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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

  For the fiscal year ended December 31, 2002

OR

  For the transition period from                      to                     

Commission File Number: 0-23270

Dominion Homes, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 614-761-6000

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

None

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

Common Shares with no par value

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

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

Indicate by check mark whether the registrant is an accelerated filer. Yes   x   No   ¨             

Based upon the closing sale price reported on the NASDAQ National Market on June 30, 2003, the aggregate market value of the Common Shares of the Registrant held by non-affiliates (assuming, for this purpose, that all executive officers and directors are affiliates) on that date was $77,192,865.26.

As of March 28, 2003 there were 8,061,191 Common Shares issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 2003 (in pertinent part, as indicated) Part III

PART I

Item 1 BUSINESS

Unless otherwise specified, references in this document to “Dominion,” the “Company,” “we,” “us” and “our” include Dominion Homes, Inc. and its consolidated subsidiaries.

We are a leading builder of high-quality, single-family homes in Central Ohio and Louisville, Kentucky. Our customer-driven focus targets entry-level and move-up home buyers. We offer three distinct series of homes that are differentiated by price, size, standard features and available options. Our homes range in price from approximately $100,000 to $300,000 and in size from approximately 1,000 to 3,300 square feet.

We trace our homebuilding roots to 1952 when Donald A. Borror, our current Chairman Emeritus, built his first home in Columbus, Ohio. Donald Borror and the Borror family grew the homebuilding business, and operated it as part of the homebuilding and related divisions of BRC Properties Inc (“BRC”). We were organized as an Ohio corporation in October 1993 under the name Borror Corporation in anticipation of our initial public offering, which we completed in March 1994. In connection with the initial public offering, we acquired from BRC, our predecessor company and our largest shareholder, its homebuilding operations. BRC is primarily owned and is controlled by the Borror family. In May 1997, we changed our name to Dominion Homes, Inc.

Our principal corporate offices are located at 5501 Frantz Road, Dublin, Ohio and our telephone number is (614) 761-6000.

Our Markets

We presently build homes in two markets, Central Ohio and Louisville, Kentucky. These markets have diverse economic and employment bases with established steady population growth over the last 10 years. Based on market share, we are one of the largest homebuilding companies in each of our markets.

In 2002, we captured a 28% share in the Central Ohio market, according to an independent survey based upon the number of new homes delivered in Central Ohio. Columbus is the capital of Ohio, the county seat of Franklin County and the largest city in Ohio. The Columbus Metropolitan Statistical Area (the “Columbus MSA”) has a population of approximately 1.5 million. As of December 2002, the unemployment rate in the Columbus MSA was 4% and the national average was 6%. Columbus is the home of The Ohio State University. In addition, a number of notable organizations have their headquarters in Central Ohio, including Honda of America Manufacturing, Inc., American Electric Power Company, Inc., The Limited, Inc., Nationwide Insurance Company, Wendy’s International, Inc., Battelle Memorial Institute, The Scotts Company and Cardinal Health, Inc. We build homes in all of the counties in the Columbus MSA, which currently includes Franklin, Pickaway, Madison, Fairfield, Delaware and Licking Counties (the “MSA Counties”). We also build homes in Union County. References in this report to Central Ohio mean the MSA Counties and Union County.

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In 1998, we expanded into Louisville, Kentucky because of Louisville’s proximity to Central Ohio, its strong economy, its lack of builders with dominant market share, its available land supply and subcontractor base and its acceptance of product offerings similar to our Central Ohio product offerings. The Louisville Metropolitan Statistical Area (the “Louisville MSA”) has a population of approximately 1.0 million. As of December 2002, the unemployment rate in the Louisville MSA was 4.7%. Louisville is the home of the University of Louisville and the headquarters for major corporations such as Humana, Inc., Yum! Brands, Inc and KFC Corporation. Other major employers in Louisville include GE Appliance, Ford Motor Company and United Parcel Service, Inc. The Louisville MSA consists of Jefferson, Oldham and Bullitt Counties in Kentucky and Scott, Harrison, Floyd and Clark Counties in Southern Indiana.

Our Products

We focus on providing high-quality, affordably priced single-family homes primarily for entry-level and first-time move-up home buyers. We currently offer three distinct series of homes, which are differentiated by price, size, standard features and available options.

We also regularly experiment with new types of homes and communities that are aimed at expanding our target markets.

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Control of the Development and Building Process

Land Acquisition and Development. One of our key strengths is our ability to identify and economically acquire land to be developed for our homebuilding operations. We currently develop approximately 90% of the communities in which we build homes. This practice enables us to: (1) improve our profit margins by reducing the cost of finished lots, (2) maintain an adequate supply of finished lots to meet market demand, (3) control the details of development in order to create a distinctive look and feel in our communities and (4) streamline and coordinate the construction process.

We believe that our understanding of our homebuilding markets gives us an advantage in identifying and acquiring unimproved land with good market potential. In considering the suitability of unimproved land for development, we review factors such as: (1) availability of existing community services such as sewers, water, gas and electricity, (2) estimated costs of development, (3) the quality of school systems, (4) population growth patterns, (5) proximity to developed residential and retail areas, (6) employment growth rates, (7) anticipated absorption rates for new housing and (8) availability of transportation.

To limit our risk, we generally attempt to control land through the use of option and contingent purchase contracts when purchasing land. These contracts condition our obligation to purchase land subject to our review and approval of such matters as zoning, utilities, soil and subsurface conditions, environmental and wetland conditions, title matters, economic feasibility of development and other property-related criteria. We generally do not acquire unimproved land until necessary environmental studies and zoning permits have been obtained and the land is served by utilities. Our engineering and design professionals plan and engineer the land and oversee the construction of streets, sewers, water and drainage facilities and other improvements to meet our specifications.

In developing land, we are required by some municipalities and other governmental authorities to provide letters of credit or performance bonds to secure performance of our obligations to install sewers, streets and other improvements. At December 31, 2002, we had an aggregate of $35.5 million of letters of credit and performance bonds outstanding for these purposes. We do not believe that any of the outstanding letters of credit or performance bonds is likely to be drawn upon.

Through our control over the details of development, from the design of each community entryway to the placement of streets and amenities, we create in each of our communities a distinctive look and feel. We generally complete the sale of homes in our communities in time periods that range from three to five years from first to last sale, with smaller communities generally taking less time to complete than larger communities. Certain large communities can take more than five years to complete. In addition, we typically incorporate an association of the owners to ensure the continued maintenance of the common areas after the community is developed.

Our Independence Series communities provide detached single-family homes in communities reminiscent of older, traditional communities. The homes have front porches, the streets are narrower than in conventional subdivisions and alleys are provided in the rear of the

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homes. We have established Independence Series communities both as single family homes in condominium communities and as fee simple communities under new provisions of the City of Columbus’ zoning code for traditional neighborhood developments. Each of these Independence Series communities maximizes the use of land and reduces development costs. Land use is maximized through increased density of homes in the community and more efficient access to individual homes. Development costs are reduced through simplified infrastructure design and placement. The common areas in these communities are owned and maintained by an association of the owners.

We selectively enter into joint ventures with other homebuilders to own and develop communities. Development costs of the joint ventures generally are funded by the participants. The participants in the joint ventures acquire substantially all of the developed lots. In certain cases, we may be liable under debt commitments within the particular joint venture. At December 31, 2002, we were actively participating in twenty joint ventures. One of the joint ventures has obtained financing which is secured by mortgages on the joint venture property, which, at December 31, 2002, had $920,000 in loans outstanding, $460,000 of which was subject to our guaranty.

Land inventory owned by us consists of either (1) land titled in our name or (2) our pro rata share of land that is titled in the name of one of our joint ventures. Land inventory controlled by us consists of land that we have committed to purchase or have the right to acquire under contingent purchase and option contracts.

The following table sets forth our land inventory as of December 31, 2002:

Home Building Process. To further improve our building efficiency and to better control our supply and cost of raw materials, we operate our own lumber and construction products distribution center (the “Distribution Center”). The Distribution Center enables us to provide just-in-time delivery of materials to our Central Ohio job sites and to purchase high-quality lumber products and other building materials, including shingles, doors and windows, directly from mills and wholesalers at more attractive prices than are available to many of our competitors. We sometimes purchase lumber for delayed delivery to ensure adequate supply and predictable costs. Substantially all of the lumber and other building materials maintained at the Distribution Center during 2002 were exclusively for our use. In addition to buying and delivering building materials, most of the floor trusses used in our Central Ohio homes are manufactured at the Distribution Center.

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We act as the general contractor for the construction of our homes. Our construction superintendents, together with the construction managers to whom they report, monitor construction, coordinate the activities of subcontractors and suppliers, maintain quality and cost controls and monitor compliance with zoning and building codes. We use subcontractors to minimize our employment cost, equipment and building supply inventory. This practice also increases our ability to respond to changes in the demand for housing. We have longstanding business relationships with many of our subcontractors. These relationships, combined with our building volume, year round construction schedule and efficient home designs, have enabled us to negotiate favorable agreements with our subcontractors and allow us to better control the costs of skilled labor.

We have information and administrative systems to support our construction operations. These systems allow us to control construction costs by providing us the information necessary to monitor subcontractor performance and expenditures on each home. Subcontracted work is authorized by work orders. The cost of deviations from the work order must be approved for payment by our construction superintendents and we investigate significant cost variances. These information systems also integrate our sales reporting, contract management and material distribution systems into the construction process.

Although we generally do not start construction of a Celebration or Tradition Series home until we have obtained an executed sales contract, we start construction of a limited number of homes without a sales contract. We do this selectively in anticipation of seasonal demand and to attract customers, such as corporate transferees, who need homes in 60 to 90 days. An inventory home is also created when a sales contract is cancelled after construction has commenced, generally because a contingency has not been satisfied. In addition, the production method used to build our Independence Series homes dictates that we start a limited number of these homes without a sales contract. We normally obtain sales contracts on these inventory homes early in the construction process. At December 31, 2002, we had 164 inventory homes in various stages of construction as compared to 196 inventory homes at December 31, 2001. We also start the foundation of homes on a strategic and selective basis during the fall and early winter in order to moderate the effects of weather on the building process. These foundations are not included in the number of inventory homes we report.

“The Best of Everything^®” Philosophy

We market our customer-driven focus as “The Best of Everything.” As part of this philosophy, we build affordable homes with high-quality materials and construction practices, and we provide our home buyers with a high level of customer service.

Marketing and Sales. We have an extensive targeted marketing plan, which includes advertising by broadcast, newspapers, magazines, direct mail and billboards. Our advertising typically emphasizes the quality of our homes, the location of our communities, the brand name components used in our homes, the wide variety of our home styles and the longevity of the Company. We believe these factors differentiate our products and reinforce our “Dominion Homes-The Best of Everything^®” brand awareness program. According to a third party survey conducted during 2002, over 94% of Central Ohio respondents recognized the Dominion Homes^® brand.

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We conduct our home sales from more than 50 furnished model homes located throughout Central Ohio and Louisville, Kentucky, and from two Dominion HomeStores^® in Central Ohio. We employ approximately 70 trained sales representatives who help prospective buyers select a home design in one of over 50 communities. Our sales representatives are trained to fully explain the features and benefits of our homes, the available mortgage financing opportunities and the construction process. Our sales representatives are also trained to help the buyer determine which home design best suits the customer’s needs. We devote significant attention to the continued training of our sales representatives to assure high levels of professionalism and product knowledge. Our sales representatives are Company employees and are compensated on a commission-only basis. We believe that the use of an in-house sales staff allows for a more knowledgeable sales presentation and enables us to communicate a consistent message to our customers.

We encourage independent realtor participation in the home sales process because realtors often introduce our homes to customers who might not otherwise consider purchasing a new home. In order to facilitate enhanced real estate broker participation, we maintain two sales offices, each known as The Dominion HomeStore^®, that primarily focus on sales through the realtor community. In 2002, our Dominion HomeStores generated more than $102.5 million in sales.

Occasionally, we use promotional and sales incentives, such as discounts on the purchase price of our homes, to market our products. We also offer discounts to previous purchasers of our homes, our vendors, our own employees and select companies through our “Best Benefit” program.

Quality Homes and Communities. Our more than 50 communities offer customers a wide-range of choice in neighborhood features such as schools, bicycle and jogging trails, walking paths, park areas, playgrounds and swimming facilities. We believe that our homes have more standard features than any competitor selling at comparable prices in our markets. Every Dominion Home includes a front porch, maintenance-free exterior, two-car garage, cathedral ceiling, air conditioning, all major kitchen appliances and fully sodded yard. We use nationally recognized and industry leading brand name components in constructing our homes. These components include Andersen^® wood windows, the Kohler^® family of bathroom and kitchen fixtures, Trane^® natural gas furnaces, Armstrong^® flooring, General Electric^® appliances, Wilsonart^® decorative laminate and Aristokraft^® cabinets.

As part of our “Gold Medal” quality assurance program, every home we build undergoes eight separate inspections by our construction personnel. As part of this program, members of our senior management also inspect randomly selected homes on a monthly basis. We offer a comprehensive warranty program that features a two-year warranty covering the roof, windows, doors and all mechanical elements of our homes, including the heating, plumbing and electrical systems. We also offer a 30-year warranty covering all major structural components. The structural warranty on each home is automatically transferred to subsequent owners of the home. We also transfer to our customers all warranties provided by manufacturers and suppliers.

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Customer Financing. Through our mortgage financing services subsidiary, Dominion Homes Financial Services, Ltd. (“DHFS”), we assist virtually all of our customers in obtaining mortgages to finance the purchase of their homes. We do not provide mortgage financing to our customers and, consequently, do not bear the interest rate and market risks associated with making mortgage loans. Our services include loan application counseling and processing and placement of mortgages, through an agent, to a number of third-party mortgage lenders. In 2002, DHFS provided mortgages for approximately 2,410 of our customers, representing approximately 93% of our closings. The average mortgage amount was $172,000. DHFS generated revenues of approximately 2.6% of the total loan volume.

We offer to our customers a number of attractive loan options that include interest rate buy downs and payment of the customer’s loan origination fees, rate commitment fees, discount points and some closing fees. We currently offer a “no money down” program to purchasers of our Independence and Celebration Series homes. This no money down program is provided through several non-profit corporations and is permitted by the U.S. Department of Housing and Urban Development. These no money down programs allow a home buyer to receive gift funds from the non-profit corporation to be used as a down payment. We are obligated to make a contribution to the non-profit corporation that is slightly larger than the amount of the gift to the home buyer. We aggressively market these no money down programs because they enable us to sell homes to entry-level home buyers who otherwise would not have the down payment necessary to qualify for mortgage financing. A significant percentage of our home buyers in 2002 participated in one of the no money down programs.

The majority of our homes are financed under Federal Housing Administration (“FHA”) or Department of Veteran Affairs (“VA”) mortgage programs. In comparison to conventional financing, FHA and VA financing generally allows customers to purchase homes with a higher percentage of their incomes directed toward housing expenses and with lower down payments. FHA and VA financing rules are also generally more liberal in the amount of points and closing costs that the seller may pay. During 2002, approximately 74% of our closings involved government insured financing. At January 1, 2003, the maximum dollar amount for FHA mortgages was $208,801 in the Columbus MSA, $154,896 in Union County and $180,405 in the Louisville MSA.

We sell our homes using standard sales contracts. These contracts generally require the home buyer to make a $500 deposit when the purchaser signs the contract and to pay the balance of the cash down payment at the start of construction. Our “no money down” program requires the customer to make an initial deposit of $250 when the contract is executed and a second $250 deposit when the customer’s loan is approved. Both of these deposits are returned to the home buyer upon the successful closing of the home.

Customer Communication. Our website provides an additional means to market our products and communicate with our customers. Through our website, a potential home buyer can take virtual tours of models and search our home inventory by specifying size, location, amenities and price. Additionally, a home buyer can submit mortgage applications online to our mortgage financing services subsidiary. Our website allows our home buyers to communicate with their sales representatives and construction superintendents, and to monitor construction progress.

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Most of our closings are performed by our affiliated title insurance agencies. Alliance Title Agency, Ltd. (“Alliance”) provides title insurance for most of our home closings in Central Ohio. Alliance is an Ohio limited liability company of which we own 49.9%, the maximum percentage allowable under Ohio law. Our wholly-owned subsidiary, Alliance Title Agency of Kentucky, LLC, a Kentucky limited liability company, began providing title insurance for our Louisville, Kentucky home closings in early 2002. We believe that maintaining affiliated title insurance agencies facilitates quick and convenient closings. The title insurance agency personnel are trained to have a basic understanding of our home construction process and “The Best of Everything” philosophy. We also believe that having affiliated title insurance agencies and a mortgage financing services subsidiary enhances the communication between these entities and the Company.

On two different occasions after a home closing, we survey our customers and invite them to complete a questionnaire that rates their sales representative, construction superintendent, decorating consultant and loan counselor. The questionnaires also provide other information regarding the customers’ homebuilding experience. We use the information obtained from these questionnaires to refine our product offerings.

Value Engineering. We have enhanced “The Best of Everything” philosophy through our innovative approach to home design and construction. We use simplified architectural designs with fewer available options, but with more standard features and amenities than are normally found in new homes at comparable prices. This approach enables us to use standard-sized building materials and reduces construction deviations and change orders. On an ongoing basis, we work closely with our vendors to further refine and standardize our building material needs, enabling us to realize additional cost and supply efficiencies. This focus on the design and construction process allows us to deliver to our customers, affordably priced homes with more consistent quality and shorter construction times.

Our design work is performed by our architectural department. Each home design is value engineered for greater efficiency in the building process and to lower the cost to the home buyer. On an ongoing basis, the architectural department uses its knowledge of our markets and feedback from our customers to create new designs and modify existing designs to keep pace with changing consumer tastes and preferences. The architectural department uses computers and computer graphics that provide flexibility in creating new designs, modifying existing designs and accurately estimating the materials required for any particular design.

Growth Opportunities

We believe that there are opportunities for continued growth in our Central Ohio and Louisville, Kentucky markets. We continue to identify and economically acquire property to provide lots for future homebuilding. Through the introduction of affordably priced product offerings, such as our Independence Series, we intend to continue to expand the potential customer base that can afford our homes. We believe that the entry-level and move-up buyer markets will provide a consistent, stable demand for our homes.

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We also continually evaluate opportunities to expand into new markets. We consider expansion opportunities through either creating a start-up operation or acquiring an existing homebuilding company. We expect to identify and announce a potential new market during 2003. In evaluating new markets, we are looking for markets that have many of the following characteristics:

Intellectual Property

We have obtained federal registrations for the service marks Dominion Homes^®, The Best of Everything^®, The Dominion HomeStore^® and Dominion Homes Financial Services ^®. We have obtained or applied for design patents on many of our homes. We also either have

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obtained or applied for copyright registrations for both the architectural plans and the architectural works for virtually all of the homes that we build.

Executive Officers and Certain Other Key Employees

Our executive officers and certain other key employees are listed below:

Background and Experience of Executive Officers and Certain Key Employees

References to us in the following biographies for periods of time prior to March 9, 1994, refer to the homebuilding divisions of BRC which were transferred to us in connection with the initial public offering of our Common Shares. See “Certain Information Regarding the Selling Shareholder—Description and Ownership of BRC.”

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Donald A. Borror has served on our board of directors since 1978, and has served as our Chairman Emeritus since July 1999. He served as our Chairman from 1978 through July 1999, and as our President from 1977 to March 1987. Mr. Borror has been involved in the homebuilding business since 1952 and founded our homebuilding business in 1976. He has a Bachelor of Arts degree from The Ohio State University and a Juris Doctor degree from The Ohio State University College of Law.

Douglas G. Borror has served on our board of directors since January 1984, as our Chairman since July 1999, and as our Chief Executive Officer since September 1992. He also served as our President from March 1987 through July 1999, and as our Chief Operating Officer from September 1992 through September 1996. Since December 2000, Mr. Borror has also served as Executive Vice President of BRC. He also serves on the Board of Trustees of The Ohio State University and on the Boards of Directors of Columbia Gas of Ohio, Inc., The Huntington National Bank and Command Alkon Incorporated. Mr. Borror has a Bachelor of Arts degree from The Ohio State University.

Jon M. Donnell has served on our board of directors since May 1997, as our President since July 1999, and as our Chief Operating Officer since September 1996. He served as our Chief Financial Officer from August 1995 through June 1998, as our Treasurer from August 1995 through December 1995 and as our Executive Vice President from January 1996 through August 1996. From August 1995 through December 1996, Mr. Donnell also served as our Senior Vice President. Prior to joining us in 1995, he spent 11 years with the Del Webb Corporation, a national real estate development and homebuilding company, most recently as Vice President and Associate General Manager of Webb’s Sun City Hilton Head community. Mr. Donnell is a Certified Public Accountant, and has a Bachelor of Science degree from the University of Arizona.

David S. Borror has served on our board of directors since 1985 and as our Executive Vice President since January 1988. He served as our Vice President from July 1985 until January 1988, and as our General Counsel from January 1988 to December 1993. Since December 2000, Mr. Borror has also served as President of BRC. He has a Bachelor of Arts degree from The Ohio State University and a Juris Doctor degree from The Ohio State University College of Law.

Terry E. George has served as our Senior Vice President since November 1993 and as our Treasurer since January 1996. He served on our board of directors from 1985 through May 1997, as our Controller from August 1995 to January 1996, and as our Operations Manager from October 1991 through August 1995. Mr. George has also served as Vice President and Treasurer of BRC since December 1996, and previously served as a Vice President of BRC from October 1987 to November 1993. Since December 2000, he has additionally served as Secretary of BRC. Mr. George also serves on the Board of Directors of First Community Bank. He has a Bachelor of Science degree from The Ohio State University and is a Certified Public Accountant in the State of Ohio.

Robert A. Meyer, Jr. has served as our Senior Vice President since January 1996 and as our General Counsel and Secretary since December 1993. He served as our Vice President from December 1993 through December 1995. Prior to joining us in 1993, Mr. Meyer was engaged in

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the private practice of law in the Columbus, Ohio office of Porter, Wright, Morris & Arthur, LLP from November 1978 to December 1993. He has a Bachelor of Science degree from Indiana University and a Juris Doctor degree from The Ohio State University College of Law.

Peter J. O’Hanlon has served as our Chief Accounting Officer since March 2003, as our Senior Vice President of Finance since January 2000 and as our Chief Financial Officer since June 1998. Prior to joining us in 1998, he was Controller of Gables Residential Trust, an Atlanta-based real estate investment trust, from 1993 through May 1998, and Chief Financial Officer of Wilson Company, an Atlanta-based privately held holding company, from 1987 through 1992. Mr. O’Hanlon is a Certified Public Accountant. He has a Bachelor of Arts degree from Emory University and a Masters degree in Business Administration from Northwestern University.

Karl E. Billisits has served as our Executive Vice President of Construction Operations since December 2000. He served as our Senior Vice President of Land Acquisition and Development from April 1999 through November 2000, as our Vice President of Engineering and Development from January 1999 through April 1999, as our Vice President of Engineering from May 1998 through January 1999, as our Director of Engineering from April 1997 through May 1998, and as our Engineer from April 1994 through April 1997. Prior to joining us in 1994, Mr. Billisits was employed as a consulting engineer with Bauer, Davidson & Merchant, a Columbus, Ohio-based consulting engineering firm. He has a Bachelor of Science degree in Civil Engineering from The Ohio State University, and is a Registered Professional Engineer in the States of Ohio, Kentucky and Michigan.

Stephan M. George has served as our Executive Vice President and as President of our Louisville, Kentucky subsidiary since December 2000. He served as our Executive Vice President of Operations from May 1999 through December 2000. Prior to joining us in 1999, Mr. George served as Chief Operating Officer of Silverman Building Company, a Farmington, Michigan-based homebuilding company, from March 1998 through April 1999, and Vice President of Operations of Cambridge Homes, Inc., a Libertyville, Illinois-based homebuilding company, from December 1987 to March 1998. He has a Bachelor of Science degree in Civil Engineering from Cornell University and a Masters degree in Business Administration from Loyola University.

Jack L. Mautino has served as our Executive Vice President of Sales since December 2000. He served as Senior Vice President and General Manager of our Louisville, Kentucky subsidiary from August 1998 through November 2000, as our Senior Vice President of Sales from May 1998 through August 1998, as our Vice President of Sales from October 1995 through August 1998, as a Sales Manager from December 1991 to December 1995, and as a Sales Representative from July 1990 to December 1991. Prior to joining us in 1990, Mr. Mautino was employed by Ryland Homes. He has a Bachelor of Science degree from Duquesne University.

Lori M. Steiner has served as our Senior Vice President of Strategy and Communications since January 1999. She served as our Senior Vice President of Marketing from ay 1998 through December 1998, as our Vice President of Marketing from January 1995 through May 1998 and as our Marketing Director from September 1990 through January 1995. Ms. Steiner served as an account manager for Brooks Young Communications, a Columbus,

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Ohio-based regional advertising company, from March 1989 to September 1990. She has a Bachelor of Arts degree from Wittenberg University.

Family Relationships

Donald A. Borror is the father of Douglas G. Borror and David S. Borror. There are no other family relationships among the executive officers and/or directors of the Company.

Employment Agreements

We have employment agreements with certain of our officers, including the following executive officers—Jon M. Donnell, our President and Chief Operating Officer, Robert A. Meyer, Jr., our Senior Vice President, General Counsel and Secretary, and Peter J. O’Hanlon, our Senior Vice President of Finance, Chief Financial Officer and Chief Accounting Officer—that became effective as of January 1, 2001. Each employment agreement is for a term of three years, and provides for renewal annually for a three-year term unless we provide notice to the executive of our intention not to renew. We have not provided any such notice to Mr. Donnell, Mr. Meyer or Mr. O’Hanlon. Each employment agreement provides for a lump sum payment, and payment of 12 months’ salary (or 18 months in the case of Mr. Donnell’s agreement) payable through our ordinary payroll process, to the executive if we terminate his employment without cause or if the executive terminates his employment with good reason. Each employment agreement includes non-competition covenants effective for one year after termination. Each employment agreement also includes provisions that become effective upon a “change in control” of the Company. Upon a change in control, all employee benefit rights, including stock options, vest. In addition, if within two years of a change in control, the employment of the executive is terminated without cause, or if the executive terminates his employment with good reason, he would be entitled to certain benefits, including a lump sum payment equivalent to two years’ salary, the payments he otherwise would have been entitled to receive had we terminated his employment without cause and without a change in control, and certain outplacement services.

Employees

On December 31, 2002, we employed 562 individuals, which included 523 employees (including four part-time employees) in Central Ohio and 39 employees (including one part-time) in Louisville, Kentucky. We employ 211 individuals in construction, 138 in sales and marketing, 70 in the lumber and building materials distribution center, 20 in land development, 23 in mortgage services and 100 in management, professional services, administrative or clerical positions. Our employees are not represented by labor unions or covered by collective bargaining agreements. We believe our relationships with our employees and subcontractors are generally good.

Other Information

Information regarding seasonality, our practices regarding working capital items and backlog orders is contained in the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Information regarding the availability of labor

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and raw materials, competition and governmental regulations affecting our business is contained in the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement under the Private Securities Litigation Act of 1995 – Material or labor shortages can adversely affect our business.” “ – The homebuilding industry is highly competitive” and “ – Governmental regulations and environmental considerations affect us in many ways.”

We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

We also make available at our Internet website, http://www.dominionhomes.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Item 2 PROPERTIES

We lease from BRC our 40,000 square foot corporate offices in Central Ohio. The lease was effective January 1, 1998, has a term of twelve years and a rental rate of $12.00 per square foot on a triple net basis. The lease contains two options to renew for periods of five years each at then-current market rates. The rental rates were established by an MAI appraiser commissioned by the Affiliated Transaction Review Committee of our Board of Directors, and confirmed in a review by a second MAI appraiser.

We lease from BRC an aggregate of 15,750 square feet of commercial space in Central, Ohio. We use this space for our decorating center, centralized sales office and mortgage financing services company. The weighted average lease rate of this space is $11.00 a square foot. Our Affiliated Transaction Review Committee approved each of the leases after review of a report by an independent MAI appraiser.

On August 21, 2002, we entered into a short-term lease for 7,658 square feet of office space from an unaffiliated third party. The lease term is from September 1, 2002 to August 31, 2003 and can be extended, at our option, on a month to month basis for up to twelve months. The annual lease rate is $16.00 a square foot.

In the fourth quarter of 2002, we purchased 5.68 acres adjacent to our corporate office building in order to build a second corporate office building, and we entered into a contract to sell 2.74 acres of these 5.68 acres to an unaffiliated third party. We also entered into a construction contract to build a 35,000 square foot office building on the remaining 2.94 acres.

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The net cost of the land and building is expected to be approximately $4.5 million and the building is expected to be completed in early 2004. We expect to finance the new building with borrowings under the existing bank credit facility. However, we expect to sell and lease back the new office building from an as yet unidentified third party. Upon the completion of the building, we expect that the staff and activities in the leased 15,750 square feet of commercial space and the leased 7,658 square feet of office space will be consolidated in the new office building. As of January 1, 2004, the remaining lease obligation for the commercial space is approximately $300,000.

We also lease from non-affiliated parties approximately 4,200 square feet of commercial space in Louisville, Kentucky for our Louisville, Kentucky homebuilding operations and 1,200 square feet of warehouse space in Central Ohio for our model furnishings inventory.

Our Distribution Center is located on approximately six acres in Columbus, Ohio. The facility includes nine buildings, constructed of steel, wood or concrete block and contains approximately 75,000 square feet of space.

We have entered into a program with a non-affiliated party to sell and lease back many of our model homes. At December 31, 2002, we had 22 model homes in Central Ohio and Louisville, Kentucky under lease with this program. These leases have a one-year term and then become month-to-month leases, renewing at our option.

Item 3 LEGAL PROCEEDINGS

We are involved in various legal proceedings that arise in the ordinary course of business, some of which are covered by insurance. In the opinion of our management, there are no currently pending proceedings that will have a material adverse effect on our financial condition or results of operations.

On September 20, 2002, the Sierra Club re-filed a lawsuit against the City of Columbus (the “City”) in Federal District Court (Sierra Club Ohio Chapter v. The City of Columbus, United States District Court, Southern District of Ohio, Eastern Division, Case No. C2-02-722) under the Federal Clean Water Act alleging that the City has unlawfully discharged sanitary sewage during storm events. We are not a party to this lawsuit. The lawsuit seeks various remedies that, if granted, could restrict the City’s ability to permit new connections to the Columbus sewer system pending the elimination of the discharges. Based on our review of similar lawsuits and the remedies granted, we believe that it is unlikely that any remedies granted pursuant to this lawsuit would result in a material adverse affect on our Central Ohio homebuilding operations. However, we will continue to monitor this lawsuit.

Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

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PART II

Item 5 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our common shares are traded on the NASDAQ National Market under the symbol “DHOM.” The following table sets forth, for the periods indicated, the high and low closing prices for the common shares, as reported by the NASDAQ National Market.

On March 28, 2003, the last sale price of our common shares, as reported by the NASDAQ National Market, was $13.96 per share, and there were approximately 211 holders of record of our common shares.

We have not ever paid any cash dividends on our common shares. From time to time, our Board of Directors evaluates the desirability of paying cash dividends. The future payment and amount of cash dividends will depend upon our financial condition and results of operations, applicable loan covenants and other factors deemed relevant by our Board of Directors. The provisions of our existing bank credit facility limit the amount of cash dividends that we may pay during any calendar year to 25% of the our net income after taxes for such year.

All of our securities that we sold during 2002 were registered pursuant to the Securities Act of 1933, as amended.

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Item 6 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table sets forth our selected consolidated financial and operating data as of the dates and for the periods indicated. This table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements, including the Notes thereto, appearing elsewhere herein.

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Overview

We are a leading builder of high quality, single family homes in Central Ohio (primarily the Columbus Metropolitan Statistical Area) and Louisville, Kentucky. Our customer driven focus targets entry-level and move-up buyers. We offer three distinct series of homes that are differentiated by price, size, standard features and available options. The homes range in price from approximately $100,000 to $300,000 and in size from approximately 1,000 to 3,300 square feet.

Our net income for 2002 increased 62.3% to a record $24.5 million, or $3.28 per diluted share, from $15.1 million, or $2.30 per diluted share, for 2001. The increase in diluted earnings per share occurred despite the fact that we sold 1,503,900 of our common shares in a public offering during 2002. The weighted average number of diluted shares outstanding during the twelve months ended December 31, 2002 increased 13.4% to 7,457,985 from 6,575,026 shares during the twelve months ended December 31, 2001. During 2003, the diluted earnings per share will be impacted by the full number of common shares issued in the public offering.

Sales contracts for the year ended December 31, 2002 increased 11.6% to 2,577 from 2,309 for 2001 and the aggregate sales value of 2002 contracts increased 8.8% to $469.3 million from $431.3 million for 2001. Our backlog on December 31, 2002 was 1,018 sales contracts, with an aggregate sales value of $194.2 million, compared to a backlog on December 31, 2001 of 1,032 sales contracts, with an aggregate sales value of $201.2 million.

The operating results are due, in part, to a change in product philosophy that we began implementing in 2000 when we changed from being an option-based builder targeting the first and second time move-up buyer to a production builder targeting the entry level and first time move-up buyer. The strategy was to design more affordable homes, provide the customer with an easy and satisfying buying experience and streamline the building process to create cost efficiencies, shorter build times, and higher quality construction. In December 2000, we introduced our new Independence Series with prices starting at $100,000. The Independence Series has expanded the potential customer base that can afford our homes. In 2001 and 2002, we simplified and value engineered our other series of homes, the Celebration and Tradition Series. We have incorporated into our homes many popular features that our competitors typically offer as options. By decreasing the number of options available, we have increased the efficiency of our homebuilding process which lowered the cost of building these homes, decreased the build times necessary to complete them and improved the building experience of our customers.

In 2003, we intend to continue our three point growth strategy which is to (1) increase market share in Central Ohio primarily by expanding our Independence Series of homes, (2) increase market share in Louisville, Kentucky, and (3) expand to a new market.

Our market share in Central Ohio increased to 28% in 2002 from 24% in 2001, primarily due to increased closings from our new entry-level Independence Series of homes. In 2003, we

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expect to continue to increase the number of communities in which we offer Independence Series homes.

We have been in the Louisville, Kentucky market for four years and have become the largest single family homebuilder in this market with approximately a 5% market share. Our goal in 2003 is to increase our investment in this subsidiary by 30% to 40%.

We hope to make an announcement concerning a new market by the end of the summer 2003. In evaluating potential new markets, we look for a market that has many of the following characteristics: (1) a location in the Midwest, (2) a potential for economies of scale, (3) a highly fragmented homebuilder market, (4) a stable and diverse economy, (5) demographics similar to our current markets and (6) compatibility with our existing product offerings.

The early and harsh winter throughout the Midwest, as well as regulatory delays in opening a few communities, will likely have an impact on our 2003 results. However, our sales in early 2003 have been good so we remain cautiously optimistic about the year.

On February 10, 2003, we announced that our Board of Directors had authorized the repurchase of up to 250,000 of our common shares. The repurchase plan will end December 31, 2003. The repurchase of common shares will be funded by internally generated cash and our existing credit facility, and we will hold repurchased shares as treasury shares. The repurchase program was implemented due to the Board of Director’s confidence in our long term prospects and belief that our common shares represent an attractive investment opportunity. Accordingly, on February 13, 2003, we amended our bank credit facility to increase, from $500,000 to $4 million in any one year and $7 million during the term of the facility, the dollar amount of our common shares that we are allowed to repurchase. During the first quarter of 2003, we purchased 147,500 common shares at an aggregate purchase price of $1.8 million.

Safe Harbor Statement under the Private Securities Litigation Act of 1995

This Report contains various “forward–looking statements” within the meaning of applicable securities laws. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “believe,” “intend,” “expect,” “hope” or similar words. These statements discuss future expectations, contain projections regarding future developments, operations or financial conditions, or state other forward-looking information. These forward looking statements involve various important risks, uncertainties and other factors which could cause our actual results for 2003 and beyond to differ materially from those expressed in the forward looking statements. Included among such important risks, uncertainties and other factors are the following:

We are particularly affected by national and local general economic, business and other conditions. Our financial position and results from operations are affected by changes and cycles in national and local general economic, business and other conditions, most of which are beyond our control. These conditions include:

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In addition, domestic terrorist attacks and the threat or the involvement of the United States in international armed conflict may also adversely affect general economic conditions, consumer confidence and the homebuilding markets.

Adverse weather conditions may prevent or delay the construction of homes and reduce the number of home sales. Poor weather conditions can hinder our construction and development activities, and thereby increase the cost of constructing our homes and delay the closing of our homes and our recognition of revenue from such closings. In addition, in cases of prolonged severe weather, potential home buyers may delay or forgo the purchase of a home.

Delays in construction of our homes could cause mortgage commitments to expire. Delays in the construction of a home could cause the mortgage commitment to expire and could require us, if mortgage interest rates have increased, to pay significant amounts to the mortgage lender to extend the original mortgage interest rates.

We are dependent upon the availability and affordability of residential mortgage financing. Virtually all purchasers of our homes finance their purchase through third party lenders who offer conventional, FHA and VA mortgage financing. A material increase in mortgage interest rates or unfavorable changes to these lending programs would adversely affect the ability of prospective home buyers, particularly our targeted entry-level home buyers, to obtain mortgage financing. We are also dependent upon the availability and cost of mortgage financing for buyers of the current homes owned by potential purchasers of our homes. Prior to purchasing our homes, some of our home buyers must sell their current homes, and these sales are dependent upon the availability and cost of mortgage financing. In addition, because the majority of our home buyers use FHA mortgage financing, a material reduction in the scope or funding of FHA mortgage programs could have a material adverse effect on our sales.

In particular, a substantial number of our home buyers use down payment assistance programs, which allow home buyers to receive gift funds from non-profit corporations to be used as a down payment. At one time, HUD proposed rules which would have prohibited the use of gift fund programs in conjunction with FHA-insured mortgage loans. HUD subsequently withdrew these proposed rules but has continued to increase its regulation of gift fund programs. If HUD would prohibit or make materially unfavorable changes to the use of gift fund programs, we would

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expect to offer, as we have in the past, a different type of down payment program. There can be no assurance that any such replacement program would be as attractive to home buyers as the programs offered today and that our sales would not suffer.

We are significantly leveraged and are dependent upon the availability of financing. We incur significant up-front expenditures for land acquisition, development and construction costs. We have traditionally financed these costs with bank borrowings, internally-generated funds and joint venture arrangements. Although we have not in recent years experienced problems in obtaining financing, we cannot be sure that continued financing will be available to us in the future, or that any financing available to us will be on favorable terms. Our ability to make payments of principal or interest on, or to refinance our indebtedness, will depend on our future operating performance and successful execution of our business strategy.

Developing our own land and building inventory homes involves significant risks. We currently are developing approximately 90% of the communities in which we are building homes. Therefore, our short- and long-term financial success is and will continue to be dependent upon our ability to acquire land, adjust our strategy for purchasing land, and develop communities successfully. We commit substantial financial and managerial resources to acquire land and develop the streets, utility services and other infrastructure before any revenues are generated from the community. We may acquire and develop land upon which we cannot, or choose not to, build or sell homes. The market value of undeveloped land and building lots fluctuates. We also build some homes before we obtain non-cancelable sale contracts for those homes. We may have to hold these unsold inventory homes for an indefinite time prior to a sale. In addition, because market prices fluctuate, we may have to sell inventory homes at a loss.

Government regulations and environmental considerations affect us in many ways. We are subject to local, state and Federal requirements concerning zoning, resource protection, building design and construction, and similar matters. These requirements include local regulations, which impose restrictive zoning and density requirements to limit the number of homes that can eventually be built within the boundaries of a particular location. Particularly in the case of local political subdivisions, anti-growth sentiments can lead to ballot measures that can interfere with or impede our ability to develop land or build homes. These requirements also affect construction activities, including construction materials, which must be used in home construction, as well as sales activities and other dealings with home buyers. We also must obtain licenses, permits and approvals from various governmental agencies for our development activities, the granting of which are beyond our control. Obtaining acceptable zoning and overcoming objections of neighborhood groups and citizen activists is becoming more difficult, time consuming and expensive. There can be no assurance that these issues will not adversely affect the Company in the future.

We also are subject to a variety of local, state and Federal requirements concerning the protection of health and the environment. The particular environmental laws, which apply to any given project, vary greatly according to the project site and the present and former uses of the property. These environmental laws may result in delays and cause us to incur substantial compliance costs, including substantial expenditures for pollution and water quality control. These laws may prohibit or severely restrict development in certain environmentally sensitive regions. In an effort to avoid major environmental issues in our developments, we have a general

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practice of requiring environmental reports from qualified, independent professionals and resolution of identified environmental issues prior to purchasing land. However, we cannot be sure that we will not incur material liabilities relating to the removal of toxic wastes or other environmental matters affecting land that we have acquired.

Building moratoria may result in periodic delays or may preclude us from developing certain projects. These moratoria generally result from insufficient water supplies or sewer facilities, delays in utility hookups, inadequate road capacity or anti-growth sentiment within the specific market area or community. These moratoria can occur before or after we start our operations and without notice or recourse. To date, moratoriums have not had a material adverse effect on our business.

We operate in two geographic areas. We currently operate in Central Ohio and Louisville, Kentucky. Our lack of geographic diversity means that adverse general economic or weather conditions in either of these markets could have a material adverse impact on our operations.

Expansion strategies contain inherent risks. We continually evaluate opportunities to expand into new markets whether through acquisitions or start-up operations. Any expansion strategy involves many risks. New markets may prove to be less stable than our current markets and may result in delays, problems and expenses not typically encountered in our current markets. Regulations in various states may prohibit or impede us from using some of our community development strategies, such as those utilized with the Independence Series that require condominium or other high density housing. We may fail to identify suitable acquisition candidates or complete acquisitions on acceptable terms. The magnitude, timing and nature of acquisitions will depend upon various factors, including the availability of suitable acquisition candidates, financial resources and skilled employees to manage the acquired companies, the negotiation of acceptable terms, and general economic and business conditions. The likelihood of our success in establishing start-up operations also depends on similar factors, including identification of suitable start-up markets, availability of financial resources and skilled employees and subcontractors, and general economic and business conditions. In addition, because start-up operations may require significant lead-time before they generate sufficient revenues to be profitable. Expansion through acquisitions or start-up operations will require substantial attention from our management team. The diversion of management’s attention, as well as any other difficulties that may be encountered in the transition and integration process, could have a material adverse effect on our operations.

Introduction of new product offerings has inherent risks. We have recently introduced and will continue to introduce new home designs and new community concepts as part of our product offerings. There are significant risks that we may not accurately predict the tastes or preferences of potential home buyers. A failure to predict these tastes or preferences could have a material adverse effect on our sales.

We are dependent on key personnel. We have several key executive officers, the loss or prolonged absence of whom could have an adverse effect on our operations. In particular, the loss of the services or prolonged absence of Douglas Borror, our Chairman and Chief Executive Officer, or Jon Donnell, our President and Chief Operating Officer, could have a material

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adverse effect on our operations. Our future success will depend on our continued ability to attract and retain highly skilled and qualified personnel, of which there can be no assurance.

Our results historically vary on a quarterly basis. Our business is significantly affected by changes in economic cycles, and our revenues and earnings vary with the level of general economic activity in the markets where we build homes. We historically have experienced, and expect to continue to experience, variability in revenues and reported earnings on a quarterly basis. A significant percentage of our sales contracts are executed during the first and second quarters of the year. Closing on a home typically occurs approximately six months after the date of the sales contract but, with weather and other delays, may take longer. We do not recognize any revenue on the sale of a home until the closing occurs. As a result, we historically have experienced higher closings and revenues during the second half of the year.

We are subject to warranty claims arising in the ordinary course of business that could be costly. As a homebuilder we are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the homebuilding industry and can be costly. We provide warranties on our homes for periods as long as thirty years. In the event that we experience greater warranty claims than we anticipate, we could incur significant expenses which could affect future earnings.

Litigation related to construction defects could adversely affect our business. Litigation related to construction defects has increased significantly in recent years. The homebuilding industry has experienced both an increase in the number of individual claims for construction defects as well as increased costs of insuring against such claims.

Our financial results are subject to inflation and other cost increases. We are not always able to reflect all cost increases in the prices of our homes because competitive pressures and other factors sometimes require us to maintain or discount those prices. While we attempt to maintain costs with subcontractors from the date a sales contract with a customer is accepted until the date construction is completed, we may incur unanticipated costs which cannot be passed on to the customer.

Material or labor shortages can adversely affect our business. During periods of increased construction activity, the homebuilding industry has faced shortages in the availability of skilled labor. Waiting for skilled labor to become available may result in construction delays. The use of less skilled labor to satisfy a skilled labor shortage may cause quality standards to suffer. Increases in the demand for skilled labor also can result in increases in the cost of skilled labor. The principal raw materials used in the homebuilding industry are lumber, brick and concrete as well as plumbing and electrical supplies. While these materials are generally available from a variety of sources, they are subject to periodic price fluctuations. In particular, the homebuilding industry has experienced occasional lumber shortages which produced significant price increases. Because we may not be able to pass on to our customers price increases in raw materials or labor, future price increases in these items could have a material adverse effect on our operating margins and earnings.

The homebuilding industry is highly competitive. We compete in each of our geographic markets with national, regional and local homebuilders, some of which have greater financial,

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marketing, land acquisition and sales resources than we do. We compete not only for home buyers, but also for desirable properties, financing, raw materials and skilled labor. We also compete with the resale market for existing homes, which some home buyers may prefer over new homes. Additionally, there are many other national and regional homebuilders, many of which have greater financial, marketing, land acquisition and sales resources than we do, that do not currently have a significant presence in either of our current markets. A concerted effort by these homebuilders to enter or expand their current operations in either or both of our markets could have an adverse impact on our sales.

We are restricted by covenants in our bank credit facility. Our bank credit facility imposes restrictions on our operations and activities. Some of the more significant restrictions limit:

Application of critical accounting policies requires management to make certain estimates and assumptions that may impact our future financial results. In preparing our financial statements, management is required to make certain estimates and assumptions that affect the annual and quarterly reported amounts of assets, liabilities, revenues and expenses, and disclosures about contingent assets and liabilities. Our actual results could be different from these estimates and assumptions. Some of the more critical accounting policies include:

Seasonality and Variability in Quarterly Results

We experience significant seasonality and quarter-to-quarter variability in our homebuilding activity. Typically, closings and related revenues increase in the second half of the year. We believe this seasonality reflects the tendency of home buyers to shop for a new home in the spring with the goal of closing in the fall or winter. Weather conditions can also accelerate or delay the scheduling of closings.

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The following table sets forth certain data for each of the last eight quarters:

At December 31, 2002 the aggregate sales value of homes in backlog was $194.2 million compared to $201.2 million at December 31, 2001. At December 31, 2002, the average sales value of homes in backlog was $190,743 compared to $194,972 at December 31, 2001.

Results of Operations

The following table sets forth, for the periods indicated, certain items from our Consolidated Statements of Operations expressed as percentages of total revenues, as well as certain operating data:

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We include a home in “sales contracts” when a home buyer signs our standard sales contract, which requires a deposit and generally has no contingencies other than for buyer financing or for the sale of an existing home, or both. We recognize revenue and cost of real estate sold at the time of closing. “Closings” or “deliveries” occur when we deliver the deed to the buyer and we receive payment for the home. We include a home in “backlog” when a home buyer signs our standard sales contract, but the closing has not occurred as of the end of the period.

Homes included in “sales contracts” in the foregoing table are net of cancellations. Most cancellations occur when home buyers cannot qualify for financing. While most cancellations occur prior to the start of construction, some cancellations occur during the construction process. The cancellation rates for homes in backlog as of December 31, 2001, 2000, and 1999 were 11.6%, 15.3%, and 11.6%, respectively.

We annually incur a substantial amount of indirect construction costs, which are essentially fixed in nature. For purposes of quarterly financial reporting, we capitalize these costs to real estate inventories based on the ratio of estimated annual indirect costs to direct construction costs to be incurred. Thus, variations in construction activity cause fluctuations in interim and annual gross profits.

2002 Compared to 2001

Revenues. Our revenues for 2002 increased by 24.3% to $491.7 million from the delivery of 2,591 homes compared to revenues for 2001 of $395.7 million from the delivery of 2,054 homes. This $96.0 million increase in revenues was primarily due to the delivery of 537 more homes resulting from an overall improvement in build times in all series of homes. Included in the 2,054 homes delivered in 2001 were 15 homes, with a sales value of $2.2 million that we sold to unaffiliated third parties and leased back for use as model homes and sales offices. We did not sell and leaseback any homes in 2002. As expected, the average price of homes delivered in 2002 decreased 2.1% or $4,000 to $185,100 from $189,100 in 2001. The lower average price of delivered homes in 2002 was the result of closing a larger percentage of our new entry-level series of homes.

Included in revenues are other revenues, consisting principally of fees from the Company’s mortgage financing services subsidiary. During 2002, these other revenues increased by 61.1% to $11.6 million of which $10.8 million was from mortgage financing service fees. Other revenues for 2001 amounted to $7.2 million, $7.1 million of which was from mortgage financing service fees.

Gross Profit. Our gross profit for 2002 increased by 27.3% to $115.0 million from $90.3 million for 2001. The primary reasons for the 2002 increase in gross profit were the larger number of homes delivered during 2002, the reduced cost associated with mortgage financing contributions due to falling interest rates and increased mortgage financing service fees.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for 2002 increased by 22.9% to $64.5 million from $52.5 million for 2001. The primary reasons for the increase in selling, general and administrative expenses for 2002 were

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the higher sales commissions associated with the sale of more homes, payment of higher compensation due to improved profits and general and administrative expenses of our mortgage financing services subsidiary.

Interest Expense. Our interest expense for 2002 decreased by 25.6% to $8.7 million from $11.7 million for 2001, as a result of the reduction of debt from our sale of common shares and a lower average borrowing rate. The average revolving line of credit borrowings outstanding were $117.4 million and $126.4 million for 2002 and 2001, respectively. The weighted average rate of interest under the revolving line of credit was 6.2% for 2002 compared to 7.7% for 2001.

Provision for Income Taxes. Our income tax expense for 2002 increased to $17.3 million from $11.0 million for 2001. The Company’s estimated annual effective tax rate decreased to 41.4% for 2002, from 42.1% for 2001.

2001 Compared to 2000

Revenues. Our revenues for 2001 increased by 21.2% to $395.7 million from the delivery of 2,054 homes compared to revenues for 2000 of $326.4 million from the delivery of 1,798 homes. This $69.3 million increase in revenues was primarily due to the delivery of 256 more homes at a higher average delivery price and the increased revenues from the mortgage financing services subsidiary. Included in the 2,054 homes delivered in 2001 were 15 homes, with a total sales value of $2.2 million that we sold to unaffiliated third parties and leased back for use as model homes and sales offices. Included in the 1,798 homes delivered in 2000 were 28 homes, with a total sales value of $4.8 million that we sold to unaffiliated third parties and leased back for use as model homes and sales offices. The average price of homes delivered in 2001 increased to $189,100 from $180,800 in 2000, an increase of $8,300, or 4.6%, per home. Lower mortgage interest rates and increased FHA mortgage limits during 2001, allowed our home buyers to buy more expensive homes while minimizing their required down payments. Included in revenues are other revenues, consisting primarily of revenues from our mortgage financing services subsidiary and the sale of land. These other revenues during 2001 amounted to $7.2 million, of which $7.1 million was from mortgage financing service fees, compared to other revenues during 2000 of $1.4 million, of which $1.0 million was from mortgage financing service fees.

Gross Profit. Our gross profit for 2001 increased by 38.2% to $90.3 million from $65.3 million for 2000. This $25.0 million increase was primarily due to the delivery of more homes, the increase in the average sales price of delivered homes, the reduced costs we paid on our home buyers’ mortgage financing, the increased revenues from the mortgage financing services subsidiary and a reduction in direct construction costs.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for 2001 increased by 28.6% to $52.5 million from $40.8 million for 2000. This $11.7 million increase was primarily due to the increased variable costs associated with delivering more homes at a higher average sales price and of operating the mortgage financing services subsidiary.

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Interest Expense. Our interest expense for 2001 increased by 27.9% to $11.7 million from $9.1 million for 2000. This $2.6 million increase was due to the higher average borrowings under our bank credit facility. The increased borrowings were somewhat offset by the lower weighted average interest rate we paid during 2001. We incurred higher average borrowings due to having more homes and more expensive homes under construction during 2001 and we increased our investment in real estate inventories. The average borrowings outstanding under our bank credit facility were $126.4 million for 2001 compared to $110.4 million for 2000. The weighted average rate of interest on our total borrowings was 7.7% for 2001 compared to 8.5% for 2000.

Provision for Income Taxes. Our income tax expense for 2001 increased by 73.2% to $11.0 million from $6.3 million for 2000. Our estimated annual effective tax rate for 2001 increased to 42.1% from 41.2% for 2000.

Liquidity and Capital Resources

Historically, our capital needs have depended upon sales volume, asset turnover, land acquisition and inventory levels. Our traditional sources of capital have been internally generated cash, bank borrowings and seller financing. We have incurred indebtedness in the past and expect to incur indebtedness in the future to fund our operations and our investment in land.

Sources and Uses of Cash

For the Three Year Period Ended December 31, 2002

During 2002, we generated $29.0 million of cash flow from operations before expenditures on real estate inventories. We also raised approximately $27.4 million in cash from the sale of 1,503,900 common shares, and we used this cash to reduce debt under our bank credit facility. Our real estate inventories increased by $33.7 million because homes under construction increased by $10.7 million and land and land development and other costs increased by $23.0 million. We utilized cash from operations together with borrowings under our bank credit facility to finance the increase in real estate inventories.

During 2001, we generated $27.7 million of cash flow from operations before expenditures on real estate inventories. Our real estate inventories increased by $43.2 million because homes under construction grew by $25.1 million and land and land development and other costs increased by $18.1 million. We utilized cash from operations together with borrowings under our bank credit facility to finance the increase in real estate inventories.

During 2000, we generated $15.9 million of cash flow from operations before expenditures on real estate inventories. Our real estate inventories grew by $25.9 million because homes under construction increased by $6.4 million and land and land development and other costs increased by $19.5 million. We utilized cash from operations together with borrowings under our bank credit facility to finance the increase in real estate inventories.

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Real Estate Inventories

We are currently developing approximately 90% of the communities in which we are building homes. We generally do not purchase land for resale. We attempt to maintain a land inventory sufficient to meet our anticipated lot needs for the next three to five years. At December 31, 2002, we owned lots or land that we estimate could be developed into 8,499 lots, including 720 lots in Louisville, Kentucky. We controlled through option agreements or contingent contracts land that we estimate could be developed into 6,957 additional lots, including 369 lots in Louisville, Kentucky. These option agreements expire at various dates through 2009. During 2002, we exercised options to purchase 2,615 lots, including 511 lots in Louisville, Kentucky. We decide whether to exercise any particular option or otherwise acquire additional land based upon our assessment of a number of factors, including our existing land inventory at the time and our evaluation of the future demand for our homes.

Our real estate inventories at December 31, 2002, increased $32.9 million to $262.9 million compared to $230.0 million at December 31, 2001. Real estate inventories include land and land development costs, homes under construction and other building materials. As of December 31, 2002, land and land development costs increased to $157.2 million from $134.3 million on December 31, 2001, homes under construction increased to $102.5 million from $91.7 million on December 31, 2001 and other building material inventories decreased to $3.2 million from $4.0 million on December 31, 2001. Our land and land development costs increased principally due to the increased number of sales communities required to support our Independence Series.

We selectively enter into joint ventures with other homebuilders to own and develop communities. The participants in the joint ventures acquire substantially all of the lots developed by the joint ventures and fund the development costs of the joint ventures. In certain cases, we may be liable under debt commitments within the particular joint venture. As of December 31, 2002, we were party to one joint venture that finances its own development activities. We have guaranteed the obligations under the joint venture’s loan agreement up to $1.2 million, representing our one-half interest. At December 31, 2002, the joint venture had $920,000 in loans outstanding and the portion guaranteed by us was $460,000.

On December 31, 2002, we had 164 single family inventory homes, including 17 in Louisville, Kentucky, in various stages of construction, representing an aggregate investment of $14.9 million, compared to 199 single family inventory homes, including 47 in Louisville, Kentucky, in various stages of construction, representing an aggregate investment of $17.5 million on December 31, 2001. We do not include inventory homes in sales or backlog.

Land Purchase Commitments

On December 31, 2002, we had commitments to purchase residential lots and unimproved land at an aggregate cost of $6.2 million, net of approximately $875,000 in good faith deposits, or guarantees. We intend to purchase this land over the next few years. On December 31, 2002, we also had $63.2 million of cancelable obligations to purchase residential lots and unimproved land, net of $1.6 million in good faith deposits or guarantees. See Note 5 to the Consolidated Financial Statements in Item 8 below.

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Cancelable obligations consist of options under which we have the right but not the obligation to purchase land and contingent purchase contracts under which our obligation to purchase land is subject to the satisfaction of zoning, utilities, environmental, title or other contingencies. We expect to purchase most of the residential lots and unimproved land that we have under contract, provided we can obtain adequate zoning and if no other significant obstacles to development arise. We expect to fund our land acquisition and development obligations from internally generated cash and from the borrowing capacity under our bank credit facility.

Inflation and Other Cost Increases

We are not always able to reflect all of our cost increases in the prices of our homes because competitive pressures and other factors sometimes require us to maintain or discount those prices. While we attempt to maintain costs with subcontractors from the date a sales contract with a customer is accepted until the date construction is completed, we may incur unanticipated costs which cannot be passed on to the customer. For example, delays in construction of a home can cause the mortgage commitment to expire and can require us, if mortgage interest rates have increased, to pay significant amounts to the mortgage lender to extend the original mortgage interest rate. In addition, during periods of high construction activities, we may incur additional costs to obtain subcontractors when certain trades are not readily available, which additional costs can result in lower gross profits.

Debt and Other Obligations

On December 31, 2001, we entered into an Amended and Restated $175.0 million Senior Unsecured Revolving Credit Facility (“the Facility”). Eight banks participate in the Facility, led by Huntington National Bank, which serves as the Administrative Agent and Issuing Bank under the Facility. For a more detailed description of the Bank Facility, including restrictions on our business activities, see Note 7 to the Consolidated Financial Statements in Item 8 below.

In addition to the amendments described in Note 7 of the Consolidated Financial Statements, the Facility was further amended on February 13, 2003 to increase the dollar amount of our common shares that we are allowed to repurchase from $500,000 to $4.0 million during any fiscal year or $7.0 million in the aggregate after December 31, 2001. During the first quarter of 2003, we purchased 147,500 common shares for an aggregate purchase price of $1.8 million.

The Facility provides for a variable rate of interest on our borrowings. The variable rate is based on either the bank’s prime rate or the three month LIBOR rate plus a margin based on our interest coverage ratio that ranges from 1.75% to 2.5% and is determined quarterly. In order to reduce the risks caused by interest rate fluctuations, we have entered into interest rate swap contracts that fix the interest rate on a portion of our borrowings under the Facility. Additional information regarding the interest rate swap contracts we have entered into is set forth below under the heading “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A below.

As of December 31, 2002, we were in compliance with the Facility covenants and had $64.9 million available under the Facility, after adjustment for borrowing base limitations.

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Borrowing availability under the Facility could increase, depending on our use of the proceeds of borrowings under the Facility.

We purchased land for development that was partially financed with seller provided term debt with an outstanding balance of $621,000 at December 31, 2002. We expect to repay this debt during 2003.

The following is a summary of our contractual cash obligations and other commercial commitments at December 31, 2002 (in thousands):

Recently Issued Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This Interpretation clarifies that a guarantor is required to recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure requirements related to product warranties at December 31,

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2002. We are assessing the impact that the adoption of the remaining provisions of this Interpretation will have on our results of operations and financial position.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“FAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FAS 123.” The transition and annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 15, 2002. The new interim disclosure provisions are effective for the first interim period beginning after December 15, 2002. We adopted the disclosure requirements at December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities  –  an interpretation of ARB No. 51.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. This Interpretation explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is evaluating the characteristics of its investments in land development joint ventures and Alliance Title Agency to determine whether these investments are variable interest entities requiring consolidation under the provisions of FIN 46.

Critical Accounting Policies

The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, including the related Notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates including those related to real estate inventories, warranty obligations, and construction costs for homes closed. We base these estimates on historical trends and experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

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to expected future demand and market conditions. The adequacy of our reserves could be materially affected by changes in market conditions.

As of December 31, 2002, we were a party to six interest rate swap contracts with an aggregate notional amount of $80 million, as reflected in the table below. We enter into swap contracts to minimize earnings fluctuations caused by interest rate volatility associated with our variable rate debt. The swap contracts allow us to have variable rate borrowings and to select the level of fixed rate debt for the Company as a whole. Under the swap contracts, we agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate amounts calculated by reference to an agreed notional amount. The level of fixed rate debt

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on December 31, 2002, after considering the effect of the swap contracts, is approximately 72% of total borrowings under the Facility. We do not enter into derivative financial instrument transactions for speculative purposes. The swap contracts are more fully described below:

The following table presents descriptions of the financial instruments and derivative instruments that we held at December 31, 2002. For the liabilities, the table presents principal calendar year cash flows that exist by maturity date and the related average interest rate. For the interest rate derivatives, the table presents the notional amounts and expected interest rates that exist by contractual dates. Interest on our variable rate liabilities is LIBOR plus a variable margin ranging from 1.75% to 2.50%. Cash flows for interest on $80.0 million of the variable rate liabilities subject to interest rate derivatives is the contractual average pay rate plus the variable margin (1.75% at December 31, 2002). The notional amount is used to calculate the contractual payments to be exchanged under the contract. The fair value of the variable rate liabilities at December 31, 2002 and 2001 was $111,070,000 and $131,511,000, respectively. The fair value of the derivatives at December 31, 2002 was a liability of $4.2 million and at December 31, 2001 a liability of $3.0 million. We do not expect a loss to be realized because we expect to retain the swap contracts to maturity. All dollar amounts are in thousands.

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Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors

and Shareholders

of Dominion Homes, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Dominion Homes, Inc. and its subsidiaries (the “Company”) at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 our opinion.

/s/    PricewaterhouseCoopers LLP

Columbus, Ohio

February 13, 2003

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Dominion Homes, Inc.

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

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Dominion Homes, Inc.

Consolidated Balance Sheets

(In thousands, except share information)