Greenbaum, Rowe, Smith & Davis LLP Metro Corporate Campus One, P.O. Box 5600 Woodbridge, New Jersey 07095 (732) 549-5600 Attorneys for the Debtors David L. Bruck, Esq. (DLB/1957) UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY Chapter 11 In re: 1

KARA HOMES. INC., et al.,

Debtors.

Lead Case No. 06-19626-MBK (Jointly Administered) Hon. Michael B. Kaplan, U.S.B.J.

FIRST AMENDED MASTER DISCLOSURE STATEMENT FOR DEBTORS’ MASTER PLAN OF REORGANIZATION PLEASE READ THIS DISCLOSURE STATEMENT CAREFULLY. THIS DISCLOSURE STATEMENT CONTAINS INFORMATION THAT MAY BEAR UPON YOUR DECISION TO ACCEPT OR REJECT THE DEBTORS’ MASTER PLAN OF REORGANIZATION. THE DEBTORS BELIEVE THAT THE MASTER PLAN OF REORGANIZATION IS IN THE BEST INTEREST OF CREDITORS AND THAT THE MASTER PLAN OF REORGANIZATION IS FAIR AND EQUITABLE. THE DEBTORS THUS URGE THAT ALL VOTERS ACCEPT THE MASTER PLAN OF REORGANIZATION. GREENBAUM, ROWE, SMITH & DAVIS LLP Attorneys for the Debtors /s/David L. Bruck By:_________________________________ David L. Bruck, Esq. DATED: June 27, 2007 1

The following Affiliates filed for Chapter 11 protection, which cases are being jointly administered: Bergen Mills Estates, LLC, 06-19758; Country Club Estates by Kara, LLC, 06-19744; Estates at Galloway Woods, LLC, 06-19746; Hartley Estates by Kara, LLC, 06-19759; Horizons at Birch Hill, LLC, 06-19767; Horizons at Shrewsbury Commons, LLC, 07-11496; Horizons at Woodlake Greens, LLC, 0619745; Horizons at Woods Landing, LLC, 06-19760; Kara at Atlantic Hills, LLC, 07-10489; Kara at Buckley Estates, LLC, 06-19742; Kara at Crine West, LLC, 06-19770; Kara at Dayna Court, LLC, 06-19743; Kara at the Glen Eyre, LLC, 06-19765; Kara at Hawkins Ridge, LLC, 06-19757; Kara at Lacey, LLC, 06-19738; Kara at Monroe, LLC, 06-21513; Kara at Mt. Arlington I, LLC, 06-19780; Kara at Mt. Arlington II, LLC, 06-19782; Kara at Navasink, LLC, 06-19737; Kara at Park Ridge Estates, LLC, 06-19783; Kara at the Tradewinds, LLC, 06-19741; Kara Homes at Enclave II, LLC, 06-22341; Sterling Acres at Monroe, LLC, 06-19774; The Landings at Manahawkin, LLC, 0619740; Winding Run Estates by Kara, LLC, 06-19764; and Woodland Estates at North Edison, LLC, 06-21512. On February 13, 2007, six additional Affiliates filed for Chapter 11 protection: Forest Edge Estates by Kara, 07-11941; Kara at Farrington Ridge, LLC, 07-11939; Limerick Estates by Kara, LLC, 07-11937; Kara at Orchard Meadows, LLC, 07-11932; Summerfield Estates by Kara, LLC, 07-11928; and Kara at Freehold, LLC, 07-11924. On March 12, 2007, Kara at Dover, LLC filed a Chapter 11 Petition, 07-13367. On June 8, 2007, 22 additional Affiliates filed for Chapter 11: The Shores at Little Egg Harbor, LLC, 07-18057; Kara of Monmouth, LLC, 07-18062; Bridgepoint at Harbor Heights, LLC, 07-18065; Kara of Middlesex, LLC, 07-18068; Kara at Emerald Hill, LLC, 07-18069; Kara at Evergreen Estates, LLC, 07-18070; Kara at North Haledon, LLC, 07-18072; Kara at Island Breeze, LLC, 07-18074; Kara at Island Crest, LLC, 07-18075; Kara at Island Gate, LLC, 07-18076; Island Woods Estates by Kara Homes, LLC, 07-18078; Kara at Kensington Hill, LLC, 07-18079; Kara at Lakeshore Harbor, LLC, 07-18081; K & W Builders, Inc., 07-18083; Kara at Cedar Grove, LLC, 07-18085; Sterling Woods at Barnegat, LLC, 07-18086; Kara at Tallymawr, LLC, 07-18088; Kara at White Oak, LLC, 07-18091; Kara at Berkeley, LLC, 07-18094; Kara at Madison, LLC, 07-18096; and on June 11, 2007, KH Builders, LLC, 07-18165 filed a Chapter 11 petition (collectively, the “Affiliate Debtors”).

TABLE OF CONTENTS Page I.

INTRODUCTION ............................................................................................................. 1

II.

SUMMARY OF THE PLAN............................................................................................. 3

III.

DEFINITIONS................................................................................................................... 5

IV.

BRIEF CHRONOLOGY AND THE PARTIES................................................................ 5 A.

History.................................................................................................................... 5

B.

The Bankruptcy Filing ........................................................................................... 5

C.

The Lenders ........................................................................................................... 6

D.

Construction, Winterization, Security and Sale of Homes .................................... 7

E.

The Liquidating Debtors, Reorganized Debtors, Filing of New Cases and Sale of Certain Developments ............................................................................... 7

F.

Disposition of Other Affiliates............................................................................. 10

G.

The Remaining Core Business and New Purchase Agreement Option for Contract Purchasers ............................................................................................. 11

H.

Reorganized Kara Homes Inc .............................................................................. 12

I.

Summary of the Specific Cases ........................................................................... 13

J.

Global Settlement with Amboy National Bank ................................................... 18

K.

Committee Settlement.......................................................................................... 18

L.

Treatment of Certain Designated Claims............................................................. 19

M.

Department of Community Affairs...................................................................... 20

N.

Discharge of Guaranty Claims against Kara Homes, Inc .................................... 22

O.

Other Assets ......................................................................................................... 23

P.

Cash Bond Disclosure.......................................................................................... 24

Q.

Adversary Proceedings Involving the Debtors .................................................... 24

R.

Bar Date ............................................................................................................... 28

S.

Listing of Claims in each Case ............................................................................ 29

T.

Avoidance Actions............................................................................................... 29

U.

SUMMARY OF THE PLAN............................................................................... 29

V.

CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS ........................................................................................................ 30

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TABLE OF CONTENTS (continued) Page A.

Municipal Tax Claims And Municipal Utility Authorities’ Claims (Class 1) .......................................................................................................................... 32

B.

Priority Claims (Class 2)...................................................................................... 33

C.

Claims Of Senior Mortgage Lenders (Class 3).................................................... 33

D.

Class 4 – Secured Claims..................................................................................... 34

E.

UNSECURED CREDITORS (Class 5) (Impaired)............................................ 35

F.

EQUITY INTEREST HOLDERS (Class 6) ........................................................ 35

G.

Executory Contracts and Unexpired Leases ........................................................ 36

NEW PURCHASE AGREEMENT OPTION ............................................................................. 36 A.

Purchase Agreements Not Executory Contracts .................................................. 36

B.

New Purchase Agreement Option........................................................................ 36

C.

Deadline to Make Election................................................................................... 37

MEANS OF IMPLEMENTING THE PLAN.............................................................................. 37 A.

Issuance of New Interests in the Reorganized Debtors ....................................... 37

B.

Capitalization of the Reorganized Debtors .......................................................... 37

C.

Allocation of Cash Infusion ................................................................................. 38

D.

Cancellation of Existing Securities and Agreements........................................... 39

E.

Continued Corporate Existence and Vesting of Assets in the Reorganized Debtors Free and Clear ........................................................................................ 39

F.

Legal Form and Governance................................................................................ 39

G.

Exemption from Transfer Taxes .......................................................................... 40

H.

The Liquidation Trust .......................................................................................... 40

I.

Distribution of Property ....................................................................................... 44

J.

Preservation of Causes of Action......................................................................... 44

PROCEDURES FOR DISPUTED CLAIMS .............................................................................. 45 AND DISALLOWANCE OF CERTAIN CLAIMS.................................................................... 45 A.

Objections to Claims............................................................................................ 45

B.

Treatment of Disputed Claims ............................................................................. 46

C.

Resolution of Disputed Claims ............................................................................ 46

D.

Allowance of Disputed Claims ............................................................................ 47

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TABLE OF CONTENTS (continued) Page CONFIRMATION AND EFFECTIVE DATE ........................................................................... 47 A.

Conditions to Confirmation ................................................................................. 47

B.

Conditions to Effectiveness ................................................................................. 48

TITLE TO PROPERTY AND RELEASES ................................................................................ 49 A.

Vesting of Property .............................................................................................. 49

B.

Discharge and Injunction ..................................................................................... 49

C.

No Waiver of Discharge ...................................................................................... 50

D.

Post-Consummation Effect of Evidences of Claims or Interests......................... 50

E.

Term of Injunctions or Stays................................................................................ 51

F.

Releases by Holders of Claims and Interests....................................................... 51

G.

Release by the Debtors......................................................................................... 52

H.

Injunction Related to Releases............................................................................. 52

I.

Exculpation .......................................................................................................... 53

V.

DISCLOSURES REQUIRED BY 11 U.S.C. §§1129(A)(4) AND (5)............................ 54

VI.

FEASIBILITY ................................................................................................................. 54

VII.

LIQUIDATION ANALYSIS........................................................................................... 54

VIII.

CONFIRMATION........................................................................................................... 55

IX.

POST-CONFIRMATION................................................................................................ 56 A.

Post-Effective Date Committee ........................................................................... 56

B.

Post-Confirmation Conversion/Dismissal ........................................................... 56

X.

DISCHARGE................................................................................................................... 56

XI.

CONCLUSION................................................................................................................ 57

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I.

INTRODUCTION

Pursuant to §1125 of the Bankruptcy Code, the Debtors (as defined in the Plan) hereby furnish this First Amended Master Disclosure Statement for Debtors’ First Amended Master Plan of Reorganization dated June __, 2007, (the “Disclosure Statement”) to each known Creditor and/or Equity Interest Holder of the Debtors for purposes of (i) providing Creditors and/or Equity Interest Holders with adequate information regarding the Debtors’ First Amended Master Plan of dated June __, 2007 (the “Plan”) to make an informed judgment concerning acceptance or rejection of the Plan, and (ii) soliciting acceptances of the Plan. The Plan is attached hereto as Exhibit “A.” ALL HOLDERS OF CLAIMS AND/OR EQUITY INTERESTS WITH RESPECT TO THE DEBTORS ARE ENCOURAGED TO REVIEW THE FULL TEXT OF THE PLAN AND TO READ CAREFULLY THIS ENTIRE DISCLOSURE STATEMENT, INCLUDING ALL EXHIBITS. PARTICULAR ATTENTION SHOULD BE GIVEN TO THOSE PROVISIONS OF THE PLAN IMPAIRING THE RIGHTS OF CREDITORS AND/OR EQUITY INTEREST HOLDERS. THE BANKRUPTCY COURT HAS SCHEDULED A HEARING ON CONFIRMATION OF THE PLAN FOR __________ __, 2007 AT 11:00 A.M. (ET). THE DISCLOSURE STATEMENT WAS APPROVED BY THE BANKRUPTCY COURT ON __________ ___, 2007. CREDITORS AND/OR EQUITY INTEREST HOLDERS ENTITLED TO VOTE ON THE PLAN SHOULD HAVE RECEIVED A BALLOT IN THE SOLICITATION PACKAGE CONTAINING THIS DISCLOSURE STATEMENT. THE BALLOTS WHICH YOU HAVE RECEIVED ENTITLE YOU TO VOTE ONLY IN THE CASE IN WHICH YOU ARE LISTED AS A CREDITOR. IF YOU ARE LISTED AS A CREDITOR IN MORE THAN ONE CASE, YOU HAVE RECEIVED MORE THAN ONE BALLOT. IF, FOR ANY REASON, YOU RECEIVE A BALLOT IN A CASE IN WHICH YOU ARE NOT A CREDITOR, CONTACT DEBTORS’ COUNSEL, DAVID L. BRUCK, ESQ., OR ADRIENNE MIRABELLA AT GREENBAUM, ROWE, SMITH & DAVIS, LLP, P.O. BOX 5600, WOODBRIDGE, NEW JERSEY 07095 (732) 549-5600. YOUR VOTE IS IMPORTANT. THE DEBTORS BELIEVE THAT THE PLAN IS IN THE BEST INTERESTS OF CREDITORS AND EQUITY INTEREST HOLDERS. THE DEBTORS URGE ALL CREDITORS AND EQUITY INTEREST HOLDERS ENTITLED TO VOTE ON THE PLAN TO VOTE IN FAVOR OF THE PLAN. ANY CREDITOR OR EQUITY INTEREST HOLDER WHO WISHES TO VOTE ON THE PLAN SHOULD (1) COMPLETE THE ENCLOSED BALLOT; AND (2) MAIL THE ORIGINAL BALLOT TO THE BALLOTING AGENT, DONLIN, RECANO & COMPANY, INC., RE: KARA HOMES, INC., ATT: VOTING DEPT., P.O. BOX 2034, MURRAY HILL STATION, NEW YORK, NY 10156-0701. THE DEADLINE FOR VOTING ON THE PLAN IS _________ __, 2007. BALLOTS MUST BE RECEIVED BY THE BALLOTING AGENT ON OR BEFORE SUCH DEADLINE IN ORDER TO BE COUNTED. BALLOTS RECEIVED AFTER THE DEADLINE WILL NOT BE COUNTED.

TABLE OF CONTENTS (continued) Page CREDITORS AND EQUITY INTEREST HOLDERS NEED NOT CAST A BALLOT TO RECEIVE A DISTRIBUTION UNDER THE PLAN. THE PLAN, IF CONFIRMED, WILL BE BINDING ON EACH AND EVERY CREDITOR AND EQUITY INTEREST HOLDER OF THE DEBTORS, REGARDLESS OF WHETHER THE CREDITOR OR EQUITY INTEREST HOLDER VOTED FOR OR AGAINST THE PLAN, OR FILED A PROOF OF CLAIM OR INTEREST. THE REPRESENTATIONS IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE DATE HEREOF UNLESS ANOTHER TIME IS SPECIFIED HEREIN. WHILE THE DEBTORS MAY FURNISH CREDITORS AND INTEREST HOLDERS WITH ADDITIONAL INFORMATION PRIOR TO THE VOTING DEADLINE IN ACCORDANCE WITH APPLICABLE LAW, THE DELIVERY OF THIS DISCLOSURE STATEMENT WILL NOT UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS DISCLOSURE STATEMENT MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE WHETHER TO ACCEPT OR REJECT THE PLAN. NOTHING CONTAINED IN THIS DISCLOSURE STATEMENT SHALL CONSTITUTE, OR BE DEEMED TO CONSTITUTE, ADVICE ON TAX OR OTHER LEGAL CONSEQUENCES OF ANY REORGANIZATION ON THE HOLDERS OF CLAIMS OR EQUITY INTERESTS. THE INFORMATION IN THIS DISCLOSURE STATEMENT IS INCLUDED FOR THE PURPOSE OF SOLICITING ACCEPTANCES OF THE PLAN. IT IS NOT TO BE CONSTRUED AS ADMISSIONS OR STIPULATIONS, BUT RATHER AS STATEMENTS MADE IN SETTLEMENT NEGOTIATIONS. NO INDEPENDENT AUDIT WAS CONDUCTED OF THE FINANCIAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT. THIS DISCLOSURE STATEMENT WAS PREPARED BY DEBTOR AND OTHERS BASED UPON INFORMATION CONTAINED IN THE DEBTORS’ BOOKS AND RECORDS AND OTHER SOURCES BELIEVED TO BE ACCURATE TO THE BEST OF THE DEBTORS’ KNOWLEDGE. THE PROJECTIONS OF REVENUES AND COSTS ARE GOOD FAITH ESTIMATES, USING ASSUMPTION FOR ABSORPTION RATES AND MARKET CONDITIONS WHICH MAY NOT PROVE TO BE ACCURATE. NO REPRESENTATION IS MADE AS TO THE ACCURACY OF THESE PROJECTIONS. REVENUES GENERATED BY THE FUNDING OF THE PLAN MAY BE MORE OR LESS THAN AS PROJECTED AND WILL DEPEND UPON RISK FACTORS INHERENT IN THE REAL ESTATE DEVELOPMENT BUSINESS. THE INFORMATION IS TRUE AND CORRECT TO THE BEST OF THE KNOWLEDGE OF THE DEBTORS, TRAXI, LLC AND DEBTORS’ COUNSEL. FOR VARIOUS REASONS, HOWEVER, THE DEBTORS’ RECORDS PRIOR TO THE PETITION DATE HAVE NOT ALWAYS BEEN COMPLETE AND THE ACCURACY OF THE INFORMATION SUBMITTED WITH THIS STATEMENT IS DEPENDENT IN PART UPON ANALYSIS OF THE DEBTORS’ RECORDS PERFORMED BY TRAXI, LLC AND OTHERS DURING THE CHAPTER 11 PROCEEDINGS. THEREFORE, WHILE ALL REASONABLE EFFORTS HAVE BEEN MADE UNDER THE CIRCUMSTANCES TO BE ACCURATE, THE DEBTORS ARE UNABLE TO WARRANT -2-

TABLE OF CONTENTS (continued) Page OR REPRESENT THAT THIS DISCLOSURE STATEMENT IS WITHOUT ERROR. DEBTORS’ COUNSEL HAS NOT UNDERTAKEN ANY SEPARATE ANALYSIS OF THE INFORMATION CONTAINED HEREIN. THUS, THEY ALSO ARE UNABLE TO WARRANT THAT THE DISCLOSURE STATEMENT IS WITHOUT ERROR. HOWEVER, NEITHER THE DEBTORS, NOR DEBTORS’ COUNSEL, NOR TRAXI, LLC IS AWARE OF ANY ERRORS OR OMISSIONS. EVERY EFFORT HAS BEEN MADE TO PAINT A COMPLETE PICTURE OF DEBTOR’S ASSETS AND LIABILITIES. NO PERSON IS AUTHORIZED BY THE DEBTORS IN CONNECTION WITH THE PLAN OR SOLICITATION OF VOTES FOR THE PLAN TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS DISCLOSURE STATEMENT AND THE ATTACHED EXHIBITS OR SCHEDULES. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEBTORS OR APPROVED BY THE BANKRUPTCY COURT. II.

SUMMARY OF THE PLAN

The Plan provides for the reorganization of certain of the Debtors (the “Operating Debtors”) through funding provided by a combination of new equity, in the amount of $10 million, a revolving construction loan facility in the amount of up to $26 million and additional lending provided by a number of those senior secured creditors holding mortgage liens upon the developments owned by the Operating Debtors. The Operating Debtors include Kara Homes, Inc., Bergen Mills Estates, LLC, Horizons at Woods Landing, LLC, Country Club Estates by Kara, LLC, Horizons at Woodlake Greens, LLC, Kara at Buckley Estates, LLC, Kara at Hawkins Ridge, LLC, Kara at Mt. Arlington II, LLC, Kara at Navasink, LLC, the Landings at Manahawkin, LLC, Winding Run Estates, LLC and Kara at Orchard Meadows, LLC. The complete details on the developments being acquired pursuant to the Plan and those otherwise dealt with are included herein. The Debtors not reorganized will be liquidated (hereinafter referred to as the “Liquidating Debtors”). Treatment of creditors will be handled partially on a global, pro rata basis among all creditors in all cases, and partially on an estate-specific basis driven by the economics of the individual projects. The Plan and its success depends in large part on the willingness and commitment of various lenders, including Plainfield Specialty Holdings II Inc. (“Plainfield”) and others to fund construction in excess of $115 million over a two to four year period to complete the build-outs of the developments to be assigned to the Reorganized Debtors. Estimates of costs, revenues, absorption rates and the like are included in the Financial Schedules and are available in detail on a house by house basis on request of a party. Regarding the Operating Debtors, the Plan provides for a series of restructuring transactions whereby, in exchange for a $10 million equity investment (the “Cash Infusion”), (1) Maplewood Homebuilders LLC, as Plan Sponsor, will receive 100% direct ownership of the -3-

TABLE OF CONTENTS (continued) Page Reorganized Kara Homes Common Stock and indirect ownership of ninety percent (90%) of the LLC Membership Interests of the applicable Reorganized Debtors, and (2) Newco, a whollyowned corporate subsidiary of Reorganized Kara Homes, Inc. to be formed on the Effective Date of the Plan, will receive 100% direct ownership of the New LLC Membership Interests to be issued by the applicable Reorganized Debtors. Any Equity Interests in both the Operating Debtors and the Liquidating Debtors held by Zuhdi Karagjozi will be cancelled pursuant to the Plan without receiving or retaining any property, claim, or interest thereon. The Cash Infusion will be funded by Plainfield, through Maplewood, subject to the terms and conditions set forth in the Commitment Letter (as defined in the Plan). Plainfield has no obligation to fund the Cash Infusion unless and until the conditions set forth in the Commitment Letter have been satisfied. The Cash Infusion will be used on the Effective Date to pay Confirmation needs including the payment of Allowed Professional Fees, Allowed Administrative Expenses, Allowed Priority and Tax Claims, real estate taxes in the cases of the Operating Debtors, and cure costs of assuming contracts sought to be assumed by the Operating Debtors. In addition, a portion of the Cash Infusion will be used to partially fund a cash dividend to the Liquidation Trust for the benefit of unsecured creditors with additional funds generated from the prosecution of claims and the disposition of assets of the Liquidating Debtors. The balance of the Cash Infusion will be attributed to fund the restructuring transactions described above and as working capital for the Operating Debtors. Ownership of Maplewood will be allocated among the investors therein in accordance with their contributions. At the present time, the investors consist of Plainfield and an entity formed and owned by Glen Fishman. Pursuant to the Plan, and except as otherwise provided in the Plan, (i) the Operating Debtors’ assets will vest in the Reorganized Debtors free and clear of all claims, liens, encumbrances, debts, obligations, and security interests, and (ii) the Operating Debtors will receive a discharge of any and all existing debts, claims, and interests of any kind. The name “Kara Homes” will be retained by Maplewood, but may, at Maplewood’s discretion, not be used in the conduct of its business. The DIP Loan will be converted to a term loan and the DIP Lender will retain a blanket lien upon certain of the Reorganized Debtors’ assets, except the assets owned by Horizons at Mt. Arlington I, LLC and certain Avoidance Actions of the Debtors, and will be repaid from (1) the assets of the Reorganized Debtors on a first in, first out basis, and (2) certain Liquidation Trust Assets that will be held in escrow until the DIP Loan in paid in full. Upon payment on the Effective Date of the cash dividend to the Liquidation Trust, all unsecured creditors will have no further interest in the Operating Debtors. The Liquidation Trustee will pursue claims and avoidance actions and liquidate certain remaining assets of the Liquidating Debtors. The Debtors believe and assert that except as noted, no party other than the senior lenders, taxing and municipal authorities and Plainfield hold valid liens upon the Reorganized Debtors’ assets. The Liquidation Trust will be formed for the purpose of receiving the distribution to creditors on the Effective Date and pursuing Avoidance Actions and Causes of Action and -4-

TABLE OF CONTENTS (continued) Page otherwise gathering and liquidating remaining assets of the Liquidating Debtors. The Liquidation Trustee will allocate of the proceeds and expenses of litigation among the Cases on a Pro Rata basis. The general unsecured creditors (Class 5) in each Case will receive an allocation of the Liquidation Trust Assets (as defined in the Plan). III.

DEFINITIONS

For purposes of this Disclosure Statement, all capitalized terms used but not defined herein shall have the meaning given them in the Plan. IV.

BRIEF CHRONOLOGY AND THE PARTIES A.

History

Kara Homes, Inc. (“Kara”) was one of the largest home builders in the State of New Jersey. Formed in 1999 by Zuhdi Karagjozi (“Karagjozi”), Kara constructed, sold and delivered in excess of 2,200 homes over the eight years of its business life. Kara operated through a number of limited liability companies (“LLCs” or “Affiliates”); each Affiliate owned its own development. Each Affiliate is owned ninety (90%) percent by Kara and ten (10%) percent by Karagjozi. Karajozi, in turn, presently owns one hundred (100%) percent of Kara. Kara provided administrative and management services to the Affiliates. In 2005, Kara generated approximately $290 million in revenues from the sale and delivery of approximately 590 homes. During 2006 through August 31, 2006, Kara sold and delivered 315 homes generating revenue in excess of $192 million. As the economy slowed and the real estate market diminished during the second and third quarters of 2006, Kara confronted delays in the field and a slow down in homes sales which resulted in a material disruption in its cash flow. On October 5, 2006, Kara filed a Chapter 11 petition shortly followed by 33 of its affiliates (“Affiliates”) during the next several months. An additional 20 Affiliates filed petitions on June 8, 2007 and 1 Affiliate filed on June 11, 2007. As of the date of filing of the within Disclosure Statement, Kara and 54 Affiliates are Chapter 11 Debtors in bankruptcy proceedings pending in the United States Bankruptcy Court for the District of New Jersey. As a result of the filing of the Chapter 11s and the loss of liquidity, construction activities at all of the Kara developments came to a halt in the third quarter of 2006. The pre-petition lenders ceased all funding of construction. B.

The Bankruptcy Filing

With the filing of the Chapter 11 petitions, Kara retained the firm of Greenbaum, Rowe, Smith & Davis LLP as its bankruptcy counsel. An Official Committee of Unsecured Creditors (the “Committee”) was formed by the Office of the United States Trustee and Cole, Schotz, Meisel, Forman & Leonard was retained as its counsel. The Committee retained J.H. Cohn as its accountants. In mid November of 2006, the Bankruptcy Court entered an Order authorizing the retention by Kara of Traxi, LLC (“Traxi”) as its Crises Manager, and Perry M. Mandarino was appointed as the Chief Restructuring Officer and Anthony Pacchia as the Chief Financial Officer. -5-

TABLE OF CONTENTS (continued) Page The Board of Directors of Kara was restructured and two independent board members were appointed, William Weber and James Corbett. Zuhdi Karagjozi, the founder and one hundred (100%) percent shareholder of Kara, remained as a Director. In November 2006, in order to stabilize Kara and retain its workforce, professionals and corporate infrastructure, Kara obtained Debtor in Possession financing from Bear Stearns Investment Products (“Bear Stearns”) in the amount of $2,600,000. These funds were used to pay for ongoing administrative expenses, payroll, rent, utilities and insurance. No monies were available from the Bear Stearns Facility for construction. Subsequently, in early January, 2007, Kara replaced the Bear Stearns Facility with a lending facility (the “Plainfield Facility”) from Plainfield. The Plainfield Facility was originally in the amount of $5 million; and approximately $2.3 million was used to satisfy the Bear Stearns Facility. The Debtors are operating today by funding provided by the Plainfield Facility. The Plainfield Facility is a lien upon all assets owned by the Debtors except those owned by Kara at Mt. Arlington I, LLC and the New Cases (as hereinafter defined). Plainfield has a lien upon the membership interests in Kara at Mt. Arlington I, LLC. On May 11, 2007, an order was entered increasing the Plainfield Facility to $7.0 million in order to fund the Debtors’ operation through the Effective Date. As of the date of this Disclosure Statement, the Debtors owe Plainfield approximately $6,450,000.00 on account of the DIP Loan. It is anticipated that there may be sufficient monies remaining between funding by the DIP Loan to permit the Debtor to operate through the Effective Date. C.

The Lenders

At the inception of the Case, there were sixteen (16) pre-petition senior lenders, all holding mortgages on separate developments. The sixteen pre-petition senior lenders included Amboy National Bank, Bank of America, 1st Constitution Bank, Provident Bank, TD BankNorth, ING Direct, Investors Savings, Magyar Bank, National City Bank, Northern Funding, North Fork Bank, Park Avenue Bank, First Savings, Sun Bank, Valley National Bank and Yardville Bank. In addition, Apple Chase Investors and Riverside Capital provided junior mortgage financing on certain projects. All in all, the aggregate mortgage debt encumbering the Affiliates’ developments as of the Filing Date was in excess of $222 million. Through closings and sales of homes post-petition, the aggregate mortgage debt was initially reduced to approximately $198 million. Through sales of developments during the proceeding, the secured debt has or will be further reduced. It is anticipated that upon the Effective Date, aggregate secured mortgage debt encumbering the developments to be part of the Reorganized Debtors shall approximate $70,000,000. During the proceeding, a number of the pre-petition lenders, including North Fork Bank, Bank of America, National City Bank and Yardville Bank sold all or a portion of their loans to new lenders. Accordingly, Westport Capital (“WPC”) now holds the North Fork claim; Credit Suisse Loan Funding, LLC (“Credit Suisse”) holds a portion of the Yardville and Bank of America (BOA) claims; Plainfield, Lehman Commercial (“Lehman”) and Del Mar Master Fund Ltd. (“DelMar”) now hold the claims of National City Bank. Plainfield has, or will have prior to the Confirmation hearing, purchased the BOA claim on Kara at Navasink, LLC, TD BankNorth claim on Bergen Mills, the Provident Bank claim on Orchard Meadows, the Silver Point claim -6-

TABLE OF CONTENTS (continued) Page on Winding Run, and the Amboy claim on Kara at Navasink, LLC pursuant to the Global Amboy Settlement. Plainfield is also negotiating with TD BankNorth regarding the funding of Woodlake Greens. In early March 2007, the Bankruptcy Court opined that the Affiliates are each single asset real estate entities as defined in Section 101 (51B) of the Code. The entry of this opinion was by way of summary judgment in the Adversary Proceeding instituted by the Debtor. Such characterization as a single asset real estate entity subjected the Affiliates to the provisions of 11 U.S.C. 362(d)(3) which required the filing of Plans or commencement of monthly payments to secured creditors thirty (30) days after the entry of the judgment or order making such determination. The Debtors filed their initial Plans of Reorganization on April 12, 2007. The Debtors’ exclusive period has been extended to August 12, 2007. This First Amended Disclosure Statement and the accompanying Plan is the result of negotiations between the major parties to these cases since April 12, 2007. D.

Construction, Winterization, Security and Sale of Homes

Construction of the homes owned by some of the Affiliates has recently resumed, or will shortly be resuming, at certain developments through financing provided by the mortgagees holding the senior debt. These include Horizons at Mt. Arlington, Country Meadow Estates, Buckley Estates, Horizons at Woods Landing and Hawkins Ridge. The lenders providing funding include Westport Capital, Credit Suisse, First Constitution, ING Direct and Plainfield. In addition, Magyar Bank is funding one home at Prospect Ridge and Valley National Bank has agreed to fund completion of two homes at Sterling Acres. During the proceeding, Kara obtained, through the entry of Court Orders, funding for winterization and security on substantially all of the Affiliates’ projects from the existing PrePetition Lenders, or the entities purchasing the Pre-petition Lenders’ claims. In addition, during the proceeding and through April 30, 2007, the Affiliates closed and delivered 33 homes generating in excess of $11.0 million in proceeds and reducing the pre-petition bank debt by approximately $10.2 million. The net proceeds2 over and above the pre-petition bank debt (approximately $1,600,000) is presently held in segregated interest bearing escrow accounts either in Debtors’ counsel’s Trust Account or by the senior lenders pursuant to Orders entered by the Court authorizing these sales. On the Effective Date of the Plan, these funds will be paid to the DIP Lender in partial satisfaction of the DIP Loan. A Schedule identifying these funds and the closings from which they arise is annexed hereto in the financial schedules as Exhibit “B.” An additional eight (8) homes was approved for sale by Order dated June 18, 2007 and a motion for the sale of an additional fourteen (14) homes is presently in the process of being filed.

2

Approximately $574,000 was released to Amboy pursuant to the Amboy/Debtor/Committee/Plainfield/Zuhdi Settlement Agreement. In addition, pursuant to Orders permitting construction financing, certain senior debt holders including Credit Suisse First Boston and Westport Capital are receiving one hundred (100%) percent of the net closing proceeds in reduction of their claim.

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TABLE OF CONTENTS (continued) Page E. The Liquidating Debtors, Reorganized Debtors, Filing of New Cases and Sale of Certain Developments There are now 55 Debtors in the within Chapter 11 proceedings including Kara. On June 8, 2007 and June 11, 2007, 21 new Cases (the “New Cases”) were filed including those listed on Exhibit “C”. All of the New Cases so filed are cases in which the homes have been sold but transition and site cost liabilities remain. All of these New Cases are Liquidating Debtors. In some of these cases, the only assets remaining are the cash bonds posted by the Debtor-Affiliates with the municipality. See Section “P” Cash Bond Disclosure and Exhibit “D” attached. The remaining Liquidating Debtors and their assets are either being sold “As Is” or have been built out and sold during the proceeding. A list of the Liquidating Debtors is included in the Definition Section of the Plan at Section 1.50. The Reorganized Debtors are Kara Homes, Inc., Kara at Navasink LLC, Horizons at Woodlake Greens LLC, The Landings at Manahawkin LLC, Winding Run Estates by Kara LLC, Kara at Hawkins Ridge LLC, Kara at Mt. Arlington II LLC, Bergen Mills Estates LLC, Horizons at Woods Landing LLC, Kara at Buckley LLC and Kara at Orchard Meadow LLC. In addition to the Reorganized Debtors, pursuant to the Amboy Global Settlement, Plainfield has the option to purchase all or a portion of the development owned by Kara at Crine West. If Plainfield purchases all or a portion of Crine West, such Debtor will become a part of the Reorganized Debtors. Horizons at Mt. Arlington I, LLC - Special Provisions Horizons at Mt. Arlington I is a development encumbered by a mortgage now held by Westport Capital (“WPC”). Negotiations are underway for the sale of this development to WPC through the filing of a separate Plan with the Debtor. Such a Plan will involve cash to this estate over and above the existing senior debt held by WPC. Sales During the Proceeding Approval of the sale of six3 developments occurred on April 9, 2007. By selling these six (6) developments and seven (7) more, Kara has and will eliminate approximately $70 million in secured debt, approximately $4 million in subordinated secured debt and $3.2 million in filed construction claims. The claims of other unsecured creditors in these cases aggregate in excess of $8.5 million. It is unlikely that the sale of any of these developments will produce sufficient revenue in any Case to provide a dividend to unsecured creditors. These sales included the following developments:

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Woodland Estates, Kara at Monroe, Dayna Court, Hartley Estates, Prospect Ridge and Sterling Acres were auctioned on March 27, 2007. Hidden Lakes (Kara at Lacey) is scheduled for sale on June 26, 2007. Kara at Franklin Lakes, LLC, a non-debtor, will sell its real estate to Amboy National Bank for $250,000 pursuant to the Amboy Settlement Agreement and the Plan. Amboy National Bank was granted relief from the stay on April 9, 2007 as to the Birch Hill Development.

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TABLE OF CONTENTS (continued) Page (a) Woodland Estates. 9 lots, including 5 contracts. A hearing to approve this sale was held on April 9, 2007 at which time, the sale was approved for a bid price of $11.6 million to Fenix Realty. The Closing occurred on May 21, 2007 and there was a deficit in excess of $125,000 after satisfaction of senior debt held by Investor Savings, junior secured debt of approximately $1.4 million held by Riverside Capital, and other costs, including real estate taxes, the assumption of liabilities for deposits on designated contract purchasers. The Purchaser absorbed the deficit. (b) Park Meadow (Kara at Monroe). 7 lots, including 3 under contract; this sale received Court approval at a hearing on April 9, 2007. A Closing was held on May 21, 2007. Kara received approximately $106,000 after satisfaction of the senior debt held by Investor Savings, and other costs. (c) Dayna Court. 5 lots, including 4 under contract. An auction was held on March 27, 2007. A cash bid by APS Contracting was acceptable to Magyar Bank in lieu of its credit bid, although its credit bid was higher. This sale received Court approval at a hearing on April 9, 2007. From the $1,450,000 to be paid by APS Contracting, $1,375,000 will go to Magyar to pay its lien claim and a commission will be paid to Sheldon Good and Company. Subject to closing adjustments, approximately $50,000 will come into the Case. Magyar releases the Debtors and the Guarantors from any further liability. A closing will be held in June 2007. (d) Hartley Estates. 9 lots, including 3 under contract. An auction was held on March 27, 2007. A credit bid by a Magyar entity was the high bid. This sale received Court approval on April 9, 2007. The Magyar bid will generate approximately $45,000 to the Hartley Estate Case. A closing is anticipated in June 2007. (e) Prospect Ridge (Park Ridge Estates). 9 lots, including 4 under contract. An auction was held on March 27, 2007. A credit bid by a Magyar entity was the high bid. This sale received Court approval on April 9, 2007. The Magyar bid will generate approximately $90,000 to the Prospect Ridge Case. A closing is anticipated in June 2007. (f) Sterling Acres. 7 lots, 4 of which are under contract. An auction was held on March 27, 2007. A credit bid by a Magyar entity was the high bid. This sale received Court approval on April 9, 2007. The Magyar bid will generate approximately $45,000 to the Sterling Acres Case. A closing is anticipated in June 2007. Two additional homes at Sterling Acres are being completed by funds provided by Valley National Bank. In addition, the following properties are scheduled for sale: (g) Hidden Lakes (Kara at Lacey). 5 lots under contract, 2 spec homes and 2 empty lots. An auction of this property is scheduled for June 26, 2007. (h) Saxon Estates. 1 lot under contract. An Order scheduling an auction of this lot was entered on May 14, 2007. The Auction is scheduled for June 26, 2007.

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TABLE OF CONTENTS (continued) Page (i) Franklin Lakes. This development is approved for 84 lots. It is encumbered by mortgages held by Amboy National Bank (“Amboy”) totaling approximately $9,500,000. Kara at Franklin Lakes, LLC is not presently a debtor in these proceedings; however, it is owned 90% by Kara and 10% by Karagjozi. Amboy has provided the Debtor with an appraisal at $8,200,000. The Committee had challenged the extent and validity of a portion of Amboy’s lien above $6,600,000. Pursuant to a Settlement Agreement between the Debtor, Kara at Franklin Lakes, LLC, Amboy, the Committee, Plainfield, Zuhdi Karagjozi and the Debtor, Amboy shall pay to Kara at Franklin Lakes, LLC $250,000 in exchange for a deed in lieu and the parties shall exchange releases. The Settlement Agreement involves other Cases and other Amboy claims and was the subject of a motion for approval pursuant to Rule 9019 scheduled to be heard on June 13, 2007. The Court approved the Settlement Agreement and the Order was entered on June 14, 2007. Closing on this sale is scheduled for June 25, 2007. In addition to the ten (10) developments sold or to be sold as above, the Debtor intends to sell Glen Eyre Palette 1 and Palette 2, and the Estates at Galloway. As to Glen Eyre Palette 1, the mortgage debt is approximately $5,400,000. The debt is held by Lehman Commercial Paper (“Lehman”). As to Glen Eyre Palette II, the mortgage debt is now held by Lehman in the face amount of approximately $10,800,000. A motion to schedule an auction as to Glen Eyre Palette II was heard on June 18, 2007. The Auction is scheduled for August 8, 2007. An Order scheduling the sale of Glen Eyre Palette I was entered on June 5, 2007. (j) As to the Estates at Galloway, an offer has been submitted by an entity introduced by Yardville Bank, the holder of the mortgage debt to purchase this development for approximately $4,000,000. On June 18, 2007, the Court held a hearing and this transaction was approved. The terms of proposed sale includes the assumption by the stalking horse bidder of the Yardville debt and a contribution to the Case in an amount sufficient to obtain the release of the second mortgage held by Park Bank ($150,000) and pay real estate taxes. Approximately $35,000 will come into this Case if this sale is approved. (k) Finally, Amboy filed a lift stay motion with respect to the Horizons at Birch Hill development which the Debtor determined in the exercise of its business judgment not to oppose. The hearing was held on April 9, 2007, and an Order was entered lifting the automatic stay and allowing Amboy to pursue its remedies. Amboy had filed stay relief motions with respect to its remaining collateral, Tradewinds, Cottage Gate, Ridgeview and Crine West. The Debtors, Plainfield, Karagjozi, the Committee and Amboy have entered into the Global Settlement regarding these matters which was approved by the Court on June 13, 2007. The Settlement Agreement resolved these matters. See Section “J” hereinafter, entitled “Global Settlement With Amboy.” The assets of the foregoing Debtors are subject to the security interest of the DIP Lender. Pursuant to the Committee settlement with the DIP Lender, the proceeds from these sale proceedings will be applied to reduce the applicable mortgage debt with the remaining proceeds to be held in escrow by the Liquidation Trustee until the DIP Loan is repaid from other specified sources set forth in the settlement agreement. If the DIP Loan is not repaid from the other

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TABLE OF CONTENTS (continued) Page specified sources, the proceeds from these sale proceedings will be used to satisfy the DIP Loan after the DIP Lender has provided an accounting. F.

Disposition of Other Affiliates

In addition to the Properties and the Affiliates listed above, the following Affiliates will not be Reorganized Debtors and are categorized as Liquidating Debtors in the Plan: (i) Kara at the Enclave II, LLC. Kara at the Enclave II, LLC (“Enclave”) owns four lots, all of which are under contract. The senior debt is held by 1st Constitution Bank in the approximate outstanding balance of $714,462. During the proceeding, 1st Constitution agreed to advance monies for completion of the homes under contract. It is anticipated that the proceeds from the sale of these homes will be sufficient to satisfy the outstanding senior debt held by 1st Constitution, but will not be sufficient to provide any meaningful dividend to other parties. Kara at the Tradewinds, LLC (ii) Kara at the Tradewinds, LLC. (“Tradewinds”) owns a partially completed home and an empty lot. The senior mortgage hold is Amboy National Bank in the amount of approximately $3 million. During the proceeding, Amboy received $1,340,000 from the Baiks, the owners of Lot 7.09, Block 4. The remaining lots are not under contract; and pursuant to the Global Amboy Settlement, the two lots are to be sold by the Affiliate at auction or in the absence of bidding, be sold to Amboy for a credit bid. There are alleged construction lienholders in this Case as well as unsecured creditors. The Debtors does not believe that there will be sufficient monies available from the sale of these two properties to provide any meaningful dividend to creditors. (iii) Horizons at Shrewsbury Commons, LLC. Horizons at Shrewsbury Commons, LLC owns land approved for the construction of 66 housing units. None of these houses have been constructed and none are under contract. The senior mortgage debt is held by TD BankNorth in the approximate outstanding balance of $14,227,000. The Debtor has determined that it is not economically feasible to develop this project given the amount of the senior secured debt; and accordingly, this development will not be part of the Reorganized Debtors. It is anticipated that a sale under 11 U.S.C. §363 of this property will be effected either prior to or immediately subsequent to the Effective Date. (iv) Forest Edge Estates by Kara, LLC. This development owns two lots which are under contract. Sun National Bank is the holder of the senior mortgage debt in the approximate amount of $588,000. The Debtor has determined that is not economically feasible to complete construction of these two homes; and accordingly, has consented to an Order granting relief from the automatic stay to Sun National Bank to allow it to continue to proceed with foreclosure. (v) Limerick Estates by Kara, LLC. Limerick Estates by Kara, LLC owns one remaining lot which is under contract. The senior mortgage debt is held by Provident Savings Bank in the approximate amount of $260,000. Recently, an Order was entered granting -11-

TABLE OF CONTENTS (continued) Page Provident relief from the automatic stay in order to prosecute a foreclosure. The Debtor has determined that it is not economically feasible to fund construction of this remaining home. (vi) Summerfield Estates. 1 home under contract. This property is being foreclosed by Provident Bank. G. The Remaining Core Business and New Purchase Agreement Option for Contract Purchasers Core Business Once the above developments are sold or disposed of, the Reorganized Debtors will consist of twelve (12) entities including Reorganized Kara and eleven (11) active developments (with the possibility of Crine West, or a portion thereof, as the twelfth development). In addition, the Debtor is in the process of filing a motion to assume and assign its interest in the tract of land identified as “Toby Gardens” to Plainfield. When finally approved, the Toby Gardens Project will consist of 38 Units located in Old Bridge, New Jersey. In all, the projections reflect that the core business consists of 471 homes to be constructed, 129 of which are the subject of a Purchase Agreement. A schedule of the core business developments, the status of the homes, the cost of completion and debt structure is discussed hereinafter in the Section dealing with each specific development, and in the financial schedules included in summary form. See Kara Homes, Inc., Project Rollup Summary, Exhibit “E.”

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TABLE OF CONTENTS (continued) Page New Purchase Agreement Option Pursuant to the Plan, each and every Purchase Agreement will be deemed expired by its terms notwithstanding their having been scheduled as an executory contract in the Debtors’ Schedules. Each Contract Purchaser will have the option to either (a) enter into a New Purchase Agreement with the applicable Reorganized Debtor on or after the Effective Date that is substantially similar to the material terms and conditions as the applicable expired Purchase Agreement and receive a credit against the final purchase price for all Contract Purchaser Deposits made by such Contract Purchaser in exchange for (i) the release and discharge of all Claims against any of the Operating Debtors and the Reorganized Debtors arising under the Contract Purchaser’s Purchase Agreement, and (ii) voting in favor of the Plan, or (b) decline to enter into a New Purchase Agreement and (i) seek to obtain reimbursement of its Contract Purchaser Deposit from the applicable Deposit Bonding Company, or (ii) receive treatment under the Plan as an Unsecured Creditor. Each Contract Purchaser will indicate on its Ballot whether or not it wishes to exercise the New Purchase Agreement Option and enter into a New Purchase Agreement. Any Contract Purchaser who does not so affirmatively indicate on its Ballot that it has exercised its New Purchase Agreement Option, and who does not return such Ballot prior to the Voting Deadline, will be deemed not to have timely elected the New Purchase Agreement Option, and its Claim shall be treated as a Class 5A Unsecured Claim. New Purchase Agreement Options will be provided to each Contract Purchaser together with the Confirmation Package consisting of the Disclosure Statement, the Plan, ballots and a form of New Purchase Agreement. For purposes of classifying claims, in light of Judge Kaplan’s ruling on April 9, 2007, in the context of the sale motions of the Magyar Properties, except where otherwise noted, claims asserted by Contract Purchasers for alleged vendee liens are treated as Class 5 Unsecured Claims. A section dealing specifically with the claim of vendees’ liens (and construction liens) is set forth hereinafter. See Section “L.” H. Reorganized Kara Homes Inc. Reorganized Kara Homes Inc., and its 90% ownership of the LLC Membership Interests, will be wholly owned by Maplewood postconfirmation. From the Effective Date, the Reorganized Debtors shall trade under the name Maplewood Homebuilders LLC (“Maplewood”). Kara Homes will continue as an administrative and development arm of the business and may employ the staff used to administer the operation of the Reorganized Debtors. An organization chart is included in the Financial Schedules as Exhibit “F.” As part of confirmation, the Reorganized Debtors, including Kara Homes, will be fully discharged from all debt, claims, encumbrances, or interests, as more fully provided in the Plan. To the extent of ongoing obligations for lease and executory contract liabilities, the Operating Debtors will, as part of the Confirmation process, assume some of the executory contracts and assign them to the Reorganized Debtors and reject others as set forth in Exhibit “G.”

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TABLE OF CONTENTS (continued) Page I.

Summary of the Specific Cases

The following, in summary form, sets forth the listing of the Debtors, the identification and description of the developments owned by the Debtors, and a general description of the treatment of the Debtors under the Plan. 1. Kara at the Enclave II, LLC. Kara at the Enclave II, LLC (“Enclave”) owns a development in Toms River, New Jersey, identified as Country Meadows Estates. Country Meadows Estates was originally conceived as a 23 unit single family home development. Prior to and subsequent to the filing of the Chapter 11 proceeding, Enclave sold and delivered 19 homes. There are 4 homes remaining under contract. This development is encumbered by a first and prior mortgage lien held by 1st Constitution Bank in the approximate outstanding balance of $714,462. 1st Constitution Bank is in the process of funding completion of these homes. An Order was entered (Doc. No. “1329”) authorizing funding by 1st Constitution Bank under the lien of its pre-petition mortgage. It is anticipated that completion of these homes will be accomplished either prior to or soon after the Effective Date. This Debtor will not be a Reorganized Debtor. 2. Kara at Tradewinds, LLC. Kara at Tradewinds was conceived as a development of 20 unique single family homes to be built in Sea Bright, New Jersey. The development is directly on the beach. Of the 20 planned single family homes, 17 have been sold and closed, 1 lot has been conveyed to a buyer (the “Baiks”) and was under contract for completion of construction; 1 home has been partially completed but was not under contract; and the last lot is also for sale. The Debtor and the Baiks recently agreed to a termination of their contractual relationship. An Order was entered terminating the contractual relationship (Doc. No. “2158”). Kara has no further interest in the Baik property. This development is encumbered by a first mortgage lien held by Amboy National Bank (“Amboy”) in the approximate amount of $3,400,000 after receiving the pay down from the Baiks of $1,340,000 by Order entered on June 6, 2007 (Doc. No. “2158”). A motion seeking Court approval of a Global Settlement with Amboy was heard on June 13, 2007. The Settlement was approved. Under the Settlement Agreement, the two remaining properties, Block 4, Lot 10, and Block 4, Lot 6 will be submitted for the scheduling of an auction. Amboy will credit bid $1,625,000 on lot 10 and $1,500,000 on Lot 6. See Section 12, Amboy Settlement Agreement. This Debtor will not be a Reorganized Debtor. 3. Kara at Crine West, LLC. Kara at Crine West was conceived as an 84 lot single family home development in Marlboro Township. Of the 84 planned homes, 36 have been sold and closed, 15 are under contract, 3 homes are partially completed and without contracts, and 30 lots remain unsold. The Crine West development is encumbered by a first mortgage lien held by Amboy National Bank in the approximate amount $17,787,000 and a subordinate mortgage in the approximate amount of $1,610,000 is held by Apple Chase Investors. Pursuant to the Amboy Settlement, Plainfield has an option to acquire all of the Lots, while Amboy is given relief from the stay and the parties exchange releases. If Plainfield exercises the option to acquire any or all of the Lots, it will use funding to be provided by Maplewood under the -14-

TABLE OF CONTENTS (continued) Page Revolving Construction commitment to complete these homes in which case, Kara at Crine West, LLC may become a Reorganized Debtor. See Section 13, Amboy Settlement Agreement. 4. Kara at Navasink, LLC. Kara at Navasink is also known as Cottage Gate. Cottage Gate is located in Middletown Township and was originally conceived as a two phase development. Phase I consists as a 66 home development comprised of 55 single family homes, ten duplex COAH units, and one community residence. Of the 66 units originally planned, 38 have been sold and closed, 7 are under contract, and 21 lots are in partial development without contract. This development is encumbered by first mortgages covering different lots originally held by Bank of America (“BOA”) and Amboy National Bank (“Amboy”) in the aggregate amount of $6,028,496. Amboy’s lien encumbers 5 lots in the aggregate approximate $2,985,000. One of Amboy’s lots is under contract. Pursuant to the Amboy Settlement, Plainfield will purchase Amboy’s claim for $2,500,000. See Section 10, Amboy Settlement Agreement. The remaining lots were encumbered by BOA’s lien of approximately $3,040,000. Pursuant to a Court approved settlement with BOA, the Debtor was either to seek funding to complete construction of BOA’s collateral on a subordinate basis or was to schedule an auction of the collateral. In addition, Apple Chase holds a junior mortgage encumbering a portion of this development, the extent and validity of which mortgage is the subject of a dispute being handled by the Committee. The banks (Amboy and BOA) have mortgages on different homes and are not either cross-collateralized or subordinate one to the other. A motion was filed, pursuant to the BOA Settlement, to sell the BOA collateral. During the interim, Plainfield has purchased the BOA Mortgage, and a notice of transfer of claim has been filed with the Clerk of the Bankruptcy Court. Plainfield has advised the Debtor that it wishes the scheduled auction of Cottage Gate withdrawn and the auction has been withdrawn effective as of June 12, 2007. In addition to the property owned by Kara at Navasink, LLC, the Debtor is also the contract purchaser of (“Phase II”) adjacent land approved for development of 35 homes. The land is owned by Barry Rosengarten. The purchase price of the adjacent land is $4,200,000. Rosengarten has filed an adversary proceeding against Kara and Kara at Navasink, LLC seeking to terminate the contract because of alleged defaults, pre-petition. The Debtor has opposed the relief sought by Rosengarten. The parties are in the process of negotiating a settlement of this matter which if concluded will be submitted to the Court for approval. If no settlement is concluded or approved, Rosengarten and the Debtors will continue this litigation and/or it will be assigned for the Creditor Trust to prosecute. The Cottage Gate development will be part of the Reorganized Debtor and will be built out with funding provided under the Revolving Construction Facility. 5. Horizons at Woods Landing, LLC. Horizons at Woods Landing is an age restricted, active adult community to be built in Mays Landing and was originally conceived as being developed into 249 detached single family homes. 143 homes have been sold and closed, 20 contracts exist, 4 spec houses and 82 empty lots. Horizons at Woods Landing is encumbered by a first mortgage lien in the approximate amount of $7,940,000 held by ING Direct (“ING”). ING is presently funding completion of certain homes at the development, pursuant to an Order entered on May 17, 2007. ING has declared a default against the Debtor in its post-petition -15-

TABLE OF CONTENTS (continued) Page obligations. The Debtor is working to cure the alleged default. Under the Plan, ING’s secured claim will be unimpaired. This Debtor will be a Reorganized Debtor. 6. The Landings at Manahawkin, LLC. The Landings at Manahawkin, LLC is located in Stafford Township, Ocean County, New Jersey, and consists of 197 townhouses and single level condominiums to be built in 20 buildings. Of the 197 residences to be constructed, 28 have been sold and closed; there are 60 open contracts and 109 unsold lots. The Landings at Manahawkin is encumbered by a first mortgage lien in the approximate amount of $20,181,000 originally held by National City Bank and now held by Delmar Master Fund Ltd. (“Delmar”). It is anticipated that either Delmar will fund completion of the Development or that funding will be provided by the Revolving Construction Facility. A Term Sheet with Delmar is being negotiated. This Debtor will be a Reorganized Debtor. 7. Winding Run Estates by Kara, LLC. Winding Run Estates is located in Little Egg Harbor, Ocean County, New Jersey. The development was conceived as a 152 single family home development. Of the 152 homes, 109 have been sold and closed, 12 remain under contract, and there are 31 unsold lots. The Winding Run development is encumbered by a first mortgage lien originally held by National City Bank in the outstanding amounts of approximately $3,400,000. The lien is now held by Plainfield. This development will be completed with funding from the Revolving Construction Facility. Under the Plan, Plainfield’s secured claim will be treated in accordance with the Term Sheet regarding Kara at Winding Run, LLC annexed hereto as Exhibit “I.” This Debtor will be a Reorganized Debtor. 8. Kara at Hawkins Ridge, LLC. Kara at Hawkins Ridge was conceived as a 19 single family home development located in Jackson Township, Ocean County, New Jersey. Of the 19 planned homes, none have been sold. There are 11 homes under contract, one spec home has been partially constructed and there are 7 empty lots. The Hawkins Ridge development is encumbered by a first mortgage lien originally held by National City Bank in the outstanding amount of approximately $7,100,000. During the Chapter 11, National City Bank sold its loan to Plainfield. On June 12, 2007, a Corrected Final Order was entered (Doc. No. “2206”) authorizing funding of the build out of this development. Under the Plan, Plainfield’s secured claim will be treated in accordance with the Term Sheet regarding the Kara at Hawkins Ridge, LLC annexed as Exhibit “J.” This Debtor will be a Reorganized Debtor. 9. Kara at Mt. Arlington I, LLC (Pennington Woods). Kara at Mt. Arlington I is located in Mt. Arlington Township, Morris County, New Jersey and was originally conceived as a 156 unit townhouse development. Of the original 156 homes, 34 have been sold and closed, 24 remain under contract, 61 are partially completed spec homes and 36 lots remain empty and unsold. Originally, North Fork Bank held a mortgage of approximately $21 million encumbering Mt. Arlington I. During the proceeding, NorthFork sold its mortgage to Westport Capital (“WPC”). Apple Chase holds a junior mortgage on this development which is the subject of a dispute filed by the Committee challenging the extent and validity of the Apple Chase mortgage. WPC is presently funding some construction at this development and it is anticipated that WPC will continue to fund construction of this development. The Debtor is negotiating a separate Plan of Reorganization with WPC. The Plan involves the sale of either -16-

TABLE OF CONTENTS (continued) Page Kara’s equity in this Affiliate or the assets to WPC in exchange for a contribution to the Case. This development will not be part of the Reorganized Debtor. 10. Bergen Mills Estates, LLC. Bergen Mills Estates is located in Monroe Township, Middlesex County, New Jersey and was originally conceived as a 41 single family development. Of the original 41 homes, 25 have been sold and closed, 11 remain under contract, and there are 5 partially completed spec homes. Bergen Mills Estates is encumbered by a senior mortgage lien held by TD BankNorth in the approximate amount of $5,892,000. In addition, Park Avenue Bank holds a first priority mortgage encumbering 16 Sanibel Drive in the approximate amount of $1,054,248. Plainfield has recently purchased TD BankNorth’s claim in this Case. Under the Plan, Plainfield’s secured claim will be treated in accordance with the Term Sheet annexed as Exhibit “K.” This Debtor will be a Reorganized Debtor. 11. Horizons at Shrewsbury Commons, LLC. Horizons at Shrewsbury is an age restricted development approved for the construction of 66 planned single family homes to be built in the Borough of Shrewsbury, Monmouth County, New Jersey. None of these homes has been constructed or built. Horizons at Shrewsbury is encumbered by a first mortgage lien held by TD BankNorth in the approximate amount of $14,227,000. The Debtor will market this development for sale, and seek the Court’s approval of a 363(b) sale, at which Plainfield will serve as a Stalking Horse bidder with an offer of $8,500,000. This development will not be part of the Reorganized Debtor unless Plainfield purchases the development at auction. 12. Horizons at Woodlake Greens, LLC. Horizons at Woodlake Greens is a 209 unit single family home development located in Lakewood Township, Ocean County, New Jersey. Of the 209 units originally conceived, 112 have been sold and closed; there are 16 open contracts, four homes built on spec, and 77 empty lots. Horizons at Woodlake Greens is encumbered by a first mortgage lien in the approximate amount of $9,800,000 held by TD BankNorth. TD BankNorth’s debt will be reinstated at the outstanding principal balance. Prepetition interest at the non-default contract rate will be capitalized. Post-petition interest will be waived. Plainfield will fund the construction on a pari passu basis. At each closing TD BankNorth will first get its release price and then Plainfield will have its construction funds, together with interest, repaid. Commencing at the Effective Date, interest on the TD BankNorth debt will be paid quarterly at TD BankNorth’s non-default interest rate. Under the Plan, TD BankNorth’s secured claim will be treated in accordance with the Term Sheet annexed as Exhibit “L.” This Debtor will be a Reorganized Debtor. 13. Kara at Buckley Estates, LLC. Kara at Buckley Estates is a 21 lot single family home development located in Marlboro Township, Monmouth County, New Jersey. Of the original 21 homes, 13 have been sold and closed. There are 7 open contracts, and one home partially built. Kara at Buckley Estates is encumbered by a first mortgage lien originally held by Yardville National Bank. During the proceeding, Yardville sold its claim to Credit Suisse Loan Funding LLC (“CSLF”). On April 26, 2007, an Amended Final Order was entered providing for restating of the loans originally between Kara at Buckley Estates, LLC and Yardville National Bank and now between Kara at Buckley and CSLF as a new loan. The Restated Note was executed on May 18, 2007 in the amount of $12,650,600 including a roll up of the old debt and -17-

TABLE OF CONTENTS (continued) Page new revolving construction funding of $2,100,000. CSLF and the Affiliate are proceeding pursuant to the funding mechanism in place. The term sheet describing the treatment of the secured claims of these Debtor are annexed as Exhibits “M” and “N.” This Debtor will be a Reorganized Debtor. 14. Forest Edge Estates by Kara, LLC. Forest Edge Estates is an 11 unit single family home development located in Stafford Township, Ocean County, New Jersey. Of the original 11 housing units planned, nine have been sold and closed and two are under contract. This development is encumbered by a first mortgage lien held by Sun Bank in the approximate amount of $588,000. Sun Bank has been granted stay relief to commence foreclosure. This development will not be part of the Reorganized Debtor. 15. Kara at Orchard Meadows, LLC. Kara at Orchard Meadows was originally conceived as a 13 unit detached single family home development located in Marlboro Township, Middlesex County, New Jersey. Of the 13 homes contemplated, 11 have been sold and closed and 2 are under contract. The Orchard Meadows development is encumbered by first mortgage lien held by Provident Bank (now owned by Plainfield) and Northern Source, respectively, in the aggregate amount of $1,055,000. Each bank has a lien on a separate lot. It is anticipated that Plainfield will fund completion on a subordinate basis and a motion to obtain post-petition financing has been filed . A copy of the Term Sheet for this development is annexed as Exhibit “O.” This Debtor will be a Reorganized Debtor. 16. Limerick Estates by Kara, LLC. Limerick Estates is a development originally envisioned as 17 homes located in South Amboy, New Jersey. Of these, 16 have been sold and closed and one remains under contract. This development is encumbered by a first mortgage lien held by Provident Bank in the outstanding amount of approximately $260,000. Unless Plainfield purchases Provident’s claim, this Affiliate will not be part of the Reorganization. 17. Kara at Mt. Arlington II, LLC (Ridgeview). This development is an age restricted development conceived as a 144 unit condominium project to be constructed in five buildings. Of the original 144 units, 141 have been sold and closed, one remains under contract and two homes are substantially complete, but unsold. Amboy National Bank held the first mortgage encumbering this development in the approximate amount of $618,000. By Order entered on May 10, 2007 as a part of the Amboy Settlement, Amboy was given relief to satisfy, in part, its debt from the escrow funds being held arising from closing proceeds during the proceeding. Amboy carved out $82,000 for the Debtor and retains a lien of approximately $50,000 to be paid from the proceeds of sale of the first of the 3 homes. Funding of construction will be by virtue of the Revolving Construction Facility. This Debtor will be a Reorganized Debtor. 18. Kara at Farrington Ridge, LLC. Kara at Farrington Ridge is a development located in Old Bridge Township, which was originally conceived as a 26 unit single family home development, 25 of these homes were sold and closed pre-petition; one home was sold and Park Avenue Bank, the holder of the first mortgage, was paid the net closing proceeds of $510,000.

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TABLE OF CONTENTS (continued) Page 19. Country Club Estates by Kara, LLC (Waters Edge). Waters Edge Estates is located in Little Egg Harbor, Ocean County, New Jersey and was originally comprised of 14 single family homes. Of the original 14 homes, 4 have been sold and closed, 3 are under contract. There are 6 unsold lots. This development is encumbered by a first mortgage lien originally held by First Trust and now held by Credit Suisse Loan Funding, LLC in the approximate outstanding balance of $4,743,000. An Order was entered on April 24, 2007 approving post-petition financing for completion of this development by CSLF. This Debtor will be a Reorganized Debtor. J.

Global Settlement with Amboy National Bank

On June 13, 2007 an Order was entered approving a settlement between the Debtors Plainfield, the Committee, Karajgozi and Amboy National Bank. Specifically, Amboy was a significant lender to the Debtors pre-petition and held loans on developments owned by the Debtors known as Kara at Crine West, LLC, Kara at Navasink, LLC, Kara at Tradewinds, LLC, Kara at Mt. Arlington II, LLC, Horizons at Birch Hill, LLC, and a non-debtor, Kara at Franklin Lakes, LLC. In March 2007, Amboy filed stay relief motions with respect to its mortgages encumbering the above developments. Relief was granted with respect to Birch Hill. Thereafter, settlement discussions between Amboy, the Debtors, the Committee, Plainfield and Karagjozi achieved an overall settlement agreement pursuant to which Amboy’s claims in the Cases of the various Affiliates were resolved as well as its guarantee claims against Kara Homes, Inc. and Karagjozi. For reference, a copy of the Order approving the settlement with a copy of the Settlement Agreement is annexed hereto as Exhibit “P.” In summary, however, the settlement achieves the following: (i) With respect to Kara at Crine West, LLC, the settlement provides for an option to Plainfield to purchase a designated fifteen lots (“Crine Option Property”) for $7,240,000 paid to Amboy; and the option to purchase additional lots while Amboy commences a foreclosure proceeding with respect to thirty lots designated as the “Crine Remaining Property.” (ii) With respect to Kara at Franklin Lakes, LLC, the non-debtor entity has agreed to deliver a deed in lieu of foreclosure to Amboy in exchange for a cash payment of $250,000. (iii) With respect to Kara at Tradewinds, LLC, the settlement provides for the sale by the Affiliate of two lots remaining unsold with Amboy providing credit bids. (iv) With respect to Kara at Navasink, LLC, the settlement provides for the purchase by Plainfield of Amboy’s debt for $2,500,000 within a designated time after approval of the Settlement. (v) In addition to the above, there is an agreement as to the allocation of sale proceeds on a certain contract referred to as the “Natale” contract, 55% to the Debtor and 45% to Amboy. -19-

TABLE OF CONTENTS (continued) Page (vi) The Global Settlement provides for the exchange of releases among all parties and the entry of an Order allowing Amboy’s claims (vii) Under the Global Settlement, Amboy agrees to vote its ballots in favor of Plans which embody the terms of the Global Settlement. K.

Committee Settlement

The Committee has entered into a Binding Term Sheet with the Debtors and Plainfield. A copy of the Binding Term Sheet is annexed as Exhibit “Q”. Pursuant to the Term Sheet, the Committee agrees to recommend approval of the Plan to the unsecured creditors. In exchange, the Plan Sponsor agrees to fund the initial cash dividend to the Liquidation Trust in the amount of $2,250,000 and provide other accommodations as provided in the Term Sheet. L.

Treatment of Certain Designated Claims

1.

Claims of Contract Purchasers

During the Proceeding, the alleged vendees liens of contract purchasers for the return of their deposits has been a continuous issue. In addition, the bonding companies issuing bonds on the deposits subject of the contract purchasers’ claims have sought subrogation to the alleged vendees lien claims of the contract purchasers. The vendee lien claims allegedly arise under New Jersey law and pursuant to the provisions of 11 U.S.C. §365(j). The Debtors dispute the contract purchasers’ claims that they have an entitlement to liens. The Debtors maintain that any vendees liens allegedly arising under New Jersey were not perfected as of the Filing Date and therefore invalid under 11 U.S.C. §544. As to any vendees liens allegedly arising pursuant to section 365(j) of the Bankruptcy Code, such liens, if any, do not arise or are wholly undersecured because the Debtors have no interest in the properties. Additional defenses exist as well and will be part of Debtors brief filed in support of Confirmation. The Plan treats the claims of contract purchasers and bonding companies as Unsecured Claims (Class 5). If necessary valuation hearings will be scheduled as part of the Confirmation process. 2.

Construction Lien Claims

All Allowed construction lien claims are treated as unsecured claims under the Plan because they are, in all instances, subordinate to the Senior Debt, and the applicable Debtor has no equity or remaining interest in the collateral to which their claims would attach. If necessary valuation hearings will be scheduled as part of the Confirmation process. 3.

Performance Bonds

-20-

TABLE OF CONTENTS (continued) Page In addition to the above two claims, there are the claims of sureties issuing performance bonds to the Debtors to ensure the completion of the infrastructure and site work for the benefit of the municipalities in which the developments are located. With respect to the Reorganized Debtors, they intend to complete construction of the developments including the infrastructure and site work so as to obtain a release by the municipality of the bonds issued by the sureties. Accordingly, no provision is made in the Plan for any distribution to such sureties. Their claims are contingent. Negotiations continue with these sureties and the municipalities in an effort to gain their cooperation and consent to the replacement of the existing bonds with new bonds and/or maintenance of the existing bonds with the Reorganized Debtors, in each case with Maplewood as the Principal. With respect to the sureties on bonds pertaining to Liquidating Debtors, the sureties may have recourse upon advancing monies for completion of the bonded improvements to the subrogation rights of the municipalities to the cash portion of any bonds in place. The extent their claims are not satisfied, they will be treated as unsecured claims (“Class 5”). The sureties’ claims may be estimated prior to or subsequent to Confirmation to determine their claims as unsecured creditors in their respective cases. M.

Department of Community Affairs

Certain of the developments constructed by Kara, through its Affiliates, were subject to compliance with the Planned Real Estate Full Development Act (“PREDFDA”), N.J.S.A. 45:22A21 et seq. The New Jersey Department of Community Affairs, division of Codes and Standards (“DCA”), regulates the offering of homes in subject communities under this statute. The developments subject to PREDFDA generally fall within one of three categories. Those in which (1) all of the homes have been sold and conveyed to individual purchasers; (2) some of the homes have been sold and conveyed; and (3) none of the homes have been sold and conveyed. As of the date of this Disclosure Statement, all of the Affiliates have sought relief under the provisions of Chapter 11. Kara has formally notified the condominium associations in each instance of the pendency of these bankruptcy proceedings. To the extent that Kara Homes, Inc. may have any liability for the claims which may be asserted by creditors of these non-debtor entities, Kara’s liability shall be expunged as part of this Chapter 11 proceeding. In the following four (4) developments are Operating Debtors and are subject to PREDFDA. The Operating Debtor DCA projects are as follows: 1. Horizons at Woodlake Greens, Township of Lakewood (Horizons at Woodlake Greens, LLC); 2. Horizons at Mount Arlington, A Condominium, Borough of Mt. Arlington (Kara at Mount Arlington II, LLC); 3.

Cottage Gate at Navasink Condominium, Middletown (Kara at Navasink, LLC);

and -21-

TABLE OF CONTENTS (continued) Page 4. Landings at Manahawkin Condominium, Township of Stafford (Landings at Manahawkin, LLC). The DCA has advised that it may not authorize the sale of homes in these developments absent compliance by the Reorganized Debtors with PREDFDA and that the existing contract purchasers must be offered the option to proceed on their contracts or not do so. The Plan provides that option to contract purchasers. All of the homes in the following five (5) developments subject to PREDFDA have been conveyed to individual purchasers. The sold-out DCA developments are as follows: 1. Bridgepointe at Harbor Heights, A Condominium, Township of Old Bridge (Bridgepointe at Harbor Heights, LLC); 2.

Aspen Woods, Township of Aberdeen (Kara at Monmouth, LLC);

3.

Horizons at Barnegat, Township of Barnegat (Kara at Atlantic Hills, LLC);

4. Lakeshore Village, A Condominium Borough of Mt. Arlington (Kara At Lakeshore Harbor, LLC); and 5.

The Summit at Cedar Grove, Township of Cedar Grove (Kara at Cedar Grove,

LLC). The development, Horizons at Shrewsbury Commons, is subject to PREDFDA and was registered by DCA; however, no offering or sale of homes was commenced after the project was registered. With the exception of Horizons at Shrewsbury Commons, each of the above developments was issued a Notice of Violation and Order to Pay Penalty and Order to Release Escrow Monies in which each development was cited for numerous violations of PREDFDA. On February 16, 2007, all matters were transferred to the Office of Administrative Law for a hearing pursuant to N.J.S.A. 52:14B-1 to –15. Subsequently, by order of Doughlas H. Hurd, ALJ dated March 8, 2007, the matters were placed on the inactive list for a period of six (6) months due to the pending bankruptcy case. Kara is working with the DCA to amend its offering literature to reflect the bankruptcy and the filing of the Plan so that sales can resume either at or prior to confirmation. Relative to the projects that are subject to DCA (as well as the DCA-exempt projects discussed in Section 2), the association formed to govern the affairs of the development proceed through the turnover of control from the control of the developer to the individual owners. The turnover of control involves both the surrender of positions on the governing board, as well as the assertion of claims by the owners for deficiencies in construction and in the fiscal management of the association. The respective associations typically assert claims for remedial work or monetary damages. Kara has added the association to its creditors list so that they may -22-

TABLE OF CONTENTS (continued) Page participate in the Chapter 11 proceeding. Treatment of this monetary damage claim will be as Class 5 Creditors in each Case. 1. DCA Exempt Projects. Certain developments are exempt from DCA registration under PREDFDA, due to exemptions under the statute, e.g. the development contains fewer than 100 lots. The debtor developments in which homes are to be owned by Operating Debtors: (a)

Orchard Meadow Estates.

The DCA exempt projects in which all homes have been conveyed to individual purchasers are: (a)

Heatherstone Estates;

(b)

Island Breeze;

(c)

Island Crest;

(d)

Island Gate;

(e)

Tallymawr; and

(f)

Lenesy Estates.

While these projects are not subject to regulation by DCA, they are governed by homeowner associations, which were created to administer the affairs of the communities. As with the communities subject to PREDFDA, there may be claims arising out of the construction and management of the common facilities and areas, performance of the obligations of Kara under the governing documents of the community, and the fiscal operation of the homeowners association while in control of Kara. These homeowner associations are listed as creditors in the Affiliate Cases and in the Kara Homes, Inc. Case so that they may participate in the Chapter 11 proceeding. Petitions for these Cases either have been filed as of the date of filing of this First Amended Disclosure Statement or will soon be filed. Claims of the homeowner associations are treated as Class 5 Claims. 1. Membership of Board of Directors. Kara held a majority of the positions on certain Association Boards as of the filing of the Bankruptcy Petition. In response to pressure from certain Boards, Kara agreed to temporarily appoint one or more unit owners to its positions so that a majority of the positions would be filled by unit owners, and the Board would then be able to achieve a quorum to conduct business. The appointment of unit owners to Kara’s positions is revocable, allowing Kara or a successor to subsequently appoint a developer representative (or successor developer representative) to the Boards. Kara appointed unit owners (other than the developer) to its positions on the following Boards, subject to Kara’s right to revoke such appointment at any time:

-23-

TABLE OF CONTENTS (continued) Page 1.

Horizons at Birch Hill, A Condominium;

2.

Cottage Gate at Navasink Condominium;

3.

Horizons at Woods Landing Condominium;

4.

Horizons at Woodlake Greens;

5.

Horizons at Pennington Woods Condominium; and

6.

Landings at Manahawkin Condominium.

3. Unit Warranties. Homeowners may have claims against Kara and/or the Affiliate for warranty claims pertaining to their home. There is in place a private warranty insurance company to insure that the warranty work is performed. The Reorganized Debtors will continue to pay the premiums on the warranty policies as an ongoing expense. Any unpaid warranty claims will be treated as Class 5 Claims in the Affiliate Cases. N.

Discharge of Guaranty Claims against Kara Homes, Inc.

Pursuant to the Plan, the guaranty claims against Kara Homes Inc. are unsecured claims that will be discharged. O.

Other Assets

In addition to real estate assets currently owned by the Affiliates, there are six land options or contracts to purchase real estate parcels which may have substantial value but require funding. These land options are as follows: Community

Location

Purchase Price

Cottage Gate

Middletown Township

$ 4,200,000

- 35 single family and 4 Mt. Laurel units - approvals already obtained

Heritage Place

Old Township

Bridge $ 1,179,976

(Toby Gardens)

- 38 condo units - Garden style Obtained approvals

final

municipal

- DOT and utilities permits pending

-24-

TABLE OF CONTENTS (continued) Page Horizons at Old Grace Estates Township

Bridge $ 4,920,000

- 36 age restricted single family units - Rite Aid to be built - Application for use variance approved

Horizons at Dover Township Toms River

$ 4,500,000

- Concept plan calls for 108 multifamily units No-formal approvals obtained yet

Meadows at Borough of Tinton $ 2,000,000 Tinton Falls Falls

- 17 single family units; potentially one Mt. Laurel unit - Preliminary approval obtained on 2/06 - 75K required for final approvals

Horizons Aberdeen Forge

at Aberdeen Township

Forge $ 14,712,022

- 288 age restricted single- and multi-family units

Total Purchase Price: $35,111,998.00 These land options/contracts are held in the name of Kara Homes Inc. or t/a Kara Development Inc. Some of the Sellers have terminated the contracts pre-petition and take the position that Kara has no interest remaining. Presently, only the Cottage Gate contract and the Heritage Place/Toby Gardens contracts are perceived as having value. At a hearing held on April 9, 2007, the Guttman Family Trust, an owner of a portion of the land in the Horizons at Toms River option, was granted abstention by the Court, and has commenced a suit in the Superior Court of New Jersey to terminate its contract. The seller of Toby Gardens filed a motion in the Bankruptcy Court to force Kara to assume or reject its contract by June 21, 2007, which motion was granted. A stipulation has been entered into extending the date to June 28, 2007. If no financing is in place to provide adequate assurance of the Reorganized Debtors’ ability to perform, the contract will be deemed terminated. Kara, with Plainfield, is in the process of filing a motion to assume and assign this contract to Plainfield or Maplewood. Kara and Plainfield are negotiating with the Seller of the Cottage Gate contract in an effort to conclude that transaction.

-25-

TABLE OF CONTENTS (continued) Page P.

Cash Bond Disclosure

A listing of the cash bonds in place with the various municipalities is annexed as Exhibit “D.” There is in excess of $3.0 million in cash bonds which may be due to the Reorganized and Liquidating Debtors. Claims for the return of all or a portion of the cash due to the Liquidating Debtors will be pursued by the Liquidation Trustee. To the extent that sureties issuing performance bonds to the various municipalities either perform the work upon the demand of the municipality, or pay for the cost of the work, the sureties will be subrogated to the municipalities’ claims against the cash bonds. It is uncertain at this time whether any cash will be released to the Reorganized or Liquidating Debtors in the future. To the extent it may be released, it will either by used to pay down the DIP Loan or be paid to the Liquidation Trustee. Q.

Adversary Proceedings Involving the Debtors

Kara Homes, Inc., Kara at Buckley Estates, LLC (“Buckley”) and Kara at the Tradewinds, LLC (“Tradewinds”) filed an Amended Fraudulent Transfer and Preference Complaint (the “Complaint”) in Adversary Proceeding 06-03124 (MBK) against the following defendants: Diamond Developers at the Tradewinds, LLC (“Diamond Developers”); Michael D. Garofalo; Vintage Contracting of New Jersey, Inc. (“Vintage Contracting”); All Seasons Maintenance, Inc.; East Coast Site Work, Inc.; Amboy National Bank and Yardville National Bank. The Debtors challenge the conveyance of five lots, two of which Buckley owned and three of which Tradewinds owned, to Mr. Garofalo or to Diamond Developers, an entity that Mr. Garofalo formed, as fraudulent transfers and/or preferences under Bankruptcy Code Sections 548(a)(1)(B) and 547(b), respectively, that the Debtors can avoid. The matter is the subject of ongoing settlement discussions. 1. Adversary Proceedings against construction lien-holders. On or about January 15 2007, twenty-three (23) Affiliates each filed a “Complaint to Determine Extent, Validity and Priority of Liens and Void Liens” against the construction creditors that had recorded liens against their respective developments (collectively the “Defendants”). Kara Homes, Inc. was joined as a plaintiff in each of the twenty-three (23) Adversary Proceedings listed below (Kara Homes, Inc. and the Affiliates shall collectively be referred to as “Plaintiffs”): 1.

Name of Affiliate

Adv. Pro. No.

2..

Horizons at Birch Hill, LLC

07-1065

2.

Kara at Buckley Estates, LLC

07-1064

3.

Country Club Estates by Kara, LLC

07-1059

4.

Kara at Crine West, LLC

07-1056

5.

Kara at Dayna Court, LLC

07-1049

-26-

TABLE OF CONTENTS (continued) Page 6.

Estates at Galloway Woods, LLC

07-1062

7.

Kara at Glen Eyre, LLC

07-1069

8.

Hartley Estates by Kara, LLC

07-1050

9.

Kara at Hawkins Ridge, LLC

07-1057

10.

The Landings at Manahawkin, LLC

07-1058

11.

Kara at Mt. Arlington I, LLC

07-1066

12.

Kara at Navasink, LLC

07-1067

13.

Kara at Park Ridge Estates, LLC

07-1051

14.

Kara at Tradewinds, LLC

07-1068

15.

Sterling Acres at Monroe, LLC

07-1052

16.

Horizons at Woodlake Greens, LLC

07-1070

17.

Kara at Lacey, LLC

07-1061

18.

Winding Run Estates by Kara, LLC

07-1063

19.

Bergen Mills Estates, LLC

07-1071

20.

Horizons at Woods Landing, LLC

07-1055

21.

Kara at Monroe, LLC

07-1053

22.

Woodland Estates at North Edison

07-1060

23.

Kara Homes at Enclave II, LLC

07-1054

In the “Factual Background” of each complaint, Defendants’ lien claims were categorized by both their recording date and the manner in which they were recorded. With respect to the recording date, Defendants were divided into three categories: (1) those who filed liens prior to the date on which Kara Homes, Inc. filed for bankruptcy, (2) those who filed liens subsequent to the date on which Kara Homes, Inc. filed for bankruptcy, but prior to the date on which the Affiliate filed for bankruptcy, and (3) those who filed liens subsequent to the bankruptcy petition dates of both Plaintiffs. With respect to the manner of filing, construction creditors were divided into two categories: (1) those who filed a Notice of Unpaid Balance; Right to File Lien, in accordance with the residential construction contract procedures under the New Jersey -27-

TABLE OF CONTENTS (continued) Page Construction Lien Act (N.J.S.A. 2A-44A-1 et seq.), and (2) those who only filed a Construction Lien. In each complaint, Plaintiffs alleged that those construction creditors who recorded liens after both Plaintiffs filed for bankruptcy violated the automatic stay, causing damage to the Plaintiffs and entitling them to compensatory and punitive damages as well as reasonable attorneys fees and other costs. Additionally, Plaintiffs sought the discharge of pre-petition construction liens, which were either unperfected or unenforceable at the time of the commencement of the bankruptcy proceedings, due to Defendants’ failure to comply with the New Jersey Construction Lien Act when recording their liens. Plaintiffs also seek a determination of the extent validity and priority of liens to be determined by the Court. Presently, there are settlement negotiations with a number of the defendants and there are motions pending for summary judgment. To the extent these matters are not concluded by the Effective Date, the Liquidation Trustee will be substituted as a party plaintiff. 3. Toms River.

Adversary Proceedings against the Townships of Middletown, Lakewood and

(a) Kara Homes, Inc. and Kara at Navasink, LLC (the “Debtors”) filed adversary proceedings, now pending under Docket No. 07-1150, against Middletown Township. The complaint seeks the return of $149,225.00 in cash deposits. In addition, in light of the status of the completion of required site improvements, the Debtors requested a 70% reduction of performance guarantee B21881506 ($877,459.84), and a 100% reduction of performance guarantee B21881507 ($450,056.40). (b) Kara Homes, Inc., Kara at Dayna Court, LLC, and Kara Homes at Enclave II, LLC (the “Debtors”) filed adversary proceedings, now pending under Docket No. 07-1151, against the Township of Toms River and Dover Township Municipal Utilities Authority. The complaint seeks the return of $31,500.00, posted with respect to Dayna Estates, and $155,391.82, posted with respect to the Enclave. In addition, the Plaintiffs seek to recover the cash deposits in Kara’s other developments in the Township of Toms River, namely in Saddle Ridge Estates, Tallymawr Manor and White Oak Estates. Finally, in light of the status concerning completion of the required site improvements, the Plaintiffs requested a reduction of the performance guarantee with respect to each of the projects. (c) Kara Homes, Inc. and Horizons at Woodlake Greens, LLC (the “Debtors”) filed adversary proceedings, now pending under Docket No. 07-1152, against the Township of Lakewood and Lakewood Township Municipal Utilities Authority. The complaint seeks the return of $162,657.00 in cash deposits from the Municipal Utilities Authority. In addition, the Debtors requested a reduction of the performance guarantee to reflect the status of completion of the site improvements. In each of the above actions, Debtors also requested the accounting of escrow accounts to determine whether they are excessive or no longer needed for payment of the Defendants’ professional fees. -28-

TABLE OF CONTENTS (continued) Page These matters have been settled and Orders either have been or are being entered approving these settlements. Copies of the Orders are annexed hereto as Exhibits (“R” through “U”). 4. Barry Rosengarten v. Kara at Navasink, LLC. On November 27, 2006, Barry Rosengarten (“Rosengarten”) filed an Adversary Complaint (06-3016) and an Order to Show Cause seeking to enjoin the sale of the Spaltro Contract and to declare that the contract between Rosengarten and Kara, for the sale of the Cottage Gate II property, terminated as of October 10, 2006, or alternatively, as of December 4, 2006, by virtue of the operation of 11 U.S.C. §108(a). The first portion of the Order to Show Cause, seeking injunctive relief, has since been withdrawn as moot. With respect to the Cottage Gate II Property, the parties have since engaged in settlement negotiations. 5. Adversary Proceedings Brought by the Committee of Unsecured Creditors against Apple Chase Investors, LLC. (a) The “Crine West Complaint” (Adv. Pro. No. 07-1011). The amended complaint in this adversary proceeding was filed on March 5, 2007. The amended complaint sets forth claims relevant to Debtors s Kara Homes, Inc. (“Kara Homes”), Kara at Navasink, LLC (“Navasink”), Horizons at Birch Hill, LLC (“Horizons”) and Kara at Crine West (“Crine West”). The facts set forth in the complaint involve (i) a loan, in the amount of $3,780,000.00, made by Apple Chase to Crine West on March 26, 2004 (the “Crine West Loan”), (ii) the alleged contemporaneous collateralization of the Crine West Loan, (iii) the subsequent alleged crosscollateralization of the Crine West Loan, and (iv) the alleged subsequent modification of the Crine West Loan documents. The complaint seeks to: (i)

Determine the extent and validity of Apple Chase’s alleged liens on Navasink’s, Horizons’, Crine West’s and Atlantic Hills’ properties;

(ii)

Avoid, recover and preserve for the bankruptcy estates of Navasink, Horizons, Kara Homes and Atlantic Hills, transfers made and obligations incurred by those Debtors to Apple Chase;

(iii)

Equitably subordinate Apple Chase’s claims against the bankruptcy estates of Navasink, Horizons, Kara Homes and Atlantic Hills;

(iv)

Obtain such other relief as the Court deems just and proper.

(b) The “Mt. Arlington II Complaint” (Adv. Pro. No. 07-1012). The amended complaint in this adversary proceeding was filed on February 20, 2007. The amended complaint sets forth claims against Apple Chase relevant to Debtors Kara Homes, Kara at Mt. Arlington II, -29-

TABLE OF CONTENTS (continued) Page LLC (“Mt. Arlington II”), Winding Run Estates by Kara, LLC (“Winding Run”) and The Landings at Manahawkin (“Landings”). The facts set forth in the amended complaint involve: (i) a loan in the amount of $1,800,000.00 made by Apple Chase to Mt. Arlington II on December 29, 2005, the alleged repayment of that loan, and Apple Chase’s failure to release the subject Mortgage and Mortgage Security Agreement as of record, (ii) a loan in the amount of $5,000,000.00 made by Apple Chase to Landings, on April 8, 2005 (the “Landings Loan”), and the alleged collateralization and guaranties of the Landings Loan, which alleged collateralization and Guaranties involved Mt. Arlington II and Kara Homes, (iii) preferential payments made by Landings to Apple Chase towards the reduction of the Landings Loan Balance, (iv) the alleged fraudulent conveyance of four lots owned by Winding Run to Apple Chase. The complaint seeks to:

R.

(i)

Determine the extent and validity of Apple Chase’s liens on Mt. Arlington II’s and Winding Run’s Property;

(ii)

Avoid, recover and preserve for the bankruptcy estates of Mt. Arlington II, Winding Run and Kara Homes transfers made and obligations incurred by those Debtors to Apple Chase;

(iii)

Avoid, recover and preserve for Landings’ bankruptcy estate preferential transfers made by Landings to Apple Chase;

(iv)

Equitably subordinate Apple Chase’s claims against the bankruptcy estates of Kara Homes, Mt. Arlington II and Winding Run;

(v)

Obtain such other relief as the Court deems just and proper.

Bar Date

The Bar Date for filing Proofs of Claims in these Cases was February 14, 2007 for certain Cases and later dates for others. In some instances, the Bar Date has been extended with the consent of the Debtors. To the extent that claims arise from the rejection of executory contracts either prior to the Effective Date or as set forth in the Plan, holders of rejection claims shall have a period of thirty (30) days from the date of such rejection to file Proofs of Claims. S.

Listing of Claims in each Case.

Annexed hereto as Exhibit “V” is a listing on a Case by Case basis of claims, either filed by creditors or listed by the Debtors in their petitions. The listing of claims in the Kara Homes, Inc. case is inclusive of Senior Lender Claims by way of guarantee claims and is duplicative of claims in other cases. The aggregate of claims in the Kara Homes, Inc. case is in excess of $258 million. -30-

TABLE OF CONTENTS (continued) Page T.

Avoidance Actions.

The Debtors, the Creditors’ Committee and their respective professionals have been and continue to analyze whether any transfers made by the Debtors prior to the Petition Date are avoidable as preferences or fraudulent conveyances pursuant to the provisions of the Bankruptcy Code or applicable non-bankruptcy law. Such transfers include, but are not limited to, transfers made during the ninety (90) day period and one (1) year period immediately preceding the Petition Dates. New Jersey statutes provide a further “look back” period beyond 1 year. During the proceedings, Debtors’ counsel and Committee’s counsel filed certain Avoidance Actions as set forth hereinafter in Section K. At this time, the Debtors and the Creditors’ Committee cannot estimate what portion of the above transfers will be recoverable by the Estate. Pursuant to the Plan, all Avoidance Actions and Causes of Action shall be transferred to the Liquidation Trust, provided, however, (a) with regard to alleged Liens against the Reorganizing Debtors, notwithstanding section 551 of the Bankruptcy Code, the avoidance of any Lien, or any Lien void under section 506(d) of the Bankruptcy Code, is preserved for the exclusive benefit of the DIP Lender until the DIP Loan Claims are paid in full, and thereafter for the benefit of the Reorganizing Debtors (which Claims, if any, will be pursued exclusively by the Reorganizing Debtors in accordance with Section 5.12(b) of the Plan); (b) with regard to alleged Liens against the Liquidating Debtors whose Assets are encumbered by the DIP Lien, the avoidance of any Lien, or any Lien void under section 506(b) of the Bankruptcy Code, is preserved for the benefit of the DIP Lender until the DIP Loan Claims are paid in full and thereafter for the benefit of the beneficial owners of the Liquidation Trust; and (c) with regard to alleged Liens against Liquidating Debtors whose Assets are not encumbered by the DIP Lien, all rights of the Liquidating Trust arising under section 551 of the Bankruptcy Code shall be transferred to and preserved for the benefit of the beneficial owners of the Liquidation Trust on the Effective Date. The Liquidating Trust shall not hold any Lien, Claim, secured or unsecured, or Interest in or against any of the Reorganizing Debtors or their Assets. U.

SUMMARY OF THE PLAN

The following is a brief description of the significant provisions of the Plan. As noted, the Plan is, in part, a reorganization, providing fresh funding in order to keep the core business of the Operating Debtors and in part, a liquidation as to the remaining cases. The Plan provides separate Classes for each Debtor. This summary highlights only certain provisions of the Plan and is not a substitute for a full and complete reading of the Plan. A copy of the Plan is attached hereto as Exhibit “A.” Creditors are referred to the Plan for a more thorough discussion of the provisions of the Plan. In case of any discrepancy between the terms of the Plan and the Disclosure Statement, the terms of the Plan shall govern. V.

CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS

The Plan divides holders of Claims and Equity Interests in each Case into Classes based on their legal rights to satisfaction of the Claims from assets of each Case. Only Allowed Claims shall receive distributions under the Plan. Claims that have not become Allowed Claims or that -31-

TABLE OF CONTENTS (continued) Page are subject to an objection before the Bankruptcy Court or other pending litigation shall be entitled to receive distribution(s) under the Plan only if and after the Claims become Allowed Claims. For all purposes, the Plan shall constitute a separate plan of reorganization for each of the Debtors and Confirmation standards shall be met on an individualized case basis. 1.

Unclassified Claims.

Section 1123(a)(1) of the Bankruptcy Code provides that certain Claims, including Administrative Expense Claims and Tax Claims, shall not be designated into Classes. The Unclassified Claims in each Affiliate’s Case treated herein are described below. (a) Administrative Expense Claims. Except to the extent that the Holder of an Allowed Administrative Expense Claim agrees otherwise, and except for Allowed DIP Claims, which will be treated in the manner set forth in Section 2.02 hereof, Holders of Allowed Administrative Expense Claims will receive, in full satisfaction, settlement, and release of, and in exchange for, such Allowed Claim, on the later of (a) the Effective Date (or as soon as practicable thereafter), (b) the date on which such Claim becomes an Allowed Administrative Expense Claims, or (c) the date upon which such Claim is to be paid under its terms, payment in Cash equal to 100% of said Allowed Administrative Expense Claim, provided, however, that Allowed Administrative Expense Claims representing obligations incurred in the ordinary course of business and assumed by the Reorganized Debtors will be paid or performed in accordance with the terms and conditions of the particular transactions and agreements related thereto. As of the date hereof, accrued but unpaid accounts payable arising post-petition for all of the Debtors are approximately $1,200,000 exclusive of professional fees and real estate taxes. The Debtors dispute certain claims. As of May 31, 2007, accrued and unpaid administrative fees and expenses for professionals for the post-petition period aggregate $4,921,455. Creditor

Total

Total

Total

Description

Accrued

Paid

Unpaid

Greenbaum, Rowe, Smith & Davis, LLP

$2,150,000.00

$225,275.00

$1,924,725.00

For Debtors’ attorney fees & expenses

Trenk, DiPasquale, Webster,

$ 570,072.32

$100,000.00

$ 470,072.32

For fees & expenses as special counsel to Debtors

Traxi, LLC

$1,508,607.00

$375,000.00

$1,133,607.00

For fees & expenses as Debtors’ Crisis Manager

Cole, Schotz, Meisel, Forman & Leonard, PA

$ 861,075.00

$125,000.00

$ 723,051.00

For fees & expenses as counsel to Creditors’ Committee

Della Fera, Sodono P.C.

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TABLE OF CONTENTS (continued) Page J.H. Cohn

$ 733,108.28

$125,000.00

$ 608,108.28

For fees & expenses as accountants for Creditors’ Committee

Donlin, Recano & Company, Inc.

$ 87,789.11

$ 25,896.38

$ 61,892.73

For fees & expenses for claims & balloting agent through April 30th

United States Trustee

$

$0

$

For fees & expenses for U.S. Trustee’s Fees

TOTAL

$5,910,651.71

$976,171.38

$4,921,456.33

All Professionals seeking an award by the Bankruptcy Court of Professional Fees shall be required to file their respective final applications for allowance of Professional Fees by the date that is ninety (90) days after the Confirmation Date. In full satisfaction, settlement, and release of such Allowed Claims in favor of the Reorganized Debtors, the Reorganized Debtors, subject to the occurrence of the Effective Date, shall pay up to $5,400,000 on account of such Allowed Claims in accordance with the following provisions: (i) there will be a $6,000,000 cap on unpaid Professional Fees as of the Effective Date, and all unpaid Professional Fees over $6,000,000 as of the Effective Date are waived as to the Reorganized Debtors and can be collected, if at all, only from sources other than the Reorganized Debtors; (ii) the Reorganized Debtors will contribute up to $5,400,000 in principal to satisfy unpaid Professional Fees as of the Effective Date, the precise amount of which will be equal to 90% of the amount of total unpaid Professional Fees as of the Effective Date (the “Reorganized Debtor Professional Fee Amount). The balance of 10% will be either waived by holders of Allowed Professional Fee Claims or collected from a source other than the Reorganized Debtors; (iii) The Reorganized Debtor Professional Fee Amount shall be paid to holders of Allowed unpaid Professional Fee Claims, on a pro rata basis subject to the provisions hereof, as follows: (A)

66.67% on the Effective Date;

(B) 11.11% on December 20, 2007, together with interest thereon at the rate of 8% per annum accruing from the Effective Date to the date of payment; and C) 22% pari passu with the permanent reduction of the DIP Loan, together with interest thereon at the rate of 8% per annum accruing from the Effective Date to the date of payment; provided, however, that notwithstanding anything herein to the contrary, the Reorganized Debtor Professional Fee Payment shall be allocated among holders of Allowed Professional Fee Claims -33-

TABLE OF CONTENTS (continued) Page such that the total payments from all sources received on account of all awarded Professional Fees in the Cases will result in each professional receiving the same percentage of their Allowed Professional Fees. Except as otherwise provided in the Plan, the DIP Loan claims will be treated as follows: (a) the legal, equitable, and contractual rights of the DIP Lender pursuant to the DIP Loan and the DIP Order will be unaltered, and (b) the DIP Loan shall be reinstated and extended with interest to accrue at the agreed upon rate as set forth in the DIP Loan. On or before to the Effective Date, the Post-Petition Closing Proceeds shall be paid to the DIP Lender in partial satisfaction of the DIP Loan, in accordance with the terms of the DIP Loan. Subject to the occurrence of the Effective Date, the DIP Lender shall release the DIP Lien on (i) Avoidance Actions, and (ii) Kara Homes’ 90% equity interest in Mt. Arlington I, LLC. (b) United States Trustee Fees. All fees then due and payable by the Debtors under section 1930 of Title 28 of the United States Code that have accrued but remain unpaid prior to the Effective Date shall be paid by the Reorganized Debtors on the Effective Date. On and after the Effective Date, the Liquidation Trustee shall pay any such fees until the entry of a final decree in the Cases. A.

Municipal Tax Claims And Municipal Utility Authorities’ Claims (Class 1)

1. Description. Municipalities and Municipal Utility Authorities have claims in each of the Cases for unpaid real estate taxes and sewer and/or water charges. A schedule of these outstanding taxes and charges in each Case is annexed hereto as Exhibit “W.” In the aggregate, such taxes and charges approximate $2,200,000. Outstanding real estate taxes and charges against the Operating Debtors is estimated at $836,000. Outstanding real estate taxes and charges against the Liquidating Debtors is estimated at $1,364,000. 2.

Treatment. (a)

Class 1A - Municipal Tax Claims And Municipal Utility Authorities Claims With Respect to the Operating Debtors

Except to the extent a Holder of an Allowed Municipal Tax Claim and Municipal Utility Authorities Claim has agreed to a less favorable treatment of such Allowed Claim, each Holder of an Allowed Municipal Tax Claim and Municipal Utility Authorities Claim against an Operating Debtor, if any, shall receive, in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Claim, Cash equal to the amount of such Allowed Claim on the later of (1) the Effective Date and (2) fifteen (15) Business Days after the date such Claim becomes an Allowed Claim by Final Order, payable in accordance with Section 5.11 hereof. Upon full payment of their Allowed Class 1A Claims, any lien or encumbrance securing the applicable Class 1A Claim, if any, shall be deemed cancelled, discharged, extinguished and of no further force or effect. The Holders of Municipal Tax Claims and Municipal Utility Authorities Claims against any of the Operating Debtors are unimpaired and not entitled to vote to accept or reject the Plan. -34-

TABLE OF CONTENTS (continued) Page (b)

Class 1B Municipal Tax and Claims With respect to Liquidating Debtors.

Municipal

Utility

Except to the extent that a Holder of an Allowed Municipal Tax Claim or Municipal Utilities Claim against the Liquidating Debtors has agreed to a less favorable treatment of such Allowed Claim, each Holder of an Allowed Municipal Tax Claim or Municipal Utilities Claim with respect to the Liquidating Debtors shall receive, in full satisfaction, settlement, discharge and release of and in exchange for such Allowed Claim, a continuing lien upon its collateral to be paid from the gross proceeds of the sale of such collateral at such time as such Collateral shall be sold. The Holders of Municipal Tax Claims and Municipal Utility Authorities Claims against the Liquidating Debtors are impaired, and they are entitled to vote to accept or reject the Plan. B.

Priority Claims (Class 2)

1. Description. Class 2 consists of all Allowed Priority Claims, if any, against any of the Debtors. Priority Claims are as set forth in 11 U.S.C. §507. Included but not limited within the definition of Priority Claims is the claims of former or existing employees of the Debtors, for wages, salaries, or commissions, including vacation, severance and sick leave pay earned by such individuals within 180 days before the date of filing of the Petition, limited to the maximum sum of $10,000 for each individual. Class 2A consists of all Allowed Priority Claims against any of the Operating Debtors; Class 2B consists of all Allowed Priority Claims, if any, against any of the Liquidating Debtors. (a) Treatment of Class 2A Priority Claims. Except to the extent a Holder of an Allowed Priority Claim against any of the Operating Debtors has agreed to a less favorable treatment of such Allowed Claim, each holder of an Allowed Class 2A Priority Claim, if any, shall receive in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Claim, Cash equal to the amount of such Allowed Claim on the later of (1) the Effective Date and (2) fifteen (15) Business Days after the date such Claim becomes an Allowed Claim by Final Order. Holders of Priority Claims against any of the Operating Debtors are not impaired and are not entitled to vote to accept or reject the Plan. (b) Treatment of Class 2B - Priority Claims. Except to the extent that a Holder of an Allowed class 2B Priority Claim has agreed to accept a less favorable treatment of such Allowed Claim, each Holder of an Allowed Class 2B Priority Claim with respect the Liquidating Debtors shall receive, in full satisfaction, settlement, discharge and release of, and in exchange for of such allowed claim, such Cash proceeds as shall be available for distribution to such Holder from the liquidation of the Assets of the Liquidating Debtors. Holders of Priority Claims against any of the Liquidating Debtors are impaired and are entitled to vote to accept or reject the Plan. C.

Claims Of Senior Mortgage Lenders (Class 3)

1. Description. Class 3 in each Debtor Case consists of the first priority secured claims of the Senior Secured Lenders (“Lenders”) and/or their assigns upon the real and personal -35-

TABLE OF CONTENTS (continued) Page property in each Case. None of the Lenders hold loans which are cross collateralized. A schedule including the name of the Affiliate, the name of the holder of the Class 3 Claim and the amount of such Claim including principal and interest accrued is annexed hereto as Exhibit “X.” (a) Treatment of Class 3A Claims. Unless the Holder of an Allowed Senior Secured Mortgage Claim against any of the Operating Debtors has entered into a Term Sheet, then, in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Claim, such Holder shall either, at the election of the Operating Debtors, (i) receive title to and surrender of such Holder’s collateral in exchange for the release of any Lien, security interest, or other encumbrance securing repayment of any and all Claim held by such Holder against the Operating Debtors, or (ii) be paid by the applicable Operating Debtor under the terms of the applicable agreement under which the Senior Secured Mortgage Claim arose, provided that the applicable Operating Debtor shall cure any arrearages under such agreements; The Operating Debtors or the Reorganized Debtors, as applicable, may commence an adversary proceeding in the Bankruptcy Court seeking a determination as to amount, extent, validity, and priority of any Liens securing any Class 3A Claim. The Holders of Senior Secured Mortgage Claims against any of the Operating Debtors are impaired and are entitled to vote to accept or reject the Plan. (b) Treatment of Class 3B Claims. The Liquidating Debtors shall, at the election of a particular Liquidating Debtor, in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Claim either (a) surrender title to the collateral of the Holder of an Allowed Senior Secured Mortgage Claim or (b) schedule a sale pursuant to section 363 of the Bankruptcy Code with such Lien to attach to the proceeds of such sale. The Holders of Class 3B Claims are impaired and are entitled to vote to accept or reject the Plan. D.

Class 4 – Secured Claims.

1. Description. Other Secured Claims consist of all Allowed Secured Claims, if any, against any of the Debtors that are not otherwise classified in the Plan. Class 4A consists of Secured Claims against the Operating Debtors, and Class 4B consists of Secured Claims against the Liquidating Debtors. (a) Treatment of Secured Claims (Class 4A). Except to the extent such Holder has agreed to a less favorable treatment of its Allowed Class 4A Claim, in full satisfaction, settlement, discharge, and release of, and in exchange for, each Allowed Class 4A Claim, any and all of the applicable Liens in favor of the Holders of Allowed Secured Claims, if any, against any of the Operating Debtors shall attach to, and be satisfied from, the value realized from its collateral in the order of their priority, with the same validity, force, and effect which they now have, subject to any Causes of Action and defenses the Operating Debtors may possess with respect thereto. In the event that the value realized from a Secured Creditor’s collateral is less than the amount of its Allowed Secured Claim, the Holder shall have a Deficiency Claim. Any and all Liens or encumbrances in favor of the Holders of Allowed Class 4A Claims shall be of no force and effect and shall otherwise automatically be deemed cancelled, discharged, and extinguished as against the Operating Debtors, the Reorganized Debtors, and/or any of the -36-

TABLE OF CONTENTS (continued) Page Assets thereof. The Holders of Other Secured Claims against any of the Operating Debtors are impaired and are entitled to vote to accept or reject the Plan. (b) Treatment of Class 4B Secured Claims. Each Holder of an Allowed Class 4B Claim, in full satisfaction, settlement, discharge and release of, and in exchange for, each Allowed Class 4B Claims, and any applicable Lien arising in favor of the holder of such Allowed Class 4B Claim against any of the Liquidating Debtors, shall attach to and be satisfied from the value in any funds realized from its collateral in the order of priority and with the same validity and extent, force and effect which they now have subject to any claims and defenses the Liquidating Debtors may possess with respect thereto. In the event that the value realized from the Holder of a Class 4B Claim’s collateral shall be less than its Allowed Secured Claim, the Holder of shall have a Deficiency Claim classified as Class 5B. The Holders of Secured Claims against any of the Liquidating Debtors are impaired and are entitled to vote to accept or reject the Plan. E.

UNSECURED CREDITORS (Class 5) (Impaired)

1. Description. The claims of Class 5 Claimants include all unsecured claims in each Debtor Case. Such claims include trade claims, deficiency claims, deposit claims of homebuyers ,bonding company claims, rejection claims, claims by homeowners and condominium associations in these Cases and claims of all kinds which may be filed in these Cases. (a)

Treatment of Class 5A Claims.

On the Effective Date, the Holders of Allowed Unsecured Claims against any of the Operating Debtors shall receive in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Claim, its Pro Rata share of (i) the Cash Payment, and (ii) the proceeds, if any, of any Causes of Action commenced by the Litigation Trust where the Litigation Trust succeeded to the claims of Kara Homes. In addition, each Holder of an Allowed Class 5A Claim shall receive its Pro Rata share of any other Litigation Trust Assets on a per Liquidating Debtor Estate basis. Any agreements or contracts purporting to give rise to any such Class 5A Claim shall be deemed terminated and of no further force and effect as of the Effective Date other than as evidence of the Holder thereof’s right to receive its Pro Rata allocation from the Liquidation Trust Assets as set forth herein. Holders of Unsecured Claims against any of the Operating Debtors are impaired and are entitled to vote to accept or reject the Plan. Notwithstanding the classification of a Contract Purchaser as holding a Class 5A General Unsecured Claim, in lieu of such Claim, a Contract Purchaser may elect to exercise its rights under Article V of the Plan. (b) Treatment of Class 5B Claims. Each Holder of an Allowed Unsecured Claim against any of the Liquidating Debtors shall receive in full satisfaction, settlement, discharge and release of, and in exchange for, such Allowed Claim, its Pro Rata share of the (i) the Cash Payment, and (ii) the proceeds, if any, of any Causes of Action commenced by the -37-

TABLE OF CONTENTS (continued) Page Litigation Trust where the Litigation Trust succeeded to the claims of Kara Homes. In addition, each Holder of an Allowed Class 5B Claim shall receive its Pro Rata share of any other Litigation Trust Assets on a per Liquidating Debtor Estate basis. Any agreements or contracts purporting to give rise to any such Class 5B Claim shall be deemed terminated and of no further force and effect as of the Effective Date other than as evidence of the Holder thereof’s right to receive it allocation from the Liquidation Trust Assets as set forth herein. Holders of Allowed Unsecured Claims against any of the Liquidating Debtors are impaired and are entitled to vote to accept or reject the Plan. F.

EQUITY INTEREST HOLDERS (Class 6)

1. Description. The Equity Interests in each Debtor Case are presently owned ninety (90%) by Kara Homes, Inc., and ten (10%) percent by Karagjozi. Karagjozi owns one hundred (100%) percent of Kara Homes, Inc. (a) Treatment of Class 6A Claims. Except as otherwise provided in the Plan, on the Effective Date, in the time and manner set forth in Article VI of Plan, all outstanding stock and/or membership interests in any of the Operating Debtors shall be cancelled and deemed terminated and of no force and effect and the Holders of Equity Interests shall not be entitled to receive or retain any property under the Plan on account of such Equity Interest, provided, that, Kara Homes existing corporate structure of ownership of the LLC Membership Interests shall be maintained and unaffected by the Plan, as further set forth in Plan Section 6.02 and 6.04. Holders of Equity Interests in the Operating Debtors are impaired and are conclusively deemed to reject the Plan. (b) Treatment of Class 6B Claims. On the Effective Date, all outstanding stock and/or membership interests in any of the Liquidating Debtors shall be cancelled and deemed terminated and of no force and effect and the Holders of such Equity Interests shall not be entitled to receive or retain any property under the Plan on account of such Equity Interest. Holders of Equity Interests in the Liquidating Debtors are impaired and are conclusively deemed to reject the Plan. G.

Executory Contracts and Unexpired Leases

All executory contracts and unexpired leases to which the Debtors are parties that have not been assumed and assigned or rejected prior to Confirmation, shall be rejected effective upon Confirmation. Entities wishing to file Claims for rejection of executory contracts and unexpired leases should refer to the Plan for a discussion of the procedures and deadlines for filing such claims. The Debtors intend, as part of the Confirmation process, to assume certain executory contracts. See Exhibit “G.” NEW PURCHASE AGREEMENT OPTION

-38-

TABLE OF CONTENTS (continued) Page A. Purchase Agreements Not Executory Contracts. As of the Effective Date, each and every Purchase Agreement shall be deemed expired by its terms notwithstanding their having been scheduled as an Executory Contract in the Schedules. B. New Purchase Agreement Option. Each Contract Purchaser shall have the option to either (a) enter into a New Purchase Agreement with the applicable Reorganized Debtor on or after the Effective Date that is substantially similar to the material terms and conditions as the applicable expired Purchase Agreement and receive a credit against the final purchase price for all Contract Purchaser Deposits made by such Contract Purchaser in exchange for (i)

the release and discharge of all Claims against any of the Operating Debtors and the Reorganized Debtors arising under the Purchase Agreement, and

(ii)

voting in favor of the Plan,

or (b)

decline to enter into a New Purchase Agreement and (i)

seek to obtain reimbursement of its Contract Purchaser Deposit from the applicable Deposit Bonding Company, or

(ii)

receive treatment under the Plan as a Holder of a Class 5A Claim, subject to any objection by the Liquidating Trust.

C. Deadline to Make Election. A Contract Purchaser may, at any time up to and including the Voting Deadline, elect to (i) enter into a New Purchase Agreement with the applicable Reorganized Debtor, and (ii) vote in favor of the Plan by indicating its intent to do so on its Ballot. Each Contract Purchaser shall indicate on its Ballot whether or not it wishes to exercise the New Purchase Agreement Option and enter into a New Purchase Agreement. Any Contract Purchaser who does not so affirmatively indicate on its Ballot that it has exercised its New Purchase Agreement Option, and who does not return such Ballot prior to the Voting Deadline, shall be deemed not to have timely elected the New Purchase Agreement Option, and its Claim shall be treated as an Allowed Class 5A Unsecured Claim. Each Opt-In Contract Purchaser shall waive any and all Claims, Liens, causes of action, or other right to payment such Contract Purchaser has, may have, or may assert against any of the Operating Debtors and/or Reorganized Debtors (except those arising under the applicable New Purchase Agreement). Each Opt-Out Contract Purchaser shall retain any and all of its Claims as against the Estate of the applicable Operating Debtor (but shall be enjoined from asserting any such Claim against any of the Reorganized Debtors, the Plan Sponsor, or the -39-

TABLE OF CONTENTS (continued) Page Assets thereof), and shall be entitled to assert or pursue such Claims against the applicable Deposit Bond Company or agree to be treated as a Class 5A Unsecured Claim. MEANS OF IMPLEMENTING THE PLAN A. Issuance of New Interests in the Reorganized Debtors. Notwithstanding any otherwise applicable non-bankruptcy law, on and subject to the occurrence of the Effective Date, Reorganized Kara Homes, Inc. shall issue Reorganized Kara Homes Common Stock and each of the applicable Reorganized Debtors shall issue the New LLC Membership Interests. The issuance of the Reorganized Kara Homes Common Stock and/or New LLC Membership Interests in accordance with Article VI of the Plan is duly authorized without the need for any further corporate action or order of the Bankruptcy Court. B.

Capitalization of the Reorganized Debtors.

Notwithstanding any otherwise applicable non-bankruptcy law, on and subject to the occurrence of the Effective Date and pursuant to the Commitment Letter, the Debtors and the Reorganized Debtors shall be duly authorized and directed to undertake the following transactions as set forth below in this Section 6.02, which transactions shall be required to occur in the following sequence (unless otherwise directed by the Plan Sponsor): (1) First, the Karagjozi Shares shall be automatically and irrevocably expunged, extinguished, cancelled and deemed terminated and of no force and effect, without receiving or retaining any property, claim, or interest thereon, without the need for any further corporate action, shareholder or member approval, court order, consent, notice, or further action by any of the Debtors or Reorganized Debtors in accordance with Sections 4.01(g) and 6.04 of the Plan; (2) Second, Reorganized Kara Homes, Inc. shall issue the Reorganized Kara Homes Common Stock and the Plan Sponsor shall make the Cash Infusion in exchange for one hundred percent (100%) direct ownership of the Reorganized Kara Homes Common Stock and indirect ownership of ninety percent (90%) of the LLC Membership Interests; (3) of Newco;

Third, Reorganized Kara Homes shall form and own one hundred percent (100%)

(4) into Newco;

Fourth, Reorganized Kara Homes shall invest $100,000 from the Cash Infusion

(5) Fifth, the applicable Reorganized Debtors shall issue the New LLC Membership Interests and shall transfer one hundred percent (100%) of the New LLC Membership Interests to Newco in exchange for such $100,000; (6) Sixth, the vesting of Assets in the Reorganized Debtors as provided in Section 9.01 of the Plan shall occur; and

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TABLE OF CONTENTS (continued) Page (7) Seventh, the Karagjozi Interests shall be automatically and irrevocably expunged, extinguished, cancelled and deemed terminated and of no force and effect, without receiving or retaining any property, claim, or interest thereon, without the need for any further corporate action, shareholder or member approval, court order, consent, notice, or further action by any of the Debtors or Reorganized Debtors in accordance with Sections 4.01(g) and 5.04 of the Plan. Holders of Equity Interests shall not be entitled to receive or retain any property under the Plan and there shall be no distribution of any kind on account of the Karagjozi Interests or the Karagjozi Shares. The Debtors and Reorganized Debtors shall be authorized and directed to take any further actions as may be reasonably necessary or appropriate (as directed by the Plan Sponsor) to effectuate such transactions set forth above and any other transactions contemplated by the Plan. C. Allocation of Cash Infusion. On and subject to the occurrence of the Effective Date and subject to full compliance with and pursuant to the Commitment Letter, the Cash Infusion shall be allocated to satisfy the following as required under the Plan: (a)

one hundred (100%) percent of Allowed Administrative Expenses;

(b) sixty six and two thirds (66.67%) percent of Allowed unpaid Professional Fees, subject to the limitation in the DIP Order; (c)

one hundred (100%) percent of all fees payable for US Trustee Fees;

(d) one hundred (100%) percent of Allowed Municipal Tax Claims and Municipal Authorities Claims of the Operating Debtors; (e)

one hundred (100%) percent of Allowed Priority Claims of the Operating

(f)

$2,250,000 Cash payable to the Liquidation Trust.

Debtors; and

The Cash Infusion shall be distributed in accordance with Section 6.11 hereof. All remaining amounts of the Cash Infusion shall be used by the Reorganized Debtors to fund the transactions set forth in Section 6.02 hereof and operating expenses of the Reorganized Debtors on and after the Effective Date. D. Cancellation of Existing Securities and Agreements. Except as otherwise provided in the Plan, on the Effective Date the Equity Interests in all of the Debtors, shall be cancelled, discharged, extinguished and of no further force or effect, provided, that, Kara Homes’ existing corporate structure of ownership of the LLC Membership Interests shall be maintained and unaffected by the Plan, as further set forth in Plan Sections 6.02 and 6.04. Except as otherwise provided in the Plan with respect to the DIP Loan and as set forth on the Term Sheets, on the Effective Date, any and all Liens, security interests, encumbrances, and pledges securing any secured obligations of the Debtors shall be released and deemed cancelled, discharged, extinguished and of no further force or effect and shall attach to, and be satisfied -41-

TABLE OF CONTENTS (continued) Page from, the value realized from the applicable collateral. Notwithstanding any otherwise applicable non-bankruptcy law the filing of the Confirmation Order with any federal, state, or local agency or department shall constitute good and sufficient evidence of, but shall not be required to effect, the cancellation, discharge, and termination of such liens, security interests, and pledges. E. Continued Corporate Existence and Vesting of Assets in the Reorganized Debtors Free and Clear. Except as otherwise provided in Section 6.02 of the Plan, each Operating Debtor will, as a Reorganized Debtor, continue to exist after the Effective Date as a separate corporate or limited liability entity (as applicable), with all of the powers of a corporation or limited liability company, as applicable, under applicable law and without prejudice to any right to alter or terminate such existence (whether by merger, dissolution, or otherwise) under applicable state law. Except as expressly provided herein, pursuant to sections 1141(b) and (c) of the Bankruptcy Code, as of the Effective Date, all property and Assets of the estate of an Operating Debtor, and any property and Assets retained by the Reorganized Debtors under the Plan, including, but not limited to, the Performance Bonds of the Operating Debtors, will vest in such Reorganized Debtor free and clear of all claims, Liens, charges, and other encumbrances and interests with such interests attaching to, and being satisfied from, the value realized from the applicable collateral. On and after the Effective Date, each Reorganized Debtor may operate its business and may use, acquire, and dispose of property and Assets and compromise or settle claims without supervision or approval of the Bankruptcy Court. F.

Legal Form and Governance

(a) New Organizational Documents. Each of the Reorganized Debtors shall be deemed to have adopted its respective New Organizational Documents as of the Effective Date without the need for any further approval by any shareholder, officer, or director of any of the Debtors or order of the Bankruptcy Court. On the Effective Date, or as soon thereafter as practicable, the Reorganized Debtors shall file their New Organizational Documents, as required, with the appropriate Persons in their jurisdiction of incorporation or establishment. The New Organizational Documents, to the extent applicable, shall prohibit the issuance of nonvoting equity securities to the extent required by section 1123(a)(6) of the Bankruptcy Code. (b) Governance of Reorganized Debtors. On the Effective Date, the operation of Reorganized Kara Homes, Inc. shall become the general responsibility of the New Board, subject to, and in accordance with, its New Organizational Documents. The initial members of the New Board of Reorganized Kara Homes shall be appointed by the Plan Sponsor in its sole discretion and set forth in the Plan Supplement prior to the Confirmation Hearing. (c) Officers of Reorganized Kara Homes The initial officers of Reorganized Kara Homes shall be appointed by the Plan Sponsor in its sole discretion and set forth in the Plan Supplement prior to the Confirmation Hearing. G. Exemption from Transfer Taxes. Pursuant to section 1146(a) of the Bankruptcy Code, the issuance, transfer, or exchange of equity securities in connection with or under the -42-

TABLE OF CONTENTS (continued) Page Plan, including, but not limited to, the LLC Membership Interests, the New LLC Membership Interests, and/or the Reorganized Kara Homes Common Stock, as applicable, the creation of any mortgage, deed of trust, or other security interest, the making or assignment of any lease or agreement, or the making or delivery of any deed or other instrument of transfer under, in furtherance of, or connection with the Plan, shall not be subject to any stamp, real estate transfer, mortgage recording, or sales, use, or other similar tax. H.

The Liquidation Trust

(a) Execution of Liquidation Trust Agreement. On or prior to the Effective Date, the Liquidation Trust Agreement shall be executed, and all other necessary steps shall be taken to establish the Liquidation Trust without any requirement of further action by the Liquidation Trustee (or other governing body). Plan Section 6.08 sets forth certain of the rights, duties, and obligations of the Liquidation Trust and the Liquidation Trustee. In the event of any conflict between the terms of Plan Section 6.08 and the terms of the Liquidation Trust Agreement, the terms of the Liquidation Trust Agreement shall govern. A copy of the Liquidation Trust Agreement is annexed hereto as Exhibit “Y” (b) Purpose of Liquidation Trust. The Liquidation Trust shall be established for the purposes of prosecuting claims and causes of action and liquidating and distributing its Assets, in accordance with Treasury Regulation section 301.7701-4(d), and pursuing Liquidation Trust Claims with no objective to continue or engage in the conduct of a trade or business. (c) Liquidation Trust Assets. The Liquidation Trust’s res shall consist of the Liquidation Trust Assets. Any Cash or other property received from third parties from the prosecution, settlement, or compromise of the Liquidation Trust Claims shall constitute Liquidation Trust Assets for purposes of distributions under the Liquidation Trust. On the Effective Date or as soon thereafter as is practicable, the Debtors shall transfer all of the Liquidation Trust Assets to the Liquidation Trust free and clear of all liens, claims, and encumbrances, except to the extent otherwise provided herein. (d) Liquidation Trustee. The designation of the Liquidation Trustee shall be effective on the Effective Date without the need for any further order of the Bankruptcy Court or any further action by the Debtors or the Committee.

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TABLE OF CONTENTS (continued) Page (e)

Powers and Duties of the Liquidation Trustee.

The Liquidation Trustee shall allocate and make (i) Distributions. Distributions to the trust beneficiaries in each Case of the Debtors from the liquidation of the Liquidation Trust Claims and pay Liquidation Trust expenses as set forth in the Liquidation Trust Agreement, subject to the limitations contained in Section 2.02 hereof, provided that the Liquidation Trust shall be required to make Interim Distributions of Available Cash to Holders of Allowed Unsecured Claims in each Case whenever the aggregate amount to be distributed equals or exceeds $250,000. (ii) Other Duties. The Liquidation Trustee will be responsible for (A) objecting to Unsecured Claims that are not Allowed hereunder or by a Final Order subject to the limitations set forth in Article VIII; (B) investigating and prosecuting the Liquidation Trust Claims; (C) filing all federal, state and local tax returns of the Liquidation Trust; (D) establishing reserves and opening, maintaining and administering bank accounts as necessary to discharge the duties of the Liquidation Trustee; and (E) representing the Estates before the Bankruptcy Court or other courts of competent jurisdiction with respect to matters concerning the Liquidation Trust. The Liquidation Trustee is empowered and authorized to take the foregoing actions and exercise such other powers as may be vested in the Liquidation Trustee pursuant to the Liquidation Trust Agreement and the Plan, provided that the investment powers of the Liquidation Trustee, other than those reasonably necessary to maintain the value of the Liquidation Trust Assets and to further the liquidating purpose of the Liquidation Trust, shall be limited to powers to invest in demand and time deposits, such as short-term certificates of deposit, in banks or other savings institutions, or other temporary, liquid investments, such as Treasury bills. Notwithstanding any other provision of the Plan, in order to facilitate an orderly transfer of the Liquidation Trust Assets by the Debtors to the Liquidation Trust, the Liquidation Trustee shall be authorized to engage Professionals, and incur fees and expenses in connection with such engagement, immediately upon Confirmation and without further order of the Bankruptcy Court. (f) No Bond Requirement. The Liquidation Trustee shall not be required to obtain a bond to secure the performance its duties. (g) Compensation of the Liquidation Trustee. The Liquidation Trustee shall be entitled to reasonable compensation and reimbursement of expenses without the need for Bankruptcy Court approval or the filing of any applications with respect thereto. (h)

Federal Income Tax Treatment of the Liquidation Trust.

(i) Liquidation Trust Assets Treated as Owned by Holders of Allowed Class 5 Claims. For all federal income tax purposes, all parties (including, without limitation, the Debtors, the Liquidation Trustee, and the holders of Allowed Class 5 Claims shall each treat the transfer of the Liquidation Trust Assets to the Liquidation Trust for the benefit of the holders of Allowed Class 5 Claims and (subject to the limitations set forth in the Plan and the Liquidation Trust Agreement), whether Allowed on or after the Effective Date, as (A) a transfer of the -44-

TABLE OF CONTENTS (continued) Page Liquidation Trust Assets directly to the holders of Allowed Class 5 Claims and (subject to the limitations set forth in the Plan and the Liquidation Trust Agreement), to the extent provided for in the Plan, in satisfaction of such Claims (other than to any extent allocable to Disputed Class 5 Claims) followed by (B) the transfer by such holders to the Liquidation Trust of the Liquidation Trust Assets in exchange for beneficial interests in the Liquidation Trust. Accordingly, the Holders of such Allowed Claims shall be treated for federal income tax purposes as the grantors and owners of their respective shares of the Liquidation Trust Assets. (ii)

Tax Reporting.

As shall be set forth in the Liquidation Trust Agreement, the Liquidation Trustee shall file returns for the Liquidation Trust as a grantor trust pursuant to Treasury Regulation section 1.671-4(a) and in accordance with this Section 6.08. The Liquidation Trustee shall also annually send to each record holder of a beneficial interest a separate statement setting forth the holder’s share of items of income, gain, loss, deduction, or credit and will instruct all such holders to report such items on their federal income tax returns or to forward the appropriate information to the beneficial holders with instructions to report such items on their federal income tax returns. The Liquidation Trust’s taxable income, gain, loss, deduction, or credit will be allocated (subject to Section 6.08 hereof) to the holders of Allowed Class 5 Claims to the extent provided for in the Plan, in accordance with their relative beneficial interests in the Liquidation Trust. As soon as possible after the Effective Date, but in no event later than ninety (90) days after the Effective Date, the Liquidation Trustee shall make a good faith estimate of the value of the Liquidation Trust Assets. Such estimate of value shall be made available from time to time, to the extent relevant, and used consistently by all parties (including, without limitation, the Debtors, the Liquidation Trustee, and the holders of Allowed Class 5 Claim for all federal income tax purposes. The Liquidation Trustee shall also file (or cause to be filed) any other statements, returns, or disclosures relating to the Liquidation Trust that are required by any governmental unit. Subject to definitive guidance from the Internal Revenue Service or a court of competent jurisdiction to the contrary (including the receipt by the Liquidation Trustee of a private letter ruling if the Liquidation Trustee so requests one, or the receipt of an adverse determination by the Internal Revenue Service upon audit if not contested by the Liquidation Trustee), the Liquidation Trustee shall (i) treat any Liquidation Trust Assets allocable to, or retained on account of, Disputed Class 5 Claims (in an amount and manner as set forth in Plan Article VIII), if any, as held by one or more discrete trusts for federal income tax purposes (the “Liquidation Trust Claims Reserve”), consisting of separate and independent shares to be established in respect of each Disputed Class 5 Claim, in accordance with the trust provisions of the Tax Code (section 641 et seq.), (ii) treat as taxable income or loss of the Liquidation Trust Claims Reserve, with respect to any given taxable year, the portion of the taxable income or loss of the Liquidation Trust that would have been allocated to the holders of Disputed Class 5 Claims, if any, had such Claims been Allowed on the Effective Date (but only for the portion of the taxable year with respect to which such Claims are unresolved), (iii) treat as a distribution from the Liquidation Trust Claims Reserve any increased amounts distributed by the Liquidation Trust as -45-

TABLE OF CONTENTS (continued) Page a result of any Disputed Class 5 Claims resolved earlier in the taxable year, to the extent such distributions relate to taxable income or loss of the Liquidation Trust Claims Reserve determined in accordance with the provisions hereof, and (iv) to the extent permitted by applicable law, report consistent with the foregoing for state and local income tax purposes. All holders of Class 5 Claims and Settling Defendants shall report, for tax purposes, consistent with the foregoing. The Liquidation Trustee shall be responsible for payments, out of the Liquidation Trust Assets, of any taxes imposed on the Liquidation Trust or the Liquidation Trust Assets, including the Liquidation Trust Claims Reserve. In the event, and to the extent, any Cash (if any) retained on account of Disputed Class 5 Claims in the Liquidation Trust Claims Reserve is insufficient to pay the portion of any such taxes attributable to the taxable income arising from the Assets allocable to, or retained on account of, Disputed Class 5 Claims, such taxes shall be (i) reimbursed from any subsequent Cash amounts (if any) retained on account of Disputed Class 5 Claims or (ii) to the extent such Disputed Class 5 Claims have subsequently been resolved, deducted from any amounts distributable by the Liquidation Trustee as a result of the resolutions of such Disputed Class 5 Claims. (i) Dissolution. The Liquidation Trustee and the Liquidation Trust shall be discharged or dissolved, as the case may be, at such time as (i) all Disputed Class Claims have been resolved, (ii) all Liquidation Trust Assets have been liquidated, and (iii) all distributions required to be made by the Liquidation Trustee under the Plan have been made. (j) Prosecution of Designated Causes of Action. On and after the Effective Date, except as otherwise provided in the Plan or the Confirmation Order, the Liquidation Trustee, on behalf of the Liquidation Trust and in accordance with the best interests of the beneficial owners of the Liquidation Trust, may enforce, prosecute, settle or compromise (or decline to do any of the foregoing) the Liquidation Trust Claims without notice to any party (other than DIP Lender). The proceeds of any Liquidation Trust Claim so brought by the Committee, after deducting the Committee’s legal fees and expenses, shall be turned over to the Liquidation Trustee for Distribution in accordance with Section 2.02. (k) Settling Causes of Action. The Liquidation Trustee shall be authorized to settle any Liquidation Trust Claim (a) upon written notice to the DIP Lender, and without further notice to any person, where the amount asserted in the Liquidation Trust Claim is less than $100,000, and (b) upon ten (10) days written notice of a proposed settlement to the DIP Lender where the amount asserted in the Liquidation Trust Claim exceeds $100,000; provided that, notwithstanding the foregoing, the Liquidation Trustee has the power to seek Bankruptcy Court approval of any settlement even if such approval is not required under this Section. If the DIP Lender objects to a proposed settlement of a Liquidation Trust Claim in writing and serves such objection upon the Liquidation Trustee so that it is received before the expiration of the 10-day period, the Liquidation Trustee shall not be authorized to proceed with the proposed settlement unless (A) all objections are settled or withdrawn, or (B) the Liquidation Trustee obtains an order of the Bankruptcy Court approving the settlement of the Liquidation Trust Claim pursuant to Bankruptcy Rule 9019 after providing 20 days notice to the DIP Lender. On and after the date, if

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TABLE OF CONTENTS (continued) Page any, the DIP Loan is paid in full, the Liquidation Trustee shall discontinue sending notices to the DIP Lender. I.

Distribution of Property.

(a) Requirement for Allowance of Claims. No Distributions will be made on account of any Claim that is not an Allowed Claim. (b) Time and Method of Distributions. Except as otherwise provided herein, all pre-Effective Date Distributions under the Plan shall be made by the Debtors and all postEffective Date Distributions shall be made by the Liquidation Trustee. Subject to the provisions of Bankruptcy Rule 2002(g), and except as provided in the Plan, Distributions to Holders of Allowed Claims will be made at the address of each such Holder set forth on the Schedules unless superseded by the address set forth on proofs of Claim filed by such Holders, or at the last known addresses of such Holder if no proof of Claim is filed, or if the Liquidation Trustee or the Debtors has been notified in writing of a change of address. On the Final Distribution Date, the Liquidating Debtors and the Liquidation Trustee shall jointly take all actions necessary to obtain an order closing the Bankruptcy Case pursuant to section 350 of the Bankruptcy Code. (c) Time Bar to Cash Payment. Any Unclaimed Property on the Final Distribution Date will be deemed paid to such entitled Holder, and such Holder will not be entitled to any future or other Distributions under the Plan. Any Unclaimed Property shall constitute Cash and be redistributed to Holders of Allowed Claims in such Class on the date of the next Distribution. If the Final Distribution Date has passed, such Unclaimed Property shall escheat to the State of New Jersey. Neither the Debtors nor the Liquidation Trustee shall have an obligation to make further Distributions to any Holder if a prior Distribution becomes Unclaimed Property. The Distribution otherwise payable to such Holder shall be redistributed to Holders of Allowed Claims in such Class. (d) Finality of Distributions. All Distributions made prior to the Effective Date pursuant to a Final Order of the Bankruptcy Court or after the Effective Date pursuant to the provisions of the Plan, shall be deemed final, and no Person shall have any right to require or petition the Bankruptcy Court for a disgorgement of any such Distribution. J.

Preservation of Causes of Action.

(a) Preservation of Rights of Action Generally. Nothing in the Plan constitutes or shall be deemed to constitute a waiver by the Debtors or their respective Estates regarding any existing or potential claims or Causes of Action have not yet been pursued by the Debtors. Unless a claim or Cause of Action against a Holder of a Claim or other Person is expressly waived, relinquished, released, compromised, or settled in the Plan or any Final Order, the Debtors expressly reserve such claim or Cause of Action for later adjudication (including without limitation, claims and Causes of Action not specifically identified, or which Debtors may presently be unaware, or which may arise or exist by reason of additional facts or circumstances unknown to the Debtors at this time, or facts or circumstances which may change -47-

TABLE OF CONTENTS (continued) Page or be different from those which Debtors now believes to exist) and, therefore, no preclusion doctrine, including, without limitation, the doctrines of res judicata, collateral estoppel, issue preclusion, claim preclusion, waiver, estoppel (judicial, equitable, or otherwise), or laches shall apply to such claims or Causes of Action upon, or after, the confirmation or consummation of the Plan based on the Disclosure Statement, the Plan, or the Confirmation Order, except where such claims or Causes of Action have been released in the Plan or other Final Order. The Debtors, the Reorganized Debtors, the Liquidation Trustee and any successor entities under the Plan expressly reserve the right to retain and enforce any claims alleged in any lawsuit in which the Debtors is a defendant or interested parties against any person or entity, including without limitation, the plaintiffs or co-defendants in such lawsuits, except as otherwise provided in the Plan. (b) Preservation of Rights of Action Regarding the Reorganized Debtors. Except as otherwise provided in the Plan, in accordance with section 1123(b) of the Bankruptcy Code, as of the Effective Date, the Reorganized Debtors shall retain all rights (i) to institute and present in the name of the Operating Debtors, or otherwise, all proceedings that they may deem proper in order to collect, assert, or enforce any claim, right, or title of any kind in or to any of the Operating Debtors’ Assets or to avoid any purported Lien, and (ii) to defend and compromise any and all actions, suits, or proceedings in respect of such Assets. (c) Preservation of Rights of Action Regarding the Liquidation Trustee. Subject to Section 5.12(b) of the Plan, the Liquidation Trustee, on behalf of the Liquidating Debtors’ Estates, retains all rights to pursue all Liquidation Trust Claims to the extent the Liquidation Trustee deems appropriate (under any theory of law, including, without limitation, the Bankruptcy Code and any applicable local, state, or federal law, in any court or other tribunal, including, without limitation, in an adversary proceeding filed in the Case). Except as otherwise provided in the Plan or in any contract, instrument, release, indenture, or other agreement entered into in connection with the Plan, the Liquidation Trustee is authorized to exercise and perform the rights, powers and duties held by the Estates, including without limitation the authority under Bankruptcy Code section 1123(b)(3) to provide for the settlement, adjustment, retention and enforcement of claims and interests of the Estates, including, but not limited to all Causes of Action and the authority to exercise all rights under sections 1106, 1107 and 1108 of the Bankruptcy Code. The Liquidation Trustee, on behalf of the Liquidating Debtors, shall retain, and may enforce, any and all rights or Liquidation Trust Claims. The Liquidation Trustee, on behalf of the Liquidating Debtors, shall have the right, authority, and discretion to institute, prosecute, abandon, settle, or compromise any and all such Liquidation Trust Claims, subject to the Committee’s and the DIP Lender’s right to review and object to any proposed settlement or compromise as set forth herein. V.

PROCEDURES FOR DISPUTED AND DISALLOWANCE OF CERTAIN CLAIMS

CLAIMS

A. Objections to Claims. Subject to the other provisions of the Plan, at any time prior to the Effective Date, the Debtors shall be entitled to object (in whole or in part) to Administrative Expense Claims, Tax Claims, Municipal Tax Claims and Municipal Utility -48-

TABLE OF CONTENTS (continued) Page Authorities Claims, Priority Claims, Other Secured Claims, Wholly Unsecured Claims, and Unsecured Claims. On and after the Effective Date, the Reorganized Debtors shall be entitled to object (in whole or in part) to Administrative Expense Claims, Tax Claims, Municipal Tax Claims and Municipal Utility Authorities Claims, Priority Claims, Secured Claims, and the Liquidation Trust shall be entitled to object (in whole or in part) to Unsecured Claims. Any objections to Claims shall be served and filed on or before the later of (i) one hundred eighty (180) days after the Effective Date, and (ii) such date as may be fixed by the Bankruptcy Court, whether fixed before or after the date specified in clause (i) above (the “Claims Objection Bar Date”). B.

Treatment of Disputed Claims.

(a) Estimation of Claims. The Debtors, the Reorganized Debtors, and/or the Liquidation Trustee may at any time request that the Bankruptcy Court estimate any contingent or Disputed Claim pursuant to section 502(c) of the Bankruptcy Code, regardless of whether the Liquidation Trustee or the Debtors previously objected to such Claim or whether the Bankruptcy Court ruled on any such objection. The Bankruptcy Court will retain jurisdiction to estimate any Claim at any time during litigation concerning any objection to any Claim, including, without limitation, an objection during the pendency of any appeal relating to any such objection. Subject to the provisions of section 502(j) of the Bankruptcy Code, in the event that the Bankruptcy Court estimates any contingent or Disputed Claim, the amount so estimated will constitute the Allowed amount of such Claim. If the estimated amount does not constitute a maximum limitation on the amount of such Claim, the Debtors, the Reorganized Debtors, or the Liquidation Trustee may pursue supplementary proceedings to object to the allowance of such Claim. All of the aforementioned objection, estimation, and resolution procedures are intended to be cumulative and not necessarily exclusive of one another. Claims may be estimated and subsequently compromised, settled, withdrawn, or resolved by any mechanism approved by the Bankruptcy Court. (b) Payments and Distributions on Disputed Claims. The Debtors, the Reorganized Debtors, or the Liquidation Trustee as may be appropriate shall maintain a reserve on account of any distributable amounts required to be set aside on account of Disputed Claims as necessary to provide required distributions if such Claim were an Allowed Claim. The reserves shall be established either on the books or in separate accounts, in the Reorganized Debtors’ or Liquidation Trustee’s discretion. At such time as a Disputed Claim becomes, in whole or in part, an Allowed Claim, the Reorganized Debtors or the Liquidation Trustee, as may be appropriate, may, but shall not be required to, distribute to the Holder thereof the Distributions, if any, to which such Holder is then entitled under the Plan. Such Distribution, if any, will be made on the earlier of the next Interim Distribution date or ninety (90) days after the date that the order or judgment of the Bankruptcy Court allowing such Disputed Claim becomes a Final Order. No interest will be paid on Disputed Claims that later become Allowed or with respect to any Distribution to such Holder. C. Resolution of Disputed Claims. Unless otherwise ordered by the Bankruptcy Court after notice and a hearing, following the Effective Date, the Liquidation Trust shall have -49-

TABLE OF CONTENTS (continued) Page the right to the exclusion of all others (except as to applications for allowances of Professional Fees under Bankruptcy Code §§ 330 and 503) to make and file objections to Unsecured Claims and the Reorganized Debtors, to the exclusion of all others, shall have the right to object to Administrative Expense Claims, Tax Claims, Municipal Tax Claims and Municipal Utility Authorities Claims, Priority Claims, Other Secured Claims, and the Liquidation Trust shall be entitled to object (in whole or in part) to Unsecured Claims, and each, as applicable, and shall serve a copy of each objection upon the holder of the Claim to which the objection is made as soon as practicable, but in no event later than the Claims Objection Bar Date then in effect. From and after the Confirmation Date, all objections shall be litigated to a Final Order except to the extent the Reorganized Debtors or the Liquidation Trust, as the case may be, elects to withdraw any such objection filed or the Reorganized Debtors or the Liquidation Trust, as the case may be, and the holder of a Claim elects to compromise, settle, or otherwise resolve any such objection, in which event they may settle, compromise, or otherwise resolve any Disputed Claim without approval of, or any further order of, the Bankruptcy Court; provided, however, that the Debtors or the Liquidation Trust executes a stipulation with the holder of such Claim and file such stipulation in the Cases. D. Allowance of Disputed Claims. If, on or after the Effective Date, any Disputed Claim becomes, in whole or in part, an Allowed Claim, the Litigation Trust or the Reorganized Debtors, as applicable, shall, no later than the fifteenth (15th) Business Day of the first month following the month in which the Disputed Claim becomes an Allowed Claim, distribute to the holder thereof the distributions, if any, that such holder would have received had its Claim been Allowed on the Effective Date or the Allowance Date (as applicable), except as otherwise provided therein.

VI.

CONFIRMATION AND EFFECTIVE DATE

A. Conditions to Confirmation. Confirmation of the Plan shall not occur unless and until the following conditions satisfied or waived or modified pursuant to the Commitment Letter and Plan Section 9.03: (a) the Bankruptcy Court shall have entered an order approving the Disclosure Statement as containing adequate information pursuant to section 1125 of the Bankruptcy Code, and such order shall not have been reversed, stayed, amended, or modified in any manner adverse to the Debtors, their Estates, or the Plan Sponsor, (b) the Confirmation Order shall be acceptable, in form and substance, to the Debtors, the Plan Sponsor, and the Committee, (c)

the Confirmation Order shall provide, among other things,

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TABLE OF CONTENTS (continued) Page (i)

that the transfer of the Reorganized Kara Homes Common Stock, the LLC Membership Interests, and the New LLC Membership Interests shall be free and clear of all Claims, debts, Liens, security interests, obligations, encumbrances, and interests of Creditors and Holders of Equity Interests except as expressly provided in the Plan, and exempt from section 5 of the Securities Act of 1933 and any State or local law requiring registration for offer or sale of a security or registration or licensing of an issuer of a security under section 1145 of the Bankruptcy Code,

(ii)

for the injunction of any prosecution of Claims or Equity Interests against the Reorganized Debtors, the DIP Lender, and the Plan Sponsor, except as expressly provided for in the Plan;

(iii)

the Purchase Agreements are not Executory Contracts; and

(iv)

that any statutory or equitable lien claims asserted by, among others, Construction Lienholders, real estate brokers, vendees, or Contract Purchasers pursuant to state law or section 365(j) of the Bankruptcy Code, are classified for all purposes, including voting, under the Plan as Deficiency Claims in Class 5.

B. Conditions to Effectiveness. Notwithstanding any other provision of the Plan or the Confirmation Order, the Effective Date shall not occur, and the Plan shall not be binding on any Person, unless and until each of the following conditions has been satisfied or waived or modified pursuant to Plan Section 9.03: (a)

The Confirmation Order shall (i)

have been entered on the docket by the Clerk of the Bankruptcy Court in form and substance acceptable to the Debtors, the Plan Sponsor, and the Committee on or before September 30, 2007 and shall be a Final Order no later than October 30, 2007,

(ii)

not have been reversed, stayed, amended, or modified in any manner adverse to the Debtors, their Estates, or the Plan Sponsors; and

(iii)

provide that any statutory or equitable lien claims asserted by, among others, Construction Lienholders, real estate brokers, vendees, or Contract Purchasers pursuant to state law or section 365(j) of the Bankruptcy Code, are classified for all purposes, including voting, under the Plan as Deficiency Claims in Class 5;

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TABLE OF CONTENTS (continued) Page (b) Execution of all documents by the Debtor and the Committee deemed reasonably necessary to consummate the Cash Infusion, in form and substance acceptable to the Plan Sponsor in its sole discretion; (c) The transactions set forth in Section 6.02 of the Plan shall occur to the reasonable satisfaction of the Plan Sponsor and in the sequence specified therein; (d) All other documents provided for under, and reasonably necessary to effectuate the (i) terms of, and (ii) actions and transactions contemplated under the Plan shall be in form and substance reasonably acceptable to the Debtors, the Plan Sponsor, and the Committee, and shall have been executed and delivered by the parties thereto, unless such execution or delivery has been waived in writing by the parties benefited by such documents; (e) The Certificate of Incorporation of Newco, in form and substance acceptable to the Plan Sponsor, shall have been filed by Debtors’ counsel in the State of New Jersey; (f) The membership interests of the Operating Debtors shall have been transferred to Reorganized Kara Homes; (g)

The New LLC Membership Interest shall have been transferred to Newco;

(h) All other actions and documents reasonably necessary or appropriate to implement the Plan shall have been effected or executed. VII.

TITLE TO PROPERTY AND RELEASES

A. Vesting of Property. Except as otherwise provided in the Plan or the Confirmation Order, upon the Effective Date, but retroactive to the Confirmation Date, (a) the Reorganized Debtors shall continue to exist as separate corporate entities with all the powers of corporations or limited liability companies under applicable law and without prejudice to any right to alter or terminate such existence (whether by merger or otherwise) under applicable state law, and (b) all Assets of the respective Operating Debtors, including, but not limited to the Performance Bonds, wherever situated, shall vest in the applicable Reorganized Debtor, subject to the provisions of the Plan and the Confirmation Order. Thereafter, each Reorganized Debtor may operate and engage in its business, incur debt and other obligations in the ordinary course of its business, and may otherwise use, acquire, and dispose of property free of any restrictions of the Bankruptcy Code, the Bankruptcy Rules, and the Bankruptcy Court. After the Effective Date, but retroactive to the Confirmation Date, all Assets and property retained by the Reorganized Debtors pursuant hereto shall be free and clear of all Claims, debts, Liens, security interests, obligations, encumbrances, and interests of Creditors and Equity Interest Holders of any of the Debtors and all other Persons, except as expressly provided for in the Plan or the Confirmation Order and except for the obligation to perform according to the Plan and the Confirmation Order, and except for the respective claims, debts, Liens, security interests, encumbrances, and interests of the DIP Lender under the DIP Loan and those Holders of -52-

TABLE OF CONTENTS (continued) Page Allowed Class 1A Claims whose Allowed Secured Claims the applicable Operating Debtor elects to Reinstate pursuant to Plan Section 4.01(a) (with the consent of the Plan Sponsor). B. Discharge and Injunction. Pursuant to section 1141(b) of the Bankruptcy Code or otherwise, except as may otherwise expressly be provided herein or in the Confirmation Order, upon the occurrence of the Effective Date, the rights afforded and the payments and distributions to be made under the Plan shall be in complete exchange for, and in full and unconditional settlement, satisfaction, discharge, and release of, any and all existing debts, Claims, and Interests of any kind, nature, or description whatsoever against any of the Debtors or any of the Debtors’ Assets or other property, and shall effect a full and complete release, discharge, and termination of all Liens, security interests, or other Claims, interests, or encumbrances upon all of the Debtors’ Assets and property. No Creditor or Interest Holder of any of the Debtors nor any other Person may receive any distribution from the Debtors, the Estates, or the Reorganized Debtors, or seek recourse against, the Operating Debtors, the Operating Debtors’ Estates, the Reorganized Debtors, the DIP Lender, the Plan Sponsor, or any of the Assets that are to be distributed under the terms of the Plan or transferred to the Plan Sponsor, except for those distributions expressly provided for under the Plan. All Persons are precluded from asserting, against any property that is to be distributed under the terms of the Plan, any Claims, Interests, obligations, rights, Causes of Action, liabilities, or equity interests based upon any act, omission, transaction, or other activity of any kind or nature that occurred prior to the Effective Date, other than as expressly provided for in the Plan or the Confirmation Order, whether or not (a) a Proof of Claim or proof of Interest based upon such debt or Interest (as applicable) is filed or deemed filed under section 501 of the Bankruptcy Code; (b) a Claim or Interest based upon such debt or Interest (as applicable) is allowed under section 502 of the Bankruptcy Code; or (c) the Holder of a Claim or Interest based upon such debt or Interest (as applicable) has accepted the Plan or is deemed to have accepted the Plan under section 1126(f) of the Bankruptcy Code. Except as otherwise provided in the Plan or the Confirmation Order with respect to a Claim that is expressly reinstated under the terms and conditions of the Plan, all Holders of Claims and interests arising prior to the Effective Date shall be permanently barred and enjoined from asserting against any of the Debtors, the Estates, the Reorganized Debtors, the Plan Sponsor, or their respective successors and assigns, any of the following actions on account of such Claim or Equity Interest: (a) commencing or continuing in any manner any action or other proceeding on account of such Claim or Equity Interest against property to be distributed under the terms of the Plan, vested in the Reorganized Debtors, or transferred to the reorganized Debtors, other than to enforce any right to distribution with respect to such property under the Plan; (b) enforcing, attaching, collecting, or recovering in any manner any judgment, award, decree, or order against any of the property to be distributed under the terms of the Plan, vested in the Reorganized Debtors, or transferred to the Reorganized Debtors, other than as permitted under subclause (a) above; (c) creating, perfecting, or enforcing any Lien or encumbrance against any property to be distributed under the terms of the Plan, vested in the Reorganized Debtors, or transferred to the Reorganized Debtors; (d) asserting any right of setoff, subrogation, or recoupment of any kind, directly or indirectly, against any obligation due the Operating Debtors or the Reorganized Debtors, or any other property of any of the Operating Debtors or the Reorganized Debtors, or any direct or indirect transferee of any property of, or successor in -53-

TABLE OF CONTENTS (continued) Page interest to, any of the foregoing Persons (including the Plan Sponsor); and (e) acting or proceeding in any manner, in any place whatsoever, that does not conform to, or comply with, the provisions of the Plan. C. No Waiver of Discharge. Except as otherwise specifically provided herein, nothing in the Plan shall be deemed to waive, limit, or restrict in any way the discharge granted to the Operating Debtors upon Confirmation of the Plan by section 1141 of the Bankruptcy Code. D. Post-Consummation Effect of Evidences of Claims or Interests. Except as otherwise expressly set forth in the Plan, any and all notes, stock certificates, and/or other evidences of Claims against, or Equity Interests in, any of the Debtors shall, effective upon the Effective Date, represent only the right to participate in the distributions contemplated by the Plan, if any, and shall otherwise be cancelled and of no force and effect as of the Effective Date. E. Term of Injunctions or Stays. Unless otherwise provided herein (including, without limitation, Section 10.02 hereof), all injunctions or stays provided for in these Cases pursuant to sections 105 and 362 of the Bankruptcy Code, or otherwise, and in effect on the Confirmation Date, shall remain in full force and effect until the Effective Date.

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TABLE OF CONTENTS (continued) Page F.

Releases by Holders of Claims and Interests.

(a) Except as otherwise provided herein, as of the Confirmation Date, but subject to the occurrence of the Effective Date, each Non-Debtor Releasing Party, in consideration of the obligations of the Operating Debtors, Liquidating Debtors, the Reorganized Debtors, and the Plan Sponsor under the Plan and the Cash, the Cash Infusion, and other contracts, instruments, releases, agreements, and documents to be executed and delivered in connection with the Plan, shall be deemed to have conclusively, absolutely, unconditionally, irrevocably, and forever released and discharged (i) the Operating Debtors, the Liquidating Debtors, and the Reorganized Debtors; (ii) the DIP Lender; (iii) the Plan Sponsor; (iv) the Committee and the members thereof, solely in their respective capacities as such; (vi) with respect to each of the foregoing Persons, such Person’s predecessors, successors, and assigns, and current and former directors, officers, employees, stockholders, members, subsidiaries, affiliates, principals, agents, advisors, financial advisors, attorneys, accountants, investment bankers, consultants, underwriters, appraisers, representatives, and other professionals, in each case in their respective capacities as such (collectively, the “Released Parties”) from any and all claims, obligations, rights, Causes of Action, or liabilities (including, but not limited to, any claims arising out of, or relating to, any alleged fiduciary or other duty), whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity or otherwise, that such Non-Debtor Releasing Party ever had, now has, or may have that are based in whole or in part on any act, omission, transaction, or occurrence from the beginning of time through and including the Effective Date and in any way relating to the Debtors or the respective Assets thereof, these Cases, or the Plan; the Disclosure Statement; the formulation, negotiation, preparation, dissemination, implementation, and/or administration of the Plan, the Disclosure Statement, and the documents contained in the Plan Supplement; the confirmation and consummation of the Plan; the subject matter of, or the transactions or events giving rise to, any Claim or Equity Interest of such Non-Debtor Releasing Party, or any security previously issued by any of the Debtors, and any and all claims based upon or arising out of such actions or omissions shall be forever and completely waived and released by the Non-Debtor Releasing Parties; provided, however, this Section 10.06(a) shall not release, and the Non-Debtor Releasing Parties do not waive the right to enforce, the Debtors’ or the Reorganized Debtors’ duties, obligations, covenants, and agreements under (a) the Plan, (b) any settlement agreement approved by the Bankruptcy Court in these Cases, (c) the assumed contracts, or (d) the Plan documents to be delivered under the Plan; provided further, however, that the release set forth in this Section 10.06(a) is in addition to the discharge of Claims and termination of Equity Interests provided in the Plan and under the Confirmation Order and the Bankruptcy Code; and provided further, however, that nothing in this Section 10.06(a) shall be deemed to assert or imply any admission of liability on the part of any of the Released Parties. (b) All Non-Debtor Releasing Parties shall be forever precluded from asserting any of the Claims, obligations, rights, causes of action, or liabilities released pursuant to this Section 10.06 against any of the Released Parties or any of the Released Parties’ respective Assets (including, without limitation, the Assets of the Reorganized Debtors or the Plan Sponsor); and to the extent that any Non-Debtor Releasing Party receives monetary -55-

TABLE OF CONTENTS (continued) Page damages from any Released Party on account of any claim released pursuant to this Section 10.06, such Non-Debtor Releasing Party hereby assigns all of its right, title, and interest in and to such recovery to the Released Parties against whom such money is recovered. (c) Notwithstanding any provision of the Plan to the contrary, the releases contained in Plan Section 10.06 shall not be construed as, or operate as a release of, or limitation on (i) any claims by the Non-Debtor Releasing Parties against the Released Parties that do not relate to or involve the Debtors or these Cases, or (ii) any claims, obligations, rights, causes of action, or liabilities by the Non-Debtor Releasing Parties against the Released Parties arising out of any action or omission to the extent that such action or omission is determined in a Final Order by a court of competent jurisdiction to have constituted willful misconduct or fraud. G. Release by the Debtors. On the Effective Date, pursuant to section 1123(b) of the Bankruptcy Code, Bankruptcy Rule 9019, or otherwise, and except as otherwise specifically provided in the Plan or in the Plan Documents, the Debtors, in consideration of the obligations of the Debtors and their respective Estates, the Reorganized Debtors, the DIP Lender, and the Plan Sponsor under the Plan and the Cash, the Cash Infusion, and other contracts, instruments, releases, agreements, and documents to be executed and delivered in connection with the Plan, shall be deemed to have conclusively, absolutely, unconditionally, irrevocably, and forever released and discharged the Released Parties from any and all claims, obligations, suits, judgments, damages, demands, debts, rights, Causes of Action, and liabilities, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, then existing or hereafter arising, in law, equity, or otherwise, that such Debtor ever had, now has, or may have that are based in whole or in part on any act, omission, transaction, or occurrence taking place on or prior to the Effective Date and in any way relating to the Debtors, these Cases, or the Plan; the Disclosure Statement; the formulation, negotiation, preparation, dissemination, implementation, and/or administration of the Plan and the Disclosure Statement; the confirmation and consummation of the Plan; the subject matter of, or the transactions or events giving rise to, any Claim or Equity Interest of such Debtor, or any security previously issued by any of the Debtors. The immediately preceding sentence shall not, however, apply to (i) any indebtedness of any Person to any of the Debtors for money borrowed by such Person or any other contractual obligation of any Person to any of the Debtors, (ii) any claims by the Debtor Releasing Parties against the Released Parties arising out of any action or omission to the extent that such action or omission is determined in a Final Order by a court of competent jurisdiction to have constituted willful misconduct or fraud, or (iii) any setoff or counterclaim that the Debtors may have or assert against any Person, provided that the aggregate amount thereof shall not exceed the aggregate amount of any Claims held or asserted by such Person against the Debtors. Holders of Claims and Equity Interests against any of the Debtors shall be enjoined from commencing or continuing any action, employment of process, or act to collect, offset, or recover any such claim that could be brought on behalf of or in the name of the Debtors. H. No Releases to Insiders. Notwithstanding anything herein to the contrary, neither the Debtors nor the Liquidating Trust shall be or be deemed to have released any of the -56-

TABLE OF CONTENTS (continued) Page Debtors’ officers, directors, shareholders, members, or equity holders for any act or omission occurring prior to the Petition Date. I. Injunction Related to Releases. The Confirmation Order will and shall be deemed to permanently enjoin the commencement or prosecution by any Person, whether directly, derivatively, or otherwise, of any claims, obligations, suits, judgments, damages, demands, debts, rights, Causes of Action, or liabilities released or exculpated pursuant to the Plan (including the releases set forth in this Article X). J. Exculpation. No Released Party shall have or incur, and each Released Party hereby is exculpated from, any liability to any Person for any act taken or not taken or any omission in connection with, arising from or relating to these Cases (and the commencement or administration thereof); the Disclosure Statement, the Plan, or the formulation, negotiation, preparation, dissemination, implementation, or administration of any of the foregoing documents; the solicitation of votes in connection with confirmation of the Plan; the documents contained in the Plan Supplement; the confirmation and/or consummation of the Plan and all of the transactions contemplated herein (including, without limitation, the transfer of the Reorganized Kara Homes Common Stock to the Plan Sponsor and the issuance and transfer of the New LLC Membership Interests to Newco); any contract, instrument, release, or other agreement or document created or entered into in connection with the Plan; any other act taken or omitted to be taken in connection with, or in contemplation of, any of the restructuring or other transactions contemplated by the Plan; and the property to be vested in the Reorganized Debtors or distributed or otherwise transferred under the Plan; provided, however, that nothing in this Section 10.09 shall release any entity from any claims, obligations, rights, causes of action, or liabilities arising out of such entity’s fraud or willful misconduct. Each Released Party shall be entitled reasonably to rely upon the advice of counsel with respect to its duties and responsibilities under the Plan, and shall be fully protected in acting or refraining from acting in accordance with such advice. From and after the Effective Date, the Released Parties shall be, and hereby are, exculpated, released and forever discharged by all Persons, including, without limitation, Holders of Claims and other parties in interest, from and against any and all claims, debts, dues, accounts, actions, suits, causes of action, bonds, covenants, judgments, damages and other assertions of liability arising out of any such Released Party’s good faith exercise of what such Released Party reasonably understands to be its powers or the discharge of what such Released Party reasonably understands to be its duties conferred by the Plan or by any order of the Bankruptcy Court entered pursuant to, or in furtherance of, the Plan, applicable law, or otherwise, (except only for actions or omissions to act to the extent determined by a Final Order of a court of competent jurisdiction to be due to their own respective gross negligence or willful misconduct) on and after the Effective Date. No Holder of a Claim or other party in interest will have, or may pursue, any claim or cause of action against any Release Party for exercising any of the powers or discharging any of the duties conferred upon a Released Party by the Plan or any documents contained in the Plan Supplement (including without limitation, for making payments in accordance with the Plan or for implementing the provisions of the Plan). Any act or omission -57-

TABLE OF CONTENTS (continued) Page taken with the approval of the Bankruptcy Court will be conclusively deemed not to constitute fraud or willful misconduct. VIII. DISCLOSURES REQUIRED BY 11 U.S.C. §§1129(a)(4) AND (5) Section 1129(a)(4) of the Bankruptcy Code provides that a plan can be confirmed only if any payment made or to be made by a debtor or by a person issuing securities or acquiring property under a plan for services or for costs and expenses in connection with the case or in connection with the plan and incident to the case, has been approved by, or is subject to approval by the Bankruptcy Court as reasonable. Article VI of the Plan meets the requirements of § 1129(a)(4) of the Bankruptcy Code. Section 1129(a)(5) of the Bankruptcy Code conditions confirmation on disclosure of the identity and affiliates of any individual proposed to serve after Confirmation as a director, officer, or voting trustee of the Debtors. Section 1129(a)(5) further requires that: (i) appointment to or continuance in such office of such individual be consistent with the interests of Creditors and equity security holders and with public policy; and (ii) the Debtors discloses the identity of any insider who will be employed or retained by the organized entity and the nature of any compensation for such insider. Prior to the hearing on the Disclosure Statement, the identification of the officers and directors of the Reorganized Debtors shall be made. IX.

FEASIBILITY

Section 1129(a)(l1) of the Bankruptcy Code requires that confirmation not likely be followed by liquidation or the need for further financial reorganization. X.

LIQUIDATION ANALYSIS

Appraisals of the Real Estate owned by the Affiliates was performed by DJM Associates. DJM Associates was retained by the Debtors to perform such appraisal on an “As Is” basis. A copy of the Liquidation Analysis as to the 21 Cases that are part of the Active Developments is attached as Exhibit “Z.” The Liquidation Analysis reflects that at a forced sale of the Active Developments owned by Kara and its Affiliates, the expected sale proceeds would be $68 million, an amount insufficient to satisfy the claims of senior lenders in those cases. Assets in Cases other than those set forth in the Liquidation Analysis have either been sold during the proceeding or are insignificant. Pursuant to the Plan, Unsecured Creditors are expected to receive a dividend of approximately $.09 on the Effective Date together with a further return from the pursuit of claims by the Liquidation Trustee in each Case. The Liquidation Analysis demonstrates that creditors will receive a superior return through Confirmation of the Plan than they would receive through conversion of the Cases to Chapter 7.

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TABLE OF CONTENTS (continued) Page XI.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN

THE DISCUSSION CONTAINED IN THIS DISCLOSURE STATEMENT AS TO FEDERAL TAX CONSIDERATIONS IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES. SUCH DISCUSSION IS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN SUCH DOCUMENTS. EACH TAXPAYER SHOULD SEEK FEDERAL TAX ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. The following discussion summarizes certain U.S. federal income tax consequences of the implementation of the Plan to the holders of Unsecured Claims. The following summary does not address the federal income tax consequences to (i) the Debtors, (ii) holders whose Claims are entitled to satisfaction in full or (iii) holders of Equity Interests. The Holders of Claims to which the following discussion is addressed should be aware that the tax consequences described below are unclear under existing law and, as a result, alternative tax results are possible. The following summary is based on the Tax Code, existing and proposed Treasury regulations promulgated thereunder (the “Treasury Regulations”), judicial decisions, and published administrative rules and pronouncements of the IRS, all as in effect on the date hereof. These rules are subject to change, possibly on a retroactive basis, and any such change could significantly affect the federal income tax consequences described below. The federal income tax consequences of the Plan are complex and are subject to significant uncertainties. The Debtors have not requested a ruling from the IRS or an opinion of counsel with respect to any of the tax aspects of the Plan. Thus, no assurance can be given as to the interpretation that the IRS will adopt. In addition, this summary addresses neither state, local, or foreign income, alternative minimum tax consequences, or other tax consequences of the Plan, nor the federal income tax consequences of the Plan to special classes of taxpayers (such as foreign taxpayers, broker-dealers, banks, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, tax-exempt organizations, persons holding an Unsecured Claim as part of a hedging, integrated constructive sale or straddle, and investors in pass-through entities). A.

Consequences to Holders of Allowed Unsecured Claims

Pursuant to the Plan, the holders of Allowed Unsecured Claims will receive, in full satisfaction and release of such Claims, all of the beneficial interests in the Liquidation Trust. 1. Gain or Loss – Generally. As discussed below in this Section, the Liquidation Trust has been structured to qualify as a “grantor trust” for federal income tax purposes. Accordingly, each holder of an Allowed General Unsecured Claim in Class 5 will be treated for

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TABLE OF CONTENTS (continued) Page federal income tax purposes as directly receiving, and as a direct owner of, its allocable percentage of the Liquidation Trust Assets. In general, a holder of an Allowed Unsecured Claim will recognize gain or loss in an amount equal to the difference between (i) the aggregate fair market value of the holder’s undivided interest in the Liquidation Trust Assets received in respect of its Allowed Claim, determined without taking into account the portion of the Liquidation Trust Assets allocable to, or retained on account of, Unsecured Claims that remain Disputed, and (ii) such holder’s adjusted tax basis in such Claim. Pursuant to the Plan and the Liquidation Trust Agreement, the Liquidation Trustee will make a good faith valuation of the Liquidation Trust Assets, and all parties (including the holders of Allowed Unsecured Claims) must consistently use such valuation for all federal income tax purposes. The valuation will be made available as necessary for tax reporting purposes (on an asset or aggregate basis, as relevant). As and when any Disputed Unsecured Claims become disallowed, holders of certain previously Allowed Claims may, pursuant to the Plan and the Liquidation Trust Agreement, become entitled to an increased share of the Liquidation Trust Assets. For federal income tax purposes, the “receipt” of such increased share (other than amounts attributable to earnings previously taxed to the appropriate Liquidation Trust Claims Reserve) may be treated as additional consideration in satisfaction of such holder’s Allowed Claim in an amount equal to the fair market value of such increased share at such time (with the potential for the recognition of gain at such time). Because such amounts may be deemed received for federal income tax purposes after the Effective Date, the imputed interest provisions of the Tax Code may apply to treat a portion of such amounts as imputed interest. In addition, it is also possible that (i) any loss realized by a holder in satisfaction of an Allowed Unsecured Claim may be deferred until all Disputed Claims are resolved and the holder’s beneficial interest in the Liquidation Trust can no longer increase, and/or (ii) any gain realized may be recognized under the “installment method” of reporting. Holders are urged to consult their tax advisors regarding the possible applicability of, and the ability to elect out of, the installment method. Any amount a holder receives following the Effective Date as a distribution in respect of its interest in the Liquidation Trust should generally not be included for federal income tax purposes in the holder’s amount realized in respect of its Allowed Claim but should be separately treated as a distribution received in respect of such holder’s interest in the Liquidation Trust. See “3. Tax Treatment of the Liquidation Trust and Holders of Beneficial Interests,” below. Where gain or loss is recognized by a holder in respect of its Allowed Unsecured Claim, the character of such gain or loss (as long-term or short-term capital, or ordinary) will be determined by a number of factors, including the tax status of the holder, whether the Claim in respect of which any property was received constituted a capital asset in the hands of the holder and how long it had been held, whether such Claim was originally issued at a discount or acquired at a market discount, and whether and to what extent the holder had previously claimed a loss in respect of such Claim. -60-

TABLE OF CONTENTS (continued) Page In general, a holder’s initial aggregate tax basis in its interest in the Liquidation Trust Assets will equal the fair market value of such interest when received, and the holding period for such interest generally will begin the day following the receipt of such interest. 2.

Distributions in Discharge of Accrued But Unpaid Interest

Pursuant to the Plan, to the extent applicable to a particular Claim, all distributions in respect of any Allowed Claim will be allocated first to the principal amount of such Allowed Claim, as determined for federal income tax purposes, and thereafter, to the remaining portion of such Claim comprising interest, if any (but solely to the extent that interest is an allowable portion of such Allowed Claim), including, without limitation, any portion of the Claim representing accrued original issue discount (“OID”) or accrued but unpaid interest. However, there is no assurance that the IRS will respect such allocation for federal income tax purposes. In general, to the extent that an amount received (whether stock, cash, or other property) by a holder of debt is received in satisfaction of accrued interest or OID during its holding period, such amount will be taxable to the holder as interest income (if not previously included in the holder’s gross income). Conversely, a holder generally recognizes a deductible loss to the extent any accrued interest previously included in its gross income is not paid in full. However, the IRS has privately ruled that a holder of a security, in an otherwise tax-free exchange, could not claim a current deduction with respect to any unpaid OID. Accordingly, it is also unclear whether, by analogy, a holder of a Claim that does not constitute a security would be required to recognize a capital loss, rather than an ordinary loss, with respect to any previously included OID that is not paid in full. 3.

Tax Treatment of the Liquidation Trust and Holders of Beneficial Interests

Upon the Effective Date, the Liquidation Trust will be established for the benefit of holders of Allowed Unsecured Claims, whether Allowed on or after the Effective Date. (a)

Classification of the Liquidation Trust.

The Liquidation Trust are intended to qualify as a liquidating trust for federal income tax purposes. In general, a liquidating trust is not a separate taxable entity but rather is treated for federal income tax purposes as a “grantor” trust (i.e., a pass-through entity). However, merely establishing a trust as a liquidating trust does not ensure that it will be treated as a grantor trust for federal income tax purposes. The IRS, in Revenue Procedure 94-45, 1994-2 C.B. 684, set forth the general criteria for obtaining an IRS ruling as to the grantor trust status of a liquidating trust under a Chapter 11 plan. The Liquidation Trust have been structured with the intention of complying with such general criteria. Pursuant to the Plan, and in conformity with Revenue Procedure 94-45, all parties (including the Debtors, the Liquidation Trustees, and the holders of General Unsecured Claims) are required to treat, for federal income tax purposes, the Liquidation Trust as a grantor trust of which the holders are the owners and grantors. The following discussion assumes that the Liquidation Trust will be so respected for -61-

TABLE OF CONTENTS (continued) Page federal income tax purposes. However, no ruling has been requested from the IRS and no opinion of counsel has been requested concerning the tax status of the Liquidation Trust as a grantor trust. Accordingly, there can be no assurance that the IRS would not take a contrary position. Were the IRS successfully to challenge such classification, the federal income tax consequences to the Liquidation Trust, the holders of Unsecured Claims, and the Debtors could vary from those discussed herein (including the potential for an entity level tax on any income of the Liquidation Trust). (b)

General Tax Reporting by the Liquidation Trust and Beneficiaries

For all federal income tax purposes, all parties (including the Debtors, the Liquidation Trustee, and the holders of Unsecured Claims) must treat the transfer of assets to the Liquidation Trust, and any amounts subsequently transferred to the Liquidation Trust (but only at such time as actually transferred to the Liquidation Trust, in accordance with the terms of the Plan), as a transfer of such assets directly to the holders, followed by the transfer of such assets by the holders to the Liquidation Trust. Consistent therewith, all parties must treat the Liquidation Trust as a grantor trust of which such holders are the owners and grantors. Thus, such holders (and any subsequent holders of interests in the Liquidation Trust) will be treated as the direct owners of an undivided interest in the assets of the Liquidation Trust for all federal income tax purposes. Pursuant to the Plan, the Liquidation Trustees will determine the fair market value of the assets of the Liquidation Trust as of the Effective Date, and all parties, including the holders of the beneficial interests therein (i.e., the holders of Allowed Class 5 Claims), should consistently use such valuation for all federal income tax purposes where valuation is relevant in determining gain, loss, or tax basis. The valuation will be made available as necessary for tax reporting purposes (on an asset or aggregate basis, as relevant). Accordingly, except as discussed below (in connection with pending Disputed Claims), each holder should report on its federal income tax return its allocable share of any income, gain, loss, deduction, or credit recognized or incurred by the Liquidation Trust, in accordance with its relative beneficial interest. The character of items of income, deduction, and credit to any holder and the ability of such holder to benefit from any deductions or losses may depend on the particular situation of such holder. The federal income tax reporting obligations of a holder are not dependent upon the Liquidation Trust’s distributing any cash or other proceeds. Therefore, a holder may incur a federal income tax liability with respect to its allocable share of the income of the Liquidation Trust even if the Liquidation Trust have not made a concurrent distribution to the holder. In general, other than in respect of cash originally retained on account of Disputed Claims and distributions resulting from unclaimed distributions, a distribution of cash by the Liquidation Trust to a holder will not be taxable to the holder as such holder is regarded for federal income tax purposes as already owning the underlying assets or realizing the income. The Liquidation Trustee will file with the IRS returns for the Liquidation Trust as a grantor trust pursuant to Treasury Regulation section 1.671-4(a). The Liquidation Trustee will also send to each record holder a separate statement setting forth the information necessary for -62-

TABLE OF CONTENTS (continued) Page such holder to determine its share of items of income, gain, loss, deduction, or credit and will instruct the holder to report such items on its federal income tax return or to forward the appropriate information to the beneficial holders with instructions to report such items on their federal income tax returns. Such items generally would be reported on the holder’s state and/or local tax returns in a similar manner. The Liquidation Trustees will also file, or cause to be filed, all appropriate tax returns with respect to any Liquidation Trust Assets allocable to Disputed Claims, as discussed below. (c)

Tax Reporting for the Liquidation Trust Claims Reserve

Absent definitive guidance from the IRS or a court of competent jurisdiction to the contrary (including the issuance of applicable Treasury Regulations, the receipt by the Liquidation Trustees of a private letter ruling if the Liquidation Trustees so requests one, or the receipt of an adverse determination by the IRS upon audit if not contested by the Liquidation Trustees), the Liquidation Trustees will: 1. treat all Liquidation Trust Assets allocable to, or retained on account of, Disputed Class 5 Claims, as held in a discrete trust (termed, the Liquidation Trust Claims Reserve) for federal income tax purposes, consisting of separate and independent shares to be established in respect of each Disputed Claim, in accordance with the trust provisions of the Tax Code (section 641 et seq. of the Tax Code); 2. treat as taxable income or loss of the Liquidation Trust Claims Reserve with respect to any given taxable year the portion of the taxable income or loss of the Liquidation Trust that would have been allocated to the holders of such Disputed Class 5 Claims had such claims been Allowed on the Effective Date (but only for the portion of the taxable year with respect to which such claims are unresolved); 3. treat as a distribution from the Liquidation Trust Claims Reserve any increased amounts distributed by the Liquidation Trust as a result of any Disputed Class 5 Claim resolved earlier in the taxable year, to the extent such distribution relates to taxable income or loss of the Liquidation Trust Claims Reserve determined in accordance with the provisions of the Plan; and 4. to the extent permitted by applicable law, report consistently for state and local income tax purposes. In addition, pursuant to the Plan, all holders of Claims are required to report consistently with such treatment. Accordingly, subject to issuance of definitive guidance, the Liquidation Trustees will report on the basis that any amounts earned by the Liquidation Trust Claims Reserve and any taxable income of the Liquidation Trust allocable to it are subject to a separate entity level tax, except to the extent such earnings are distributed during the same taxable year. The Liquidation Trustees will use funds from the Liquidation Trust Claims Reserve to pay any taxes on such -63-

TABLE OF CONTENTS (continued) Page income, although any amounts earned by or attributable to the Liquidation Trust Claims Reserve and distributed to a holder during the same taxable year will be includible in such holder’s gross income, and such holder would pay the taxes under those circumstances. 4. Information Reporting and Withholding. All distributions to holders of Allowed Claims under the Plan are subject to any applicable withholding (including employment tax withholding). Under federal income tax law, interest, dividends, and other reportable payments may, under certain circumstances, be subject to “backup withholding” at the then applicable rate (currently 28%). Backup withholding generally applies if the holder (i) fails to furnish its social security number or other taxpayer identification number (“TIN”), (ii) furnishes an incorrect TIN, (iii) fails properly to report interest or dividends, or (iv) under certain circumstances, fails to provide a certified statement, signed under penalty of perjury, that the TIN provided is its correct number and that it is a United States person that is not subject to backup withholding. Certain persons are exempt from backup withholding, including, in certain circumstances, corporations and financial institutions. Backup withholding is not an additional tax but merely an advance payment, which may be refunded to the extent it results in an overpayment of tax and the appropriate information is supplied to the IRS. Recently effective Treasury Regulations generally require disclosure by a taxpayer on its federal income tax return of certain types of transactions in which the taxpayer participated after January 1, 2003, including, among other types of transactions, certain transactions that result in the taxpayer’s claiming a loss in excess of specified thresholds. These categories are very broad; however, there are numerous exceptions. Holders are urged to consult their tax advisors regarding these regulations and whether the transactions contemplated by the Plan would be subject to these regulations and require disclosure on the holders’ tax returns. THE FOREGOING SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE PARTICULAR CIRCUMSTANCES PERTAINING TO A HOLDER OF A CLAIM. EACH HOLDER OF A CLAIM IS URGED TO CONSULT ITS OWN TAX ADVISORS FOR THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES APPLICABLE UNDER THE PLAN. XII.

CONFIRMATION

The purpose of this Disclosure Statement is to provide Creditors with adequate information to enable them to make an informed decision regarding the merits of the Plan. A hearing on this First Amended Disclosure Statement is set for July 6, 2007 at 10:00 a.m. The Bankruptcy Code contemplates that creditors will vote on Confirmation of the Debtors Master Plan of Reorganization. The following paragraphs summarize the voting and the confirmation requirements in Chapter 11 proceedings. This summary constitutes neither a complete recital of the Bankruptcy Code requirements regarding voting and confirmation nor a conclusive statement of Creditor rights. Any Creditor or Interest Holder with questions concerning voting, confirmation, or other matters should seek the advice of counsel. -64-

TABLE OF CONTENTS (continued) Page Pursuant to Bankruptcy Code section 1129, in order to confirm the Plan, the Bankruptcy Court must find, among other things that: (i) the Plan complies with applicable provisions of the Bankruptcy Code; (ii) the Debtors have complied with the applicable provisions of the Bankruptcy Code; (iii) the Debtors proposed the Plan in good faith and not by any means forbidden by law; (iv) the Debtors have made the disclosure required by section 1125 of the Bankruptcy Code; (v) the Plan has been accepted by the requisite vote of Creditors; (vi) the Plan is feasible and Confirmation is not likely to be followed by liquidation unless such liquidation is provided for in the Plan; (vii) the Plan is in the best interest of Creditors by providing to Creditors on account of such claims or Interest property of a value, as of the Effective Date, that it is not less than the amount that such Creditor would receive or retain in a Chapter 7 liquidation; (viii) all fees and expenses required under 28 U.S.C. §1930 as determined by the Bankruptcy Court a hearing on confirmation have been paid or the Plan provides for payment of such fees on the Effective Date; and (ix) the Plan addresses Priority Claims. As indicated above, the Plan must be accepted by the requisite vote of Creditors in each Case in order to be confirmed by the Bankruptcy Court. Section 1129 of the Bankruptcy Code requires that each Class of Claims in each Case accept the Plan by the requisite majority, or that the class be unimpaired under the Plan and deemed to have accepted the Plan without solicitation. Only Creditors holding Classified Claims in each Case which are impaired under the Plan are entitled to vote to accept or reject the Plan. Generally a class is “impaired” unless the legal, equitable or contractual rights attaching to the Claims of that class are unaltered by the Plan or the Plan proposes to cure pre-Petition Date defaults and reinstate maturities and compensate the holder of such Claim for any damages or proposes payment in full in cash. In each of the Cases the Plan states that all classes other than Class 1 in the Reorganized Debtors Cases are impaired. The majorities as required for acceptance by an impaired class relate to both the amount of Allowed Claims in the class and the number of members in the class that actually vote for acceptance or rejection of the Plan. An impaired class is deemed to have accepted the Plan if the holders of at least two-thirds in dollar amount and a majority in number of the Allowed Claims of the class vote to accept the Plan. Only holders of Allowed Claims entitled to vote, who actually do vote to accept or reject the Plan are counted in this tabulation. If the Plan in each Case is accepted by all classes that are impaired under the Plan as to that Case, the Plan will be confirmed provided that the Bankruptcy Court finds that the Plan as to that Case satisfied the other conditions set forth in section 1129(a) of the Bankruptcy Code. If, however, the voting members of an impaired class in a Case do not unanimously vote for the Plan, but nevertheless accept the Plan by at least the requisite two-thirds of the amount and a majority number of claims that are actually voted, then to be confirmed over the objection of a member of such impaired class, the Plan must provide as to that Case that each member of the class receive property of a value, as of the Effective Date, not less than the amount such Creditor would receive under Chapter 7 of the Bankruptcy Code. The Plan may be confirmed as to a Case even though it is not accepted by all impaired classes in the Case to the extent (i) at least one impaired class accepts in a Case the Plan; (ii) the Plan is “fair and equitable” as to those impaired classes not accepting the Plan; (iii) the Plan does not “discriminate unfairly” against any impaired class electing not to accept the Plan, and (iv) the Plan meets the conditions set forth in section 1129(b) of the Bankruptcy Code regarding cram down. The “fair and equitable” -65-

TABLE OF CONTENTS (continued) Page standard requires, among other things that (i) no holder of a claim or interest in any class junior to any dissenting class of unsecured Claims receive or retain an account of such Claims or Interest unless the dissenting class of unsecured Claims receives full compensation for its Allowed Claims; and (ii) the members of any dissenting class of secured claims either retain their lien and receive deferred cash payments with a value as of the Effective Date of the Plan equal to the value of their interest in the Debtors’ property or otherwise receive the “indubitable equitable” standard to prohibit any class of Claims senior to a dissenting class from receiving greater than 100% of the value of the Allowed Claims in the class. The requirement that the Plan not “discriminate unfairly” simply means that the dissenting class must be treated substantially the same as other classes of equal rank. Debtors intend to rely upon the cram down provisions of the Bankruptcy Code to the extent necessary. XIII. POST-CONFIRMATION A.

Post-Effective Date Committee

The Committee shall continue in existence as presently constituted until the Effective Date and shall automatically dissolve and have no further duties or obligations upon the occurrence of the Effective Date.

B.

Post-Confirmation Conversion/Dismissal

A creditor or party in interest may bring a motion to convert or dismiss a Case under section 1112(7) after the Plan is confirmed if there is a default in performing the Plan as to such Case. If the Bankruptcy Court orders the Case converted after the Plan is confirmed, property of the Estate in that Case that has not been disbursed pursuant to the Plan will revest in the Chapter 7 estate. The Bankruptcy Court may revoke the Order of Confirmation in a Case if and only if the Confirmation Order was procured by fraud and if a party in interest brings a motion to revoke Confirmation within one hundred eighty (180) days after the entry of the Confirmation Order as to a Case.

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TABLE OF CONTENTS (continued) Page XIV. DISCHARGE Upon entry of an Order confirming the Debtors’ Plans, the Debtors shall be discharged from all claims held by entities against the Debtors. XV.

CONCLUSION

The Debtors believe that acceptance of the Plan by Creditors is in the best interest of all parties, and that Confirmation will provide the best and most prompt recovery for Creditors. The Debtors urge all parties to vote in favor of the Plan. KARA HOMES, INC. AND THE AFFILIATES /s/Perry M. Mandarino Dated: June 27, 2007 Perry M. Mandarino, Chief Restructuring Officer

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