Overview, Industry Outlook and Company Actions

During the first half of 2009, our operations continued to be impacted by the economic recession resulting in difficult year-over-year comparisons of our operational results. Competition for home buyers remained intense with existing home foreclosures, and the selection of mortgage financing products remains limited with more restrictive underwriting standards. Therefore, even though home affordability has significantly improved over the past several years, benefiting from both low prices and low interest rates, we have not yet seen a significant market recovery, although we are beginning to see some signs of stabilization in certain of our markets as our sales pace strengthened during the spring selling season, an early indicator of a potential shift in consumer confidence. We have adjusted our operations to reflect this prolonged industry contraction by reducing our active community count by 16.4%, or 35 communities, over a year ago. As such, although our home orders declined 22.1% and 31.3%, respectively, in the three and six months ended June 30, 2009 as compared to the prior year, our absorptions per active community remained relatively stable, with 6.6 sales per community for the current quarter as compared to 6.9 comparable sales in the second quarter of 2008.

During the first half of 2009, we continued to focus on our goals to generate positive cash flow and strengthen our balance sheet. We have had positive cash flows from operations for the past seven quarters, including the collection of $107.7 million in income tax refunds in the first half of 2009, and we grew our cash balance to a Company record of $385.3 million at June 30, 2009. We believe this liquidity provides us with flexibility given the current difficult market conditions but also allows us to take advantage of unique opportunities to purchase deeply-discounted lots in select markets in which we have a short supply of buildable lots.

During this downturn, we have repositioned much of our product to increase affordability to appeal to customers at lower price points. Our lower cost structure is enabling us, in most cases, to decrease the selling price of these new homes below the FHA pricing cap and allows us to successfully compete with foreclosures. We are reducing or eliminating certain standard features from our base home models to re-align them with current market demands, while continuing to provide a wide selection of upgrade options, allowing our customers to personalize their new homes with the features they consider most important. All divisions have been re-negotiating material and subcontract labor contracts to achieve further cost savings.

To appeal to our target customers in the first-time and first-time move-up demographic, we are also planning to temporarily increase our spec starts to ensure we have a sufficient supply of completed homes for buyers looking for an immediate move-in. Approximately half of our sales during the second quarter of 2009 were from spec sales, which contributed to the decline in our unsold inventory to $78.7 million, or 491 homes, at June 30, 2009, as compared to $158.4 million at December 31, 2008, comprised of 768 homes.

Summary Company Results

Total home closing revenue was $220.4 and $451.4 million for the three and six months ended June 30, 2009, respectively, decreasing 41.1% and 39.5% from the same periods last year. Net loss for the first quarter and first half of 2009 increased $50.1 and $23.2 million to a loss of $73.6 and $92.0 million. The quarter-over-quarter decline is primarily due to impairments, with $66.6 million (pre-tax) of real estate-related impairments recorded in the first quarter of 2009 as compared to $39.0 million in the same period of 2008. The second quarter impairments in 2009 are primarily comprised of a $55.4 million write-off related to the abandonment of our last significant optioned project. The project, a 1,200 lot parcel in North Phoenix, was no longer projected to generate profits sufficient to justify the additional investment needed to move forward with its purchase. The six-month net loss decline is primarily due to the $36.2 million tax benefit recorded during 2008. As we fully reserved our deferred tax assets in the third quarter of 2008, no tax benefits are reflected in our 2009 results, although we will be able to use our $162.1 million deferred tax asset to offset an estimated $450 million of future taxable income.

At June 30, 2009, our backlog of $382.3 million reflects a decrease of 47.7% or $349.2 million when compared to the backlog at June 30, 2008 but improved $43.1 million from our March 31, 2009 balance of $339.2 million due to our increased sequential sales, as previously discussed. The year-over-year decreases are due to the declines in demand, compounded by increased price concessions and incentives, as the average sales price in backlog decreased from $273,000 at June 30, 2008 to $240,000 at June 30, 2009. In the second quarter of 2009, our cancellation rate on sales orders improved to 23% of gross orders as compared to 29% in the same period a year ago.

Critical Accounting Policies

The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, real estate, warranty reserves, off-balance-sheet arrangements, valuation of deferred tax assets and share-based payments. There have been no significant changes to our critical accounting policies during the six months ended June 30, 2009 compared to those disclosed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our 2008 Annual Report on Form 10-K.

The tables below present operating and financial data that we consider most critical to managing our operations (dollars in thousands):

Home Closing Revenue



                          Three Months Ended       Six Months Ended
                               June 30,                June 30,
                           2009        2008        2009        2008
Total
Dollars                 $  220,414   $ 373,923   $ 451,392   $ 745,579
Homes closed                   890       1,388       1,822       2,716
Average sales price     $    247.7   $   269.4   $   247.7   $   274.5

West Region
California
Dollars                 $   22,299   $  64,548   $  55,723   $ 134,827
Homes closed                    64         152         156         325
Average sales price     $    348.4   $   424.7   $   357.2   $   414.9
Nevada
Dollars                 $    8,221   $  16,242   $  17,089   $  36,117
Homes closed                    41          61          79         134
Average sales price     $    200.5   $   266.3   $   216.3   $   269.5
West Region Totals
Dollars                 $   30,520   $  80,790   $  72,812   $ 170,944
Homes closed                   105         213         235         459
Average sales price     $    290.7   $   379.3   $   309.8   $   372.4

Central Region
Arizona
Dollars                 $   30,786   $  68,432   $  72,446   $ 129,868
Homes closed                   152         266         350         475
Average sales price     $    202.5   $   257.3   $   207.0   $   273.4
Texas
Dollars                 $  137,473   $ 191,839   $ 260,838   $ 374,611
Homes closed                   552         789       1,068       1,528
Average sales price     $    249.0   $   243.1   $   244.2   $   245.2
Colorado
Dollars                 $   10,196   $   9,197   $  22,070   $  21,981
Homes closed                    30          26          69          64
Average sales price     $    339.9   $   353.7   $   319.9   $   343.5
Central Region Totals
Dollars                 $  178,455   $ 269,468   $ 355,354   $ 526,460
Homes closed                   734       1,081       1,487       2,067
Average sales price     $    243.1   $   249.3   $   239.0   $   254.7

East Region
Florida
Dollars                 $   11,439   $  23,665   $  23,226   $  48,175
Homes closed                    51          94         100         190
Average sales price     $    224.3   $   251.8   $   232.3   $   253.6

Home Orders



                          Three Months Ended       Six Months Ended
                               June 30,                June 30,
                           2009        2008        2009        2008
Total
Dollars                 $  263,493   $ 386,804   $ 495,616   $ 807,013
Homes closed                 1,147       1,473       2,134       3,107
Average sales price     $    229.7   $   262.6   $   232.2   $   259.7

West Region
California
Dollars                 $   31,352   $  65,137   $  53,205   $ 145,145
Homes closed                   103         165         157         366
Average sales price     $    304.4   $   394.8   $   338.9   $   396.6
Nevada
Dollars                 $    7,524   $  17,509   $  12,912   $  39,053
Homes closed                    40          67          66         152
Average sales price     $    188.1   $   261.3   $   195.7   $   256.9
West Region Totals
Dollars                 $   38,876   $  82,646   $  66,117   $ 184,198
Homes closed                   143         232         223         518
Average sales price     $    271.9   $   356.2   $   296.5   $   355.6

Central Region
Arizona
Dollars                 $   46,510   $  60,823   $  78,805   $ 120,902
Homes closed                   241         285         409         545
Average sales price     $    193.0   $   213.4   $   192.7   $   221.8
Texas
Dollars                 $  147,878   $ 218,454   $ 296,777   $ 435,817
Homes closed                   654         876       1,302       1,801
Average sales price     $    226.1   $   249.4   $   227.9   $   242.0
Colorado
Dollars                 $   14,085   $  10,282   $  22,568   $  27,550
Homes closed                    46          29          72          77
Average sales price     $    306.2   $   354.6   $   313.4   $   357.8
Central Region Totals
Dollars                 $  208,473   $ 289,559   $ 398,150   $ 584,269
Homes closed                   941       1,190       1,783       2,423
Average sales price     $    221.5   $   243.3   $   223.3   $   241.1

East Region
Florida
Dollars                 $   16,144   $  14,599   $  31,349   $  38,546
Homes closed                    63          51         128         166
Average sales price     $    256.3   $   286.3   $   244.9   $   232.2

                               Six Months Ended June 30,
                               2009                 2008
                        Beginning   Ending   Beginning   Ending

Active Communities
Total                         178      178         220      213

West Region
California                     12       12          27       17
Nevada                         12       12          11       12
West Region Total              24       24          38       29

Central Region
Arizona                        31       31          36       31
Texas                         109      108         127      136
Colorado                        3        4           6        5
Central Region Total          143      143         169      172

East Region (Florida)          11       11          13       12




                          Three Months Ended      Six Months Ended
                               June 30,               June 30,
                           2009        2008       2009        2008
Cancellation Rates (1)
Total                          23 %        29 %       25 %        28 %

West Region
California                     24 %        30 %       24 %        29 %
Nevada                         15 %        16 %       20 %        16 %
West Region Total              22 %        27 %       23 %        25 %

Central Region
Arizona                        12 %        21 %       14 %        21 %
Texas                          28 %        30 %       29 %        30 %
Colorado                       12 %        37 %       18 %        27 %
Central Region Total           24 %        29 %       25 %        28 %

East Region (Florida)          16 %        47 %       17 %        32 %

Order Backlog



                             At June 30,
                          2009        2008
Total
Dollars                 $ 382,255   $ 731,419
Homes in backlog            1,593       2,679
Average sales price     $   240.0   $   273.0

West Region
California
Dollars                 $  31,392   $  91,850
Homes in backlog               88         205
Average sales price     $   356.7   $   448.0
Nevada
Dollars                 $   2,276   $  21,596
Homes in backlog               12          82
Average sales price     $   189.7   $   263.4

West Region Totals
Dollars                 $  33,668   $ 113,446
Homes in backlog              100         287
Average sales price     $   336.7   $   395.3

Central Region
Arizona
Dollars                 $  48,570   $ 111,592
Homes in backlog              249         460
Average sales price     $   195.1   $   242.6
Texas
Dollars                 $ 266,094   $ 445,557
Homes in backlog            1,121       1,745
Average sales price     $   237.4   $   255.3
Colorado
Dollars                 $  13,763   $  23,706
Homes in backlog               47          66
Average sales price     $   292.8   $   359.2
Central Region Totals
Dollars                 $ 328,427   $ 580,855
Homes in backlog            1,417       2,271
Average sales price     $   231.8   $   255.8

East Region
Florida
Dollars                 $  20,160   $  37,118
Homes in backlog               76         121
Average sales price     $   265.3   $   306.8

Companywide. Home closing revenue for the three months ended June 30, 2009 decreased $153.5 million or 41.1% when compared to the same period in the prior year, primarily due to the 498 reduction in units closed and a $21,700 lower average closing price. Closing units for the six months ended June 30, 2009 experienced comparable declines of 894 homes and $294.2 million from the first half of 2008. Lower sales volume of 2,134 units in the first six months of 2009 as compared to 3,107 in the same period of 2008 reflect the reduced demand caused by the industry downturn as it continues to be impacted by the economic recession. However, our current quarter sales increased 16.2% over the first quarter of 2009 and 129.4% over the quarter ended December 31, 2008 reflecting improved demand, the higher sales generated in the historically strong spring selling season and the positive impact of our lower cancellation rates in the current year. The year-over-year sales declines coupled with steady closings resulted in a decrease to our backlog of 1,086 units, down to 1,593 homes as of June 30, 2009 as compared to 2,679 homes at June 30, 2008. Our sales and backlog were also impacted by the 16.4% decrease in our actively-selling community count from 213 at June 30, 2008 to 178 at June 30, 2009.

The homebuilding market has been experiencing some positive trends in recent months. As reported by the U.S. Department of Housing and Urban Development, new home permits, new home starts and new home sales have all increased sequentially in April, May and June 2009. Additionally, the average months' supply of inventory decreased to 8.8 months, lower than it's been since mid 2007. While we do expect additional foreclosures to continue to negatively affect sales performance for the next several quarters, these mostly positive trends contributed to our improved home sales and our belief that there may be some early indications that as the market stabilizes, consumer confidence in the industry is returning.

West. In the second quarter of 2009, home closings in our West Region decreased 108 units or 50.7%, with a 23.4% decline in average sales price, for total revenue of $30.5 million, a 62.2% or $50.3 million decrease in home closing revenue as compared to the second quarter of 2008. These results were primarily due to the 88 unit and $42.2 million revenue decreases in our California markets. The Region's 28.4% decrease in the average number of active communities contributed to the 89 unit decrease in sales in the second quarter of 2009 as compared to the same period in 2008, which also impacted our ending backlog of $33.7 million, a $79.8 million, or 70.3% decrease from the prior year. For the six months ended June 30, 2009, home closings in our West Region decreased to 235 units with a value of $72.8 million, a 57.4% decrease in home closing revenue as compared to the same period in the prior year. The Region's closings reflect the poor economic conditions of the past several quarters, while the average sales price decreases are also impacted by our new lower-priced product, which will continue to be a more significant portion of our total sales and closings mix.

Central. In the second quarter of 2009, home closings in our Central Region decreased 347 units, or 32.1%, with a 2.5% decline in average sales price, for total revenue of $178.5 million, a 33.8% or $91.0 million decrease in home closing revenue as compared to the second quarter of 2008, the smallest percentage declines of any of our Regions. Although Texas remained our strongest market during the second quarter of 2009 with 552 homes closed, it has experienced noticeable slowing as indicated by the 28.3% decrease in its closing revenue from the same period in 2008, comprising 59.7% of the Region's total revenue decline. The Arizona market continues to work through its oversupply of existing home inventory and foreclosures, which negatively affected our home sales and led to a 15.4% unit decline in home orders for the three months ended June 30, 2009. In the Region, the slower sales pace led to an 854 unit decline in ending backlog as of June 30, 2009, with average sales prices of homes in backlog of $231,800 in 2009, as compared to $255,800 as of June 30, 2008. The total backlog values and average backlog price declines reflect our continued focus to target the market's entry level and first time move-up customer price point, which comprise the majority of today's buyer demographic. For the six months ended June 30, 2009, closings of 1,487 units generating $355.4 million of revenues represent declines of 28.1% and 32.5% from the same period in 2008. The 640 unit and $186.1 million decrease in sales in the first six months of 2009 echo the declines experienced in the second quarter. Although we expect to continue to experience some deterioration in this Region until conditions stabilize, as Texas does not appear to have been as affected by the current economic downturn and did not experience the significant price appreciation in prior years that benefited some of our other markets, we believe the impact of the negative economic conditions will be less severe in our Texas communities and, therefore, the Central Region.

East. In the second quarter of 2009, home closings in our East Region decreased 43 units, or 45.7%, with a 10.9% decline in average sales price, for total revenue of $11.4 million, a 51.7% or $12.2 million decrease in home closing revenue as compared to the second quarter of 2008. The 43 unit decline in deliveries in this Region from the prior year only includes three closings from Ft. Myers communities, as compared to 15 in 2008. Our Ft. Myers operation is almost fully wound down as of June 30, 2009. The results also reflect the slowed sales pace of the last several quarters, when Florida's homebuilding market was one of the most difficult in the nation. We have recently acquired deeply-discounted lots and started operating in several desirable communities in Central Florida, replacing some of our older close-out communities and leading to a 12 unit increase in our orders for the quarter ended June 30, 2009 to 63 units as compared to 51 in the same period in the prior year. However, the full benefit of these new communities has not yet been realized, and we ended the current quarter with a closing backlog of 76 units with a value of $20.2 million at June 30, 2009, a 45 unit and $17.0 million decline from the same period in the prior year. For the six months ended June 30, 2009, closings of 100 units in our East Region with $23.2 million of corresponding home revenue declined $24.9 million, or 51.8%, compared to the six months ended June 30, 2008. Yet, our East Region only experienced a 22.9% unit decline and benefited from a 5.5% increase in average sales prices in year-to-date sales as compared to 2008, reflecting the impact of the communities previously discussed. Florida has historically sold a portion of its homes to international investors and is more sensitive to the collapse of the international credit markets in addition to our national recession, which has contributed to Florida being one of the states that was most affected by the economic and financial downturn.

Other Operating Information (dollars in thousands)



                                                Three Months Ended           Six Months Ended
                                                     June 30,                    June 30,
                                                2009          2008          2009          2008

Home Closing Gross (Loss)/Profit

West - Dollars                               $   (6,281 )  $  (11,822 )  $   (8,009 )  $  (32,837 )
West - Percent of homes closing revenue           (20.6 )%      (14.6 )%      (11.0 )%      (19.2 )%

Central - Dollars                            $  (33,542 )  $   35,332    $  (14,786 )  $   60,655
Central - Percent of home closing revenue         (18.8 )%       13.1 %        (4.2 )%       11.5 %

East - Dollars                               $      739    $     (242 )  $    1,061    $   (3,469 )
East - Percent of home closing revenue              6.5 %        (1.0 )%        4.6 %        (7.2 )%

Total - Dollars                              $  (39,084 )  $   23,268    $  (21,734 )  $   24,349
Total - Percent of home closing revenue           (17.7 )%        6.2 %        (4.8 )%        3.3 %

Home Closing Gross (Loss)/Profit

Companywide. Home closing gross (loss)/profit represents home closing revenue less cost of home closings. Cost of home closings include land and lot development costs, direct home construction costs, an allocation of common community costs (such as model complex costs, common community and recreation areas and landscaping, and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead, closing costs and impairments, if any.

Home closing gross loss decreased to a negative margin of (17.7)% for the quarter ended June 30, 2009 as compared to 6.2% for the quarter ended June 30, 2008. This decrease is primarily due to higher levels of impairments recorded in 2009, with $66.2 million recorded in the second quarter of the year versus $28.5 million in the second quarter of 2008. The 2009 impairments primarily comprised of $55.4 million related to the termination of the optioned project in North Phoenix, Arizona, our last large optioned project. Excluding these impairments, gross margins were 12.3% and 13.8% for the quarters ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009, the gross loss was (4.8)%, an 810 basis point decrease from the same period in the prior year. Excluding the impact of impairments of $76.6 million and $72.9 million in the first half of 2009 and 2008, respectively, gross margins were 12.2% and 13.0% for the same periods. As our average closing prices declined 8.1% and 9.8%, respectively, in the current quarter and first half of 2009, our ability to maintain pre-impairment gross margins at almost the same level as 2008, in spite of average sales price decreases, is due at large extent to the cost benefits achieved through our re-designed product and negotiated price reductions of materials and labor and from the benefit of a lower basis of some of our inventory due to the bargain prices obtained on our recently-acquired lots and prior impairments. We have also reduced our construction cycle times, which resulted in further cost savings, and the deeply discounted lots that were recently acquired also helped avoid additional margin compression. We provide gross margins excluding impairments - a non-GAAP term - as we use it to evaluate our performance and believe it is a widely-accepted financial measure by users of our financial statements in analyzing our operating results and provides comparability to similar calculations by our peers in the homebuilding industry.

West. Our West Region home closing gross loss declined to a negative margin of
(20.6)% for the three months ended June 30, 2009 from a negative margin of
(14.6)% in the same period of 2008. For the first six months of 2009, the gross loss was (11.0)% compared to (19.2)% in the first six months of 2008. These losses included impairments of $8.7 million and $14.4 million, respectively, in the three and six months ended June 30, 2009 versus $18.7 million and $45.4 million, respectively, in the same periods of the prior year. Excluding these impairments, the gross margins were relatively consistent between 2009 and 2008, as the second quarter of 2009 and 2008 were 8.1% and 8.5%, respectively, and 8.8% and 7.4% for the first half of 2009 and 2008. As discussed above, we have been successful in reducing costs in line with sales price declines in this Region, generating similar margins over the past 12 months.

Central. The Central Region's (18.8)% and (4.2)% home closing gross loss for the three and six months ended June 30, 2009 decreased from 13.1% and 11.5% in the same periods of 2008. The decline in gross margin in the current quarter is attributable to the increased volume of impairments recorded in the current quarter as compared to the same period in the prior year, comprised primarily of the termination of the North Phoenix project noted above, and by reduced sales prices. The Central Region's home closing (losses)/margins include $56.7 million and $60.3 million of real estate-related impairments for the three and six months ended June 30, 2009, compared to $6.2 million and $17.4 million for the three and

six months ended in the same periods of 2008. Excluding these impairments, gross margins would have been 13.0% and 15.4% for the three months ended June 30, 2009 and June 30, 2008, respectively, and 12.8% and 14.8% for the six months ended June 30, 2009 and June 30, 2008, respectively. The decrease is primarily due to declines in the Texas margins from the impact of the fall 2008 credit crisis and ensuing economic downturn. Prior to that time, Texas was much less affected by the downturn in the homebuilding industry. The pre-impairment gross margin decrease is also due to the larger presence of Texas in the . . .