Results of Operations

OVERVIEW

Revenues are generated from our homebuilding operations and our financial
services operations. The following table presents a summary of our consolidated
results of operations for the six months and three months ended May 31, 2012 and
2011 (in thousands, except per share amounts):



                                             Six Months Ended May 31,            Three Months Ended May 31,
                                              2012               2011              2012                2011
Revenues:
Homebuilding                              $    552,500        $  465,284       $     300,605        $  269,983
Financial services                               4,910             3,394               2,247             1,755

Total                                     $    557,410        $  468,678       $     302,852        $  271,738

Pretax income (loss):
Homebuilding                              $    (77,509 )      $ (185,184 )     $     (30,137 )      $  (70,433 )
Financial services                               3,471             2,254               1,501             1,629

Total pretax loss                              (74,038 )        (182,930 )           (28,636 )         (68,804 )
Income tax benefit (expense)                     4,100              (100 )             4,500               300

Net loss                                  $    (69,938 )      $ (183,030 )     $     (24,136 )      $  (68,504 )

Basic and diluted loss per share          $       (.91 )      $    (2.38 )     $        (.31 )      $     (.89 )

In the first six months of 2012, the overall housing market showed signs that it is stabilizing and moving into a period of recovery from the severe housing downturn that began in mid-2006. Historically high housing affordability, particularly compared to rising rental costs, with record-low interest rates for residential consumer mortgage loans helped to spur home sales activity. Meanwhile, relatively low inventories of homes available for sale in some markets helped to moderate prior downward trends in home prices and, in a few areas, push selling prices higher. Conditions are uneven, however, with local economic and employment dynamics strongly influencing the health or weakness of and within individual housing markets, and during the period there has generally been greater sales activity for existing homes than for new homes. In addition, and notwithstanding the somewhat healthier environment, the homebuilding industry still faces significant challenges from unbalanced inventories of homes available for sale in several markets; sales of distressed homes, including a sizeable number of lender-owned homes acquired through foreclosures and short sales that are currently or may soon be made available for sale; and restraints on consumer demand for housing. These restraints include variable macroeconomic conditions, uncertainty regarding job growth, tight residential consumer mortgage lending standards and reduced credit availability for residential consumer mortgage loans. Though the recent positive trends and more favorable buyer sentiment have been encouraging, continued improvement for the housing industry will depend substantially on the extent and pace of economic growth.

In the three months ended May 31, 2012, we continued to focus on our primary strategic goals - to achieve and maintain profitability at the scale of prevailing market conditions; to generate cash and strengthen our balance sheet; and to position our business to capitalize on future growth opportunities - and we generated year-over-year improvement in a number of financial and operational metrics. We ended the 2012 second quarter with the number of homes in backlog up 22% and potential future housing revenues up 38% from a year ago. In addition, while we generated only a 3% increase in net orders compared to the year-earlier quarter, reflecting in part a 4% year-over-year decrease in our number of new home communities open for sales, the value of our net orders increased 18%. We also produced year-over-year growth in homes delivered and revenues, and reduced our net loss significantly from the second quarter of 2011. Apart from our improved results in the current quarter, we believe that the actions we have taken since the beginning of 2012 have further strengthened our business and our ability to take advantage of any future improvements in housing markets as they occur. These actions included an operational transition to a new preferred mortgage lender, as further described below; investing in land and land development in desirable locations within our served markets; and extending our senior debt maturity schedule through the issuance of the $350 Million Senior Notes and the related completion of the Tender Offers.

Our total revenues of $302.9 million for the three months ended May 31, 2012 increased 11% from $271.7 million for the three months ended May 31, 2011, primarily due to higher housing revenues. Housing revenues increased 11% to $300.6 million for the second quarter of 2012 from $270.0 million for the year-earlier quarter, reflecting a 2% increase in the number of homes delivered and a 9% increase in the average selling price. We use the term "home" in this discussion and analysis to refer to a single-family residence, whether it is a single-family home or other type of residential property. We delivered 1,290 homes at an average selling price of $233,000 in the second quarter of 2012, compared with 1,265 homes delivered at an average selling price of $213,400 in the year-earlier quarter.

The year-over-year increase in the number of homes delivered in the second quarter of 2012 was due to our relatively higher backlog level at the beginning of the quarter, which was up 30% from the prior year. Within our homebuilding reporting segments, the number of homes delivered in the three months ended May 31, 2012 increased by 13% and 5% in our Central and Southeast homebuilding reporting segments, respectively, and decreased by 7% and 14% in our West Coast and Southwest homebuilding reporting segments, respectively, compared to the year-earlier quarter.

Our overall average selling price for the three months ended May 31, 2012 increased from the corresponding period of 2011, primarily due to changes in community and product mix, as we delivered more homes from markets with economic and consumer demand dynamics that supported larger home sizes and higher selling prices, and our repositioning in stronger, highly desirable, land-constrained submarkets. Our higher average selling price in the 2012 second quarter reflected year-over-year increases of 33% and 14% in our West Coast and Southwest homebuilding reporting segments, respectively, partly offset by decreases of 8% and 1% in our Central and Southeast homebuilding reporting segments, respectively.

Included in our total revenues were financial services revenues of $2.2 million for the second quarter of 2012 and $1.8 million for the second quarter of 2011. Financial services revenues increased compared to the year-earlier period mainly due to revenues associated with a marketing services agreement with our preferred mortgage lender.

We generated a net loss of $24.1 million, or $.31 per diluted share, for the three months ended May 31, 2012, compared to a net loss of $68.5 million, or $.89 per diluted share, for the three months ended May 31, 2011. Our 2012 second quarter net loss included favorable warranty adjustments of $11.2 million that reflected trends in our overall warranty claims experience, and an insurance recovery of $10.0 million related to costs we have incurred to repair construction defects on previously delivered homes, including homes affected by allegedly defective drywall material. These items were largely offset by charges of $9.9 million for inventory impairments and a charge of $8.8 million recorded as a result of an unfavorable court decision that is being appealed, as discussed in Note 14. Legal Matters in the Notes to Consolidated Financial Statements in this report. In the 2012 second quarter, our net loss also included an income tax benefit of $4.5 million, which primarily resulted from a $4.1 million state income tax refund received in connection with the resolution of a state tax audit. Our net loss for the quarter ended May 31, 2011 included charges of $20.6 million for inventory impairments and land option contract abandonments, and a loss on loan guaranty of $14.6 million related to South Edge. South Edge was a residential development joint venture located near Las Vegas, Nevada in which one of our wholly owned subsidiaries participated along with other unrelated homebuilders and a third-party property development firm. South Edge underwent and completed a bankruptcy reorganization under the South Edge Plan in 2011, a process that commenced in the first quarter of that year. The loss on loan guaranty recorded in the 2011 second quarter resulted from our updated estimate of our probable net payment obligation to reflect the terms of the South Edge Plan.

Our homebuilding operations generated operating losses of $15.5 million for the three months ended May 31, 2012 and $57.5 million for the three months ended May 31, 2011. The homebuilding operating loss narrowed by $42.0 million in the second quarter of 2012 due to higher housing gross profits, partly offset by higher selling, general and administrative expenses in the current quarter, and the inclusion of the loss on loan guaranty in the year-earlier quarter.

Housing gross profits of $50.9 million for the three months ended May 31, 2012 increased by $31.3 million from $19.6 million for the year-earlier period. Our housing gross profit margin improved to 16.9% in the second quarter of 2012 from 7.3% in the second quarter of 2011. Our housing gross profits in the 2012 second quarter included the above-described favorable warranty adjustments and insurance recovery, which were partly offset by the current quarter inventory impairment charges. In the year-earlier quarter, our housing gross profits included the above-described inventory impairment and land option contract abandonment charges. Our housing

gross profit margin, excluding inventory impairment charges, was 20.3% in the second quarter of 2012, compared to the housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, of 14.9% in the year-earlier quarter. The calculation of this measure of housing gross profit margin is described below under "Non-GAAP Financial Measures."

Our selling, general and administrative expenses of $66.5 million in the three months ended May 31, 2012 increased 6% from $62.5 million in the year-earlier period. The year-over-year increase was primarily due to the above-described court decision charge, and was partly offset by cost-saving initiatives. As a percentage of housing revenues, selling, general and administrative expenses were 22.1% for the three months ended May 31, 2012, compared to 23.2% for the year-earlier period, reflecting the impact of higher housing revenues in the current quarter.

Total revenues for the six months ended May 31, 2012 were $557.4 million, up 19% from $468.7 million for the six months ended May 31, 2011. Included in our total revenues were financial services revenues of $4.9 million for the first six months of 2012 and $3.4 million for the year-earlier period. Our net loss for the six months ended May 31, 2012 totaled $69.9 million, or $.91 per diluted share, including charges of $16.5 million for inventory impairments and the $8.8 million court decision charge, which were partly offset by the favorable warranty adjustments and insurance recovery recorded in the three months ended May 31, 2012. The net loss for the six months ended May 31, 2012 also included the income tax benefit of $4.1 million in the second quarter of 2012. In the year-earlier period, our net loss of $183.0 million, or $2.38 per diluted share, included inventory impairment and land option contract abandonment charges of $22.3 million, and a joint venture impairment charge of $53.7 million and a loss on loan guaranty of $37.3 million, both related to South Edge.

We ended the second quarter of 2012 with $377.4 million of cash and cash equivalents and restricted cash; our balance of unrestricted cash was $314.3 million. Our debt balance was $1.58 billion at May 31, 2012 and November 30, 2011. Our debt balance at May 31, 2012 included the issuance of the $350 Million Senior Notes, which was largely offset by the purchase of $340.0 million in aggregate principal amount of certain of our senior notes due 2014 and 2015 pursuant to the applicable Tender Offers. Our ratio of debt to total capital was 81.1% at May 31, 2012, compared to 78.2% at November 30, 2011. Our ratio of net debt to total capital (a calculation that is described below under "Non-GAAP Financial Measures") was 76.5% at May 31, 2012, compared to 71.4% at November 30, 2011.

Our backlog at May 31, 2012 totaled 2,962 homes, representing potential future housing revenues of $693.4 million, compared to a backlog at May 31, 2011 of 2,422 homes, representing projected future housing revenues of $501.5 million. The number of homes in our backlog increased 22% year over year, due to a higher number of homes in our backlog at the beginning of the 2012 second quarter and an increase in our net orders in the quarter.

Net orders from our homebuilding operations rose 3% to 2,049 in the second quarter of 2012 from 1,998 in the second quarter of 2011, despite a 4% year-over-year decrease in our number of new home communities open for sales, and were 71% higher than our 1,197 net orders in the first quarter of 2012. Within our homebuilding reporting segments, second quarter net orders, on a year-over-year basis, increased by 11% and 7% in our West Coast and Central homebuilding reporting segments, respectively, and decreased by 15% and 8% in our Southwest and Southeast homebuilding reporting segments, respectively. The lower net orders from our Southwest and Southeast homebuilding reporting segments reflected a strategic reduction in our investments in certain underperforming locations in those segments. This strategic reduction, mainly exiting South Carolina in 2011 and significantly downsizing our business in Arizona and in Charlotte, North Carolina during 2011 and into 2012, is part of an ongoing repositioning of our operational footprint to better-performing markets. In addition, our net order results were a product of our focus in 2012 to prioritize gross profit margin improvement over sales pace. Reflecting this focus, the value of the net orders we generated in the second quarter of 2012 increased 18% to $503.1 million from $427.5 million in the year-earlier quarter. Three of our four homebuilding reporting segments generated year-over-year increases in net order value, with our West Coast homebuilding reporting segment up 31% to $235.3 million, our Central homebuilding reporting segment up 12% to $155.5 million, and our Southeast homebuilding reporting segment up 6% to $67.7 million.

The value of the net orders we generated in the first six months of 2012 increased 9% to $780.6 million from $716.3 million in the prior-year period. Our cancellation rate as a percentage of gross orders was 26% in the second quarter of 2012, compared to 25% in the year-earlier quarter and 36% in the first quarter of 2012. We believe our operational transition to our new preferred mortgage lender, Nationstar Mortgage LLC ("Nationstar"), will help moderate our cancellation rate by addressing the residential consumer mortgage loan

funding issues experienced in the first half of 2012 with the wind down of a prior preferred mortgage lender relationship during that period. This wind down disrupted the ability of some of our customers to obtain mortgage financing to complete home purchases and contributed to an elevated level of cancellations, particularly in the first quarter of 2012. Nationstar began accepting new mortgage loan applications from our homebuyers on May 1, 2012.

HOMEBUILDING

The following table presents a summary of certain financial and operational data
for our homebuilding operations (dollars in thousands, except average selling
price):



                                          Six Months Ended May 31,            Three Months Ended May 31,
                                           2012               2011              2012                2011
Revenues:
Housing                                $    552,500        $  465,206       $     300,605        $  269,983
Land                                             -                 78                  -                 -

Total                                       552,500           465,284             300,605           269,983

Costs and expenses:
Construction and land costs
Housing                                     477,027           421,052             249,669           250,381
Land                                             -                125                  -                 -

Total                                       477,027           421,177             249,669           250,381
Selling, general and administrative
expenses                                    122,158           112,125              66,472            62,520
Loss on loan guaranty                            -             37,330                  -             14,572

Total                                       599,185           570,632             316,141           327,473

Operating loss                         $    (46,685 )      $ (105,348 )     $     (15,536 )      $  (57,490 )

Homes delivered                               2,440             2,214               1,290             1,265
Average selling price                  $    226,400        $  210,100       $     233,000        $  213,400
Housing gross profit margin as a
percentage of housing revenues                 13.7 %             9.5 %              16.9 %             7.3 %

Selling, general and administrative
expenses as a percentage of housing
revenues                                       22.1 %            24.1 %              22.1 %            23.2 %

Operating loss as a percentage of
homebuilding revenues                          -8.4 %           -22.6 %              -5.2 %           -21.3 %

We have grouped our homebuilding activities into four reporting segments, which we identify in this report as West Coast, Southwest, Central and Southeast. As of May 31, 2012, our homebuilding reporting segments consisted of ongoing operations located in the following states: West Coast - California; Southwest - Arizona and Nevada; Central - Colorado and Texas; and Southeast - Florida, Maryland, North Carolina and Virginia. The following tables present homes delivered, net orders and cancellation rates (based on gross orders) by homebuilding reporting segment for the three months and six months ended May 31, 2012 and 2011, and our ending backlog at May 31, 2012 and 2011:

                                            Three Months Ended May 31,
                       Homes Delivered            Net Orders            Cancellation Rates
        Segment        2012        2011        2012        2011        2012            2011
        West Coast        330         353         600         542          24 %            22 %
        Southwest         157         183         229         270          17              18
        Central           536         475         900         838          28              29
        Southeast         267         254         320         348          28              24

        Total           1,290       1,265       2,049       1,998          26 %            25 %

                                             Six Months Ended May 31,
                       Homes Delivered            Net Orders            Cancellation Rates
        Segment        2012        2011        2012        2011        2012            2011
        West Coast        639         577         889         946          27 %            19 %
        Southwest         327         341         369         476          20              18
        Central         1,023         838       1,447       1,286          33              33
        Southeast         451         458         541         592          32              28

        Total           2,440       2,214       3,246       3,300          30 %            26 %

                                                 May 31,
                                                          Backlog - Value
                               Backlog - Homes            (In Thousands)
                Segment        2012        2011         2012          2011
                West Coast        713         572     $ 301,652     $ 172,147
                Southwest         245         274        43,518        43,572
                Central         1,442       1,141       237,558       199,350
                Southeast         562         435       110,680        86,475

                Total           2,962       2,422     $ 693,408     $ 501,544

Revenues. Homebuilding revenues totaled $300.6 million for the three months ended May 31, 2012, increasing 11% from $270.0 million for the corresponding period of 2011. All of our homebuilding revenues in each period were generated entirely from housing operations. Housing revenues for the three months ended May 31, 2012 improved from the year-earlier period, due to a 2% increase in homes delivered and a 9% increase in the average selling price. We delivered 1,290 homes in the second quarter of 2012, up from 1,265 homes delivered in the year-earlier quarter. The increase in homes delivered was largely due to the relatively higher backlog level at the beginning of the 2012 second quarter, which was up 30% on a year-over-year basis. Within our homebuilding reporting segments, the number of homes delivered in the current quarter increased by 13% and 5% in our Central and Southeast homebuilding reporting segments, respectively, and decreased by 7% and 14% in our West Coast and Southwest homebuilding reporting segments, respectively, compared to the year-earlier quarter.

The second quarter of 2012 marked the eighth consecutive quarter that our average selling price has increased on a year-over-year basis. Our overall average selling price of $233,000 for the quarter ended May 31, 2012 rose from $213,400 for the year-earlier quarter, reflecting higher average selling prices in two of our four homebuilding reporting segments. Average selling prices increased 33% in our West Coast homebuilding reporting segment and 14% in our Southwest homebuilding reporting segment. In our Central and Southeast homebuilding reporting segments, the average selling prices for the three months ended May 31, 2012 decreased 8% and 1%, respectively, from the corresponding period of 2011. The increase in our overall average selling price was primarily due to changes in community and product mix, as we delivered more homes from markets with economic and consumer demand dynamics that supported larger home sizes and higher selling prices, and our repositioning in stronger, highly desirable, land-constrained submarkets.

Homebuilding revenues of $552.5 million for the six months ended May 31, 2012 increased by $87.2 million, or 19%, from $465.3 million for the year-earlier period, reflecting higher housing revenues. Housing revenues for the six months ended May 31, 2012 rose to $552.5 million, up 19% from $465.2 million for the year-earlier period, due to a 10% increase in the number of homes delivered and an 8% increase in the average selling price. We delivered 2,440 homes in the six months ended May 31, 2012, up from 2,214 homes delivered in the year-earlier period. The year-over-year increase in the number of homes delivered reflected the relatively higher backlog level at the beginning of 2012, which was up 61% on a year-over-year basis largely due to a 39% year-over-year increase in net orders in the latter half of 2011. Our average selling price for the six months ended May 31, 2012 rose to $226,400 from $210,100 for the six months ended May 31, 2011 for the reasons described above with respect to the three months ended May 31, 2012.

Operating Loss. Our homebuilding operations generated operating losses of $15.5 million for the three months ended May 31, 2012 and $57.5 million for the three months ended May 31, 2011. Our second quarter operating loss improved by $42.0 million, reflecting higher gross profits, partly offset by higher selling, general and administrative expenses in the 2012 second quarter, and the inclusion of the above-described loss on loan guaranty related to South Edge in the year-earlier quarter.

Gross profits from our homebuilding operations increased to $50.9 million in the second quarter of 2012, up $31.3 million from $19.6 million in the year-earlier period. Our housing gross profits for the three months ended May 31, 2012 included the above-described favorable warranty adjustments and insurance recovery, which were partly offset by inventory impairment charges of $9.9 million. In the prior year quarter, our housing gross profits included $20.6 million of inventory impairment and land option contract abandonment charges. In the second quarter of 2012, our housing gross profit margin improved to 16.9%, up from 7.3% in the year-earlier quarter. Our housing gross profit margin, excluding inventory impairment charges, was 20.3% in the second quarter of 2012, compared to a housing gross profit margin, excluding inventory impairment and land option contract abandonment charges, of 14.9% in the second quarter of 2011.

Selling, general and administrative expenses totaled $66.5 million in the second quarter of 2012, increasing by $4.0 million, or 6%, from $62.5 million in the year-earlier quarter. The year-over-year increase was primarily due to the court decision charge mentioned above, and was partly offset by cost-saving initiatives. As a percentage of housing revenues, selling, general and administrative expenses in the current quarter improved to 22.1% from 23.2% in the second quarter of 2011, reflecting higher housing revenues driven by the increased volume of homes delivered and the higher average selling price.

Our homebuilding business posted operating losses of $46.7 million for the six months ended May 31, 2012 and $105.3 million for the six months ended May 31, 2011, reflecting losses from housing operations. Our operating loss for the first six months of 2012 decreased by $58.6 million from the year-earlier period, largely due to higher housing gross profits, partly offset by higher selling, general and administrative expenses in the period. The decrease also reflected the inclusion of a $37.3 million loss on loan guaranty in the six months ended May 31, 2011 related to South Edge. The loss on loan guaranty resulted from recording our estimate of our probable net payment obligation related to the Springing Guaranty during the first quarter of 2011 and updating this estimate in the second quarter of 2011 to reflect the terms of the South Edge Plan. The $37.3 million charge we recognized to reflect the loss on loan guaranty was in addition to the joint venture impairment charge we recognized in the first quarter of 2011 to write off our remaining investment in South Edge.

Our housing gross profits of $75.5 million for the six months ended May 31, 2012 increased by $31.3 million from $44.2 million for the year-earlier period. . . .