
specified in this Lease and such month to month tenancy shall be subject to
every other term, convenant and agreement contained herein.

         19.12 SIGNS: Landlord will designate a uniform pattern of
identification signs for tenants to be placed on the outside of the Premises
near the door leading to the Premises. Except as expressly provided herein,
Tenant shall not place or permit to be placed in or upon the Premises or the
Building any signs or notices which are visible from outside the Premise,
without the prior written consent of Landlord.

         19.13 RULES AND REGULATIONS: Tenant and Tenant's agents, servants,
employees, visitors and licensees shall observe and comply fully and faithfully
with all reasonable and non-discriminatory rules and regulations adopted by
Landlord for the care, protection, cleanliness and operation of the Building and
its tenants including those annexed to this Lease as Exhibit "B" and any
modification or addition thereto adopted by Landlord, provided Landlord shall
give written notice thereof to Tenant. Landlord shall not be responsible to
Tenant for the non-performance by any other tenant or occupant of the Building
of any of said rules and regulations.

         19.14 NOTICES: Wherever in this Lease it shall be required or permitted
that notice or demand be given or served by either party to this Lease to or on
the other, such notice or demand shall be given or served, and shall not be
deemed to have been duly given or served unless in writing and forwarded by
certified or registered mail, return receipt requested, addressed to the
addresses of the parties set forth after their signatures at the end of this
Lease, and, with respect to notices to Landlord, also at the management office
in the Building. Notices so sent shall be deemed given on the third business day
following deposit in the mail. Either party may change such address by written
notice by certified or registered mail return receipt requested to the other.

         19.15 CORPORATE AUTHORITY: In the event the Tenant hereunder shall be a
corporation, the persons executing this Lease on behalf of the Tenant hereby
covenant and warrant that (i) the Tenant is a duly qualified corporation and all
steps have been taken prior to the date hereof to qualify Tenant to do business
in the State where the Building is situated; (ii) all franchise and cooperate
taxes have been paid to date; (iii) all future forms, reports, fees and other
documents necessary to comply with applicable laws will be filed when due; (iv)
this Lease and the execution hereof have been duly authorized by requisite
corporate action and authority and represents a binding obligation of Tenant.

         19.16 FORCE MAJEURE: Any prevention, delay or stoppage due to strikes,
lockouts, labor disputes, acts of God, inability to obtain labor and materials
or reasonable substitutes therefor, governmental restrictions, regulations,
controls, judicial order, enemy or hostile governmental action, civil commotion,
fire or other casualty, and other events caused beyond the reasonable control of
the party obligated to perform, shall excuse the performance by such party for a
period equal to any such prevention, delay, or stoppage, except the obligations
imposed with regard to rental and other charges to be paid by Tenant pursuant to
the Lease.

         19.17 REDEMPTION: Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws in the event of Tenant
being evicted or is dispossessed for any cause, or in the event of Landlord
obtaining possession of the Premises by reason of the violation by Tenant of any
of the covenants and conditions of this Lease or otherwise. The rights given to
Landlord herein are in addition to any rights that may be given to Landlord by
any stature or otherwise.

         19.18 INDEPENDENT COVENANTS: This Lease shall be construed as though
the covenants herein between Landlord and Tenant are independent, and not
dependent, and Tenant shall not be entitled to any setoff of the rent or other
amounts owing hereunder against Landlord.

         19.19 FINANCIAL STATEMENTS: Tenant agrees, upon request from Landlord,
to deliver to Landlord copies of Tenant's most recent financial statement
certified to by an officer of Tenant if Tenant is a corporation, a partner of
Tenant, if Tenant is a partnership, or by Tenant if Tenant is a sole proprietor.

         19.20 COMPLETION OR REMODELING OF PREMISES: In the event that the
Premises have never been occupied and are not completed as of the date this
Lease is entered into, and Landlord has agreed to complete the same to any
extent, or in the event that the Premises have been previously been occupied,
but Landlord has agreed to perform remodeling work thereon, such provisions will
be set forth in a work letter to be executed between Landlord and Tenant and
attached hereto as Exhibit C. Other than as set forth in such work letter,
Landlord shall have no obligations for the completion or remodeling of the
Premises, and the Tenant shall accept the Premises in their "as is " condition
on the date of the execution of this Lease. In any event, Landlord shall not
have any obligation for the repair or replacement of any portions of the
interior of the Premises which are damaged or wear out during the term hereof
regardless of the cause therefore, including, but not limited to, carpeting,
draperies, window coverings, wallcovering, painting or any of Tenant's property
or betterments in the Premises. If Landlord is to complete or remodel the
Premises, and if the Premises are not ready for occupancy on the date upon which
the term hereby demised is to begin, the rent under this Lease shall not
commence until the Premises are ready for occupancy, whereupon this Lease, and
all of the covenants, conditions and agreements herein contained shall be in
full force and effect; and the expiration of the term hereof shall be postponed
for an equivalent period of time, and the postponement of rent herein provided
to be paid by Tenant for such period prior to the delivery of the Premises to
Tenant ready for occupancy shall be in full settlement for all claims which
Tenant might otherwise have by reason of said Premises not being ready for
occupancy on the date of the beginning of the term as set forth herein.
Provided, however, if Tenant takes possession of all or any part of the Premises
prior to the date the Premises are ready for occupancy, all terms and provisions
of this Lease shall apply except for the payment of rent. "Ready for occupancy"
as used herein shall mean the date that Landlord shall have substantially
completed the Premises or any remodeling work to be performed by Landlord to the
extent agreed to in the work letter. The certificate of the architect (or other
representative of Landlord) in charge of supervising the completion or
remodeling of the Premises shall control conclusively the date upon which the
Premises are ready for occupancy, and the obligation to pay rent begins as
aforesaid. In addition to the above, if Landlord is delayed in delivering the
Premises to Tenant due to the failure of a prior occupant to vacate the same,
then, the rent and term shall also be postponed as hereinabove set forth, and
such postponement shall be in full settlement of all claims which Tenant may
otherwise have by reason of the delay of delivery.

         If, as a result of the postponement of the commencement of the term,
the term would begin other than on the first day of the month, the commencement
date thereof shall be further postponed until the first day of the following
month, but Tenant shall pay proportionate rent at the same monthly rate set
forth herein (also in advance) for such partial month and all other terms and
conditions of this Lease shall be in force and effect during such partial month.
As soon as the term commences, Landlord and Tenant shall execute an addendum to
this Lease, which may be requested by either party, setting forth the exact date
of commencement and expiration of the term hereof.

         19.21 GOVERNMENTALLY REQUIRED IMPROVEMENTS: If any improvement or
structural modification or addition to the Building is required subsequent to
the commencement of the term hereof by any change in the laws, ordinances,
rules, regulations or orders of any government or quasi-governmental authority
having jurisdiction over the Building, the rent to be paid by Tenant shall be
further adjusted, in such amount as Landlord's independent certified public
accountants may determine so that Tenant pays its pro rata share of Landlord's
per square foot cost (computed in the same manner as set forth in paragraph 17)
of such improvement or structural modification or addition, amortized, at a
market rate of return over the useful life thereof. In determining such
adjustment in rent, Landlord's independent certified public accountant shall
consider any cost reductions to Landlord in operating the Building resulting
from such improvement or structural modification or addition. Tenant shall
commence payment of any adjustment in its rent pursuant to this paragraph on the
first day of the month following notification thereof by Landlord.

         19.22 BANKRUPTCY: Landlord and Tenant understand that notwithstanding
certain provisions to the contrary contained herein, a trustee or debtor in
possession under the Bankruptcy Code of the United States may have certain right
to assume or assign this Lease. Landlord and Tenant further understand that in
any event Landlord is entitled under the Bankruptcy Code to adequate assurances
of future performance of the terms and provisions of this Lease. For purposes of
any such assumption or assignment, the parties hereto agree that the term
"adequate assurance" shall include at least the following:

         (a) In order to assure Landlord that the proposed assignee will have
the resources with which to pay the rent called for herein, any proposed
assignee must have as demonstrated to Landlord's satisfaction a net work (as
defined in accordance with generally accepted accounting principles consistently
applied) at least a s great as the net worth of Tenant on the date this Lease
became effective increased by seven percent (7%) for each year from the Lease
Commencement Date through the date of the proposed assignment. The financial
condition and resources of Tenant were a material inducement to Landlord in
entering into this Lease.

         (b) Any proposed assignee of this Lease must assume and agree to be
personally bound by the terms, provisions and covenants of this Lease.

         19.23 REAL ESTATE BROKER: Tenant warrants and agrees to save and hold
Landlord harmless form any and all leasing commissions (including any
commissions attributable to renewals or options), costs, and liability with
respect to the transaction contemplated hereby except for any commissions owing
to Genesee Commercial Group, Ltd. for which Landlord agrees to be responsible.

         19.24

         19.25 DIRECTORY BOARD: Tenant shall be entitle to have its name listed
on a building directory to be placed on the main floor of the Building. Landlord
shall designate the location and style of the directory board as well as the
amount of space thereon to be allocate to Tenant.

         19.26 GOVERNMENTAL LIMITATION: If by virtue of any governmental laws,
rules, or regulations of any local, state, or federal entity or agency having
jurisdiction over the Building, the Landlord is prevented from collecting the
Base Rent, increases therein, Additional Rent, and/or any other amounts which
Landlord is entitle to collect hereunder, Landlord, at its sole option, shall
have the right to terminate this Leases at any time thereafter upon thirty (30)
days prior written notice.


         IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the
date and year first above written.

                                    LANDLORD:

                                    GENESEE HOLDINGS CORPORATION

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


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


                                    By:______________________________________
                                       Authorized Signature



                                     TENANT:

                                     THE GENESEE COMPANY

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


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


                                     By:______________________________________







                                   ADDENDUM A


         Attached to and made a part of that certain lease dated January 1,
1994, between Genesee Holdings Corporation (Landlord) and The Genesee company
(Tenant).


                              ADDITIONAL PROVISIONS

         The following provisions are in addition to, substitution of, and/or
modification of the terms and conditions contained in the Lease and Exhibits
thereto. In the event of any conflict between such terms and conditions of the
Lease and the terms and conditions of the following provisions, the latter shall
control.


                  Base Rent. Paragraph 3 of the printed portion of the Lease is
                  hereby amended to provide that Tenant shall pay base rent
                  during the following periods in the monthly installments as
                  described below:

                  Months 1 -12                       $7,869 per month
                  Months 13-24                       $8,475 per month
                  Months 25-36                       $9,080 per month



Landlord:                                            Tenant:

Genesee Holdings Corporation                         The Genesee Company



BY:_________________________                         BY:________________________



DATE:_______________________                         DATE:______________________








                                                                    EXHIBIT 21.1

                              LIST OF SUBSIDIARIES


                                                          State of Incorporation
Name of Entity                                            or Organization
- --------------                                            ---------------
Buffington Homes, Inc.                                    Texas
Buffington Homes - San Antonio, Inc.                      Texas
Elements!, Inc.                                           Texas
Buffington Development, Inc.                              Texas
Buffington Holdings, Inc.                                 Delaware
Christopher Homes - Custom Home Division                  Nevada
Genesee Communities I, Inc.                               Colorado
Genesee Communities II, Inc.                              Colorado
Genesee Communities III, Inc.                             Colorado
Genesee Development company                               Colorado
The Genesee Corporation/Castle Pines Ltd.                 Colorado
The Genesee Company of Michigan Ltd.                      Colorado
Genesee Venture Corporation                               Colorado
The Genesee Company                                       Colorado
Fortress Landmark, Inc.                                   North Carolina
Solaris Development Corporation                           North Carolina
Legacy Homes, Inc.                                        North Carolina
Fortress Wisconsin, Inc.                                  Delaware
Fortress-Florida, Inc.


<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
     The Fortress Group, Inc. Consolidated Balance Sheet as of December 31, 1996
     and The Fortress Group, Inc. Consolidated Statement of Operations for the
     period May 21, 1996 through December 31, 1996.
</LEGEND>
<MULTIPLIER>                                   1,000
<CURRENCY>                                     U.S.
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                              DEC-31-1996
<PERIOD-START>                                 MAY-21-1996
<PERIOD-END>                                   DEC-31-1996
<EXCHANGE-RATE>                                1.000
<CASH>                                         16,212
<SECURITIES>                                   0
<RECEIVABLES>                                  15,876
<ALLOWANCES>                                   0
<INVENTORY>                                    144,106
<CURRENT-ASSETS>                               0
<PP&E>                                         3,543
<DEPRECIATION>                                 0
<TOTAL-ASSETS>                                 193,733
<CURRENT-LIABILITIES>                          0
<BONDS>                                        0
                          118
                                    0
<COMMON>                                       0
<OTHER-SE>                                     31,868
<TOTAL-LIABILITY-AND-EQUITY>                   193,733
<SALES>                                        200,721
<TOTAL-REVENUES>                               210,354
<CGS>                                          177,387
<TOTAL-COSTS>                                  197,567
<OTHER-EXPENSES>                               0
<LOSS-PROVISION>                               0
<INTEREST-EXPENSE>                             429
<INCOME-PRETAX>                                13,221
<INCOME-TAX>                                   5,013
<INCOME-CONTINUING>                            0
<DISCONTINUED>                                 0
<EXTRAORDINARY>                                0
<CHANGES>                                      0
<NET-INCOME>                                   8,208
<EPS-PRIMARY>                                  0
<EPS-DILUTED>                                  0
        




</TABLE>


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