• sources of strategies and foundations for future growth;

• supply and demand equilibrium;

• visibility of cash flow;

• financing sources;

• sufficiency of our access to capital resources;

• tax recoveries;

• the proposed completion of a $250 million rights offering;

• ability to create shareholder value;

• expectations of future cash flow;

• ability to generate sufficient cash flow from our assets in 2009 and 2010 to repay maturing project specific and other financings;

• valuation allowances;

• the effect of interest rate changes;

• strategic goals;

• the effect on our business of existing lawsuits;

• whether or not our letters of credit or performance bonds will be drawn upon;

• acquisition strategies;

• capital expenditures; and

• the time at which construction and sales begin on a project.

Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the anticipated future results expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those set forward in the forward-looking statements include, but are not limited to:
• changes in general economic, real estate and other conditions;

• mortgage rate and availability changes;

• availability of suitable undeveloped land at acceptable prices;

• adverse legislation or regulation;

• ability to obtain necessary permits and approvals for the development of our land;

• availability of labor or materials or increases in their costs;

• ability to develop and market our master-planned communities successfully;

• ability to obtain regulatory approvals;

• confidence levels of consumers;

• our debt and leverage;

• ability to raise capital on favorable terms;

• adverse weather conditions and natural disasters;

• relations with the residents of our communities;

• risks associated with increased insurance costs or unavailability of adequate coverage;

• ability to obtain surety bonds;

• competitive conditions in the homebuilding industry, including product and pricing pressures; and

• additional risks and uncertainties, many of which are beyond our control, referred to in this Form 10-K and our other SEC filings.

Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Overview
2008 was another very challenging year for the housing industry, as the downturn in the housing market intensified. Home foreclosures and lack of financing for homebuyers resulted in continued high inventories of new and resale homes and sharp declines in new home deliveries. The supply of resale and new homes far exceeds demand and even though annual single-family new home production in the United States has dropped to 0.6 million units per year, we do not anticipate that an equilibrium between the supply and demand for housing will be reached in 2009. This continuing imbalance, as well as the disruption in credit markets, has led to continued weak consumer confidence, a critical factor for home sales. The challenging market conditions in 2008 negatively impacted our operations with lower home sales per community, price reductions and high home sale cancellation rates. These factors resulted in an 11% decrease in home closings to 750 units when compared to 2007 home closings.
We entitle and develop land for our own communities and sell lots to third parties. We also design, construct and market single and multi-family homes primarily to move-up and luxury homebuyers.
We operate in the following geographic regions, which are presented as our reportable segments: Northern California (San Francisco Bay Area and Sacramento), Southland / Los Angeles, San Diego / Riverside and the Washington D.C. Area. Our other operations that do not meet the quantitative thresholds for separate segment disclosure are included in "Corporate and Other." Our goal is to maximize the total return on our common stockholders' equity over the long term. We plan to achieve this by actively managing our assets and creating value on the lots we own or control. Since going public in 2003, we have limited the capital placed at risk, and have returned, through dividends and share buybacks, $584 million to shareholders, or in excess of $20 per share. For the five year period 2004 to 2008, cash provided from operations was $272 million, which was used primarily to return cash to stockholders through the repurchase of shares and the payment of dividends and to repay debt. Despite the continuing challenges of the United States housing market, we believe our business is positioned to create further shareholder value over the long term through the selective control of a number of strategic projects and the overall level of lots controlled.
The 24,109 lots that we control, 13,084 of which we own directly or through joint ventures, provide a strong foundation for our future homebuilding business and visibility on our future cash flow. We believe we add value to the lots we control through entitlements, development and the construction of homes. In allocating capital to our operations, we generally limit our risk on unentitled land by optioning such land positions in all our markets thereby mitigating our capital at risk. Option contracts for the purchase of land permit us to control lots for an extended period of time.
Homebuilding is our primary source of revenue and has represented approximately 90% of our total revenue since 2003. Operating in markets with higher price points and catering to move-up and luxury buyers, our average sales price in 2008 of $562,000 was well in excess of the national average sales price. We also sell serviced and unserviced lots to other homebuilders, generally on an opportunistic basis where we can redeploy capital to an asset providing higher returns or reduce risk in a market. In 2008, we sold 616 lots, the majority of which was a sale of finished lots in our San Diego operations. The number of lots we sell may vary significantly from period to period due to the timing and nature of such sales which are also affected by local market conditions. Our housing and land inventory, investments in housing and land joint ventures, and consolidated land inventory not owned together comprised 87% of our total assets as of December 31, 2008. In addition, we had $152 million in other assets. Other assets consist of homebuyer receivables of $4 million, income taxes receivable of $64 million, deferred taxes of $60 million, and mortgages and other receivables of $24 million. Homebuyer receivables consist primarily of proceeds due from homebuyers on the closing of homes.

Results of Operations

                                                                    Years Ended December 31
Selected Financial Information ($US millions)                    2008           2007          2006
Revenue:
Housing                                                      $    415         $  541        $  784
Land                                                               34             42            88

Total revenues                                                    449            583           872
Direct cost of sales                                             (416 )         (481 )        (617 )
Impairments and write-offs of option deposits                    (115 )          (88 )         (10 )

Gross margin / (loss)                                             (82 )           14           245
Selling, general and administrative expense                       (69 )          (69 )         (59 )
Equity in earnings from housing and land joint ventures             3             13            58
Impairments from housing and land joint ventures                  (38 )          (15 )           -
Other (expense) / income                                          (18 )           (6 )           9

Operating (loss) / income                                        (204 )          (63 )         253
Minority interest                                                  18              7           (18 )

(Loss) / income before taxes                                     (186 )          (56 )         235
Income tax recovery / (expense)                                    70             72           (87 )

Net income / (loss)                                          $   (116 )       $   16        $  148




                                                     Years Ended December 31
         Segment Information                        2008         2007        2006
         Housing revenue ($US millions):
         Northern California                     $   127       $  121     $   106
         Southland / Los Angeles                      94          176         236
         San Diego / Riverside                        68           89         173
         Washington D.C. Area                        122          143         222
         Corporate and Other                           4           12          47

         Total                                   $   415       $  541     $   784


         Land revenues ($US millions):
         Northern California                     $     2       $    -     $     9
         Southland / Los Angeles                       -           30          31
         San Diego / Riverside                        19            -          36
         Washington D.C. Area                         13           12          12
         Corporate and Other                           -            -           -

         Total                                   $    34       $   42     $    88


         Gross margin / (loss) ($US millions):
         Northern California                     $   (18 )     $   12     $    25
         Southland / Los Angeles                      (3 )         36          68
         San Diego / Riverside                       (42 )        (10 )        86
         Washington D.C. Area                        (17 )        (26 )        53
         Corporate and Other                          (2 )          2          13

         Total                                   $   (82 )     $   14     $   245


         Home closings (units):
         Northern California                         139          131         107
         Southland / Los Angeles                     227          258         326
         San Diego / Riverside                       128          150         288
         Washington D.C. Area                        245          272         375
         Corporate and Other                           6           14          63

         Consolidated Total                          745          825       1,159
         Joint Ventures                                5           14          22

         Total                                       750          839       1,181

                                                      Years Ended December 31
   Segment Information                              2008            2007          2006
   Average selling price ($US):
   Northern California                       $   913,000     $   921,000     $ 987,000
   Southland / Los Angeles                       413,000         682,000       725,000
   San Diego / Riverside                         533,000         597,000       601,000
   Washington D.C. Area                          499,000         528,000       592,000
   Corporate and Other                           689,000         831,000       749,000

   Consolidated Average                          557,000         656,000       677,000
   Joint Ventures                              1,288,000       1,020,000       818,000

   Average                                   $   562,000     $   662,000     $ 679,000


   Net new orders (units): (1)
   Northern California                               122             141           112
   Southland / Los Angeles                           237             183           321
   San Diego / Riverside                             128             123           241
   Washington D.C. Area                              233             249           254
   Corporate and Other                                 7              13            23

   Consolidated Total                                727             709           951
   Joint Ventures                                      2              26             9

   Total                                             729             735           960


   Backlog (units at end of year): (2)
   Northern California                                10              27            17
   Southland / Los Angeles                            55              45           100
   San Diego / Riverside                               8               8            35
   Washington D.C. Area                               40              52            75
   Corporate and Other                                20              19            20

   Consolidated Total                                133             151           247
   Joint Ventures                                      1               4            12

   Total                                             134             155           259


   Lots controlled (units at end of year):
   Lots owned:
   Northern California                             1,108           1,325         1,245
   Southland / Los Angeles                         1,417           1,493         1,057
   San Diego / Riverside                           6,605           6,064         6,216
   Washington D.C. Area                            3,681           3,914         4,051
   Corporate and Other                               273             282           150

                                                  13,084          13,078        12,719
   Lots under option (3)                          11,025          12,293        14,897

   Total                                          24,109          25,371        27,616

(1) Net new orders for any period represent the aggregate of all homes ordered by customers, net of cancellations.

(2) Backlog represents the number of new homes subject to pending sales contracts.

(3) Includes proportionate share of lots under option related to joint ventures.

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007 Net Income
Net loss for the year ended December 31, 2008 was $116 million, a decrease of $132 million when compared to net income of $16 million for the year ended December 31, 2007. The decrease in net income was due to continued challenging market conditions in all our markets which resulted in impairment charges and write-downs on our housing and land assets, a 11% decrease in home closings and a reduction in our 2008 housing gross margin to 13% compared to 17% in 2007. The decrease in net income was also due to an expense of $19 million related to our interest rate swaps in 2008 compared to an expense of $8 million in 2007.

Results of Operations
Company-wide: Housing revenue was $415 million in 2008, a decrease of $126 million when compared to 2007. The decrease in housing revenue was a result of fewer homes closed from directly owned projects to 745 units, a decrease of 80 units or 10% when compared to 2007. The gross margin on housing revenue in 2008 was $52 million or 13% compared with $92 million or 17% in 2007. The decrease in gross margin and gross margin percentage was due to fewer home closings, continued increases in homebuyer incentives and reduced prices and product mix.
Land revenue in 2008 totaled $34 million on the sale of 616 lots compared with $42 million in 2007 on the sale of 1,328 lots. The gross margin on land revenue was a loss of $19 million, a decrease of $29 million when compared to 2007. Our land revenues may vary significantly from period to period due to the timing and nature of land sales, as they generally occur on an opportunistic basis and are affected by local market conditions.
In 2008, we recognized impairment charges and write-downs on our housing and land inventory of $115 million compared to $88 million in 2007. The impairment charges and write-downs related to 2,326 owned lots located primarily in the Inland Empire of California and Washington D.C. Area and 819 optioned lots located in California and the Washington D.C. Area. A summary of our gross margin / (loss) is as follows:

                 ($ millions)                         2008      2007
                 Housing                            $   52     $  92
                 Land                                  (19 )      10
                 Impairment charges / write-downs     (115 )     (88 )

                                                    $  (82 )   $  14

Northern California: Housing revenue was $127 million in 2008, an increase of $6 million when compared to 2007. The increase in revenue was primarily due to an increase of eight homes closed. Excluding impairment charges, the gross margin on housing revenue was $10 million or 8% in 2008, compared with $17 million or 14% in 2007.
Land revenue was $2 million in 2008, compared with nil in 2007. The land revenue in 2008 comprised the sale of 78 raw lots. The gross margin on land revenue was a loss of $7 million. Impairment and other charges totaled $21 million in 2008, compared with $5 million in 2007.
Southland / Los Angeles: Housing revenue was $94 million in 2008, a decrease of $82 million when compared to 2007. The decrease was due to a 39% decrease in our average selling price to $413,000 and 31 fewer homes closed. Excluding impairment charges, the gross margin on housing revenue was $12 million or 13% compared with $31 million or 18% in 2007. The decrease in the gross margin percentage was a result of reduced selling prices, increases in homebuyer incentives and product mix.
Land revenue was nil in 2008, a decrease of $30 million when compared to 2007. The land revenue in 2007 comprised the sale of 1,249 lots held under option. Impairment and other charges totaled $15 million in 2008 compared with $3 million in 2007.
San Diego / Riverside: Housing revenue was $68 million in 2008, a decrease of $21 million when compared to 2007. The decrease was primarily due to 22 fewer homes closed and a decrease in our average selling price. Excluding impairment charges, the gross margin on housing revenue was $16 million or 23% compared with $23 million or 26% in 2007. The decrease in the gross margin percentage was a result of reduced selling prices, increases in homebuyer incentives and product mix.
Land revenue was $19 million in 2008, compared with nil in 2007. The land revenue in 2008 comprised the sale of 451 finished lots. The gross margin on land revenue was a loss of $15 million. Impairment and other charges totaled $43 million in 2008, compared with $33 million in 2007.
Washington D.C. Area: Housing revenue was $122 million in 2008, a decrease of $21 million when compared to 2007. The decrease was primarily due to 27 fewer homes closed. Excluding impairment charges, the gross margin on housing revenue was $16 million or 13% compared with $19 million or 13% in 2007.
Land revenue was $13 million in 2008, compared to $12 million in 2007. The gross margin on land revenue was $3 million in 2008 compared with $2 million in 2007. Impairment and other charges totaled $36 million in 2008, compared with $47 million in 2007.

Other Income and Expenses
Equity in earnings from housing and land joint ventures in 2008 totaled $3 million, a decrease of $10 million when compared to 2007. This decrease was primarily a result of a decrease in earnings from our Windemere joint venture of $8 million. Impairments from housing and land joint ventures totaled $38 million in 2008 compared to $15 million in 2007. The impairment charges in 2008 related to 907 lots in Riverside.
Other expense in 2008 totaled $18 million, an increase of $12 million when compared to 2007. The components of the 2008 and 2007 other (expense) / income are summarized as follows:

        ($ millions)                                            2008      2007
        Change in fair value of interest rate swap contracts   $ (19 )   $  (8 )
        Interest income                                            -         1
        Other                                                      1         1

                                                               $ (18 )   $  (6 )

Selling, general and administrative expense was $69 million in 2008, consistent with 2007. The components of the 2008 and 2007 expense are summarized as follows:

           ($ millions)                                     2008      2007
           Selling, general and administrative expenses    $ (65 )   $ (68 )
           Stock compensation                                  7        18
           Changes in fair value of equity swap contract     (11 )     (19 )

                                                           $ (69 )   $ (69 )

Sales Activity
Our net new orders for the year ended December 31, 2008 were 729 units, a decrease of 6 units compared to 2007. Based on our average of 33 active selling communities, our average sales rate during 2008 was approximately 0.4 sales per week per community, consistent with 2007 but below what may be considered a normal housing market of one sale per week per active selling community. Year Ended December 31, 2007 Compared with Year Ended December 31, 2006 Net Income
Net income for the year ended December 31, 2007 was $16 million, a decrease of $132 million when compared to the year ended December 31, 2006. Our decrease in net income was due to continued challenging market conditions in all our markets which resulted in impairment charges and write-downs on our housing and land assets, a 28% decrease in home closings and a reduction in our gross margin to 17% from 26% in 2006.
Results of Operations
Company-wide: Housing revenue was $541 million in 2007, a decrease of $243 million when compared to 2006. The decrease in housing revenue was a result of fewer homes closed from projects owned directly to 825 units, a decrease of 334 units or 28% when compared to 2006 home closings. The gross margin on housing revenue in 2007 was $92 million or 17% compared with $206 million or 26% in 2006. The decrease in gross margin and gross margin percentage was due to fewer home closings, continued increases in homebuyer incentives and reduced prices and product mix.
Land revenue in 2007 totaled $42 million on the sale of 1,328 lots compared with $88 million in 2006 on the sale of 834 lots. Although the number of lots sold increased in 2007 when compared to 2006, 1,249 of the lots sold in 2007 were held under option, and as a result our revenue per lot decreased significantly. The gross margin on land revenue was $10 million, a decrease of $39 million when compared to 2006. The decrease in gross margin was primarily due to a decrease in owned lots sold to 79 lots compared to 834 owned lots sold in 2006. The decrease in owned lots sold was due to the continued slow housing market conditions. Our land revenues may vary significantly from period to period due to the timing and nature of land sales, as they generally occur on an opportunistic basis and additionally such revenues are affected by local market conditions.
In 2007, we recognized impairment and write-downs on our housing and land inventory of $88 million compared to $10 million in 2006. The impairment charges and write-downs related to 580 finished lots located in the Inland Empire of California; 1,045 finished or graded lots in the Washington D.C. Area; 1,185 optioned lots located in California; and 2,536 optioned lots located in the Washington D.C. Area.

A summary of our gross margin is as follows:

                  ($ millions)                        2007      2006
                  Housing                            $  92     $ 206
                  Land                                  10        49
                  Impairment charges / write-downs     (88 )     (10 )

                                                     $  14     $ 245

Northern California: Housing revenue was $121 million in 2007, an increase of $15 million when compared to 2006. The increase in revenue was primarily due to an increase in homes closed. The gross margin on housing revenue was $17 million or 14% in 2007, compared with $20 million or 19% in 2006. Impairment and other charges totaled $5 million in 2007, compared with nil in 2006.
Southland / Los Angeles: Housing revenue was $176 million in 2007, a decrease of $60 million when compared to 2006. The decrease was due primarily to 68 fewer homes closed. Excluding impairment charges, the gross margin on housing revenue was $31 million or 18% compared with $55 million or 23% in 2006. The decrease in the gross margin percentage was a result of reduced selling prices, increases in homebuyer incentives and product mix.
Land revenue was $30 million in 2007, a decrease of $1 million when compared to 2006. The land revenue in 2007 comprised the sale of 1,249 lots held under option. The gross margin on 2007 land revenue was $8 million or 28% compared to . . .