Overview

The U.S. housing market continues to be unfavorably impacted by a lack of consumer confidence, decreased housing affordability, tightened mortgage standards, and large supplies of resale and new home inventories and related pricing pressures. These factors have contributed to weakened demand for new homes, slower sales, higher cancellation rates, and increased price discounts and sales incentives to attract homebuyers. As a result of the combination of these homebuilding industry and related mortgage financing developments, we have experienced a net loss in each quarter since the fourth quarter of 2006. Such losses resulted from a combination of reduced operational profitability and significant asset impairments. Since the beginning of 2006, we have incurred total land-related charges of $3.6 billion, impairments of our investments in unconsolidated joint ventures totaling $288.4 million, and goodwill impairments of $370 million.

We continue to operate our business with the expectation that difficult market conditions will continue to impact us for at least the near term. We expect negative trends in our unit settlements and pricing to continue and the majority of the markets we serve to remain challenging throughout 2008 and 2009. We have adjusted our approach to land acquisition and development and construction practices and continue to shorten our land pipeline, limit land development expenditures, reduce production volumes, and balance home price and profitability with sales pace and cash flow at each of our communities. We are delaying planned land purchases and development spending and have significantly reduced our total number of controlled lots owned and under option. Additionally, we are closely managing the number of speculative homes put into production. While we will continue to purchase select land positions where it makes strategic and economic sense to do so, we anticipate minimal investment in new land parcels in the near term. We have also closely evaluated and made significant reductions in employee headcount and overhead expenses. Due to the persistence of these difficult market conditions, improving the efficiency of our overhead costs will continue to be a significant area of focus. We believe that these measures will help to strengthen our market position and allow us to take advantage of opportunities that may develop in the future.

The U.S. economy is currently undergoing a period of economic uncertainty, and the related financial markets are experiencing significant volatility. In response, the U.S. government has made significant efforts in recent months to stabilize these conditions and increase the regulatory oversight of the financial markets, including passage of the Housing and Economic Recovery Act of 2008 (the "Act"), which was enacted into law on July 30, 2008. Overall, the Act is intended to help stabilize and add consumer confidence to the housing industry. However, the Act also mandates certain changes to which the industry will have to adjust, such as the elimination of down payment assistance programs for FHA loans originated after September 30, 2008. Such programs were utilized for approximately 12% of our unit settlements in the three months ended September 30, 2008. The U.S. government has also taken a series of actions intended to stabilize the U.S. economy and financial markets and increase the overall liquidity available to companies and consumers. We are evaluating the impact the Act and these other actions will have on our business and future results of operations. Thus far, these actions have not proven stimulative for the homebuilding industry.

If these trends in economic conditions or financial market volatility continue, it could adversely affect our business and results of operations in future periods, including a potential reduction in the demand for housing as well as difficulties in accessing financing on acceptable terms. Given these conditions and the continued weakness in new home sales and closings, visibility as to future earnings performance is limited. Our evaluation for land-related charges recorded to date assumed our best estimates of cash flows for the communities tested. If conditions in the homebuilding industry or our local markets worsen in the future or if our strategy related to certain communities changes, we may be required to evaluate our assets, including additional projects, for further impairments or write-downs, which could result in future charges that might be significant.

Overview (continued)



The following is a summary of our operating results for the three and nine
months ended September 30, 2008 and 2007 ($000's omitted, except per share
data):



                                             Three Months Ended                 Nine Months Ended
                                               September 30,                      September 30,
                                           2008             2007              2008              2007
Income (loss) before income taxes:
Homebuilding operations                 $ (301,966 )    $ (1,098,679 )    $ (1,228,417 )    $ (2,050,256 )
Financial Services operations               10,092            12,896            35,938            32,659
Other non-operating                         (2,717 )          (8,130 )         (10,395 )         (25,473 )

Loss before income taxes                  (294,591 )      (1,093,913 )      (1,202,874 )      (2,043,070 )
Income taxes (benefit)                     (14,204 )        (306,042 )         (67,926 )        (661,976 )

Net loss                                $ (280,387 )    $   (787,871 )    $ (1,134,948 )    $ (1,381,094 )

Per share data - assuming dilution:
Net loss                                $    (1.11 )    $      (3.12 )    $      (4.48 )    $      (5.48 )

The following is a comparison of our loss before income taxes for the three and nine months ended September 30, 2008 and 2007:

• Our Homebuilding loss before income taxes was $302 million and $1.2 billion for the three and nine months ended September 30, 2008, respectively, compared with a Homebuilding loss before income taxes of $1.1 billion and $2.1 billion, respectively, for the same periods in the prior year. The pre-tax loss experienced by our Homebuilding operations resulted from lower settlement revenues combined with lower gross margins and significant land-related charges and impairments of investments in unconsolidated joint ventures. Such land-related charges and impairments totaled $266.2 million and $1.2 billion for the three and nine months ended September 30, 2008 compared with $842.1 million and $1.7 billion for the same periods in the prior year.

• Income before income taxes from Financial Services decreased 22% and increased 10% for the three and nine months ended September 30, 2008, respectively, compared with the prior year periods, due primarily to a shift in the mix of loans originated toward more profitable agency-backed products and the impact of new accounting standards adopted on January 1, 2008. The favorable shift in product mix was offset by reduced loan origination volume resulting from the decline in settlement revenues from Homebuilding.

• The decrease in other non-operating expenses for the three and nine months ended September 30, 2008, compared with the same periods in the prior year, resulted primarily from an increase in interest income partially offset by expenses related to the amendment of our unsecured revolving credit facility completed in February 2008 and the repurchase of $313 million of our senior notes due 2009 by means of a tender offer completed in June 2008.

Homebuilding Operations - Summary

The following table presents a summary of pre-tax income (loss) and unit
information for our Homebuilding operations for the three and nine months ended
September 30, 2008 and 2007 ($000's omitted):



                                          Three Months Ended                  Nine Months Ended
                                            September 30,                       September 30,
                                        2008              2007              2008              2007
Home sale revenue (settlements)     $  1,508,825      $  2,407,762      $  4,460,393      $  6,098,869
Land sale revenue                         12,964            30,794            39,973           163,093

Total Homebuilding revenues            1,521,789         2,438,556         4,500,366         6,261,962

Home cost of sales (a)                (1,599,064 )      (2,700,512 )      (4,981,387 )      (6,549,864 )
Land cost of sales (b)                   (27,910 )        (110,041 )        (160,979 )        (285,021 )
Selling, general and
administrative expense                  (191,997 )        (236,610 )        (571,577 )        (813,476 )
Equity income (loss) (c)                  (2,689 )         (51,695 )            (760 )        (107,958 )
Other income (expense), net (d)           (2,095 )        (438,377 )         (14,080 )        (555,899 )

Loss before income taxes            $   (301,966 )    $ (1,098,679 )    $ (1,228,417 )    $ (2,050,256 )


Total active communities at
September 30                                                                     561               669
Unit settlements                           5,377             7,468            15,548            18,826
Average selling price               $        281      $        322      $        287      $        324
Net new orders:
Units                                      3,008             4,582            13,543            20,613
Dollars (e)                         $    785,000      $  1,267,000      $  3,659,000      $  6,606,000
Backlog at September 30:
Units                                                                          5,885            12,042
Dollars                                                                 $  1,708,700      $  4,087,000

(a) Includes homebuilding interest expense, which represents the amortization of capitalized interest. Home cost of sales also includes land and community valuation adjustments of $249.9 million and $615.9 million for the three months ended September 30, 2008 and 2007, respectively, and $1 billion and $1.3 billion for the nine months ended September 30, 2008 and 2007, respectively.

(b) Includes net realizable value adjustments for land held for sale of $15.9 million and $80.5 million for the three months ended September 30, 2008 and 2007, respectively, and $125.1 million and $132.8 million for the nine months ended September 30, 2008 and 2007, respectively.

(c) Includes impairments of our investments in unconsolidated joint ventures, which totaled $1.4 million and $51.1 million for the three months ended September 30, 2008 and 2007, respectively. Impairments in unconsolidated joint ventures totaled $3.1 million and $105.2 million for the nine months ended September 30, 2008 and 2007, respectively.

(d) Includes the write off (recovery) of deposits and other related costs for land option contracts we no longer plan to pursue of ($931 thousand) and $94.6 million for the three months ended September 30, 2008 and 2007, respectively, and $19.4 million and $204.2 million for the nine months ended September 30, 2008 and 2007, respectively. Additionally, includes goodwill impairment charges of $335.6 million for the three and nine months ended September 30, 2007.

(e) Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.

Homebuilding Operations - Summary (continued)

Home sale revenues for the three and nine months ended September 30, 2008 were lower than those for the same periods in the prior year by $899 million and $1.6 billion, or 37% and 27%, respectively. The decreases in home sale revenues for the three and nine months ended September 30, 2008 compared with the prior year periods were attributable to 28% and 17% decreases, respectively, in unit settlements combined with 13% and 11% decreases, respectively, in the average selling price. The declines in unit settlements resulted from both reductions in the number of our active communities (down 16% at September 30, 2008 compared with September 30, 2007) and the challenging sales conditions in our local markets. The decreases in average selling price reflect a combination of factors, including changes in the product and geographic mix of homes closed during the period as well as lower market selling prices and increased sales incentives. Home sale revenues and average selling prices decreased in each of our Homebuilding segments in 2008.

Homebuilding gross profit margins from home settlements improved to negative 6% for the three months ended September 30, 2008, compared with negative 12.2% for the same period in the prior year. For the nine months ended September 30, 2008, Homebuilding gross profit margins were negative 11.7% compared with negative 7.4% for the same period in 2007. The low level of gross profit margins is attributable to the difficult market conditions and challenging sales environment where we have realized lower average selling prices and increased sales incentives. In addition, land and community valuation adjustments of $249.9 million and $1 billion were recorded during the three months and nine months ended September 30, 2008, respectively, compared with land and community valuation adjustments of $615.9 million and $1.3 billion, respectively, in the corresponding prior year periods.

We acquire land primarily for the construction of our homes for sale to homebuyers. We select locations for development of homebuilding communities after completing extensive market research, enabling us to match the location and product offering with our targeted consumer group. Where we develop land, we engage directly in many phases of the development process, including land and site planning, obtaining environmental and other regulatory approvals, as well as constructing roads, sewers, water and drainage facilities, and other amenities. We will often sell select parcels of land within or adjacent to our communities to retail and commercial establishments. We also will, on occasion, sell lots within our communities to other homebuilders. Gross profits from land sales for the three months ended September 30, 2008 had a negative margin contribution of $14.9 million, compared with a negative margin contribution of $79.2 million for the same period in 2007. Gross profits from land sales for the nine months ended September 30, 2008 had a negative margin contribution of $121 million, compared with a negative margin contribution of $121.9 million for the same period in 2007. These negative margin contributions include net realizable value adjustments for land held for sale of $15.9 million and $80.5 million for the three months ended September 30, 2008 and 2007, respectively, and $125.1 million and $132.8 million for the nine months ended September 30, 2008 and 2007, respectively. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of land sales. We continue to evaluate our existing land positions to ensure the most effective use of capital. As of September 30, 2008, we had $286 million of land held for sale.

Selling, general and administrative expense as a percentage of home settlement revenues was 12.7% for the three months ended September 30, 2008 compared with 9.8% for the same period in the prior year. For the nine months ended September 30, 2008, selling, general and administrative expense as a percentage of home settlement revenues was 12.8% compared with 13.3% in the prior year period. The respective $44.6 million and $241.9 million reductions in selling, general and administrative costs in the three and nine months ended September 30, 2008 compared with the same periods in the prior year resulted from our internal initiatives focused on controlling costs and matching our cost structure with the current business environment. However, these reductions were partially offset by significant decreases in revenues, lower absorption into inventory of overhead costs due to lower construction volumes, and severance costs of $2.9 million and $12.4 million, respectively, for the three and nine months ended September 30, 2008 related to further overhead reductions. The three and nine months ended September 30, 2007 included employee severance benefits of approximately $300 thousand and $26.6 million, respectively, related to a restructuring plan initiated in May 2007. Additionally, certain insurance-related expenses decreased $6.8 million and increased $22.1 million, respectively, in the three and nine months ended September 30, 2008, primarily related to the development of general liability product claims.

Equity income (loss) includes impairments of investments in unconsolidated joint ventures totaling $1.4 million and $3.1 million in the three and nine months ended September 30, 2008, respectively, and $51.1 million and $105.2 million in the three and nine months ended September 30, 2007, respectively.

Homebuilding Operations - Summary (continued)

Other income (expense), net includes the write off (or recovery) of deposits and related costs resulting from decisions not to pursue certain land acquisitions and options, which totaled ($931 thousand) and $94.6 million for the three months ended September 30, 2008 and 2007, respectively, and $19.4 million and $204.2 million for the nine months ended September 30, 2008 and 2007, respectively. These write-offs were partially offset by higher customer deposit income resulting from increased customer cancellations. For the three and nine months ended September 30, 2007, we also recorded asset impairment and lease termination costs totaling $7.1 million and $14.8 million, respectively, related to the restructuring plan initiated in May 2007. Additionally, we recorded goodwill impairment charges of $335.6 million in the three and nine months ended September 30, 2007.

For the three and nine months ended September 30, 2008, net new order units decreased 34% to 3,008 units and 34% to 13,543 units, respectively, compared with the same periods in 2007. The cancellation rate for the third quarter was 37%, compared with 44% for the same period in 2007. Most of our local markets have experienced substantial increases in resale and new home inventory, and this, combined with a lack of consumer confidence, decreased housing affordability, difficulties experienced by customers in selling their existing homes, and the more restrictive mortgage financing market, has resulted in higher cancellation rates and lower net new orders.

The dollar value of net new orders decreased 38% and 45% for the three and nine months ended September 30, 2008, respectively, compared with the same periods in 2007. At September 30, 2008, we had 561 active communities, a decrease of 16% from September 30, 2007. Ending backlog, which represents orders for homes that have not yet closed, was 5,885 units at September 30, 2008 with a dollar value of $1.7 billion, declines of 51% and 58%, respectively, compared with September 30, 2007.

At September 30, 2008 and December 31, 2007, our Homebuilding operations controlled 127,993 and 157,858 lots, respectively. Of these controlled lots, 109,877 and 131,385 lots were owned, and 18,012 and 24,813 lots were under option agreements approved for purchase at September 30, 2008 and December 31, 2007, respectively. In addition, there were 104 and 1,660 lots under option agreements, pending approval, at September 30, 2008 and December 31, 2007, respectively. For the three and nine months ended September 30, 2008, we withdrew from land contracts representing approximately 100 lots valued at $8.7 million and 5,500 lots valued at $151.8 million, respectively.

The total purchase price related to approved land under option for use by our Homebuilding operations at future dates approximated $1.2 billion at September 30, 2008. In addition, the total purchase price related to land under option pending approval was valued at approximately $7.2 million at September 30, 2008. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits and other related costs totaling $236.5 million, of which $1.4 million is refundable. This balance excludes $21.3 million of contingent payment obligations which may or may not become actual obligations to us.

Homebuilding Segment Operations

Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of first-time, first and second move-up, and active adult homebuyers. We have determined our Homebuilding operating segments to be our Areas, which are aggregated into seven reportable segments based on similarities in the economic and geographic characteristics of our homebuilding operations. We conduct our operations in 50 markets, located throughout 27 states, and have presented our reportable Homebuilding segments as follows:

Northeast:     Northeast Area includes the following states:
               Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
               New York, Pennsylvania, Rhode Island, Virginia

Southeast:     Southeast Area includes the following states:
               Georgia, North Carolina, South Carolina, Tennessee

Florida:       Florida Area includes the following state:
               Florida

Midwest:       Great Lakes Area includes the following states:
               Colorado, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio

Central:       Texas Area includes the following state:
               Texas

Southwest:     Southwest Area includes the following states:
               Arizona, Nevada, New Mexico

*California: Northern California and Southern California Areas include the following state:
California

* Our homebuilding operations located in Reno, Nevada are reported in the California segment, while our remaining Nevada homebuilding operations are reported in the Southwest segment.

Homebuilding Segment Operations (continued)



The following table presents selected financial information for our reportable
Homebuilding segments:



                                               Three Months Ended                Nine Months Ended
                                                 September 30,                     September 30,
                                             2008             2007             2008             2007
Home sale revenue (settlements) ($000's
omitted):
Northeast                                 $   202,445     $    321,586     $    596,833     $    717,726
Southeast                                     221,394          298,009          687,950          824,842
Florida                                       181,760          273,999          560,669          803,076
Midwest                                       182,415          341,892          522,052          756,257
Central                                       111,923          153,158          346,560          438,214
Southwest                                     407,295          655,972        1,130,773        1,569,248
California                                    201,593          363,146          615,556          989,506

                                          $ 1,508,825     $  2,407,762     $  4,460,393     $  6,098,869

Income (loss) before income taxes
($000's omitted):
Northeast                                 $    (2,178 )   $    (24,343 )   $    (44,692 )   $   (124,876 )
Southeast                                       5,202           11,000           (1,012 )         51,524
Florida                                        (8,131 )       (149,939 )       (181,070 )       (270,866 )
Midwest                                       (27,553 )        (49,059 )        (80,695 )       (272,802 )
Central                                        (4,132 )        (41,542 )         (2,141 )       (100,617 )
Southwest                                    (133,770 )       (202,437 )       (523,171 )       (245,867 )
California                                    (29,518 )       (178,341 )       (157,736 )       (415,237 )
Unallocated                                  (101,886 )       (464,018 )       (237,900 )       (671,515 )

                                          $  (301,966 )   $ (1,098,679 )   $ (1,228,417 )   $ (2,050,256 )

Unit settlements:
Northeast                                         497              729            1,433            1,633
Southeast                                         776            1,019            2,405            2,798
Florida                                           808            1,058            2,377            2,944
Midwest                                           661            1,132            1,899            2,537
Central                                           545              699            1,698            1,995
Southwest                                       1,571            2,025            4,191            4,860
California                                        519              806            1,545            2,059

                                                5,377            7,468           15,548           18,826

Net new orders - units:
Northeast                                         328              440            1,363            2,000
Southeast                                         493              883            2,063            2,907
Florida                                           424              766            2,283            3,362
Midwest                                           553              631            1,832            2,789
Central                                           317              521            1,259            1,876
Southwest                                         629              900            3,516            5,307
California                                        264              441            1,227            2,372

                                                3,008            4,582           13,543           20,613

Unit backlog:
Northeast                                                                           721            1,284
Southeast                                                                           939            1,817
Florida                                                                           1,158            1,630
Midwest                                                                             761            1,649
Central                                                                             431            1,003
Southwest                                                                         1,335            3,166
California                                                                          540            1,493

                                                                                  5,885           12,042

Homebuilding Segment Operations (continued)



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