Results of Operations
OVERVIEW
Revenues are generated from our homebuilding operations and our financial
services operations. Discontinued operations are comprised solely of our French
construction operations, which we sold on July 10, 2007. The following table
presents a summary of our results for the nine months and three months ended
August 31, 2008 and 2007 (in thousands, except per share amounts):

                                         Nine Months Ended August 31,               Three Months Ended August 31,
                                           2008                  2007                 2008                   2007
Revenues:
Homebuilding                          $    2,107,517         $  4,335,242        $       679,115         $  1,540,607
Financial services                             7,382               10,704                  2,495                3,293

Total                                 $    2,114,899         $  4,345,946        $       681,610         $  1,543,900


Pretax income (loss):
Homebuilding                          $     (691,892 )       $ (1,083,555 )      $      (157,733 )       $   (792,267 )
Financial services                            16,945               21,738                  5,988                6,547

Loss from continuing operations
before income taxes                         (674,947 )         (1,061,817 )             (151,745 )           (785,720 )
Income tax benefit                             6,100              419,700                  7,000              307,100

Loss from continuing operations             (668,847 )           (642,117 )             (144,745 )           (478,620 )
Income from discontinued
operations, net of income taxes                    -               47,252                      -                4,904
Gain on sale of discontinued
operations, net of income taxes                    -              438,104                      -              438,104

Net loss                              $     (668,847 )       $   (156,761 )      $      (144,745 )       $    (35,612 )


Diluted earnings (loss) per
share:
Continuing operations                 $        (8.63 )       $      (8.32 )      $         (1.87 )       $      (6.19 )
Discontinued operations                            -                 6.29                      -                 5.73

Diluted loss per share                $        (8.63 )       $      (2.03 )      $         (1.87 )       $       (.46 )

During the first nine months of 2008, difficult operating conditions prevailed across most U.S. housing markets. The supply of unsold homes in the marketplace rose substantially, exacerbated by record-high foreclosures. Meanwhile, demand for new homes remained constrained by declining consumer confidence and tightening consumer mortgage lending standards. This protracted supply/demand imbalance intensified competition for sales throughout the period and produced relentless downward pressures on prices. These adverse conditions have now persisted to varying degrees since the second half of 2006 and their impact is reflected in our results for the three- and nine-month reporting periods ended August 31, 2008. In both periods, we experienced year-over-year declines in net orders, homes delivered and revenues across all of our homebuilding reporting segments. As a result, we reported net losses for both periods.
Our results for the third quarter and nine months ended August 31, 2008 were also affected by strategic actions we have taken in the past several quarters to reduce overhead, inventory investments, and our active community count in line with currently depressed housing market activity. In both periods, we operated from 38% fewer active communities than in the comparable periods of 2007. At August 31, 2008, our inventory of lots owned and controlled was down 36% from a year ago. Our workforce has been reduced 40% since the beginning of fiscal 2008. Our year-over-year results for the three months and nine months ended August 31, 2008 were also affected by targeted price reductions and sales incentives in certain communities, taken primarily in the first half of 2008, in response to competitive conditions or to facilitate our exit from specific project or product types. In the third quarter of 2008, our net orders fell compared to the year-earlier quarter as we implemented comprehensive community-by-community pricing strategies that resulted in greater pricing discipline and fewer

price reductions and sales incentives; as we allowed certain communities to wind-down as backlog was delivered; and as we discontinued product in specific communities as part of a transition to more efficient, lower priced models. Because of current market conditions and our strategic initiatives in response, we expect to report reduced year-over-year net orders, home deliveries and revenues for the balance of fiscal 2008. We also believe difficult market conditions will persist for the housing industry well into fiscal 2009. Against this backdrop, we took additional steps during the third quarter to streamline our organizational structure, consolidating some of our homebuilding divisions and further reducing our workforce. We believe these steps will produce tangible benefits in the form of lower selling, general and administrative expenses going forward, although one-time costs to implement these steps offset their immediate impact in the third quarter of 2008.
Our total revenues of $681.6 million for the three months ended August 31, 2008 decreased 56% from $1.54 billion for the three months ended August 31, 2007 due to lower housing and land sale revenues. Third quarter housing revenues of $668.3 million declined 56% from $1.53 billion in the year-earlier quarter, reflecting decreases in both the number of homes delivered and the average selling price. We delivered 2,788 homes in the third quarter of 2008, down 51% from the 5,699 homes we delivered in the year-earlier quarter. The overall average selling price of our homes decreased 10% to $239,700 in the third quarter of 2008 from $267,700 in the corresponding period of 2007. We use the term "home" in this discussion and analysis to refer to a single-family residence, whether it is a single-family home or other type of residential property. Included in our total revenues were financial services revenues of $2.5 million in the three months ended August 31, 2008 and $3.3 million in the three months ended August 31, 2007.
We incurred a net loss of $144.7 million, or $1.87 per diluted share, in the third quarter of 2008, including pretax, non-cash charges of $82.2 million for inventory and joint venture impairments. The inventory impairments resulted from increased housing supply and persistently poor demand, which amplified pricing pressures and diminished asset values in certain of our markets. Inventory values were also affected by the uncertain time frame of a housing market recovery. Of the total third quarter impairment charges, $7.4 million related to our West Coast segment, $53.7 million related to our Southwest segment and $21.1 million related to our Southeast segment. There were no impairment charges in our Central segment. Approximately 52% of the total third quarter impairment charges were associated with unconsolidated joint ventures. Overall, the current quarter's total impairment charges were 88% lower than the total impairment and land option contract abandonment charges in the year-earlier quarter and 53% lower than such charges in the second quarter of 2008. Our inventory-related charges have decreased sequentially for the last four consecutive quarters. Our net loss in the third quarter of 2008 also included a charge of $58.1 million to record a valuation allowance against net deferred tax assets generated during the quarter in accordance with SFAS No. 109. In the third quarter of 2007, we generated an after-tax loss from continuing operations of $478.6 million, or $6.19 per diluted share, including pretax, non-cash charges of $690.1 million for inventory and joint venture impairments and the abandonment of land option contracts, and $107.9 million for goodwill impairments. Of the total impairment and land option contract abandonment charges in the third quarter of 2007, $364.6 million related to our West Coast segment, $196.6 million related to our Southwest segment, $14.9 million related to our Central segment and $114.0 million related to our Southeast segment. Our net loss of $35.6 million, or $.46 per diluted share, in the third quarter of 2007 reflected after-tax income of $443.0 million, or $5.73 per diluted share from our French discontinued operations, including the gain on sale from these operations. Total revenues for the nine months ended August 31, 2008 were $2.11 billion, a decrease of 51% from $4.35 billion for the nine months ended August 31, 2007. Included in our total revenues were financial services revenues of $7.4 million in the nine months ended August 31, 2008 and $10.7 million in the nine months ended August 31, 2007. Our net loss for the first nine months of 2008 totaled $668.8 million, or $8.63 per diluted share, including pretax, non-cash charges of $482.7 million for inventory and joint venture impairments and the abandonment of land option contracts, and $24.6 million for goodwill impairment. The net loss also reflected a $257.0 million valuation allowance charge against net deferred tax assets to fully reserve the tax benefits generated from our pretax loss in the period in accordance with SFAS No. 109. For the nine months ended August 31, 2007, we reported a net loss of $156.8 million, or $2.03 per diluted share, including pretax, non-cash charges of $1.01 billion for inventory and joint venture impairments and land option contract abandonments, $107.9 million related to goodwill impairments, and after-tax income of $485.4 million, or $6.29 per diluted share, from the French discontinued operations, including the gain on sale from these operations.
Our backlog at August 31, 2008 consisted of 4,774 homes, representing projected future housing revenues of approximately $1.13 billion. These backlog measures declined 60% and 63%, respectively, from the 11,880

homes, representing approximately $3.07 billion in projected future housing revenues, at August 31, 2007. The decrease in backlog levels reflected the combined impact over the past several quarters of negative year-over-year net order results, lower average selling prices, and our strategic initiatives to reduce our inventory and active community counts to align with reduced housing market activity. Net orders generated from our homebuilding operations decreased 66% to 1,329 in the third quarter of 2008 from 3,907 net orders in the third quarter of 2007, with year-over-year declines experienced in each of our homebuilding reporting segments. The decrease in net orders reflected our reduced community counts compared to the year-earlier third quarter, as well as our decisions to reduce our use of price reductions and sales incentives as part of a comprehensive, community-by-community review of pricing strategies; to wind down certain communities as backlog is delivered; and to discontinue product in particular communities as part of a product transition strategy. Our cancellation rate based on gross orders continued to exhibit volatility, increasing to 51% in the third quarter of 2008 from 27% in the second quarter of 2008 and 50% in the third quarter of 2007. As a percentage of beginning backlog, however, the cancellation rate improved to 22% in the third quarter of 2008 from 33% in the second quarter of 2008 and 29% in the year-earlier quarter. We continue to take steps to maintain a strong financial position and to align our operations with the significantly reduced market demand compared to the record levels of a few years ago. At August 31, 2008, our cash balance totaled $942.5 million compared to $1.33 billion at November 30, 2007. Our debt balance of $1.88 billion at August 31, 2008 decreased from $2.16 billion at November 30, 2007 due to our early redemption on July 14, 2008 of the $300 Million 7 3/4% Senior Subordinated Notes. As of August 31, 2008, our ratio of debt to total capital, net of cash, of 45.2% remained within our targeted range of 40-50%. Our liquidity, including the available capacity under our Credit Facility, was approximately $1.55 billion at August 31, 2008. We have reduced our inventory levels by 42% to $2.56 billion at August 31, 2008 from $4.42 billion at August 31, 2007, and ended the third quarter of 2008 with what we believe is an attractive, geographically diverse land portfolio of approximately 52,700 lots owned or controlled. We believe our solid financial position and present lot positions give us a distinct competitive advantage relative to other homebuilding companies and should allow us to capitalize on opportunities as housing markets stabilize.
HOMEBUILDING
We have grouped our homebuilding activities into four reporting segments, which we refer to as West Coast, Southwest, Central and Southeast. As of August 31, 2008, our homebuilding segments consisted of ongoing operations located in the following states: West Coast - California; Southwest - Arizona and Nevada; Central - Colorado and Texas; and Southeast - Florida, Georgia, North Carolina and South Carolina.
The following table presents a summary of selected financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):

                                                     Nine Months Ended August 31,               Three Months Ended August 31,
                                                       2008                  2007                 2008                   2007

Revenues:
Housing                                           $    2,031,725         $  4,196,487        $       668,292         $  1,525,863
Land                                                      75,792              138,755                 10,823               14,744

Total                                                  2,107,517            4,335,242                679,115            1,540,607


Costs and expenses:
Construction and land costs
Housing                                                2,162,558            4,461,484                642,467            1,952,718
Land                                                     159,655              196,581                 11,265               49,663

Total                                                  2,322,213            4,658,065                653,732            2,002,381
Selling, general and administrative expenses             379,914              595,971                133,211              197,164
Goodwill impairment                                       24,570              107,926                      -              107,926

Total                                                  2,726,697            5,361,962                786,943            2,307,471


Operating loss                                    $     (619,180 )       $ (1,026,720 )      $      (107,828 )       $   (766,864 )

                                                   Nine Months Ended August 31,                 Three Months Ended August 31,
                                                    2008                   2007                  2008                   2007

Homes delivered                                        8,526                 15,611                 2,788                  5,699
Average selling price                         $      238,300         $      268,800        $      239,700         $      267,700
Housing gross margin                                    -6.4 %                 -6.3 %                 3.9 %                -28.0 %

Selling, general and administrative
expenses as a percent of housing
revenues                                                18.7 %                 14.2 %                19.9 %                 12.9 %

Operating loss as a percent of
homebuilding revenues                                  -29.4 %                -23.7 %               -15.9 %                -49.8 %

The following tables present information by reporting segment and with respect to our unconsolidated joint ventures in terms of homes delivered to buyers, net orders taken and cancellation rates based on gross orders for the three-month and nine-month periods ended August 31, 2008 and 2007, together with backlog data in terms of homes and value at August 31, 2008 and 2007:

                                                            Three Months Ended August 31,
                                  Homes Delivered                      Net Orders                   Cancellation Rates
Segment                        2008             2007             2008             2007             2008            2007
West Coast                       731            1,252              361              713              48 %            57 %
Southwest                        425            1,133              282              604              37 %            51 %
Central                          745            1,433              506            1,370              43 %            47 %
Southeast                        887            1,881              180            1,220              74 %            49 %

Total                          2,788            5,699            1,329            3,907              51 %            50 %

Unconsolidated joint
ventures                          45               13               39               79              57 %            43 %




                                                              Nine Months Ended August 31,
                                   Homes Delivered                      Net Orders                    Cancellation Rates
Segment                        2008              2007             2008              2007             2008            2007
West Coast                     1,948             3,097            1,877             3,853              37 %            37 %
Southwest                      1,699             3,379            1,228             3,149              33 %            36 %
Central                        2,507             4,096            1,701             4,606              44 %            42 %
Southeast                      2,372             5,039            2,172             5,308              42 %            38 %

Total                          8,526            15,611            6,978            16,916              40 %            38 %

Unconsolidated joint
ventures                         194                32              218               273              38 %            30 %

                                                          August 31,
                                                                    Backlog - Value
                                       Backlog - Homes              (In Thousands)
     Segment                          2008         2007          2008            2007
     West Coast                        1,119        2,371     $   391,525     $ 1,042,194
     Southwest                           835        2,300         190,279         590,711
     Central                           1,205        3,565         230,154         599,400
     Southeast                         1,615        3,644         321,321         834,588

     Total                             4,774       11,880     $ 1,133,279     $ 3,066,893

     Unconsolidated joint ventures       233          295     $   136,918     $   108,821

Revenues. Homebuilding revenues decreased by $861.5 million, or 56%, to $679.1 million in the quarter ended August 31, 2008, from $1.54 billion in the year-earlier quarter, due to a decline in housing and land sales revenues. Housing revenues for the quarter ended August 31, 2008 totaled $668.3 million, down $857.6 million, or 56%, from $1.53 billion in the year-earlier quarter, reflecting fewer homes delivered and a lower average selling price. We delivered 2,788 homes in the third quarter of 2008, down 51% from 5,699 homes delivered in the third quarter of 2007, with each of our homebuilding reporting segments posting a year-over-year decrease. The overall decline in homes delivered was largely due to the 38% decrease in the number of our active communities in the third quarter of 2008 compared to the year-earlier quarter. Over the past several quarters we have decreased community counts to better align our operations with reduced housing market activity. We anticipate our lower active community count will continue to reduce the number of homes we deliver and the amount of revenues we generate from our housing operations, measured on a year-over-year basis, for the remainder of 2008. Our average selling price was $239,700 for the three months ended August 31, 2008, a decrease of 10% from $267,700 in the year-earlier period. Persistent housing supply and demand imbalances in our markets, which were exacerbated by growing foreclosures, heightened competition from homebuilders and other sellers and intensified downward pricing pressures during the quarter. In addition, we introduced product at lower price points to address the ongoing affordability concerns of potential homebuyers. The largest year-over-year decrease was in our West Coast segment, where the average selling price was down 20% in the quarter ended August 31, 2008. Both the overall average selling price, and the average selling prices in each of our homebuilding reporting segments, were sequentially higher in the third quarter compared to the second quarter of 2008 due to differences in product mix. Nonetheless, we anticipate that our average selling price in 2008 will remain below year-earlier levels, given the challenging market conditions, increased foreclosures, tightening consumer lending requirements, affordability concerns among potential homebuyers, and our introduction and roll out of value-engineered product at lower price points as part of a product transition strategy.
Homebuilding revenues for the nine months ended August 31, 2008 decreased by $2.22 billion, or 51%, to $2.11 billion from $4.33 billion for the year-earlier period, due to lower housing and land sale revenues. Housing revenues for the nine months ended August 31, 2008 totaled $2.03 billion, down 52% from $4.20 billion in the year-earlier period, reflecting a 45% decrease in the number of homes delivered and an 11% decrease in our average selling price. Company-wide homes delivered decreased to 8,526 in the first nine months of 2008 from 15,611 in the first nine months of 2007 primarily due to our reduced number of active communities. Our average selling price decreased to $238,300 in the first nine months of 2008 from $268,800 in the corresponding period of 2007 as a result of downward pricing pressures driven by difficult market conditions, intense competition and the roll out of more affordable product. Revenues from land sales totaled $10.8 million for the three months ended August 31, 2008 and $14.7 million for the three months ended August 31, 2007. For the nine months ended August 31, 2008, revenues from land sales totaled $75.8 million compared to $138.8 million for the nine months ended August 31, 2007. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land in the markets we serve and prevailing market conditions. Land sale revenues were more significant in the three-month and nine-month periods ended August 31, 2007 compared to the corresponding 2008 periods because we sold more land in 2007 as part of our strategic efforts to realign our land inventories with future sales expectations.

Operating loss. Our homebuilding operations recorded operating losses of $107.8 million in the three months ended August 31, 2008 and $766.9 million in the three months ended August 31, 2007 due to losses from both housing operations and land sales. The 2008 third quarter operating loss represented 15.9% of homebuilding revenues; in the year-earlier quarter, the operating loss represented 49.8% of homebuilding revenues. Within our homebuilding operations, the 2008 third quarter operating loss was largely the result of pretax, non-cash charges of $38.5 million for inventory impairments, continued pressure on margins in light of highly competitive market conditions, and high overhead costs relative to the volume of homes delivered. The inventory impairment charges in the third quarter of 2008 reflected the impact of increased housing supply and persistently poor demand, which increased pricing pressure and decreased asset values in certain markets. In the third quarter of 2007, the operating loss within housing operations was primarily due to pretax, non-cash inventory impairment and land option contract abandonment charges of $639.0 million, which were driven by similar housing market supply and demand factors. Our housing gross margin, including inventory-related non-cash charges, improved to 3.9% in the third quarter of 2008 from a negative 28.0% in the third quarter of 2007. Excluding the inventory-related non-cash charges, our housing gross margin would have been 9.6% in the third quarter of 2008 and 13.9% in the third quarter of 2007.
Company-wide land sales produced a loss of $.4 million in the three months ended August 31, 2008, including $.6 million of impairment charges related to planned future land sales. In the three months ended August 31, 2007, land sales generated a loss of $34.9 million, which included $34.0 million of similar impairment charges.
Selling, general and administrative expenses decreased by $64.0 million, or 32%, to $133.2 million in the three months ended August 31, 2008 from $197.2 million in the corresponding 2007 period. The decrease reflected our ongoing efforts to rescale the size of our operations to the lower volume of homes we are delivering and our future sales expectations. Due to continued deterioration in housing market conditions, we took aggressive actions during the third quarter of 2008 to further streamline our organizational structure by consolidating certain homebuilding operations and reducing our workforce. The potential benefit of these actions in reducing our selling, general and administrative expenses is not reflected in our third quarter results due to the costs incurred to implement them. As a percentage of housing revenues, selling, general and administrative expenses increased to 19.9% in the third quarter of 2008 from 12.9% in the year-earlier period, largely due to the substantial year-over-year decrease in our homebuilding revenues, which has outpaced our significant overhead reductions. Despite our intentions to continue to reduce our selling, general and administrative expenses, we expect the ratio of these expenses to housing revenues to remain above 2007 levels for the balance of the year. Our homebuilding operations generated operating losses of $619.2 million for the first nine months of 2008 and $1.03 billion for the first nine months of 2007, reflecting losses from both housing operations and land sales. As a percentage of homebuilding revenues, the operating loss was 29.4% in the first nine months of 2008 compared to 23.7% in the first nine months of 2007, reflecting a slight decrease in our housing gross margin to negative 6.4% from negative 6.3% and an increase in our selling, general and administrative expenses as a percent of housing revenues. Our housing gross margin for the nine months ended August 31, . . .