Overview, Industry Outlook and Company Actions

During the first three quarters 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 due to an excess supply of re-sale and foreclosure homes on the market. In addition, the selection of mortgage financing product is still limited and underwriting standards are more restrictive. 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 signs of stabilization in many of our markets as our sales pace strengthened during the spring selling season, an early indicator of a potential shift in consumer confidence. Furthermore, our home orders increased 8.4% in the current quarter as compared to the same period in the prior year and our absorptions per active community increased, with 6.5 sales per community for the third quarter of 2009 as compared to 4.8 in the third quarter of 2008. We believe this improvement indicates bottoming of the housing market and the beginning of a recovery. We reduced our active community count by 21.7%, or 45 communities, over a year ago. Therefore, although our average sales per community during the first nine months of 2009 was 19.0, almost flat with 19.3 for the prior comparable period, our home orders declined 21.6% for the nine months ended September 30, 2009 as compared to the prior year.

During 2009, we continued to focus on our goals to return to profitability, generate positive cash flow and strengthen our balance sheet. We grew our cash, cash equivalents and restricted cash balance to $365.6 million at September 30, 2009, including the collection of $107.7 million in income tax refunds in the first three quarters of 2009. We also increased gross margins excluding impairments to 14.5%, a record-high for the past eight quarters. Additionally, we have begun to rebuild our lot positions with well located low-cost lots to supplement and replace our older communities as they close out. We believe our strategy provides us with flexibility given the current difficult market conditions but also allows us to take advantage of unique opportunities to continue to purchase deeply-discounted lots in select markets.

During this downturn, we have conducted an in-depth market review of each one of our submarkets and have repositioned and redesigned 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 to successfully compete with foreclosures. We are designing smaller and more efficient floor plans, reducing or eliminating certain standard features from our base home models to re-align them with current market demands and reducing the number of floor plans offered, 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 of our divisions have been working with their trades to achieve additional price concessions through both materials and labor bid renegotiations, but also through reviews of our entire construction cycle, including even-flow scheduling and process improvement initiatives.

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 third quarter of 2009 were from spec sales, which contributed to the decline in our unsold inventory to $67.9 million, or 407 homes, at September 30, 2009, as compared to $158.4 million at December 31, 2008, comprised of 768 homes. During the current quarter, the decline in our unsold inventory was partly due to the demand for our started unsold homes as they were being sold faster than we were starting them, as well as our improved cycle times, which allow us to maintain a lower level of inventory to meet demand as we are able to turn the inventory faster.

Summary Company Results

Total home closing revenue was $231.8 and $683.2 million for the three and nine months ended September 30, 2009, respectively, decreasing 37.8% and 38.9% from the same periods last year, due to slower sales and closings volumes, lower average selling prices and a planned decrease in our actively-selling communities. Net loss for the three and nine months ended September 30, 2009 decreased $126.2 and $103.0 million to a loss of $(17.8) and $(109.7) million, respectively. The quarter-over-quarter net loss improvement is primarily due to a reduced level of impairments, with $13.2 million (pre-tax) of real estate-related impairments recorded in the third quarter of 2009 as compared to $55.1 million in the same period of 2008. Impairments for the nine months ended September 30, 2009 were $90.3 million as compared to $154.3 million for the nine months ended September 30, 2008. The impairments for the three quarters ended September 30, 2009 include a $55.4 million write-off related to the termination of our last significant optioned project. The project in North Phoenix was no longer projected to generate profits sufficient to justify the additional investment needed to continue development.

At September 30, 2009, our backlog of $404.8 million reflects a decrease of 34.0% or $208.1 million when compared to the backlog at September 30, 2008 but improved $22.5 million from our June 30, 2009 balance of $382.3 million and has improved sequentially each quarter since December 31, 2008. The year-over-year decreases are due to the declines in demand and average sales price which decreased from $270,100 at September 30, 2008 to $241,500 at September 30, 2009. The price decreases are due to both the continued downward pressure on pricing as well as the execution of our strategy to re-align our product offerings to target the entry-level and first-time move-up payment levels. In the third quarter of 2009, our cancellation rate on sales orders improved to 20% of gross orders, back to our historical average, as compared to 40% 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 nine months ended September 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        Nine Months Ended
                            September 30,             September 30,
                           2009        2008        2009         2008
Total
Dollars                 $  231,816   $ 372,907   $ 683,208   $ 1,118,486
Homes closed                 1,015       1,423       2,837         4,139
Average sales price     $    228.4   $   262.1   $   240.8   $     270.2

West Region
California
Dollars                 $   20,319   $  52,530   $  76,042   $   187,357
Homes closed                    62         131         218           456
Average sales price     $    327.7   $   401.0   $   348.8   $     410.9
Nevada
Dollars                 $    6,635   $  19,057   $  23,724   $    55,174
Homes closed                    33          71         112           205
Average sales price     $    201.1   $   268.4   $   211.8   $     269.1
West Region Totals
Dollars                 $   26,954   $  71,587   $  99,766   $   242,531
Homes closed                    95         202         330           661
Average sales price     $    283.7   $   354.4   $   302.3   $     366.9

Central Region
Arizona
Dollars                 $   38,617   $  75,226   $ 111,063   $   205,094
Homes closed                   213         297         563           772
Average sales price     $    181.3   $   253.3   $   197.3   $     265.7
Texas
Dollars                 $  142,697   $ 186,023   $ 403,535   $   560,634
Homes closed                   611         783       1,679         2,311
Average sales price     $    233.5   $   237.6   $   240.3   $     242.6
Colorado
Dollars                 $   10,932   $  13,342   $  33,002   $    35,323
Homes closed                    36          37         105           101
Average sales price     $    303.7   $   360.6   $   314.3   $     349.7
Central Region Totals
Dollars                 $  192,246   $ 274,591   $ 547,600   $   801,051
Homes closed                   860       1,117       2,347         3,184
Average sales price     $    223.5   $   245.8   $   233.3   $     251.6

East Region
Florida
Dollars                 $   12,616   $  26,729   $  35,842   $    74,904
Homes closed                    60         104         160           294
Average sales price     $    210.3   $   257.0   $   224.0   $     254.8

Home Orders



                          Three Months Ended        Nine Months Ended
                            September 30,             September 30,
                           2009        2008        2009         2008
Total
Dollars                 $  254,347   $ 254,381   $ 749,963   $ 1,061,394
Homes ordered                1,098       1,013       3,232         4,120
Average sales price     $    231.6   $   251.1   $   232.0   $     257.6

West Region
California
Dollars                 $   40,483   $  32,768   $  93,688   $   177,913
Homes ordered                  130          85         287           451
Average sales price     $    311.4   $   385.5   $   326.4   $     394.5
Nevada
Dollars                 $    6,637   $  11,780   $  19,549   $    50,833
Homes ordered                   33          41          99           193
Average sales price     $    201.1   $   287.3   $   197.5   $     263.4
West Region Totals
Dollars                 $   47,120   $  44,548   $ 113,237   $   228,746
Homes ordered                  163         126         386           644
Average sales price     $    289.1   $   353.6   $   293.4   $     355.2

Central Region
Arizona
Dollars                 $   40,490   $  49,314   $ 119,295   $   170,216
Homes ordered                  212         220         621           765
Average sales price     $    191.0   $   224.2   $   192.1   $     222.5
Texas
Dollars                 $  134,948   $ 145,463   $ 431,725   $   581,280
Homes ordered                  597         609       1,899         2,410
Average sales price     $    226.0   $   238.9   $   227.3   $     241.2
Colorado
Dollars                 $   10,342   $   7,943   $  32,910   $    35,493
Homes ordered                   35          25         107           102
Average sales price     $    295.5   $   317.7   $   307.6   $     348.0
Central Region Totals
Dollars                 $  185,780   $ 202,720   $ 583,930   $   786,989
Homes ordered                  844         854       2,627         3,277
Average sales price     $    220.1   $   237.4   $   222.3   $     240.2

East Region
Florida
Dollars                 $   21,447   $   7,113   $  52,796   $    45,659
Homes ordered                   91          33         219           199
Average sales price     $    235.7   $   215.5   $   241.1   $     229.4

                           Three Months Ended September 30,
                               2009                 2008
                        Beginning   Ending   Beginning   Ending

Active Communities
Total                         178      162         213      207

West Region
California                     12        9          17       15
Nevada                         12        6          12       12
West Region Total              24       15          29       27

Central Region
Arizona                        31       28          31       30
Texas                         108      102         136      132
Colorado                        4        3           5        5
Central Region Total          143      133         172      167

East Region (Florida)          11       14          12       13




                            Nine Months Ended September 30,
                               2009                 2008
                        Beginning   Ending   Beginning   Ending

Active Communities
Total                         178      162         220      207

West Region
California                     12        9          27       15
Nevada                         12        6          11       12
West Region Total              24       15          38       27

Central Region
Arizona                        31       28          36       30
Texas                         109      102         127      132
Colorado                        3        3           6        5
Central Region Total          143      133         169      167

East Region (Florida)          11       14          13       13




                          Three Months Ended     Nine Months Ended
                            September 30,          September 30,
                           2009        2008       2009        2008
Cancellation Rates (1)
Total                          20 %        40 %       23 %        31 %

West Region
California                     11 %        43 %       19 %        32 %
Nevada                         20 %        31 %       20 %        20 %
West Region Total              13 %        40 %       19 %        29 %

Central Region
Arizona                        11 %        31 %       13 %        24 %
Texas                          25 %        42 %       28 %        33 %
Colorado                       10 %        24 %       16 %        26 %
Central Region Total           21 %        39 %       24 %        31 %

East Region (Florida)          16 %        61 %       16 %        40 %

Order Backlog



                          At September 30,
                          2009        2008
Total
Dollars                 $ 404,786   $ 612,893
Homes in backlog            1,676       2,269
Average sales price     $   241.5   $   270.1

West Region
California
Dollars                 $  51,556   $  72,088
Homes in backlog              156         159
Average sales price     $   330.5   $   453.4
Nevada
Dollars                 $   2,278   $  14,319
Homes in backlog               12          52
Average sales price     $   189.8   $   275.4

West Region Totals
Dollars                 $  53,834   $  86,407
Homes in backlog              168         211
Average sales price     $   320.4   $   409.5

Central Region
Arizona
Dollars                 $  50,443   $  85,680
Homes in backlog              248         383
Average sales price     $   203.4   $   223.7
Texas
Dollars                 $ 258,345   $ 404,997
Homes in backlog            1,107       1,571
Average sales price     $   233.4   $   257.8
Colorado
Dollars                 $  13,173   $  18,307
Homes in backlog               46          54
Average sales price     $   286.4   $   339.0
Central Region Totals
Dollars                 $ 321,961   $ 508,984
Homes in backlog            1,401       2,008
Average sales price     $   229.8   $   253.5

East Region
Florida
Dollars                 $  28,991   $  17,502
Homes in backlog              107          50
Average sales price     $   270.9   $   350.0

Companywide. Home closing revenue for the three months ended September 30, 2009 decreased $141.1 million or 37.8% when compared to the same period in the prior year, primarily due to the 408 reduction in units closed and a $33,700 lower average closing price. Closing units for the nine months ended September 30, 2009 experienced comparable declines of 31.5%, or 1,302 homes from the same period in the prior year with a 10.9% decrease in average sales price. Sales volume of 3,232 units in the first nine months of 2009 declined 21.6% compared to 4,120 in the same period of 2008. Although these declines reflect the difficult market and economic conditions of the past 12 months, these decreases are also partially the result of our initiative to recalibrate our operations to the current conditions. We reduced our active communities 21.7% as of September 30, 2009 over the prior year, primarily by exiting underperforming markets and offering more affordable homes at lower price points to target the first-time and first-time move-up demographics, who we believe make up the largest segment of today's buyers. Although sales for the nine months declined as discussed above, our current quarter sales increased 85 units, or 8.4% over the quarter ended September 30, 2008, reflecting the positive impact of our lower cancellation rates in the current year and the results of our targeted marketing efforts, as we increased sales per community to 6.5 versus 4.8 in the third quarter of 2008. The year-over-year sales declines coupled with faster build cycle times and closings pace resulted in a decrease to our backlog of 593 units, down to 1,676 homes as of September 30, 2009 as compared to 2,269 homes at September 30, 2008.

The homebuilding market has been experiencing some positive trends in recent months and some negative trends appear to be leveling off. As reported by the Commerce Department, the U.S. GDP grew by an annual rate of 3.5% after four consecutive quarters of decline. The growth rate also exceeded economists' projections of 3.3%. An additional positive sign for the housing market was that October was the fourth straight month of improvement in the S&P/Case-Shiller Home Price Index, which was up nearly 5% from June 2009. 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 although we remain cautious, we believe there are early indications that the market is bottoming.

West. In the third quarter of 2009, home closings in our West Region decreased 107 units or 53.0%, with a 19.9% decline in average sales price, for total revenue of $27.0 million, a 62.3% or $44.6 million decrease in home closing revenue as compared to the third quarter of 2008. 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 we expect will continue to be a more significant portion of our total sales and closings mix. The Regions' orders for the current quarter increased to 163, a 29.4% increase from the prior year's third quarter. Although our Nevada operations continue to be hampered by foreclosures and the difficult economic conditions that state is experiencing, our California franchise, the first to be impacted by the homebuilding downturn, is starting to show signs of improvement with a 52.9% increase in unit orders despite a 50.0% decrease in average active communities between the third quarters of 2009 and 2008, reflecting our sales success in our newly acquired communities and our redesigned product line. Our ending backlog of $53.8 million is starting to reflect the increased sales pace with $32.6 million, or 37.7% decreases from the prior year. For the nine months ended September 30, 2009, home closings in our West Region decreased to 330 units with a value of $99.8 million, a 58.9% decrease in home closing revenue as compared to the same period in the prior year as 2009 year-to-date sales declined 50.5% or $115.5 million as compared to 2008 based on the market conditions noted above.

Central. In the third quarter of 2009, home closings in our Central Region decreased 257 units, or 23.0%, with a 9.1% decline in average sales price, for total revenue of $192.2 million, a 30.0% or $82.3 million decrease in home closing revenue as compared to the third quarter of 2008, the smallest percentage declines of any of our Regions. For the nine months ended September 30, 2009, closings of 2,347 units generating $547.6 million of revenues represent declines of 26.3% and 31.6% from the same period in 2008. Although Texas remained our strongest market during the third quarter of 2009 with 611 homes closed, it has experienced slowing as indicated by the 23.3% decrease in its closing revenue from the same period in 2008, comprising about half of the Region's total revenue decline. The sales pace in the Central Region stabilized during the third quarter of 2009, with 844 absorptions, only 1% fewer than 2008, aided by new communities opening in target locations in Phoenix. Texas only declined 12 sales units, or 2.0% in the current quarter from the same period in the prior year. Year-to-date sales units decreased 19.8%, slower than the 41.1% decline in average communities during the same time frame in the prior year. Average selling prices of closed homes of $233,300 year-to-date 2009 reflect marginal declines from the comparable balances of $251,600 in the same period of 2008. In the Region, the slower year-to-date sales pace led to a 607 unit decline in ending backlog as of September 30, 2009, with average sales prices of homes in backlog of $229,800 in 2009, as compared to $253,500 as of September 30, 2008. The average sales price decline reflects our focus to target the market's entry level and first time move-up customer price point, which comprise the majority of the buyer demographic. Although we expect to continue to experience some deterioration in this Region until conditions stabilize due to the positive initial indications from Arizona, and 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 ongoing negative economic conditions will be less severe in our Central Region.

East. In the third quarter of 2009, home closings in our East Region decreased 44 units, or 42.3%, with an 18.2% decline in average sales price, for total revenue of $12.6 million, a 52.8% or $14.1 million decrease in home closing revenue as compared to the third quarter of 2008. The 134 unit decline in year-to-date deliveries in this Region for 2009 includes 12 closings from Ft. Myers communities, as compared to 39 in 2008. Our Ft. Myers operation is wound down as of September 30, 2009. The closing declines 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 Orlando, replacing some of our older close-out communities and leading to a 58 unit, or 175.8% increase in our orders for the quarter ended September 30, 2009 to 91 units as compared to 33 in the same period in the prior year. The sales from these new communities also positively impacted backlog, as we ended the current quarter with a backlog of 107 units with a value of $29.0 million at September 30, 2009, a 57 unit and $11.5 million increase over the same period in the prior year. For the nine months ended September 30, 2009, closings of 160 units in our East Region with $35.8 million of corresponding home revenue declined $39.1 million, or 52.1%, compared to the nine months ended September 30, 2008. However, our East Region experienced a 10.0% unit increase and benefited from a 5.1% increase in average sales prices in year-to-date sales as compared to 2008, reflecting the impact of

the new 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. We remain cautious about our future performance in this Region and continue to focus on cost containment and deeply-discounted lots to allow for the pricing benchmarks to attract our first-time and entry-level buyers.

Other Operating Information (dollars in thousands)



                                           Three Months Ended September 30,
                                            2009                      2008
                                   Dollars    Percent (1)    Dollars    Percent (1)
Home Closing Gross Profit/(Loss)
Total                              $ 23,183          10.0 %  $  6,786           1.8 %
Add back Impairments                 10,354                    40,949
Adjusted Gross Margin                33,537          14.5 %    47,735          12.8 %

West                                    790           2.9 %    (5,440 )        (7.6 )%
Add back Impairments                  2,385                    11,519
Adjusted Gross Margin                 3,175          11.8 %     6,079           8.5 %

Central                              23,427          12.2 %    14,345           5.2 %
Add back Impairments                  5,677                    25,196
Adjusted Gross Margin                29,104          15.1 %    39,541          14.4 %

East                                 (1,034 )        (8.2 )%   (2,119 )        (7.9 )%
Add back Impairments                  2,292                     4,234
Adjusted Gross Margin              $  1,258          10.0 %  $  2,115           7.9 %




                                           Nine Months Ended September 30,
                                            2009                      2008
                                   Dollars    Percent (1)    Dollars    Percent (1)
Home Closing Gross Profit/(Loss)
Total                              $  1,449           0.2 %  $ 31,135           2.8 %
Add back Impairments                 86,943                   113,810
Adjusted Gross Margin                88,392          12.9 %   144,945          13.0 %

West                                 (7,219 )        (7.2 )%  (38,277 )       (15.8 )%
Add back Impairments                 16,804                    56,962
Adjusted Gross Margin                 9,585           9.6 %    18,685           7.7 %

Central                               8,641           1.6 %    75,000           9.4 %
Add back Impairments                 66,020                    42,591
Adjusted Gross Margin                74,661          13.6 %   117,591          14.7 %

. . .