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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number: 000-23677

Technical Olympic USA, Inc.


(Exact Name of Registrant as Specified in Its
Charter)


|                                                                                                                 |  |                                         
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                                         |  | 76-0460831                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                                               |  | (I.R.S. Employer
    Identification No.)
|                                                                                                                
|4000 Hollywood Boulevard,
    Suite 500 North
    Hollywood, Florida(Address of Principal Executive
    Offices) |  | 33021(Zip Code)                         

Registrants telephone number, including
area code:

(954)364-4000


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.01 par value


Indicate by check
mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          No o

Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

Indicate by check
mark whether the Registrant is an accelerated filer (as defined
in Exchange Act
Rule 12b-2).     Yes o          No þ

The aggregate
market value of the voting stock held by non-affiliates of the
Registrant was approximately $60.5million as of
June 30, 2003.

As of
February 6, 2004, there were 29,889,036 shares of the
Registrants common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Registrants definitive proxy statement for its 2004 annual
meeting of shareholders, which proxy statement will be filed no
later than 120 days after the close of the
Registrants fiscal year ended December 31, 2003, are
hereby incorporated by reference in Part III of this Annual
Report on Form 10-K.



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PART I



|        |         
|------- | --------
|Item 1. | Business

We design, build and market high quality detached
single-family residences, town homes, and condominiums. We
operate in markets characterized by strong population and income
growth. Currently we conduct homebuilding operations in
14 metropolitan markets, located in four major geographic
regions: Florida, the Mid-Atlantic, Texas and the West.

For the year ended December 31, 2003, we
delivered 6,135 homes, with an average sales price of $262,000
and generated approximately $1.6 billion in revenues from
home sales and $82.7 million in income from continuing
operations. Our backlog of homes at December 31, 2003 was
3,128 homes under contract, representing $855.4 million in
expected revenues.

We market our homes to a diverse group of
homebuyers, including first-time homebuyers,
move-up homebuyers, homebuyers who are relocating to
a new city or state, buyers of second or vacation homes,
active-adult homebuyers and homebuyers with grown children who
want a smaller home (empty-nesters). Our homes are
marketed under various brand names, including Engle Homes,
Newmark Homes, Fedrick, Harris Estate Homes, Marksman Homes,
D.S. Ware Homes, Masonry Homes, Trophy Homes and James Company.
As of December 31, 2003, we either owned or had options to
acquire approximately 48,200 homesites, and we were actively
marketing in 217 communities.

As part of our objective to provide homebuyers a
seamless home purchasing experience, we have developed, and are
expanding, our complementary financial services business. As
part of this business, we provide mortgage financing and closing
services and offer title, homeowners and other insurance
products. Our mortgage financing operations revenues
consist primarily of origination and premium fee income,
interest income and the gain on the sale of the mortgages, as we
sell substantially all of our mortgages and the related
servicing rights to third-party investors. Our mortgage
financing services are used primarily by buyers of our homes,
although we also offer these services to existing homeowners
refinancing their mortgages. By comparison, our closing services
and our insurance agency operations are used by our homebuyers
as well as a broad range of other clients purchasing or
refinancing residential or commercial real estate.

Business Strategies



| |                                                          
| | ---------------------------------------------------------
| | Capitalize on Growth Potential in Our
    Current Markets

We believe that a significant portion of our
future growth will stem from our ability to increase our homes
sales and capture additional market share within our current
markets. Currently, we conduct homebuilding operations in 14
metropolitan markets, each of which is highly fragmented with
numerous smaller homebuilders. Our reputation as a high quality
homebuilder combined with our financial resources gives us an
advantage over many smaller homebuilders with whom we compete.
Based on management estimates, we are positioned as a top-five
homebuilder in three of our current markets. Consequently, we
have an opportunity to significantly strengthen our market
position by expanding our product offerings and increasing the
number of our active selling communities. Our current markets
have demonstrated solid income and population growth trends. As
a result, we expect that strong demand for new housing in our
current markets will also contribute to our growth. By
leveraging our current operations, we believe that we will, over
time, maximize our financial returns, strengthen our margins and
increase our revenues and profitability.



| |                                                                     
| | --------------------------------------------------------------------
| | Implement Performance Improvement and Best
    Practices Initiatives

As part of our goal of strengthening our
financial returns, we continuously monitor and evaluate our
systems, practices and procedures in order to improve our
operations. To assist with the measurements of our results and
the results of our operating divisions, we utilize a detailed
Performance Improvement Plan that focuses on
techniques to enhance operating efficiencies. We have, and will
continue to,

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implement best practices across our operating
divisions and believe that this operating strategy has allowed,
and will continue to allow, us to:




| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | implement innovative information systems to,
    among other things, monitor homebuilding production, scheduling
    and budgeting and facilitate communication among our divisions
    with respect to the design and construction of our homes;
|
| |  | reduce the time necessary to complete each stage
    in the homebuilding process;                                                                                                                                                                
|
| |  | effectively manage our inventory of homes;                                                                                                                                                                                                       
|
| |  | use our purchasing power to achieve volume
    discounts and the best possible service from our vendors; and                                                                                                                                     
|
| |  | achieve more favorable pricing of homesite
    premiums and options.                                                                                                                                                                             



| |                                         
| | ----------------------------------------
| | Grow Our Financial Services
    Business

Our financial services operations require minimal
capital investment and are highly profitable because of the high
margins we obtain from our mortgage financing operation and the
high volume of transactions generated from our title insurance
and closing services operations. We believe that these financial
services complement our homebuilding operations and provide
homebuyers a seamless home purchasing experience. For the year
ended December 31, 2003, approximately 8% of our homebuyers
paid in cash and 59% of our non-cash homebuyers used the
services of our mortgage business, while 82% of our homebuyers
used our title and closing services and 19% used our insurance
agencies to obtain insurance. We believe that we have an
opportunity to grow our financial services business by:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing the percentage of our homebuyers who
    use our financial services;                                                                                                                
|
| |  | marketing our financial services more actively to
    buyers of homes built by other homebuilders, including smaller
    homebuilders that do not provide their own financial services;
    and
|
| |  | offering additional services that complement our
    existing financial services in all our markets.                                                                                           



| |                                        
| | ---------------------------------------
| | Selectively Expand Into New
    Markets

We intend to supplement our primary growth
strategy of expansion in our current markets with a disciplined,
financial return oriented approach to entering new markets. We
will focus on entering metropolitan areas that have favorable
homebuilding characteristics, including availability of strong
management with local market expertise as well as solid income
and population growth trends, significant single-family home
permit activity, a diversified economy and an adequate supply of
obtainable homesites. We believe this long-term emphasis on
geographic diversification across a range of growing markets
with strong fundamentals will enable us to minimize our exposure
to adverse economic conditions, seasonality and housing cycles
in individual local markets. We will enter new markets through
strategic acquisitions of other homebuilders and, to the extent
we enter new markets that complement and/or are in close
proximity to our current markets, we will utilize our existing
management expertise and resources to establish operations.

Homebuilding Operations



| |        
| | -------
| | Markets

We operate in 14 metropolitan markets located in
four major geographic regions: Florida; the Mid-Atlantic; Texas;
and the West.

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|                  |  |                                 |  |                  |  |          
|----------------- |  | ------------------------------- |  | ---------------- |  | ---------
|Florida           |  | Mid-Atlantic                    |  | Texas            |  | West     
|                  |  |                                 |  |                  |  |          
|Jacksonville      |  | Baltimore/Southern Pennsylvania |  | Austin           |  | Colorado 
|Orlando           |  | Nashville                       |  | Dallas/Ft. Worth |  | Las Vegas
|Southeast Florida |  | Northern Virginia               |  | Houston          |  | Phoenix  
|Southwest Florida |  |                                 |  | San Antonio      |  |          

For the year ended December 31, 2003, none
of our metropolitan markets represented more than 15% of our
total revenues. We select our target geographic markets based
on, among other things, historical and projected population
growth, projected job growth, regional economic conditions,
availability of strong management with local expertise, land
availability, single-family home permit activity and price, the
local land development process, consumer tastes, competition,
housing inventory and secondary home sales activity.

Florida.Our Florida
region is comprised of four metropolitan markets: Jacksonville;
Orlando; Southeast Florida, which is comprised of Broward, Palm
Beach, Martin, Port St. Lucie and Indian River Counties;
and Southwest Florida, which is comprised of Fort Myers and
Naples. We conduct business in our Orlando, Southeast Florida
and Southwest Florida markets under the Engle Homes brand name.
We entered the Jacksonville market in October 2002 through the
acquisition of D.S. Ware Homes. We have continued to conduct
business in Jacksonville under the D.S. Ware Homes brand name
but intend to soon begin conducting business in that division
under the Engle Homes brand name instead. For the year ended
December 31, 2003, we delivered 2,311 homes in Florida,
generating $562.5 million, or 35% of our revenues from home
sales.

Mid-Atlantic.Our
Mid-Atlantic region is comprised of three metropolitan markets:
Baltimore, Maryland/Southern Pennsylvania; Nashville, Tennessee;
and Northern Virginia. We entered the Baltimore market in
November 2002 through the acquisition of Masonry Homes and
continue to conduct business in this market under the Masonry
Homes brand name. We conduct business in Nashville under the
Newmark Homes and Fedrick, Harris Estate Homes brand names. We
conduct business in Northern Virginia under the Engle Homes
brand name. For the year ended December 31, 2003, we
delivered 636 homes in our Mid-Atlantic region generating
$209.3 million, or 13% of our revenues from home sales.

Texas.Our Texas
region is comprised of four metropolitan markets: Austin;
Dallas/Ft. Worth; Houston; and San Antonio. We conduct business
in all of our markets in Texas under the Newmark Homes brand
name. We also conduct business under the Engle Homes brand name
in the Dallas/Fort Worth market and under the Fedrick, Harris
Estate Homes brand name in Austin, Dallas and Houston. We build
in both mini-master and master plan communities in Texas. In
addition, to meet varying local demand in each of our Texas
markets, a considerable number of our homes in the Texas market
are built as speculative homes, which means we build
the homes prior to having sold them. The number of speculative
homes we build in any given community or market is influenced by
local market factors, such as new employment opportunities,
significant job relocations, housing demand, local market
customs and the length of time we have operated in the market.
For the year ended December 31, 2003, we delivered 1,557
homes in Texas, generating $407.4 million, or 25% of our
revenues from home sales.

West.Our West
region is comprised of three metropolitan markets: the Colorado
Front Range, which is comprised of Denver, Boulder and Colorado
Springs; Las Vegas, Nevada; and Phoenix, Arizona. In our
Colorado market we conduct business under the Engle Homes brand
name. During 2003 we expanded our operations in Colorado through
the acquisition of The James Construction Company, and we have
continued to conduct business in the greater Denver area under
The James Company brand name. Also during 2003, we entered the
Las Vegas market through the acquisition of Trophy Homes. We
continue to conduct business in Las Vegas under the Trophy Homes
brand name. In the Phoenix market, we conduct business under the
Engle Homes brand name. For the year ended December 31,
2003, we delivered 1,631 homes in our West region generating
$425.1 million, or 27% of our revenues from home sales.

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| |            
| | -----------
| | Product Mix

We select our product mix in a particular
geographic market based on the demographics of the market,
demand for a particular product, margins and the economic
strength of the market. We regularly review our product mix in
each of our markets so that we can quickly respond to market
changes and opportunities.

For the year ended December 31, 2003, we
generated 39% of our revenues from home sales from homes in the
$200,000 to $300,000 price range, 24% of our revenues from home
sales from homes in the $300,000 to $400,000 price range, 19% of
our revenues from home sales from homes in the under $200,000
price range, and 18% of our revenues from home sales from homes
in the over $400,000 price range.



| |                   
| | ------------------
| | Land and Homesites

Land is a key raw material and one of our most
valuable assets. We believe that by acquiring land and homesites
in premier locations, we enhance our competitive standing and
reduce our exposure to economic downturns. We believe that homes
in premier locations continue to attract homebuyers in both
strong and weak economic conditions. We consider that our
disciplined acquisition strategy of balancing homesites and land
we own and those we can acquire under option contracts provides
us access to a substantial supply of quality homesites and land
while conserving our invested capital and optimizing our returns.

Types of Land and
Homesites.In our homebuilding
operations, we only acquire land or homesites that are
entitled. Land is entitled when all requisite
residential zoning has been obtained for it. We attempt to
acquire entitled land and homesites that also have water and
sewage systems, streets and other infrastructure in place (we
refer to these properties as developed homesites)
because they are ready to have houses built on them. Before we
can build a house on an entitled homesite that is not developed,
the necessary infrastructure must be put in place. We generally
acquire homesites that are located adjacent to or near our other
homesites in a community, which enables us to build and market
our homes more cost efficiently than if the homesites were
scattered throughout the community. Cost efficiencies arise from
economies of scale, such as shared marketing expenses and
project management.

Land Acquisition
Policies.We have adopted strict land
acquisition policies and procedures that cover all homesite
acquisitions, including homesites acquired through option
contracts. These policies and procedures impose strict standards
for assessing all proposed land purchases with the goal of
minimizing risk and maximizing our financial returns.

Initially, our experienced management teams in
each of our divisions conduct extensive analysis on the local
market to determine if we want to enter, or expand, our
operations in that market. As part of this analysis, we review a
variety of factors, including:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | historical and projected population and
    employment rates for the surrounding area;                            
|
| |  | demographic information such as age, education
    and economic status of the homebuyers in the area;             
|
| |  | suitability for development within two to four
    years of acquisition;                                          
|
| |  | desirability of location, including proximity to
    metropolitan area, local traffic corridors and amenities; and
|
| |  | prices of comparable new and resale houses in the
    area.                                                       

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We then evaluate and identify specific homesites
in desirable locations that are consistent with our strategy for
the particular market, including the type of home and
anticipated sales price that we wish to offer in the community.
In addition, we review:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimated costs of completed homesite development;                                                                                          
|
| |  | current and anticipated competition in the area,
    including the type and anticipated sales price of homes offered
    by our competitors;
|
| |  | opportunity to acquire additional homesites in
    the future, if desired; and                                                              
|
| |  | results of financial analysis, such as projected
    profit margins and return on invested capital.                                         

In addition, we conduct environmental due
diligence, including on-site inspection and soil testing, and
confirm that the land has the necessary zoning and other
governmental entitlements required to develop and use the
property for residential home construction.

Each land acquisition proposal, which contains
specific information relating to the market, property and
community, is then subject to review and approval by our
Management Executive Committee. The Management Executive
Committee is comprised of our senior corporate officers and
representatives from our Homebuilding operations.

Land Supply.We
acquire the land and homesites we require for our homebuilding
operations through a combination of purchases and option
contracts. Under the option contracts, we purchase the right,
but not the obligation, to buy homesites at predetermined prices
on a predetermined takedown schedule anticipated to be
commensurate with home starts. Homesite option contracts are
nonrecourse, thereby limiting our financial exposure to
non-refundable deposits, which are typically less than 20% of
the underlying purchase price. This enables us to control
significant homesite positions with a minimal capital investment
and reduces the risks associated with land ownership and
development. We believe that our local reputation with land
sellers or developers provides us a competitive advantage in
acquiring homesites through option contracts. At
December 31, 2003, we had approximately 35,800 homesites
under option or similar contracts, representing approximately
74% of our total homesite supply, and we had approximately
$78.7 million in deposits under those option contracts.

As of December 31, 2003, we had
approximately 48,200 homesites which were either owned or
controlled under option contracts in our homesite inventory.
This represents supply for approximately four years of
operations, based on our current projections for home sales. The
table below shows our homesite inventory by region and in total
for the periods indicated:

|             |          |                 |       |        |  |      |        |        |  |  |        |        | 
|------------ | -------- | --------------- | ----- | ------ |  | ---- | ------ | ------ |  |  | ------ | ------ | 
|             |          |                
|             |          | At December 31,
|             |          |                
|             |          | 2001            |       | 2002   |  | 2003
|             |          |                 |       |        |  |     
|Florida      |          |                 | 4,800 |        |  |      | 11,300 |        |  |  | 19,900 |       
|Mid-Atlantic |          |                 | 2,200 |        |  |      | 4,950  |        |  |  | 4,900  |       
|Texas        |          |                 | 3,900 |        |  |      | 5,050  |        |  |  | 8,100  |       
|West         |          |                 | 4,100 |        |  |      | 5,000  |        |  |  | 15,300 |       
|             |          |                 |       |        |  |      |        |        |  |  |        |       
|             | Total(1) |                 |       | 15,000 |  |      |        | 26,300 |  |  |        | 48,200 | 
|             |          |                 |       |        |  |      |        |        |  |  |        |       



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|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes approximately 7,600, 16,500, and 35,800
    homesites under option contracts as of December 31, 2001,
    2002, and 2003, respectively.

As part of our land inventory management
strategy, we occasionally exchange or sell a portion of the
homesites and land that we have purchased to third-party
builders. Our division managers are constantly reviewing the
competitive landscape and characteristics of each of our local
markets. As we determine that certain types of homes, homes with
certain anticipated prices or homes in certain communities are
either selling quicker or at better margins, we will exchange or
sell our homesites or land for other homesite or land options to
capitalize on the market opportunities.

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| |           
| | ----------
| | Purchasing

We use our purchasing power to achieve volume
discounts and the best possible service from our vendors,
thereby reducing costs, ensuring timely deliveries and reducing
the risk of supply shortages due to allocations of materials. We
have negotiated price arrangements, which we believe are
favorable, to purchase lumber, sheetrock, appliances, heating
and air conditioning, counter tops, bathroom fixtures, roofing
and insulation products, concrete, bricks, floor coverings and
other housing equipment and materials. Our purchase contracts
are with high quality national and regional suppliers. There are
no minimum purchase requirements for these arrangements, with
flexibility reserved for each division to make independent
purchasing decisions.



| |       
| | ------
| | Design

To appeal to the tastes and preferences of local
communities, we expend considerable effort in developing an
appropriate design and marketing concept for each community,
including determining the size, style and price range of the
homes and, in certain projects, the layout of streets,
individual homesites and overall community design. In addition,
in certain markets, outside architects who are familiar with the
local communities in which we build, assist us in preparing home
designs and floor plans. The product line that we offer in a
particular community depends upon many factors, including the
housing generally available in the area, the needs of the
particular market and our costs of homesites in the community.
To improve the efficiency of our design process and make full
use of our resources and expertise, we maintain a company-wide
database of detailed information relating to the design and
construction of our homes, including architectural plans
previously or currently used in our other communities.



| |               
| | --------------
| | Design Centers

We maintain design centers in most of our markets
as part of our marketing process and to assist our homebuyers in
selecting options and upgrades which can result in additional
revenues. The design centers heighten interest in our homes by
allowing homebuyers to participate in the design process and
introducing homebuyers to the various flooring, lighting,
fixtures and hardware options available to them. In keeping with
our regional approach, each region decides what type of design
center is suitable for the local area. While the size and
content of our design centers vary between markets, the focus of
all of our design centers is on making the homebuyers
selection process less complicated and an enjoyable experience,
while increasing our profitability.



| |             
| | ------------
| | Construction

Subcontractors perform substantially all of our
construction work. Our construction superintendents monitor the
construction of each home, coordinate the activities of
subcontractors and suppliers, subject the work of subcontractors
to quality and cost controls and monitor compliance with zoning
and building codes. We typically retain subcontractors pursuant
to a contract that obligates the subcontractor to complete
construction at a fixed price in a workmanlike
manner. In addition, under these contracts the
subcontractor generally provides us with standard
indemnifications and warranties. Typically, we work with the
same subcontractors within each market, which provides us with a
stable and reliable work force and better control over the costs
and quality of the work performed. Although we compete with
other homebuilders for qualified subcontractors, we have
established long-standing relationships with many of our
subcontractors and have not experienced any material
difficulties in obtaining the services of desired subcontractors.

We typically complete the construction of a home
within four to five months. Construction time, however, depends
on weather, availability of labor, materials, supplies and other
factors. We do not maintain significant inventories of
construction materials, except for materials related to work in
progress for homes under construction. Generally, the
construction materials used in our operations are readily
available from numerous sources. We have established price
arrangements or contracts, which we believe are favorable, with
suppliers of certain of our building materials, but we are not
under specific purchasing

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requirements. In recent years, we have not
experienced significant delays in construction due to shortages
of materials.


We have, and will continue to establish, and
maintain information systems and other practices and procedures
that allow us to more effectively manage our subcontractors and
the construction process. For example, we have implemented
information systems that monitor homebuilding production,
scheduling and budgeting. We believe that this program has and
will continue to improve our efficiency and decrease our
construction time.



| |                    
| | -------------------
| | Marketing and Sales

We market our homes under various brand names,
including Engle Homes, Newmark Homes, Fedrick, Harris Estate
Homes, Marksman Homes, D.S. Ware Homes, Masonry Homes, Trophy
Homes and James Company. We believe our brands are widely
recognized in the markets in which we operate for providing
quality homes in desirable locations and enjoy a solid
reputation among potential homebuyers.

We build and market different types of homes to
meet the needs of different homebuyers and the needs of
different markets. We employ a variety of marketing techniques
to attract potential homebuyers through numerous avenues,
including Internet web sites for our various homebuilding brands
and subsidiaries, advertising and other marketing programs. We
advertise on television, in newspapers and other publications,
through our own brochures and newsletters, on billboards and in
brochures and newsletters produced and distributed by real
estate and mortgage brokers. Some of our suppliers participate
in our advertising and promotional materials, either through
co-branding, cost-sharing or through rebates.

We typically conduct home sales activities from
sales offices located in furnished model homes in each
community. We use commissioned sales personnel who assist
prospective buyers by providing them with floor plans, price
information, tours of model homes and information on the
available options and other custom features. We provide our
sales personnel with extensive training, and we keep them
updated as to the availability of financing, construction
schedules and marketing and advertising plans to facilitate
their marketing and sales activities. We supplement our in-house
training program with training by outside sales and marketing
consultants.

We market and sell homes through our own
commissioned sales personnel and in cooperation with independent
real estate brokers. Because approximately 57% of our sales
(based on homes delivered) originate from independent real
estate brokers, we sponsor a variety of programs and events,
including breakfasts, contests and other events to provide the
brokers with a level of familiarity with our communities, homes
and financing options necessary to successfully market our
homes. We also offer other incentives to brokers to actively
market our homes.

Sales of our homes generally are made pursuant to
a standard sales contract that is tailored to the requirements
of each jurisdiction. Generally, our sales contracts require a
deposit of a fixed amount (typically up to $5,000) on our less
expensive homes or as a percentage of the sales price (typically
5% to 10%) on our more expensive homes. The contract includes a
financing contingency which permits the customer to cancel in
the event mortgage financing at prevailing interest rates cannot
be obtained within a specified period, typically 30 days
from the signing. The contract may include other contingencies,
such as the prior sale of a buyers existing home. We
estimate that the average period between the execution of a
sales contract for a home and closing is approximately four to
six months for presold homes.



| |                                         
| | ----------------------------------------
| | Customer Service and Quality
    Control

Our operating divisions are responsible for both
pre-delivery quality control inspections and responding to
customers post-delivery needs. We believe that the prompt,
courteous response to homebuyers needs reduces
post-delivery repair costs, enhances our reputation for quality
and service and ultimately leads to significant repeat and
referral business. We conduct home orientations and pre-delivery
inspections and interviews with homebuyers immediately before
closing. In conjunction with these inspections, we create a list
of unfinished construction items and address outstanding issues
promptly.

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An integral part of our customer service program
includes post-delivery interviews. In most of our markets we
contract independent third parties to conduct periodic
post-delivery evaluations of the customers satisfaction
with their home, as well as the customers experience with
our sales personnel, construction department and title and
mortgage services. Typically, approximately one year after we
sell a home we arrange for follow-up interviews with the
homeowner to determine the level of the homeowners
continued satisfaction. These interviews provide us with a
direct link to the customers perception of the entire
buying experience as well as valuable feedback on the quality of
the homes we deliver and the services we provide.



| |                 
| | ----------------
| | Warranty Program

For all homes we build, we provide our homebuyers
with a one-year or two-year limited warranty of workmanship and
materials, and an eight-year or ten-year limited warranty
covering major structural defects. The extent of these
warranties may differ in some or all of the states in which we
operate. We currently have a homebuilder protective policy which
covers warranty claims for structure and design defects related
to homes sold by us during the policy period, subject to a
significant self-insured retention per occurrence. We have, and
are continuing to implement, a warranty administration program
in conjunction with our homebuilder protective policy insurance
carrier that we believe will allow us to more effectively manage
and resolve our warranty claims. We subcontract homebuilding
work to subcontractors who generally provide us with an
indemnity and a certificate of insurance before receiving
payments for their work and, therefore, claims relating to
workmanship and materials are the primary responsibility of our
subcontractors. However, there is no assurance that we will be
able to enforce these contractual indemnities. After we deliver
a home, we process all warranty requests through our customer
service departments located in each of our markets. In most
instances, a customer service manager inspects the warranty
request within 48 hours of receipt. If a warranty repair is
necessary, we manage and supervise the repair to ensure that the
appropriate subcontractor takes prompt and appropriate
corrective action. Additionally, we have developed a pro-active
response and remediation protocol to address any warranty claim
that may result in mold damage. We generally have not had any
material litigation or claims regarding warranties or latent
defects with respect to construction of homes. Current claims
and litigation are expected to be substantially covered by our
reserves or insurance.



| |                   
| | ------------------
| | Financial Services

As part of our objective to provide homebuyers a
seamless home purchasing experience, we have developed, and are
expanding, our complementary financial services business. As
part of this business, we provide mortgage financing and closing
services and offer title, homeowners and other insurance
products. Our mortgage financing operation derives most of its
revenues from buyers of our homes, although it also offers its
services to existing homeowners refinancing their mortgages. By
comparison, our closing services and our insurance agency
operations, are used by our homebuyers as well as a broad range
of other clients purchasing or refinancing residential or
commercial real estate.

Our mortgage business consists of providing our
homebuyers and third party homebuyers with loan origination
services, purchase financing and, to a lesser extent, mortgage
refinancing. We are an approved seller/servicer of Federal
National Mortgage Association, Federal Home Loan Mortgage
Corporation, Federal Housing Administration, Veterans
Association and U.S. Department of Housing and Urban Development
loans. We sell substantially all of our loans and the related
servicing rights to third-party investors. We conduct this
business through our subsidiary, Preferred Home Mortgage
Company. Preferred Home has its headquarters in Boca Raton,
Florida and has offices in each of our markets.

For the year ended December 31, 2003,
approximately 8% of our homebuyers paid in cash and 59% of our
non-cash homebuyers utilized the services of our mortgage
business. We believe we have an opportunity to expand this
business, particularly in our recently-acquired markets. We
originated approximately $1.2 billion aggregate principal
amount of mortgage loans for the year ended December 31,
2003. After excluding revenues and expenses from intercompany
transactions, our mortgage business generated pretax income of
$14.3 million for the year ended December 31, 2003.

8



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Through our title services business, we, as
agent, obtain competitively-priced title insurance for, and
provide closing services to, our homebuyers as well as third
party homebuyers. We conduct this business through our
subsidiary, Universal Land Title, Inc. and its subsidiaries.
Universal operates as a traditional title agency with its
headquarters in West Palm Beach, Florida and has 22 additional
offices.

Universal Land Title works with national
underwriters and lenders to facilitate client service and
coordinate closing at its offices. It is equipped to handle
e-commerce applications, e-mail closing packages, digital
document delivery and web-based closings. The principal sources
of revenues generated by our title insurance business are fees
paid to Universal Land Title for title insurance obtained for
our homebuyers and other third party residential purchasers.

For the year ended December 31, 2003,
approximately 82% of our homebuyers used Universal Land Title or
its affiliates for their title insurance agency and closing
services. We continue to expand our title services business to
markets not currently served by Universal Land Title. After
excluding revenues and expenses from intercompany transactions,
our title services business generated pre-tax income of
$1.2 million for the year ended December 31, 2003.
Third party homebuyers (or non-company customers) accounted for
89% of our title services business revenue for the year ended
December 31, 2003.

Alliance Insurance and Information Services, LLC,
owned by Universal Land Title, is a full service insurance
agency serving all of our markets. Alliance markets
homeowners, flood and auto insurance directly to
homebuyers and others in all of our markets and also markets
life insurance in Florida. Interested homebuyers obtain free
quotes and have the necessary paperwork delivered directly to
the closing table for added convenience. For the year ended
December 31, 2003, 19% of our homebuyers used Alliance for
their insurance needs.



| |                        
| | -----------------------
| | Governmental Regulation

We must comply with state and local laws and
regulations relating to, among other things, zoning, treatment
of waste, land development, required construction materials,
density requirements, building design and elevation of homes, in
connection with the construction of our homes. These include
laws requiring use of construction materials that reduce the
need for energy-consuming heating and cooling systems. In
addition, we and our subcontractors are subject to laws and
regulations relating to employee health and safety. These laws
and regulations are subject to frequent change and often
increase construction costs. In some cases, there are laws that
require that commitments to provide roads and other
infrastructure be in place prior to the commencement of new
construction. These laws and regulations are usually
administered by individual counties and municipalities and may
result in fees and assessments or building moratoriums. In
addition, certain new development projects are subject to
assessments for schools, parks, streets and highways and other
public improvements, the costs of which can be substantial.

The residential homebuilding industry also is
subject to a variety of local, state and federal statutes,
ordinances, rules and regulations concerning the protection of
health and the environment. Environmental laws and conditions
may result in delays, may cause us to incur substantial
compliance and other costs and can prohibit or severely restrict
homebuilding activity in environmentally sensitive regions or
areas. In recent years, several cities and counties in which we
have developments have submitted to voters slow
growth or no growth initiatives and other
ballot measures which could impact the affordability and
availability of homes and land within those localities.

In order to make it possible for purchasers of
some of our homes to obtain FHA-insured or VA-guaranteed
mortgages, we must construct those homes in compliance with
regulations promulgated by those agencies.

Our title insurance agency subsidiaries must
comply with applicable insurance laws and regulations. Our
mortgage financing subsidiaries must comply with applicable real
estate lending laws and regulations. The mortgage financing and
title insurance subsidiaries are licensed in the states in which
they do business and must comply with laws and regulations in
those states regarding mortgage financing and title insurance

9



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##### 



companies. These laws and regulations include
provisions regarding capitalization, operating procedures,
investments, forms of policies and premiums.




| |                              
| | -----------------------------
| | Competition and Market Forces

The development and sale of residential
properties is a highly competitive business. We compete in each
of our markets with numerous national, regional and local
builders on the basis of a number of interrelated factors
including location, price, reputation, amenities, design,
quality and financing. Builders of new homes compete for
homebuyers, as well as for desirable properties, raw materials
and reliable, skilled subcontractors. We also compete with
resales of existing homes, available rental housing and, to a
lesser extent, resales of condominiums. We believe we generally
compare favorably to other builders in the markets in which we
operate, due primarily to:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | our experience within our geographic markets;                                                        
|
| |  | the ability of our local managers to identify and
    quickly respond to local market conditions; and
|
| |  | our reputation for service and quality.                                                              

The housing industry is cyclical and is affected
by consumer confidence levels and prevailing economic
conditions, including interest rate levels. A variety of other
factors affect the housing industry and demand for new homes,
including the availability of labor and materials and increases
in the costs thereof, changes in costs associated with home
ownership such as increases in property taxes, energy costs,
changes in consumer preferences, demographic trends and the
availability of and changes in mortgage financing programs.

We compete with other mortgage lenders, including
national, regional and local mortgage bankers, savings and loan
associations and other financial institutions, in the
origination, sale and servicing of mortgage loans. Principal
competitive factors include interest rates and other features of
mortgage loan products available to the consumer. We compete
with other insurance agencies, including national, regional and
local insurance agencies, in the sale of title insurance,
homeowner insurance and related insurance services. Principal
competitive factors include cost and other features of insurance
products available to the consumer.

Seasonality

The homebuilding industry tends to be seasonal,
as generally there are more homes sold in the spring and summer
months when the weather is milder, although the rate of sales
contracts for new homes is highly dependent on the number of
active communities and the timing of new community openings. We
operate primarily in the Southwest and Southeast, where weather
conditions are more suitable to a year-round construction
process than in other parts of the country. Because new home
deliveries trail new home contracts by several months, we
typically have the greatest percentage of home deliveries in the
fall.

Backlog

As of December 31, 2003, we had 3,128 homes
in backlog representing $855.4 million in revenue, as
compared to 2,280 homes in backlog representing $636.9 million
in revenue as of December 31, 2002. Backlog represents home
purchase contracts that have been executed and for which earnest
money deposits have been received, but for which the sale has
not yet closed. We do not record home sales as revenues until
the closings occur. Historically, substantially all of the homes
in our backlog at any given point in time have been closed in
the following 12-month period. Although cancellations can
disrupt anticipated home closings, we believe that cancellations
have not had a material negative impact on our operations or
liquidity during the last several years. We attempt to reduce
the cancellations by reviewing each homebuyers ability to
obtain mortgage financing early in the sales process and by
closely monitoring the mortgage approval process.

Employees

At December 31, 2003, we employed 1,701
people. None of our employees are covered by collective
bargaining agreements. We believe our relations with our
employees are good.

10



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##### 



RISK FACTORS

Risks Related to Our Business



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Economic downturns in the geographic areas
    in which we operate could adversely affect demand and prices for
    new homes in those areas and could have an adverse effect on our
    revenues and earnings.

Although we operate in 14 major metropolitan
markets, our operations are concentrated in the southwestern and
southeastern United States. Adverse economic or other business
conditions in these regions or in the particular markets in
which we operate, all of which are outside of our control, could
have an adverse effect on our revenues and earnings.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to acquire suitable land
    at reasonable prices, which could increase our costs and reduce
    our earnings and profit margins.

We have experienced an increase in competition
for available land and developed homesites in some of our
markets as a result of the strength of the economy in many of
these markets over the past few years and the availability of
more capital to major homebuilders. Our ability to continue our
development activities over the long-term depends upon our
ability to locate and acquire suitable parcels of land or
developed homesites to support our homebuilding operations. As
competition for land increases, the cost of acquiring it may
rise, and the availability of suitable parcels at acceptable
prices may decline. If we are unable to acquire suitable land or
developed homesites at reasonable prices, it could limit our
ability to develop new projects or result in increased land
costs that we may not be able to pass through to our customers.
Consequently, it could reduce our earnings and profit margins.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Our significant level of debt could
    adversely affect our financial condition and prevent us from
    fulfilling our debt service obligations.

We currently have a significant amount of debt,
and our ability to meet our debt service obligations will depend
on our future performance. Numerous factors outside of our
control, including changes in economic or other business
conditions generally or in the markets or industry in which we
do business, may adversely affect our operating results and cash
flows, which in turn may affect our ability to meet our debt
service obligations. As of December 31, 2003, on a
consolidated basis, we had approximately $561.2 million
aggregate principal amount of debt outstanding (including our
revolving credit facility, our senior notes, our senior
subordinated notes, our warehouse line of credit and our other
credit facilities, but excluding consolidated land bank
obligations of $242.7 million). As of December 31,
2003, we would have had the ability to borrow an additional
$212.2 million under our revolving credit facility and
$26.8 million under our warehouse line of credit, subject
to our satisfying the relevant borrowing conditions in those
facilities. In addition, subject to restrictions in our
financing documents, we may incur additional debt.

If we are unable to meet our debt service
obligations, we may need to restructure or refinance our debt,
seek additional equity financing or sell assets. We may be
unable to restructure or refinance our debt, obtain additional
equity financing or sell assets on satisfactory terms or at all.



| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our debt instruments impose significant
    operating and financial restrictions which may limit our ability
    to refinance future operations or capital needs and pursue
    business opportunities, thereby limiting our
    growth.

The indentures governing our outstanding notes
and our revolving credit facility impose significant operating
and financial restrictions on us. These restrictions limit our
ability to, among other things:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | incur additional debt;                                                      
|
| |  | pay dividends or make other restricted payments;                            
|
| |  | create or permit certain liens, other than
    customary and ordinary liens;
|
| |  | sell assets other than in the ordinary course of
    our business;          

11



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| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | create or permit restrictions on the ability of
    our restricted subsidiaries to pay dividends or make other
    distributions to us;
|
| |  | engage in transactions with affiliates; and                                                                                            
|
| |  | consolidate or merge with or into other companies
    or sell all or substantially all of our assets.                                  

These restrictions could limit our ability to
finance our future operations or capital needs, make
acquisitions or pursue available business opportunities. In
addition, our revolving credit facility requires us to maintain
specified financial ratios and satisfy certain financial
covenants, the indentures governing our outstanding notes
require us to maintain a specified minimum consolidated net
worth, and our warehouse line of credit requires us to maintain
the collateral value of our borrowing base. We may be required
to take action to reduce our debt or to act in a manner contrary
to our business objectives to meet these ratios and satisfy
these covenants. A breach of any of the covenants in, or our
inability to maintain the required financial ratios under, our
revolving credit facility and warehouse line of credit would
prevent us from borrowing additional money under those
facilities and could result in a default under those facilities
and our other debt obligations. Our failure to maintain the
specified minimum consolidated net worth under the indentures
will require us to offer to purchase a portion of our
outstanding notes. If we fail to purchase these notes, it would
result in a default under the indentures and may result in a
default under other debt facilities.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be successful in our effort to
    identify, complete or integrate acquisitions, which could
    adversely affect our results of operations and future
    growth.

A principal component of our strategy is to
continue to grow profitably in a controlled manner, including,
where appropriate, by acquiring other property developers or
homebuilders. We may not be successful in implementing our
acquisition strategy, and growth may not continue at historical
levels or at all. The failure to identify or complete business
acquisitions, or successfully integrate the businesses we
acquire, could adversely affect our results of operations and
future growth. Specifically, any delays or difficulties in
converting our various information systems or implementing our
internal policies and procedures could increase costs and
otherwise affect our results of operations. Even if we overcome
these challenges and risks, we may not realize the expected
benefits of our acquisitions, if any.



| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional financing to fund
    our operations or for the expansion of our business, and if we
    are unable to obtain sufficient financing or such financing is
    obtained on adverse terms, we may not be able to operate or
    expand our business as planned, which could adversely affect our
    results of operations and future growth.

Our operations require significant amounts of
cash. If our business does not achieve the levels of
profitability or generate the amount of cash that we anticipate
or if we expand through acquisitions or organic growth faster
than anticipated, we may need to seek additional debt or equity
financing to operate and expand our business. If we are unable
to obtain sufficient financing to fund our operations or
expansion, it could adversely affect our results of operations
and future growth. We may be unable to obtain additional
financing on satisfactory terms or at all. If we raise
additional funds through the incurrence of debt, we will incur
increased debt service costs and may become subject to
additional restrictive financial and other covenants.



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the event that tax liabilities arise in
    connection with the restructuring, there can be no assurance
    that we will not be liable for such amounts.

Prior to a restructuring transaction which
occurred in October 2003, Technical Olympic, Inc., which we
refer to as Technical Olympic, was the parent of our
consolidated tax reporting group, and we were jointly and
severally liable for any U.S. federal income tax owed by
Technical Olympic or any other member of the consolidated group.
As part of the restructuring, Technical Olympic was merged into
TOI, LLC, a newly-formed limited liability company of which we
are the sole member, and we became the parent of our
consolidated tax reporting group. Also, as part of the
restructuring, Technical Olympic

12



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##### 



Services, Inc., which we refer to as TOSI, a
newly-formed corporation wholly-owned by Technical Olympic S.A.,
assumed all liabilities of Technical Olympic. We do not believe
that any material tax liabilities will arise by reason of the
restructuring. However, there can be no assurance that material
tax liabilities will not arise in connection with the
restructuring, that we will not be held liable for such amounts
or that we will be able to collect from TOSI any amounts for
which they may have assumed liability. The assessment of
material tax liabilities in connection with the restructuring
could have an adverse effect on our financial condition and
results of operations.




| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Technical Olympic S.A., our majority
    stockholder, can cause us to take certain actions or preclude us
    from taking actions without the approval of the other
    stockholders and may have interests that could conflict with
    your interests.

Technical Olympic S.A. currently owns 73.95%
of the voting power of our common stock. As a result, Technical
Olympic S.A. has the ability to control the outcome of
virtually all corporate actions requiring stockholder approval,
including the election of a majority of our directors, the
approval of any merger and other significant corporate actions.
Technical Olympic S.A. may authorize actions or have
interests that could conflict with those of our other
shareholders.

Risks Related to Our Industry



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in economic or other business
    conditions could adversely affect demand and prices for new
    homes, which could decrease our revenues.

The homebuilding industry historically has been
cyclical and is affected significantly by adverse changes in
general and local economic conditions, such as:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | employment levels;                                                                                     
|
| |  | population growth;                                                                                     
|
| |  | consumer confidence and stability of income
    levels;                                                
|
| |  | availability of financing for land and homesite
    acquisitions, construction and permanent mortgages;
|
| |  | interest rates;                                                                                        
|
| |  | inventory levels of both new and existing homes;                                                       
|
| |  | supply of rental properties; and                                                                       
|
| |  | conditions in the housing resale market.                                                               

Adverse changes in one or more of these
conditions, all of which are outside of our control, could
reduce demand and/or prices for new homes in some or all of the
markets in which we operate. A decline in demand or the prices
we can obtain for our homes could decrease our revenues.



| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to substantial risks with
    respect to the land and home inventories we maintain, and
    fluctuations in market conditions may affect our ability to sell
    our land and home inventories at expected prices, if at all,
    which would reduce our profit margins.

As a homebuilder, we must constantly locate and
acquire new tracts of land for development and developed
homesites to support our homebuilding operations. There is a lag
between the time we acquire land for development or developed
homesites and the time that we can bring the communities to
market and sell homes. Lag time varies on a project-by-project
basis; however, historically, we have experienced a lag time of
approximately 9 to 12 months. As a result, we face the risk
that demand for housing may decline during this period and that
we will not be able to dispose of developed properties or
undeveloped land or homesites acquired for development at
expected prices or within anticipated time frames or at all. The
market value of home inventories, undeveloped land and developed
homesites can fluctuate significantly because of changing market
conditions. In addition, inventory carrying costs (including

13



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##### 



interest on funds used to acquire land or build
homes) can be significant and can adversely affect our
performance. Because of these factors, we may be forced to sell
homes or other property at a loss or for prices that generate
lower profit margins than we anticipate. We may also be required
to make material write-downs of the book value of our real
estate assets in accordance with generally accepted accounting
principles if values decline.




| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Supply risks and shortages relating to
    labor and materials can harm our business by delaying
    construction and increasing costs.

The homebuilding industry from time to time has
experienced significant difficulties with respect to:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | shortages of qualified trades people and other
    labor;                                                                                                      
|
| |  | inadequately capitalized local subcontractors;                                                                                                                 
|
| |  | shortages of materials; and                                                                                                                                    
|
| |  | volatile increases in the cost of certain
    materials, including lumber, framing and cement, which are
    significant components of home construction costs.

These difficulties can, and often do, cause
unexpected short-term increases in construction costs and cause
construction delays. In addition, to the extent our
subcontractors incur increased costs associated with recent
increases in insurance premiums and compliance with state and
local regulations, these costs are passed on to us as. We are
generally unable to pass on any unexpected increases in
construction costs to those customers who have already entered
into sales contracts, as those contracts generally fix the price
of the house at the time the contract is signed, which may be up
to one year in advance of the delivery of the home. Furthermore,
sustained increases in construction costs may, over time, erode
our profit margins. We have historically been able to offset
sustained increases in the costs of materials with increases in
the prices of our homes and through operating efficiencies.
However, in the future, pricing competition may restrict our
ability to pass on any additional costs, and we may not be able
to achieve sufficient operating efficiencies to maintain our
current profit margins.



| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Future increases in interest rates or a
    decrease in the availability of government-sponsored mortgage
    financing could prevent potential customers from purchasing our
    homes, which would adversely affect our revenues and
    profitability.

Almost all of our customers finance their
purchases through mortgage financing obtained from us or other
sources. Increases in interest rates or decreases in the
availability of Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, Federal Housing Administration
or Veterans Association mortgage financing could cause a
decline in the market for new homes as potential homebuyers may
not be able to obtain affordable financing. Increased interest
rates can also limit our ability to realize our backlog because
our sales contracts typically provide our customers with a
financing contingency. Financing contingencies allow customers
to cancel their home purchase contracts in the event they cannot
arrange for financing at interest rates that were prevailing
when they signed their contracts. In particular, because the
availability of mortgage financing is an important factor in
marketing many of our homes, any limitations or restrictions on
the availability of those types of financing could reduce our
home sales and the lending volume at our mortgage subsidiary.
Even if our potential customers do not need financing, changes
in interest rates and mortgage availability could make it harder
for them to sell their existing homes to potential buyers who
need financing. Interest rates currently are at one of their
lowest levels in decades, and any future increases in interest
rates could adversely affect our revenues and profitability.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The competitive conditions in the
    homebuilding industry could increase our costs, reduce our
    revenues, and otherwise adversely affect our results of
    operations.

The homebuilding industry is highly competitive
and fragmented. We compete in each of our markets with numerous
national, regional and local builders. Some of these builders
have greater financial

14



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##### 



resources, more experience, more established
market positions and better opportunities for land and homesite
acquisitions than we do and have lower costs of capital, labor
and material than us. Builders of new homes compete for
homebuyers, as well as for desirable properties, raw materials
and skilled subcontractors. The competitive conditions in the
homebuilding industry could, among other things:




| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | increase our costs and reduce our revenues;                                                                 
|
| |  | make it difficult for us to acquire suitable land
    or homesites at acceptable prices;                    
|
| |  | require us to increase selling commissions and
    other incentives;                                        
|
| |  | result in delays in construction if we experience
    a delay in procuring materials or hiring laborers; and
|
| |  | result in lower sales volumes.                                                                              

We also compete with resales of existing homes,
available rental housing and, to a lesser extent, condominium
resales. An oversupply of attractively priced resale or rental
homes in the markets in which we operate could adversely affect
our ability to sell homes profitably.

Our financial services operations are also
subject to competition from third-party providers, many of which
are substantially larger, may have a lower cost of funds or
overhead than we do, and may focus exclusively on providing such
services.



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to product liability and
    warranty claims arising in the ordinary course of business that
    could adversely affect our results of operations.

As a homebuilder, we are subject in the ordinary
course of our business to product liability and home warranty
claims. We provide our homebuyers with a one-year or two-year
limited warranty covering workmanship and materials and an
eight-year or ten-year limited warranty covering major
structural defects. Claims arising under these warranties and
general product liability claims are common in the homebuilding
industry and can be costly. Although we maintain product
liability insurance, the coverage offered by, and availability
of, product liability insurance for construction defects is
currently limited and, where coverage is available, it may be
costly. We currently have a homebuilder protective policy which
covers warranty claims for structure and design defects related
to homes sold by us during the policy period, subject to a
significant self-insured retention per occurrence. However, our
product liability insurance and homebuilder protective policies
contain limitations with respect to coverage, and there can be
no assurance that these insurance rights will be adequate to
cover all product liability and warranty claims for which we may
be liable or that coverage will not be further restricted and
become more costly. In addition, although we generally seek to
require our subcontractors and design professionals to indemnify
us for liabilities arising from their work, we may be unable to
enforce any such contractual indemnities. Uninsured and
unindemnified product liability and warranty claims, as well as
the cost of product liability insurance and our homebuilder
protective policy, could adversely affect our results of
operations.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to mold litigation and
    claims arising in the ordinary course of business that could
    adversely affect our results of operations.

Recently, lawsuits have been filed against
homebuilders and insurers asserting claims of property damages
and personal injury caused by the presence of mold in
residential dwellings. Some of these lawsuits have resulted in
substantial monetary judgments or settlements. It is possible
that insurance carriers may exclude coverage for claims arising
from the presence of mold. Uninsured mold liability and claims
could adversely affect our results of operations.



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | States, cities and counties in which we
    operate have, or may adopt, slow or no growth initiatives which
    would reduce our ability to build in these areas and could
    adversely affect our future revenues.

Several states, cities and counties in which we
operate have approved, and others in which we operate may
approve, various slow growth or no
growth initiatives and other ballot measures that could

15



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##### 



negatively impact the availability of land and
building opportunities within those localities. Approval of slow
or no growth measures would reduce our ability to build and sell
homes in the affected markets and create additional costs and
administration requirements, which in turn could have an adverse
effect on our future revenues.




| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is subject to governmental
    regulations that may delay, increase the cost of, prohibit or
    severely restrict our development and homebuilding
    projects.

We are subject to extensive and complex laws and
regulations that affect the land development and homebuilding
process, including laws and regulations related to zoning,
permitted land uses, levels of density, building design,
elevation of properties, water and waste disposal and use of
open spaces. In addition, we and our subcontractors are subject
to laws and regulations relating to workers health and safety.
We also are subject to a variety of local, state and federal
laws and regulations concerning the protection of health and the
environment. In some of the markets in which we operate, we are
required to pay environmental impact fees, use energy saving
construction materials and give commitments to provide certain
infrastructure such as roads and sewage systems. We must also
obtain permits and approvals from local authorities to complete
residential development or home construction. The laws and
regulations under which we and our subcontractors operate, and
our and their obligations to comply with them, may result in
delays in construction and development, cause us to incur
substantial compliance and other increased costs, and prohibit
or severely restrict development and homebuilding activity in
certain areas in which we operate.

Our financial services operations are subject to
numerous federal, state and local laws and regulations. Failure
to comply with these requirements can lead to administrative
enforcement actions, the loss of required licenses and claims
for monetary damages.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Our business revenues and profitability may
    be adversely affected by natural disasters or weather
    conditions.

Homebuilders are particularly subject to natural
disasters and severe weather conditions as they can delay our
ability to timely complete homes, damage the partially complete
or other unsold homes that are in our inventory and/or
negatively impact the demand for homes. Our operations are
located in many areas that are especially subject to natural
disasters. To the extent that hurricanes, severe storms, floods,
tornadoes or other natural disasters or similar weather events
occur, our business may be adversely affected. To the extent our
insurance is not adequate to cover business interruption or
losses resulting from these events, our revenues and
profitability may be adversely affected.

Item 2.Properties

We lease our executive offices located at
4000 Hollywood Blvd., Suite 500 N, Hollywood, Florida
33021. We own a 19,000 square foot facility in Sugar Land,
Texas, which houses our Houston homebuilding operations and a
design center, which allows a prospective homebuyer to view
samples of some of the products and features we offer in our
homes in Houston. We lease substantially all of the office space
required for our homebuilding and financial services operations
and our corporate offices and believe that our existing
facilities are adequate for our current and planned levels of
operations. We do not believe that any single leased property is
material to our current or planned operations.

Item 3.Legal
Proceedings

We are involved in various claims and legal
actions arising in the ordinary course of business. We do not
believe that the ultimate resolution of these matters will have
a material adverse effect on our financial condition or results
of operations.

16



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##### 



Item 4.Submission
of Matters to a Vote of Security Holders

None.

PART II



|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

Our common stock began trading on the Nasdaq
National Market on March 12, 1998 under the symbol
NHCH. Following the merger on June 25, 2002,
our common stock began trading under the symbol
TOUS. The table below sets forth the high and low
sales price for our common stock as reported by the Nasdaq
National Market for the periods indicated:

|                                        |                |      |   |       |  |  |   |       | 
|--------------------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                                        |                | High |   | Low  
|                                        |                |      |   |      
|Fiscal Year Ended December 31,
    2002 |                |      |   |       |  |  |   |      
|                                        | First Quarter  |      | $ | 17.85 |  |  | $ | 13.09 | 
|                                        | Second Quarter |      | $ | 18.50 |  |  | $ | 13.00 | 
|                                        | Third Quarter  |      | $ | 16.99 |  |  | $ | 13.00 | 
|                                        | Fourth Quarter |      | $ | 17.00 |  |  | $ | 13.10 | 
|Fiscal Year Ended December 31,
    2003 |                |      |   |       |  |  |   |      
|                                        | First Quarter  |      | $ | 17.67 |  |  | $ | 13.56 | 
|                                        | Second Quarter |      | $ | 27.27 |  |  | $ | 16.70 | 
|                                        | Third Quarter  |      | $ | 28.56 |  |  | $ | 23.20 | 
|                                        | Fourth Quarter |      | $ | 34.82 |  |  | $ | 25.26 | 

As of February 6, 2004, there were
approximately 29 record holders of our common stock.

We did not declare or pay any cash dividends on
our common stock during the twelve months ended
December 31, 2002 or December 31, 2003. The credit
agreement relating to our revolving credit facility and the
indentures governing our senior notes and senior subordinated
notes generally contain covenants that limit the amount of
dividends or distributions we can pay on our common stock and
the amount of common stock we can repurchase. Currently, under
the terms of our revolving credit facility, we may not pay cash
dividends in excess of 3% of our consolidated net income.

We currently intend to adopt a formal dividend
policy permitting our board of directors to declare, from time
to time and upon unanimous consent, cash dividends, subject to
the restrictions described above and applicable law.

17



---



##### 



The following table gives information about our
common stock that may be issued upon the exercise of options,
warrants, and rights under all existing equity compensation
plans as of December 31, 2003.

EQUITY COMPENSATION PLAN INFORMATION

|                                                                  |       |                         |           |                      |  |                         |       |       |  |  |         |         | 
|----------------------------------------------------------------- | ----- | ----------------------- | --------- | -------------------- |  | ----------------------- | ----- | ----- |  |  | ------- | ------- | 
|                                                                  |       |                         |           |                      |  | Number of Securities   
|                                                                  |       |                         |           |                      |  | Remaining Available for
|                                                                  |       | Number of Securities to |           |                      |  | Future Issuance Under  
|                                                                  |       | Be Issued upon          |           | Weighted-Average     |  | Equity Compensation    
|                                                                  |       | Exercise of Outstanding |           | Exercise Price of    |  | Plans (Excluding       
|                                                                  |       | Options, Warrants       |           | Outstanding Options, |  | Securities Reflected   
|Plan Category                                                     |       | and Rights              |           | Warrants and Rights  |  | in Column(a))          
|                                                                  |       |                         |           |                      |  |                        
|                                                                  |       | (a)                     |           | (b)                  |  | (a)                    
|Equity compensation plans approved by security
    holders        |       |                         | 3,436,491 |                      |  | $                       | 19.50 |       |  |  | 563,509 |        
|Equity compensation plans(a) not approved by
    security holders |       |                         | *         |                      |  |                         | *     |       |  |  | *       |        
|                                                                  | Total |                         |           | 3,436,491            |  |                         | $     | 19.50 |  |  |         | 563,509 | 



|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

|                                                          |  |                                               |         |            |  |            |         |            |  |      |           |  |  |   |           |  |  |   |           | 
|--------------------------------------------------------- |  | --------------------------------------------- | ------- | ---------- |  | ---------- | ------- | ---------- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                                          |  |                                              
|                                                          |  | Year Ended December 31,                      
|                                                          |  |                                              
|                                                          |  | 1999(1)                                       |         | 2000(2)(3) |  | 2001(2)(3) |         | 2002(2)(3) |  | 2003
|                                                          |  |                                               |         |            |  |            |         |            |  |     
|                                                          |  |                                              
|                                                          |  | (Dollars in thousands, except per share data)
|Statement of Income Data:                                 |  |                                               |         |            |  |            |         |            |  |      |           |  |  |   |           |  |  |   |           | 
|Total revenues                                            |  | $                                             | 420,748 |            |  | $          | 549,228 |            |  | $    | 1,422,049 |  |  | $ | 1,414,287 |  |  | $ | 1,687,825 | 
|Homebuilding revenues                                     |  | $                                             | 420,748 |            |  | $          | 546,666 |            |  | $    | 1,392,912 |  |  | $ | 1,377,709 |  |  | $ | 1,642,574 | 
|Homebuilding gross profit                                 |  | $                                             | 75,156  |            |  | $          | 105,727 |            |  | $    | 284,626   |  |  | $ | 276,146   |  |  | $ | 323,214   | 
|Homebuilding pretax income                                |  | $                                             | 24,547  |            |  | $          | 36,519  |            |  | $    | 128,534   |  |  | $ | 91,209    |  |  | $ | 114,711   | 
|Financial services pretax income                          |  | $                                             |        |            |  | $          | 927     |            |  | $    | 11,449    |  |  | $ | 15,732    |  |  | $ | 15,555    | 
|Income from continuing operations before income
    taxes |  | $                                             | 24,547  |            |  | $          | 37,446  |            |  | $    | 139,983   |  |  | $ | 106,941   |  |  | $ | 130,266   | 
|Income from continuing operations                         |  | $                                             | 15,826  |            |  | $          | 23,774  |            |  | $    | 87,765    |  |  | $ | 67,041    |  |  | $ | 82,719    | 
|Share Data:                                               |  |                                               |         |            |  |            |         |            |  |      |           |  |  |   |           |  |  |   |           | 
|Income from continuing operations per
    share  basic   |  | $                                             | 1.38    |            |  | $          | 1.79    |            |  | $    | 3.15      |  |  | $ | 2.40      |  |  | $ | 2.94      | 
|Income from continuing operations per
    share  diluted |  | $                                             | 1.38    |            |  | $          | 1.79    |            |  | $    | 3.15      |  |  | $ | 2.40      |  |  | $ | 2.92      | 
|Cash dividends per share(4)                               |  | $                                             |        |            |  | $          |        |            |  | $    | 0.22      |  |  | $ |          |  |  | $ |          | 
|Statement of Financial Condition
    Data:                |  |                                               |         |            |  |            |         |            |  |      |           |  |  |   |           |  |  |   |           | 
|Inventory                                                 |  | $                                             | 166,676 |            |  | $          | 613,095 |            |  | $    | 645,986   |  |  | $ | 753,872   |  |  | $ | 1,183,423 | 
|Total assets                                              |  | $                                             | 328,892 |            |  | $          | 868,553 |            |  | $    | 999,170   |  |  | $ | 1,034,888 |  |  | $ | 1,605,029 | 
|Homebuilding borrowings(5)                                |  | $                                             | 105,876 |            |  | $          | 337,649 |            |  | $    | 308,697   |  |  | $ | 413,110   |  |  | $ | 497,919   | 
|Total borrowings(5)                                       |  | $                                             | 105,876 |            |  | $          | 346,720 |            |  | $    | 347,386   |  |  | $ | 461,419   |  |  | $ | 561,162   | 
|Stockholders equity                                      |  | $                                             | 109,618 |            |  | $          | 355,059 |            |  | $    | 413,370   |  |  | $ | 405,145   |  |  | $ | 536,410   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Technical Olympic acquired 80% of our common
    stock on December 15, 1999. Consequently, our audited
    financial statements for 1999 present the results of operations
    in two columns on a predecessor and successor basis. The
    predecessor column includes the results of operations from
    January 1, 1999 to December 15, 1999. The successor
    column includes the results of operations from

18



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##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | December 16, 1999 to December 31, 1999.
    In the above table, the financial data reflects our operations
    on a full-year basis, which represents the total of the
    predecessor and successor columns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | On June 25, 2002, we completed the merger
    with Engle. As both entities were under the common control of
    Technical Olympic, the merger was accounted for as a
    reorganization of entities under common control. In accordance
    with Statement of Financial Accounting Standards
    (SFAS) No. 141, Business Combinations, we
    recognized the acquired assets and liabilities of Engle at their
    historical carrying amounts. As both entities became under
    common control of Technical Olympic on November 22, 2000,
    our financial statements and other operating data have been
    restated to include the operations of Engle from
    November 22, 2000. See note 1 to our consolidated
    financial statements included elsewhere in this Form 10-K.
|   
|(3) | On April 15, 2002, we completed the sale of
    Westbrooke Acquisition Corp., formerly one of our Florida
    homebuilding subsidiaries. In accordance with SFAS No. 144,
    Accounting for the Impairment or Disposal of Long-Lived
    Assets, the results of Westbrookes operations have
    been classified as discontinued operations, and prior periods
    have been restated. See note 8 to our consolidated financial
    statements included elsewhere in this Form 10-K.                                                                                                                                                                                                                                                                                                 
|   
|(4) | Cash dividends per share have been restated to
    reflect the total shares outstanding as a result of the merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | Homebuilding borrowings and total borrowings do
    not include the consolidated land bank obligations of
    $30.0 million, $16.3 million and $242.7 million as of
    December 31, 2001, 2002, and 2003, respectively. For
    information concerning the consolidated land bank obligations,
    see Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Critical
    Accounting Policies.                                                                                                                                                                                                                                                                                                                                                 

19



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##### 





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with Selected Financial Data and the
consolidated financial statements and related notes included
elsewhere in this report.

Executive Summary

We generate our revenues from our homebuilding
operations (Homebuilding) and financial services
operations (Financial Services). In accordance with
Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information, we have
determined that Homebuilding and Financial Services comprise our
operating segments. Through our Homebuilding operations we
design, build and market high-quality detached single-family
residences, town homes and condominiums in 14 metropolitan
markets located in four major geographic regions: Florida, the
Mid-Atlantic, Texas and the West. At December 31, 2003, we
were actively selling homes in 217 communities, by comparison at
December 31, 2002, we were actively selling homes in 159
communities, and at December 31, 2001, we were actively
selling homes in 146 communities.

Our Homebuilding operations generate the majority
of their revenue from the sale of homes to homebuyers and to a
lesser degree from the sale of land and homesites to other
homebuilders. Our homes are designed to appeal to a diverse
group of homebuyers, such as first-time homebuyers,
move-up homebuyers, homebuyers who are relocating to
a new city or state, buyers of second or vacation homes,
active-adult homebuyers, and homebuyers with grown children who
want a smaller home (empty-nesters). Our homes are
generally sold in advance of their construction. Once a sales
contract has been signed, we classify the transaction as a
new sales contract and include the home in
backlog. Such sales contracts are usually subject to
certain contingencies such as the buyers ability to
qualify for financing. Revenue from the sale of homes and the
sale of land is recognized at closing when title passes to the
buyer. At this point a home is considered to be
delivered and is removed from backlog. The principal
expenses of our Homebuilding operations are (i) cost of
sales and (ii) selling, general and administrative
(SG&A) expenses. Homebuilding cost of sales
consists primarily of the cost of home construction, the
acquisition cost of land and the cost of land development.
SG&A expenses for our Homebuilding operations include
administrative costs, advertising expenses, on-site marketing
expenses, commission costs, and closing costs.

As part of our objective to provide homebuyers a
seamless home purchasing experience, we have developed, and are
expanding, our complementary financial services business. As
part of this business, we provide mortgage financing and closing
services and offer title, homeowners and other insurance
products. Our mortgage financing operation derives most of its
revenues from buyers of our homes, although it also offers its
services to existing homeowners refinancing their mortgages. By
comparison, our closing services and our insurance agency
operations are used by our homebuyers as well as a broad range
of other clients purchasing or refinancing residential or
commercial real estate. Our mortgage financing operations
revenues consist primarily of origination and premium fee
income, interest income, and the gain on the sale of the
mortgages. Our title operations revenues consist primarily
of title insurance and closing services. All of our underwriting
risk associated with title and homeowners insurance
policies is transferred to third-party insurers. The principal
expenses of our Financial Services operations are SG&A
expenses, which consist primarily of compensation and interest
expense on our warehouse line of credit.

2003 was a transition year for us. Upon
consummation of our merger in June 2002, we began the process of
identifying the steps to become an efficient, large-scale
homebuilder. During 2003 we executed on many of the steps
identified to achieve this objective. We began 2003 with 159
active communities and 2,280 homes in backlog, representing
revenues of $636.9 million. At the close of 2003, we had
217 active communities and 3,128 homes in backlog, representing
$855.4 million in revenues. The majority of this increase
can be attributed to our Florida and West regions where we have
made a significant investment in building our homesite supply
and opening up new communities. Our Texas region continues to be

20



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##### 



impacted by the slower demand for new housing.
However, we have seen this offset by increased activity in
several other markets.


As we add new communities, we are actively
seeking to expand our market share by increasing the number of
homes we deliver with lower average sales prices. As part of
this strategy, we have completed acquisitions of homebuilders in
the Florida, Mid-Atlantic and West regions that specialize in
homes with an average sales price lower than our current
average. In addition, we have sought to organically expand this
product diversification. Consequently, our average home sales
price decreased during 2003.

During 2003 we also spent significant time and
costs restructuring the way we operate. We began 2003 with our
homebuilding operations relying on multiple information systems.
We have converted all our homebuilding divisions to one
information system. We have also invested in building a
corporate center to efficiently manage our critical business
functions, such as operations, finance, legal and corporate
governance. We believe that these steps were essential to
support our anticipated growth and to allow us to operate
efficiently.

We expect the first half of 2004 to continue to
be impacted by costs associated with building our foundation for
growth and our considerable ramp-up of new communities. As a
result, we expect the second half of 2004 to reflect the
financial results of the significant investments we have made in
our business.

Critical Accounting Policies

In the preparation of our consolidated financial
statements, we apply accounting principles generally accepted in
the United States. The application of generally accepted
accounting principles may require management to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying results. Listed below are
those policies that we believe are critical and require the use
of complex judgment in their application.



| |                                            
| | -------------------------------------------
| | Homebuilding Revenues and Cost of
    Sales

Revenue from the sale of homes and the sale of
land and homesites is recognized at closing when title passes to
the buyer and all of the following conditions are met:
(1) a sale is consummated; (2) a significant down
payment is received; (3) the earnings process is complete;
and (4) the collection of any remaining receivables is
reasonably assured. As a result, our revenue recognition process
does not involve significant judgments or estimates. However, we
do rely on certain estimates to determine the related
construction and land costs and resulting gross profit
associated with revenues recognized. Our construction and land
costs are comprised of direct and allocated costs, including
interest, indirect construction costs and estimated costs for
future warranties and indemnities. Our estimates are based on
historical results, adjusted for current factors. Land, land
improvements and other common costs are generally allocated on a
relative fair value basis to units within a parcel or community.
Land and land development costs generally include related
interest and property taxes incurred until construction is
substantially completed.



| |                                             
| | --------------------------------------------
| | Financial Services Revenues and
    Expenses

Our Financial Services operations generate their
revenues from their mortgage financing and title operations. Our
mortgage financing operations revenues consist primarily
of origination and premium fee income, interest income and the
gain on the sale of the mortgages. Revenue from our mortgage
financing operations is generally recognized when the mortgage
loans and related servicing rights are sold to third-party
investors. Substantially all of our mortgages are sold to
private investors within 30 days of closing. Title
operations revenues consist primarily of title insurance agency
and closing services, which are recognized as homes are closed.
As a result, our revenue recognition process does not involve
significant judgments or estimates.

21



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##### 





| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

Housing projects and land/homesites under
development are stated at the lower of cost or net realizable
value. Property and equipment is carried at cost less
accumulated depreciation. We assess these assets for impairment
in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 requires that long-lived assets
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets is measured by
comparing the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. These
evaluations for impairment are significantly impacted by
estimates of future revenues, costs and expenses and other
factors involving some amount of uncertainty. If an asset is
considered to be impaired, the impairment loss to be recognized
is measured by the amount by which the carrying amount of the
asset exceeds the fair value of the asset.



| |         
| | --------
| | Goodwill

Effective January 1, 2002, we adopted the
provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. Upon the adoption of SFAS No. 142,
goodwill is no longer subject to amortization. Goodwill is
subject to at least an annual assessment for impairment by
applying a fair value-based test. If the carrying amount exceeds
the fair value, goodwill is considered to be impaired. We
continually evaluate whether events and circumstances have
occurred that indicate the remaining balance of goodwill may not
be recoverable. In evaluating impairment, we estimate the sum of
the expected discounted future cash flows derived from such
goodwill. Such evaluations for impairment are significantly
impacted by estimates of future revenues, costs and expenses and
other factors involving some amount of uncertainty. If the
goodwill is considered to be impaired, the impairment loss to be
recognized is measured by the amount by which the carrying
amount of the goodwill exceeds the fair value of the expected
future cash flows.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Homesite Option Contracts and Consolidation
    of Variable Interest Entities

We enter into option contracts with land sellers
and third-party financial entities as a method of acquiring
developed homesites. From time to time to leverage our ability
to acquire and finance the development of these homesites, we
transfer our option right to third parties. Option contracts
generally require the payment of a non-refundable cash deposit
or the issuance of a letter of credit for the right to acquire
homesites over a specified period of time at predetermined
prices. Typically, our deposits or letters of credit are less
than 20% of the underlying purchase price. We generally have the
right at our discretion to terminate our obligations under these
option agreements by forfeiting our cash deposit or repaying
amounts drawn under the letter of credit with no further
financial responsibility. We do not have legal title to these
assets. Additionally, we do not have an investment in the
third-party acquirer and do not guarantee their liabilities.
However, if certain conditions are met, including the deposit
and/or letters of credit exceeding certain significance levels
as compared to the remaining homesites under the option
contract, we will include the homesites in inventory with a
corresponding liability in consolidated land bank obligations.
At December 31, 2003, we owned approximately 12,400
homesites, or 26% of our homesite supply, and had option
contracts on 35,800 homesites, or 74% of our homesite supply.

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
(Interpretation) No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 is
applied immediately to variable interest entities
(VIEs) created after January 31, 2003.
Interpretation No. 46 addresses consolidation by business
enterprises of VIEs which have one or both of the following
characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities
without additional subordinated support from other parties,
which is provided through other interests that will absorb some
or all of the expected losses of the entity; or (2) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
(a) the direct or indirect ability to make decisions about
the entitys activities through voting rights or similar
rights; or (b) the obligation to absorb the expected losses
of the entity if they occur, which makes it possible for the

22



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##### 



entity to finance its activities; or (c) the
right to receive the expected residual returns of the entity if
they occur, which is the compensation for the risk of absorbing
the expected losses.


Generally, in the homebuilding industry,
homebuilders will enter into option contracts for the purchase
of land or homesites with entities that may qualify as VIEs. We
believe that Interpretation No. 46 will have to be
evaluated as it relates to these and similar types of
arrangements. In applying Interpretation No. 46 to our
homesite option contracts, estimates regarding cash flows and
other assumptions have to be made. We believe that our critical
assumptions are reasonable based on historical evidence and
industry practice. Based on our analysis of contracts entered
into after January 31, 2003, we determined that we are the
primary beneficiary of certain of these homesite option
contracts. Consequently, Interpretation No. 46 requires us
to consolidate the assets (homesites) at their fair value,
although (1) we have no legal title to the assets,
(2) our maximum exposure to loss is limited to the deposits
or letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us. The effect of the consolidation was to increase
inventory by $123.7 million, excluding deposits of
$9.7 million which had been previously recorded, with a
corresponding increase to consolidated land bank obligations in
the accompanying consolidated statement of financial condition
as of December 31, 2003.



| |                  
| | -----------------
| | Warranty Reserves

In the normal course of business we will incur
warranty related costs associated with homes which have been
delivered to the homebuyers. Warranty reserves are established
by charging cost of sales and recognizing a liability for the
estimated warranty costs for each home that is delivered. We
monitor this reserve on a monthly basis by evaluating the
historical warranty experience in each market in which we
operate and the reserve is adjusted as appropriate for current
quantitative and qualitative factors. Actual future warranty
costs could differ from our currently estimated amounts.



| |                                      
| | -------------------------------------
| | Insurance and Litigation
    Reserves

Insurance and litigation reserves have been
established for estimated amounts based on an analysis of past
history of claims. We have, and require the majority of our
subcontractors to have, general liability insurance that
protects us against a portion of our risk of loss from
construction-related claims. We reserve for costs to cover our
self-insured retentions and deductible amounts under these
policies and for any costs in excess of our coverage limits.
Because of the high degree of judgment required in determining
these estimated reserve amounts, actual future claim costs could
differ from our currently estimated amounts.

Recent Acquisitions

On February 28, 2003, we acquired the net
assets of The James Construction Company, a homebuilder
operating in the greater Denver, Colorado area, for
approximately $22.0 million in cash. In addition, we are
obligated to pay an additional $1.4 million to the sellers
over a two-year period.

On February 6, 2003, we acquired the net
assets of Trophy Homes, Inc., a homebuilder operating in Las
Vegas, Nevada, and certain homesites for approximately
$36.2 million in cash. In addition, if certain targets are
met regarding home deliveries during 2003 and 2004, we will be
obligated to pay up to an additional $2.5 million to the
sellers over a two-year period. Of this amount, we paid
$1.6 million of additional consideration during the year
ended December 31, 2003.

23



---



##### 



Results of Operations



| |                                             
| | --------------------------------------------
| | Selected Financial and Other
    Information

The following table includes selected
consolidated statement of income and other data (dollars in
thousands, except per share data):

|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |           | 
|------------------------------------------------------------------ | ---------- | ----------------------- | ---------- | --------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                                                                   |            |                        
|                                                                   |            | Year Ended December 31,
|                                                                   |            |                        
|                                                                   |            | 2001                    |            | 2002      |  | 2003
|                                                                   |            |                         |            |           |  |     
|Homebuilding:                                                      |            |                         |            |           |  |      |            |           |  |   |            |          
|Revenues:                                                          |            |                         |            |           |  |      |            |           |  |   |            |          
|                                                                   | Home sales |                         | $          | 1,374,551 |  |      | $          | 1,350,330 |  |   | $          | 1,604,401 | 
|                                                                   | Land sales |                         |            | 18,361    |  |      |            | 27,379    |  |   |            | 38,173    | 
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|                                                                   |            |                         | 1,392,912  |           |  |      | 1,377,709  |           |  |   | 1,642,574  |          
|Cost of sales:                                                     |            |                         |            |           |  |      |            |           |  |   |            |          
|                                                                   | Home sales |                         |            | 1,091,626 |  |      |            | 1,077,133 |  |   |            | 1,291,816 | 
|                                                                   | Land sales |                         |            | 16,660    |  |      |            | 24,430    |  |   |            | 27,544    | 
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|                                                                   |            |                         | 1,108,286  |           |  |      | 1,101563   |           |  |   | 1,319,360  |          
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Gross profit                                                       |            |                         | 284,626    |           |  |      | 276,146    |           |  |   | 323,214    |          
|Selling, general & administrative expenses                         |            |                         | 148,541    |           |  |      | 156,180    |           |  |   | 200,796    |          
|Variable stock-based compensation expense                          |            |                         |           |           |  |      |           |           |  |   | 1,221      |          
|Depreciation and amortization expense                              |            |                         | 8,849      |           |  |      | 5,952      |           |  |   | 9,262      |          
|Severance and merger related expenses                              |            |                         | 2,643      |           |  |      | 19,963     |           |  |   | 775        |          
|Loss on early retirement of debt                                   |            |                         |           |           |  |      | 5,411      |           |  |   |           |          
|Other income, net                                                  |            |                         | (3,941     | )         |  |      | (2,569     | )         |  |   | (3,551     | )        
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Homebuilding pretax income                                         |            |                         | 128,534    |           |  |      | 91,209     |           |  |   | 114,711    |          
|Financial Services:                                                |            |                         |            |           |  |      |            |           |  |   |            |          
|                                                                   | Revenues   |                         |            | 29,137    |  |      |            | 36,578    |  |   |            | 45,251    | 
|                                                                   | Expenses   |                         |            | 17,688    |  |      |            | 20,846    |  |   |            | 29,696    | 
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Financial Services pretax income                                   |            |                         | 11,449     |           |  |      | 15,732     |           |  |   | 15,555     |          
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Income from continuing operations before income
    taxes          |            |                         | 139,983    |           |  |      | 106,941    |           |  |   | 130,266    |          
|Income tax expense                                                 |            |                         | 52,218     |           |  |      | 39,900     |           |  |   | 47,547     |          
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Income from continuing operations                                  |            | $                       | 87,765     |           |  | $    | 67,041     |           |  | $ | 82,719     |          
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Earnings per common share from continuing
    operations  diluted |            | $                       | 3.15       |           |  | $    | 2.40       |           |  | $ | 2.92       |          
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Weighed average number of common shares
    outstanding  diluted  |            |                         | 27,878,787 |           |  |      | 27,878,787 |           |  |   | 28,362,768 |          
|                                                                   |            |                         |            |           |  |      |            |           |  |   |            |          
|Other Data:                                                        |            |                         |            |           |  |      |            |           |  |   |            |          
|EBITDA(1)                                                          |            | $                       | 184,160    |           |  | $    | 142,757    |           |  | $ | 174,876    |          
|Homes delivered                                                    |            |                         | 5,304      |           |  |      | 5,085      |           |  |   | 6,135      |          
|Average sales price per home delivered                             |            | $                       | 259        |           |  | $    | 266        |           |  | $ | 262        |          
|Gross margin on revenue from home sales                            |            |                         | 20.6       | %         |  |      | 20.2       | %         |  |   | 19.5       | %        
|Ratio of SG&A expenses to Homebuilding
    revenues                |            |                         | 10.7       | %         |  |      | 11.3       | %         |  |   | 12.2       | %        
|Ratio of Homebuilding pretax income to
    Homebuilding revenues   |            |                         | 9.2        | %         |  |      | 6.6        | %         |  |   | 7.0        | %        
|Homes in backlog at end of year                                    |            |                         | 2,149      |           |  |      | 2,280      |           |  |   | 3,128      |          

24



---



##### 



|                                               |  |                         |         |      |  |      |         |  |  |   |         | 
|---------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                               |  |                        
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2001                    |         | 2002 |  | 2003
|                                               |  |                         |         |      |  |     
|Sales value of homes in backlog at end of year |  | $                       | 573,405 |      |  | $    | 636,922 |  |  | $ | 855,425 | 
|Total active communities at year end           |  |                         | 146     |      |  |      | 159     |  |  |   | 217     | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA represents earnings from continuing
    operations before interest, taxes, depreciation and amortization
    and consists of the sum of income from continuing operations
    before: (a) income taxes, (b) amortization of
    capitalized interest in cost of sales, (c) Homebuilding
    interest expense and (d) depreciation and amortization. We
    have included information concerning EBITDA because we believe
    that it is an indication of the profitability of our core
    operations and reflects the changes in our operating results. We
    do not use EBITDA as a measure of our liquidity because we do
    not believe it is a meaningful indication of our cash flow.
    EBITDA is not required by generally accepted accounting
    principles, or GAAP, and other companies may calculate EBITDA
    differently. EBITDA should not be considered as an alternative
    to operating income or to cash flows from operating activities
    (as determined in accordance with GAAP) and should not be
    construed as an indication of our operating performance or a
    measure of our liquidity. A reconciliation of EBITDA to net
    income, the most directly comparable GAAP performance measure,
    is provided below (dollars in thousands):

|                                                            |  |                         |         |      |  |      |         |   |  |   |         | 
|----------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | 
|                                                            |  |                        
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|                                                            |  | 2001                    |         | 2002 |  | 2003
|                                                            |  |                         |         |      |  |     
|Net income                                                  |  | $                       | 94,037  |      |  | $    | 72,004  |   |  | $ | 82,719  | 
|Less: income from discontinued operations, net of
    taxes |  |                         | (6,272  | )    |  |      | (4,963  | ) |  |   |        | 
|                                                            |  |                         |         |      |  |      |         |   |  |   |         | 
|Income from continuing operations                           |  |                         | 87,765  |      |  |      | 67,041  |   |  |   | 82,719  | 
|Add: income taxes                                           |  |                         | 52,218  |      |  |      | 39,900  |   |  |   | 47,547  | 
|Add: interest in cost of sales                              |  |                         | 34,241  |      |  |      | 28,133  |   |  |   | 35,348  | 
|Add: interest expense                                       |  |                         | 1,087   |      |  |      | 257     |   |  |   |        | 
|Add: depreciation and amortization expense                  |  |                         | 8,849   |      |  |      | 7,426   |   |  |   | 9,262   | 
|                                                            |  |                         |         |      |  |      |         |   |  |   |         | 
|EBITDA                                                      |  | $                       | 184,160 |      |  | $    | 142,757 |   |  | $ | 174,876 | 
|                                                            |  |                         |         |      |  |      |         |   |  |   |         | 



| |                                         
| | ----------------------------------------
| | Selected Homebuilding Operating
    Data

The following table sets forth home sales and
backlog data by region (dollars in thousands):

|                                        |                 |                         |   |       |  |      |   |       |  |  |   |       | 
|--------------------------------------- | --------------- | ----------------------- | - | ----- |  | ---- | - | ----- |  |  | - | ----- | 
|                                        |                 |                        
|                                        |                 | Year Ended December 31,
|                                        |                 |                        
|                                        |                 | 2001                    |   | 2002  |  | 2003
|                                        |                 |                         |   |       |  |     
|Homes delivered:                        |                 |                         |   |       |  |      |   |       |  |  |   |      
|                                        | Florida         |                         |   | 1,931 |  |      |   | 2,024 |  |  |   | 2,311 | 
|                                        | Mid-Atlantic    |                         |   | 693   |  |      |   | 564   |  |  |   | 636   | 
|                                        | Texas           |                         |   | 1,623 |  |      |   | 1,539 |  |  |   | 1,557 | 
|                                        | West            |                         |   | 1,057 |  |      |   | 958   |  |  |   | 1,631 | 
|                                        |                 |                         |   |       |  |      |   |       |  |  |   |      
|                                        | Company total   |                         |   | 5,304 |  |      |   | 5,085 |  |  |   | 6,135 | 
|                                        |                 |                         |   |       |  |      |   |       |  |  |   |      
|Average sales price per home delivered: |                 |                         |   |       |  |      |   |       |  |  |   |      
|                                        | Florida         |                         | $ | 227   |  |      | $ | 246   |  |  | $ | 243   | 
|                                        | Mid-Atlantic    |                         | $ | 308   |  |      | $ | 351   |  |  | $ | 329   | 
|                                        | Texas           |                         | $ | 267   |  |      | $ | 258   |  |  | $ | 262   | 
|                                        | West            |                         | $ | 274   |  |      | $ | 270   |  |  | $ | 261   | 
|                                        |                 |                         |   |       |  |      |   |       |  |  |   |      
|                                        | Company average |                         | $ | 259   |  |      | $ | 266   |  |  | $ | 262   | 
|                                        |                 |                         |   |       |  |      |   |       |  |  |   |      

25



---



##### 



|                                                  |               |                         |   |           |  |      |   |           |  |  |   |           | 
|------------------------------------------------- | ------------- | ----------------------- | - | --------- |  | ---- | - | --------- |  |  | - | --------- | 
|                                                  |               |                        
|                                                  |               | Year Ended December 31,
|                                                  |               |                        
|                                                  |               | 2001                    |   | 2002      |  | 2003
|                                                  |               |                         |   |           |  |     
|Revenues from home sales:                         |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Florida       |                         | $ | 437,784   |  |      | $ | 497,018   |  |  | $ | 562,533   | 
|                                                  | Mid-Atlantic  |                         |   | 213,571   |  |      |   | 197,887   |  |  |   | 209,291   | 
|                                                  | Texas         |                         |   | 433,389   |  |      |   | 397,207   |  |  |   | 407,444   | 
|                                                  | West          |                         |   | 289,807   |  |      |   | 258,218   |  |  |   | 425,133   | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Company total |                         | $ | 1,374,551 |  |      | $ | 1,350,330 |  |  | $ | 1,604,401 | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          
|New sales contracts, net of cancellations:        |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Florida       |                         |   | 1,987     |  |      |   | 1,809     |  |  |   | 2,662     | 
|                                                  | Mid-Atlantic  |                         |   | 524       |  |      |   | 569       |  |  |   | 616       | 
|                                                  | Texas         |                         |   | 1,511     |  |      |   | 1,515     |  |  |   | 1,673     | 
|                                                  | West          |                         |   | 945       |  |      |   | 1,116     |  |  |   | 1,884     | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Company total |                         |   | 4,967     |  |      |   | 5,009     |  |  |   | 6,835     | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          
|Homes in backlog at end of period:                |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Florida       |                         |   | 1,273     |  |      |   | 1,195     |  |  |   | 1,546     | 
|                                                  | Mid-Atlantic  |                         |   | 169       |  |      |   | 244       |  |  |   | 224       | 
|                                                  | Texas         |                         |   | 402       |  |      |   | 378       |  |  |   | 494       | 
|                                                  | West          |                         |   | 305       |  |      |   | 463       |  |  |   | 864       | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Company total |                         |   | 2,149     |  |      |   | 2,280     |  |  |   | 3,128     | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          
|Sales value of homes in backlog at end of period: |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Florida       |                         | $ | 326,026   |  |      | $ | 314,253   |  |  | $ | 423,814   | 
|                                                  | Mid-Atlantic  |                         |   | 59,991    |  |      |   | 89,684    |  |  |   | 87,649    | 
|                                                  | Texas         |                         |   | 105,283   |  |      |   | 103,017   |  |  |   | 123,281   | 
|                                                  | West          |                         |   | 82,105    |  |      |   | 129,968   |  |  |   | 220,681   | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          
|                                                  | Company total |                         | $ | 573,405   |  |      | $ | 636,922   |  |  | $ | 855,425   | 
|                                                  |               |                         |   |           |  |      |   |           |  |  |   |          

Discussion of Results of Operations



| |                                                  
| | -------------------------------------------------
| | Fiscal Year 2003 Compared to Fiscal Year
    2002

Income from continuing operations increased to
$82.7 million (or $2.92 per diluted share) during the year
ended December 31, 2003 from $67.0 million (or $2.40
per diluted share) during the year ended December 31, 2002.
The increase in income from continuing operations is
attributable to an increase in Homebuilding pretax income to
$114.7 million during the year ended December 31,
2003, from $91.2 million during the year ended
December 31, 2002 and a decrease in Financial Services
pretax income to $15.6 million during the year ended
December 31, 2003, from $15.7 million during the year
ended December 31, 2002.

Total revenues increased to $1.69 billion
during the year ended December 31, 2003, from
$1.41 billion during the year ended December 31, 2002.
The increase of 19% is attributable to increases in Homebuilding
revenues and Financial Services revenues of 19% and 24%,
respectively.

Our effective tax rate attributable to income
from continuing operations decreased to 36.5% during the year
ended December 31, 2003, from 37.3% during the year ended
December 31, 2002. The decrease is due primarily to
expected reductions in state taxes as a result of modifying our
corporate structure and other tax planning initiatives.

26



---



##### 





| |             
| | ------------
| | Homebuilding

During the year ended December 31, 2003,
Homebuilding revenues increased to $1.64 billion, from
$1.38 billion during the year ended December 31, 2002.
The increase of 19% was due primarily to the increase in
revenues from home sales to $1.60 billion during the year
ended December 31, 2003, from $1.35 billion during the year
ended December 31, 2002. This increase of 19% is due to an
increase in home deliveries to 6,135 during the year ended
December 31, 2003, from 5,085 during the year ended
December 31, 2002. The 21% increase in home deliveries was
partially offset by a slight decline in the average selling
price on delivered homes to $262,000 from $266,000. In addition
to the increase in revenue from home sales, we generated
additional revenue from land sales. For the year ended
December 31, 2003, our revenues from land sales were $38.2
million, as compared to $27.4 million for the year ended
December 31, 2002. Land sales are incidental to our
residential homebuilding operations and are expected to continue
in the future but may significantly fluctuate up and down.

Our Florida region realized an increase in
revenue from home sales of $65.5 million, or 13%, to
$562.5 million during the year ended December 31,
2003. This increase is primarily due to a 14% increase in home
deliveries to 2,311, which was partially offset by a slight
decrease in the average selling price of homes delivered to
$243,000 during the year ended December 31, 2003, as
compared to 2,024 home deliveries and an average selling price
of homes delivered of $246,000 during the year ended
December 31, 2002. The increase in home deliveries is
primarily due to the deliveries generated by our Jacksonville
division, which was acquired during the fourth quarter of 2002.

Our Mid-Atlantic region realized an increase in
revenue from home sales of $11.4 million, or 6%, to
$209.3 million during the year ended December 31,
2003. This increase is primarily due to a 13% increase in home
deliveries to 636, which was partially offset by a decline in
our average selling price to $329,000 during the year ended
December 31, 2003, as compared to 564 home deliveries and
an average selling price of homes delivered of $351,000 during
the year ended December 31, 2002. The increase in home
deliveries is primarily attributable to the deliveries generated
by our Baltimore division, which was acquired during the fourth
quarter of 2002. This increase in home deliveries by our
Baltimore division was partially offset by a decline in home
deliveries by our Virginia division, which had a shortage of
available product during the period as compared to the prior
year due to the timing of new community openings. The decline in
our average sales price is also due to the shift in home
deliveries between our Virginia and Baltimore divisions, as our
Baltimore division has historically realized a lower average
sales price than our Virginia division.

Our Texas region realized an increase in revenue
from home sales of $10.2 million, or 3%, to $407.4 million
during the year ended December 31, 2003. This increase is
primarily due to a 1% increase in home deliveries to 1,557
during the year ended December 31, 2003, as compared to
1,539 home deliveries during the year ended December 31,
2002 and an increase in our average sales price to $262,000
during the year ended December 31, 2003, from $258,000
during the year ended December 31, 2002. The home delivery
volume for the year ended December 31, 2003 continues to
reflect the slower demand for new housing in several of our
Texas markets.

Our West region realized an increase in revenue
from home sales of $166.9 million, or 65%, to
$425.1 million for the year ended December 31, 2003.
This increase is due to a 70% increase in home deliveries to
1,631 during the year ended December 31, 2003, from 958
home deliveries during the year ended December 31, 2002.
The increase in home deliveries is primarily due to the
deliveries generated by our acquisitions in Las Vegas and
Colorado which occurred during the first quarter of 2003. The
increase in home deliveries was partially offset by a decline in
our average selling price in this region to $261,000 from
$270,000 as a result of the diversification of our product mix
in this region due to our recent acquisitions.

Our Homebuilding gross profit increased to
$323.2 million for the year ended December 31, 2003,
from $276.1 million for the year ended December 31,
2002. This increase of 17% is primarily due to an increase in
revenue from home sales. Our gross margin on home sales
decreased to 19.5% during the year ended December 31, 2003,
from 20.2% during the year ended December 31, 2002. This
decrease is

27



---



##### 



primarily due to an increase in the cost of
homesites and higher incentives in several of our markets, with
the greatest impact being in our Texas markets. Additionally,
for the year ended December 31, 2003, we generated gross
profit on land sales of $10.6 million as compared to
$2.9 million for the year ended December 31, 2002.


SG&A expenses increased to
$200.8 million during the year ended December 31,
2003, approximately 49% of which was general and administrative
expenses, from $156.2 million during the year ended
December 31, 2002. As a percentage of Homebuilding
revenues, SG&A expenses increased to 12.2% for the year
ended December 31, 2003, as compared to 11.3% for the year
ended December 31, 2002. A significant portion of the
increase in SG&A expenses during 2003 is attributable to the
general and administrative expenses necessary to effect our
transition from two separately operated homebuilders to a single
national homebuilder and to implement our core strategy of
obtaining critical mass in existing markets. We have begun to
see the results of this transition as we have increased the
number of active communities and homes in backlog as of
December 31, 2003, by 36% and 37% to 217 and 3,128,
respectively, as compared to 159 and 2,280, respectively, as of
December 31, 2002. The remainder of the increase in
SG&A expenses is primarily attributable to expenses
associated with recently acquired companies.

Upon consummation of our merger in June 2002, we
began the process of identifying the steps necessary to become
an efficient, large-scale homebuilder. Management identified the
following significant objectives:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Strengthen our management and operational
    resources;   
|
| |  | Streamline our operational and corporate
    structure; and
|
| |  | Integrate our information systems.                         

Since the merger, we have substantially
strengthened our management and operational resources and
streamlined our operational and corporate structure. This plan
consisted of placing experienced controllers in our divisions
and regional offices as well as developing a corporate center to
efficiently manage our finance, operations, legal and corporate
governance functions. The creation of our corporate center has
resulted in the development of an internal audit function,
centralization of our treasury function and creation of a
centralized shared services organization to oversee and manage
our land acquisition, supply management, product development and
building science functions. We believe that the development of a
strong corporate center is a key component of improving the
effectiveness of our critical business processes and
strengthening our internal control structure and corporate
governance. In connection with this initiative we incurred
recruiting fees and other costs of $1.2 million. By the
middle of 2004, we expect to have completed this portion of our
transition plan.

During 2003, we also incurred significant
professional and other fees as a result of modifying our
corporate structure to become more efficient from an
organizational, operational, and income tax standpoint. We began
to realize benefits from these expenditures through lower income
taxes in 2003 as our effective tax rate decreased to 36.5% and
expect to continue to recognize lower relative income taxes and
other operating costs over time. We believe that the costs
associated with this initiative should be completed by the end
of the first quarter of 2004.

Beginning shortly after our merger, one of our
primary initiatives was to integrate our information systems
into one enterprise-wide platform and to enhance our internal
financial and operational reporting. These enhancements included
developing a company-wide point-of-sale system, an intranet
site, which has become the information distribution network for
our divisions, and a should cost model, which will
be used to benchmark the cost/benefit of design and construction
decisions. We believe that these enhancements will enable us to
effectively operate as a large-scale homebuilder and support our
anticipated growth. As a result of our systems integration,
during the year ended December 31, 2003, we experienced a
$1.2 million increase in non-capitalizable information
technology expenses consisting primarily of consulting fees,
systems training and other related expenses. We have converted
all of our

28



---



##### 



homebuilding divisions to one information system;
however, we believe that we will continue to incur some costs
during the first two quarters of 2004 related to completing the
final phases of the conversion.


We believe that the successful completion of our
transition plan will enhance our ability to effectively manage
our business and execute our strategic growth plans. We
anticipate that additional non-recurring costs related to
completing our transition will be incurred through the first
half of 2004. We believe that on a comparable basis, our
SG&A expenses as a percentage of homebuilding revenues will
decline in the second half of 2004.

During the year ended December 31, 2003, we
recognized a compensation charge of $1.2 million for
variable accounting of certain stock-based awards, which include
accelerated vesting criteria. We recognized this expense as a
result of the market price of our common stock, as of
December 31, 2003, being greater than the exercise price.
During 2002 there was no stock-based compensation expense.

During the year ended December 31, 2003, we
incurred a net charge of $0.8 million in severance charges, as
compared to $20.0 million in severance and merger related
charges during the year ended December 31, 2002. The
charges during 2002 included severance accrued related to former
executives of both Newmark and Engle and $6.0 million in
legal, consulting and advisory fees.

During the year ended December 31, 2002, in
connection with our June 2002 Notes Offering, we recognized a
loss on the early retirement of debt of $5.4 million. This
charge relates to the exit fees incurred and the write off of
unamortized deferred finance costs associated with the then
existing borrowings.

During the year ended December 31, 2003,
depreciation and amortization expense increased to
$9.3 million, from $6.0 million during the year ended
December 31, 2002. This increase is primarily attributable
to the increase in capitalized software costs incurred in
connection with our information systems conversion as these
costs are being depreciated over a useful life ranging from
6 months to 3 years.



| |                   
| | ------------------
| | Financial Services

Financial Services revenues increased to
$45.3 million during the year ended December 31, 2003,
from $36.6 million during the year ended December 31,
2002. The increase in Financial Services revenues is primarily
attributable to an increase in the number of closings by our
mortgage and title operations. The number of closings at our
mortgage operations increased to 4,663 for the year ended
December 31, 2003, from 3,822 for the year ended
December 31, 2002.

The number of closings at our title operations
increased to 20,773 for the year ended December 31, 2003,
from 18,041 for the year ended December 31, 2002. For the
year ended December 31, 2003, our Financial Services
segment capture ratios have remained relatively consistent with
the year ended December 31, 2002. Approximately 8% of our
homebuyers paid in cash. Our mortgage operations capture ratio
for non-cash homebuyers was 59% for the year ended
December 31, 2003, as compared to 61% for the year ended
December 31, 2002. Our title operations capture ratio was
82% for the year ended December 31, 2003, as compared to
85% for the year ended December 31, 2002. As a result of
our initiative to increase the penetration of the sale of our
financial services products to our home buying customers, we
began to see an increase in our capture ratios during the fourth
quarter of 2003. We currently expect this trend to continue into
2004.

Financial Services expenses increased to
$29.7 million for the year ended December 31, 2003,
from $20.8 million for the year ended December 31,
2002. The increase in Financial Services expenses of 43% is
primarily attributable to the increased revenues and the
expansion into new markets.



| |       
| | ------
| | EBITDA

During the year ended December 31, 2003, we
generated EBITDA of $174.9 million as compared to
$142.8 million during the year ended December 31,
2002. The increase in EBITDA is primarily a result of

29



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##### 



$20.0 million in severance and merger
related charges and a $5.4 million loss on the early
retirement of debt incurred during the year ended
December 31, 2002, as compared to severance charges of
$0.8 million incurred during the year ended
December 31, 2003.




| |                                                  
| | -------------------------------------------------
| | Fiscal Year 2002 Compared to Fiscal Year
    2001

Net income decreased to $72.0 million (or
$2.58 per share) during the year ended December 31, 2002
from $94.0 million (or $3.37 per share) during the year
ended December 31, 2001. Income from continuing operations
decreased to $67.0 million (or $2.40 per share) during the year
ended December 31, 2002 from $87.8 million (or $3.15
per share) during the year ended December 31, 2001. The
decrease in income from continuing operations is attributable to
a decrease in Homebuilding pretax income to $91.2 million
during the year ended December 31, 2002 from
$128.5 million during the year ended December 31,
2001. The decrease in Homebuilding pretax income was partially
offset by an increase in Financial Services pretax income to
$15.7 million during the year ended December 31, 2002
from $11.5 million during the year ended December 31,
2001.

Total revenues decreased to $1.41 billion
during the year ended December 31, 2002 from $1.42 billion
during the year ended December 31, 2001. The decrease of 1%
is attributable to a decline in Homebuilding revenues which was
offset by an increase in Financial Services revenues.

Our provision for income taxes remained
consistent at 37.3% during the year ended December 31, 2002
from the year ended December 31, 2001.



| |             
| | ------------
| | Homebuilding

Homebuilding revenues decreased to
$1.38 billion during the year ended December 31, 2002
from $1.39 billion during the year ended December 31,
2001. The decrease of 1% was due to a decline in revenues from
home sales, to $1.35 billion in the year ended December 31,
2002 from $1.37 billion during the year ended
December 31, 2001, which was offset by an increase in
revenues from land sales, to $27.4 million from
$18.4 million during the same periods. Home deliveries
decreased to 5,085 during the year ended December 31, 2002
from 5,304 during the year ended December 31, 2001.

The decrease in home deliveries and revenue from
home sales was primarily attributable to a decline in the number
of communities in which we were actively marketing during the
year ended December 31, 2002, as compared to the year ended
December 31, 2001, and a weakening in housing demand in the
Texas and West regions. These factors were partially offset by a
strong housing demand in Florida.

At the beginning of the year ended
December 31, 2002, we were actively marketing in 146
communities. As a result of our prior strategic decision to
consolidate our home sales activities and reduce our homesite
acquisitions during the year ended December 31, 2001 and
throughout the first half of the year ended December 31,
2002, our active communities declined to a low of 127 in June
2002. In the second half of the year ended December 31,
2002, we began to increase the number of communities in which we
were marketing, both through organic growth and through
acquisition. Consequently, at December 31, 2002 we were
actively marketing in 159 communities. However, due to a lag
time between the date we begin marketing homes in a community
and the date that we begin to deliver homes, home deliveries
from these new communities did not begin to contribute to our
home sales revenue until the end of 2003.

During the year ended December 31, 2002, our
Texas region generated revenues from home sales of
$397.2 million on 1,539 home deliveries as compared to
revenues of $433.4 million on home deliveries of 1,623
during the year ended December 31, 2001. The weakening in
demand in this market also caused an increase in the level of
incentives offered which is reflected in the decline in the
average sales price per home delivered to $258,000 during the
year ended December 31, 2002 from $267,000 during the year
ended December 31, 2001. Additionally, our West region
experienced a decline in revenues from home sales to
$258.2 million on 958 home deliveries during the year ended
December 31, 2002 from $289.8 million on 1,057 home
deliveries during the year ended December 31, 2001. The
decline in

30



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##### 



revenues in the West region is primarily due to a
decline in the average number of active selling communities
during the first part of the year ended December 31, 2002,
as compared to the prior year, and a continued weakness in
demand in our Colorado markets. This softness in the market
caused us to increase incentives offered to homebuyers resulting
in a slight decrease in the average sales price per home
delivered, to $270,000 in the year ended December 31, 2002
from $274,000 in the year ended December 31, 2001.


These declines in revenue from the Texas and West
regions were partially offset by an increase in revenues
generated in our Florida region to $497.0 million on 2,024
home deliveries during the year ended December 31, 2002
from $437.8 million on 1,931 home deliveries during the
year ended December 31, 2001. The revenue increase in this
region is primarily due to the increase in our average sales
price per home delivered to $246,000 during the year ended
December 31, 2002 from $227,000 during the year ended
December 31, 2001. Additionally, we generated revenue from
home sales of $13.7 million as a result of our acquisition
of D.S. Ware Homes in the year ended December 31, 2002.

Our average sales price per home delivered
increased 3% to $266,000 during the year ended December 31,
2002 as compared to $259,000 during the year ended
December 31, 2001. The increase is primarily attributable
to increases in our Florida and Mid-Atlantic regions, where we
have continued to realize higher average sales prices from
steady demand for product. The increase in average sales price
in these regions was partially offset by declines in our Texas
and West regions, where, during the year ended December 31,
2002, we experienced significant increases in incentives
provided to homebuyers as compared to the year ended
December 31, 2001.

Homebuilding cost of sales decreased to
$1.10 billion during the year ended December 31, 2002
from $1.11 billion during the year ended December 31,
2001. The decline of 1% is attributable to the decline in the
number of home deliveries offset by an increase in cost of
land/homesite sales. Our gross margin on home sales decreased to
20.2% during the year ended December 31, 2002 as compared
to 20.6% during the year ended December 31, 2001. The
decline in gross margin is primarily attributable to increased
incentives and an increase in the average homesite cost per
closing, partially offset by an increase in our gross margin on
options and upgrades.

SG&A expenses increased by 5% to
$156.2 million during the year ended December 31, 2002
from $148.5 million for the year ended December 31,
2001. As a percentage of Homebuilding revenues, SG&A
expenses increased to 11.3% for the year ended December 31,
2002 from 10.7% for the year ended December 31, 2001. The
increase in SG&A expenses is primarily attributable to
increases in compensation, information technology, insurance and
professional fees.

Depreciation and amortization expenses decreased
to $6.0 million during the year ended December 31,
2002 from $8.8 million during the year ended
December 31, 2001. The decrease of $2.8 million is
primarily due to the elimination of goodwill amortization as a
result of the adoption of SFAS 142 effective
January 1, 2002. If we had not recorded goodwill
amortization expense during the year ended December 31,
2001, it would have resulted in an increase in net income per
common share for the year ended December 31, 2001 of $0.05.

During the year ended December 31, 2002 we
incurred $20.0 million in severance and merger related
charges as compared to $2.6 million in the year ended
December 31, 2001. These charges include severance accrued
related to the termination of executives who were employed by
either us or Engle Homes prior to the merger. Also, in
connection with our merger with Engle Homes, we incurred
approximately $6.0 million in legal, consulting and
advisory fees.

During the year ended December 31, 2002, in
connection with our offering of the June 2002 Senior Notes and
the June 2002 Senior Subordinated Notes, we recognized a loss on
the early retirement of debt of $5.4 million. This charge
relates to the exit fees incurred and the write off of
unamortized deferred finance costs associated with the then
existing borrowings.

31



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##### 





| |                   
| | ------------------
| | Financial Services

Financial Services revenues increased to
$36.6 million during the year ended December 31, 2002
from $29.1 million during the year ended December 31,
2001. The increase of 26% is primarily attributable to an
increase in the mortgage and title operations capture of our
home sale deliveries. The increase in the capture ratio of our
mortgage operations is due primarily to the expansion into the
Texas region.

Financial Services expenses increased to
$20.8 million during the year ended December 31, 2002
from $17.7 million during the year ended December 31,
2001. The increase of 18% is primarily attributable to increased
expenses incurred in connection with our expansion of the
Financial Services operations.



| |                        
| | -----------------------
| | Discontinued Operations

During March 2002, we committed to a plan to
dispose of Wesbrooke to eliminate operating redundancies in our
South Florida market and to strengthen our financial position.
Pursuant to this plan of disposition, we would sell 100% of the
common stock of Westbrooke. On April 8, 2002, we signed a
definitive agreement for the sale of Westbrooke to Standard
Pacific Corp. (Standard Pacific) for
$41.0 million in cash. This sale was completed on
April 15, 2002. In addition, Standard Pacific satisfied
$54.4 million of Westbrookes debt that included
$14.2 million of intercompany liabilities owed to us. Upon
completion of this sale, we realized a gain of
$4.3 million. We have determined that in accordance with
SFAS 144, as of March 31, 2002, the criteria to
classify the Westbrooke assets as held for sale were met.

Results of Westbrookes operations have been
classified as discontinued operations, and prior periods have
been restated. Selected financial data of our discontinued
operations are as follows for the years ended December 31,
2001 and 2002 (dollars in thousands):

|                                                         |  |      |         |      |  |   |        | 
|-------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------ | 
|                                                         |  | 2001 |         | 2002
|                                                         |  |      |         |     
|Revenues                                                 |  | $    | 205,661 |      |  | $ | 44,197 | 
|Income from discontinued operations, net of taxes        |  | $    | 6,272   |      |  | $ | 4,963  | 
|Income from discontinued operations per common
    share |  | $    | 0.22    |      |  | $ | 0.18   | 



| |       
| | ------
| | EBITDA

During the year ended December 31, 2002, we
generated EBITDA of $142.8 million as compared to
$184.2 million during the year ended December 31,
2001. The decline in EBITDA is primarily a result of
$20.0 million in severance and merger related charges
incurred during the year ended December 31, 2002 as
compared to $2.6 million incurred during the year ended
December 31, 2001 and a $5.4 million loss on the early
retirement of debt associated with our refinancing. Excluding
these unusual charges, EBITDA during the year ended
December 31, 2002 would have been $168.1 million as
compared to $186.8 million during the year ended
December 31, 2001. The decline of 10% primarily relates to
the decline in our Homebuilding pretax income, after excluding
these unusual charges, during the year ended December 31,
2002 as compared to the year ended December 31, 2001. The
decline in our Homebuilding pretax income during the year ended
December 31, 2002 was partially offset by an increase in
our Financial Services pretax income.

32



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##### 



Financial Condition, Liquidity and Capital
Resources



| |                                                                   
| | ------------------------------------------------------------------
| | Consolidated Statement of Financial
    Condition and Related Data

The following table includes selected
consolidated statement of financial condition and other
information (dollars in thousands):

|                                                 |  |                         |         |      |  |      |           |   |  |   |           |  
|------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                 |  |                        
|                                                 |  | Year Ended December 31,
|                                                 |  |                        
|                                                 |  | 2001                    |         | 2002 |  | 2003
|                                                 |  |                         |         |      |  |     
|Cash  unrestricted                              |  | $                       | 75,136  |      |  | $    | 49,211    |   |  | $ | 76,851    |  
|Inventory                                        |  | $                       | 645,986 |      |  | $    | 753,872   |   |  | $ | 1,183,423 |  
|Total assets                                     |  | $                       | 999,170 |      |  | $    | 1,034,888 |   |  | $ | 1,605,029 |  
|Homebuilding borrowings                          |  | $                       | 308,697 |      |  | $    | 413,110   |   |  | $ | 497,919   |  
|Total borrowings(1)                              |  | $                       | 347,386 |      |  | $    | 461,419   |   |  | $ | 561,162   |  
|Stockholders equity                             |  | $                       | 413,370 |      |  | $    | 405,145   |   |  | $ | 536,410   |  
|Ratio of Homebuilding borrowings to total assets |  |                         | 30.9    | %    |  |      | 39.9      | % |  |   | 31.0      | %
|Ratio of Homebuilding borrowings to capital(2)   |  |                         | 42.8    | %    |  |      | 50.5      | % |  |   | 48.1      | %



---



|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | Total borrowings include Homebuilding borrowings
    and Financial Services borrowings.                                   
|   
|(2) | Capital includes Homebuilding borrowings and
    stockholders equity. Capital excludes Financial Services
    borrowings.



| |                                                                       
| | ----------------------------------------------------------------------
| | Discussion of Financial Condition,
    Liquidity and Capital Resources



| |                         
| | ------------------------
| | Sources and Uses of Cash

Our Homebuilding operations primary uses of
cash have been for land acquisitions, construction and
development expenditures, and SG&A expenditures. Our sources
of cash to finance these requirements have been primarily cash
generated from operations, cash from our financing activities
(both debt and equity issuances) and cash borrowed under our
credit facilities.

Our Financial Services operations primarily use
cash to fund mortgages, prior to their sale, and to pay for
SG&A expenditures. We rely primarily on internally generated
funds, which include the proceeds generated from the sale of
mortgages, and from the mortgage operations warehouse line
of credit to fund these operations.

At December 31, 2003, we had unrestricted
cash and cash equivalents of $76.9 million as compared to
$49.2 million at December 31, 2002.

During the year ended December 31, 2003,
cash used in operating activities was $9.3 million as
compared to cash provided by operating activities of
$5.7 million for the year ended December 31, 2002.
This decrease is primarily a result of an increase in inventory
of $141.7 million, excluding the impact of our
acquisitions, as compared to a $75.9 million increase in
inventory for the year ended December 31, 2002. This
increase in inventory is part of our strategy to increase the
number of active communities and our land positions. During the
year ended December 31, 2003, including the impact of our
acquisitions, our controlled homesites increased to
approximately 48,200 from 26,300.

Cash used in investing activities was
$96.8 million during the year ended December 31, 2003,
as compared to $60.1 million during the year ended December
31, 2002. The increase in the use of cash in investing
activities is primarily due to the acquisitions made during the
year ended December 31, 2003 and the payment of
$18.1 million in additional consideration for acquisitions
made in 2002 and 2003. Additionally, we have had net additions
to property and equipment of $19.0 million during the year
ended December 31, 2003, as compared to $8.7 million
during the year ended December 31, 2002. This increase
relates primarily to increases in model furnishings caused by
our significant number of new communities at the end of 2003 as
compared to the end of 2002 and capitalized software costs
incurred in connection with our information systems conversion.

33



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On February 28, 2003, we acquired the net
assets of The James Construction Company, a homebuilder
operating in the greater Denver, Colorado area, for
approximately $22.0 million in cash. In addition, we are
obligated to pay an additional $1.4 million to the sellers
over a two-year period.

On February 6, 2003, we acquired the net
assets of Trophy Homes, Inc., a homebuilder operating in Las
Vegas, Nevada, and certain homesites for approximately
$36.2 million in cash. In addition, if certain targets are
met regarding home deliveries during 2003 and 2004, we will be
obligated to pay up to an additional $2.5 million to the
sellers over a two year period. Of this amount, we paid
$1.6 million of additional consideration during the year
ended December 31, 2003.

Our ratio of Homebuilding borrowings to total
assets was 31.0% at December 31, 2003, as compared to 39.9% at
December 31, 2002. Our ratio of Homebuilding borrowings to
capital was 48.1% at December 31, 2003, as compared to
50.5% at December 31, 2002. The improvement in both of
these ratios is primarily due to the recent completion of our
public offering of common stock. On November 19, 2003, we
sold, pursuant to an underwritten public offering,
2.0 million shares of our common stock at a price of $26.00
per share. The net proceeds of the offering to us were
$48.4 million, after deducting offering costs and
underwriting fees of $3.6 million. The offering proceeds
were used to pay outstanding indebtedness under our revolving
credit facility and for general working capital purposes. In
connection with our offering of common stock, Technical Olympic
S.A. sold approximately 3.2 million of shares of our common
stock, including 675,000 shares sold pursuant to the
underwriters exercise of their over-allotment option. As a
result of these transactions, Technical Olympic S.A. has reduced
its ownership of us to 73.95%.



| |                     
| | --------------------
| | Financing Activities

During 2003, we increased our total borrowings
from $461.4 million at December 31, 2002 to
$561.2 million at December 31, 2003, which included an
increase in homebuilding borrowings from $413.1 million to
$497.9 million. We used these new borrowings to fund our
increased land supply, our acquisitions and the operating costs
associated with establishing an infrastructure to support our
anticipated growth. We initially funded these costs through
borrowings under our revolving credit facility and then, as
market conditions permitted, we issued fixed-rate long term
notes and common stock to refinance these borrowings and reduce
the outstanding balance under our revolving credit facility.

On February 3, 2003, we issued
$100.0 million of 9% Senior Notes due 2010 at a price of
94.836% of the principal amount plus interest accrued since
January 1, 2003. The net proceeds of approximately
$93.6 million were primarily used to repay amounts
outstanding under our credit facility. The February 2003 Senior
Notes were issued pursuant to an indenture with substantially
the same terms and conditions as the indenture pursuant to which
we issued the $200.0 million of 9% Senior Notes due 2010
that were issued in June 2002.

On April 22, 2003, we issued an additional
$35.0 million of our 10 3/8% Senior Subordinated Notes
due 2012 at a price of 98.5% of the principal amount plus
interest accrued since January 1, 2003. The net proceeds of
approximately $34.5 million were used to repay amounts
outstanding under our credit facility. These additional debt
securities were issued under the same indenture pursuant to
which we issued the $150.0 million of 10 3/8% Senior
Subordinated Notes due 2012 that we issued in June 2002.

Interest on our outstanding senior notes and
senior subordinated notes is payable on January 1 and July 1 of
each year. The senior notes are guaranteed by all of our
material domestic subsidiaries. The senior notes rank pari passu
in right of payment with all of our existing and future
unsecured senior debt and senior in right of payment to the
senior subordinated notes and any future subordinated debt. The
senior subordinated notes rank pari passu in right of payment
with all of our existing and future unsecured senior
subordinated debt and are guaranteed on a senior subordinated
basis by all of our material domestic subsidiaries. The
indentures governing the senior and senior subordinated notes
require us to maintain a minimum net worth and place certain
restrictions on our ability, among other things, to incur
additional debt, pay or make dividends or other distributions,
sell assets, enter into transactions with affiliates, and merge
or consolidate with other entities. The interest rates on our
outstanding senior and senior

34



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##### 



subordinated notes are higher than the interest
rates that we were paying on the outstanding amounts under old
debt instruments and under our revolving credit facility. As a
result of the higher interest rates, we anticipate that interest
incurred will exceed the amounts which would have been incurred
under the prior borrowings. Therefore, the increased interest
incurred will have an effect on gross margins in future periods.


Our revolving credit facility permits us to
borrow up to the lesser of (i) $315.0 million, or
(ii) our borrowing base (calculated in accordance with the
revolving credit facility agreement) minus our outstanding
senior debt, and to issue letters of credit up to
$125.0 million. In addition, we have the right to increase
the size of the facility to provide for up to an additional
$10.0 million of revolving loans, subject to meeting
certain requirements. The revolving credit facility expires on
June 26, 2005. As of December 31, 2003, we had drawn
down $10.0 million and had issued letters of credit of
$92.8 million and as a result, had $212.2 million in
availability under the revolving credit facility. Loans
outstanding under the facility may be base rate loans or
Eurodollar loans, at our election. Base rate loans accrue
interest at a rate per annum equal to (i) an applicable
margin plus (ii) the higher of (A) Citibank,
N.A.s base rate, (B) 0.5% plus the three week average
of the reserve-adjusted three-month certificate of deposit rate
and (C) 0.5% plus the Federal Funds Rate. Eurodollar loans
accrue interest at a rate per annum equal to (i) an
applicable margin plus (ii) the reserve-adjusted Eurodollar
rate for the interest period. Applicable margins will be
adjusted based on the ratio of our liabilities to our tangible
worth. At December 31, 2003, our loans outstanding under
the revolving credit facility accrued interest at a rate of
3.92% per annum. The revolving credit facility requires us to
(1) maintain specified financial ratios regarding leverage,
interest coverage, consolidated tangible net worth and certain
operational measurements and (2) satisfy certain financial
condition tests. The revolving credit facility also places
certain restrictions on, among other things, our ability to
incur additional debt or liens, pay or make dividends or other
distributions, sell assets, enter into transactions with
affiliates and merge or consolidate with other entities. The
revolving credit facility also restricts our ability to issue
additional secured debt, subject to certain exceptions. The
revolving credit facility is secured by a first-priority
perfected lien on all capital stock of subsidiaries owned by us.
Our obligations under the revolving credit facility are
guaranteed by all our domestic subsidiaries (subject to certain
limited exceptions).

To fund the origination of residential mortgage
loans, our subsidiary, Preferred Home Mortgage Company
(Preferred Home) entered into a $90.0 million
revolving warehouse line of credit, which we refer to as our
warehouse line of credit. The warehouse line of credit is
comprised of (1) a credit facility (the PHMC Credit
Facility) providing for revolving loans of up to
$50.0 million, subject to meeting borrowing base
requirements based on the value of collateral provided and
(2) mortgage loan purchase and sale agreements (the
Purchase Facility) which provide for the purchase by
the lender of up to $40.0 million in mortgage loans
generated by Preferred Home. At no time may the amount
outstanding under the facility plus the amount of purchased
loans pursuant to the purchase and sale agreements exceed
$90.0 million. The warehouse line of credit expires on
December 19, 2004. As of December 31, 2003, we had
$63.2 million outstanding under the warehouse line of
credit. The PHMC Credit Facility bears interest at the
Eurodollar rate plus 1.375%. Amounts outstanding under the
Purchase Facility bear interest at the Eurodollar rate plus
1.125%. As of December 31, 2003, our loans outstanding
under the warehouse line of credit accrued interest at a blended
rate of 2.38% per annum. The warehouse line of credit is secured
by funded mortgages which are pledged as collateral and requires
Preferred Home to maintain certain financial ratios and
minimums. We have entered into a keep-well agreement in favor of
the lender which obligates us to provide financial support to
Preferred Home, if necessary, in order for Preferred Home to
maintain such financial ratios and minimums.

We believe that as a result of our offering of
common stock during November 2003, our offering of senior notes
in February 2003 and senior subordinated notes in April 2003 and
the increase in our revolving credit facility, we will have
adequate financial resources, including cash from operations and
availability under the revolving credit facility and the
warehouse line of credit, to meet our current and anticipated
working capital and land acquisition and development needs based
on current market conditions. However, there can be no assurance
that the amounts available from such sources will be

35



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##### 



sufficient. If we identify new acquisition
opportunities, or if our operations do not generate sufficient
cash from operations at levels currently anticipated, we may
need to seek additional debt or equity financing to operate and
expand our business.


At December 31, 2003, the amount of our
annual debt service payments was $48.5 million. This amount
included annual debt service payments on the senior and senior
subordinated notes of $46.2 million and interest payments
on the revolving credit facility, the warehouse line of credit,
and other notes of $2.3 million based on the balances
outstanding as of December 31, 2003. The amount of our
annual debt service payments on the revolving credit facility
fluctuates based on the principal outstanding under the facility
and the interest rate. An increase or decrease of 1% in interest
rates will change our annual debt service payments by
$0.8 million per year. The revolving credit facility
terminates in June 2005 at which time we will be required to
repay all outstanding principal. Under certain circumstances, we
may extend the facility in one-year increments, for up to two
additional years.

The following summarizes our significant
contractual obligations and commitments as of December 31,
2003:

|                                                                                       |  |                       |         |           |  |       |        |       |  |           |        |  |  |   |       |  |  |   |         | 
|-------------------------------------------------------------------------------------- |  | --------------------- | ------- | --------- |  | ----- | ------ | ----- |  | --------- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                                                                                       |  |                      
|                                                                                       |  | Payment Due by Period
|                                                                                       |  |                      
|                                                                                       |  |                       |         | Less than |  | 1-3   |        | 3-5   |  | More than
|Contractual Obligations                                                                |  | Total                 |         | 1 Year    |  | Years |        | Years |  | 5 Years  
|                                                                                       |  |                       |         |           |  |       |        |       |  |          
|Long-Term Debt Obligations                                                             |  | $                     | 566,170 |           |  | $     | 73,243 |       |  | $         | 7,927  |  |  | $ |      |  |  | $ | 485,000 | 
|Capital Lease Obligations                                                              |  |                       |        |           |  |       |       |       |  |           |       |  |  |   |      |  |  |   |        | 
|Operating Lease Obligations                                                            |  |                       | 17,330  |           |  |       | 8,561  |       |  |           | 6,970  |  |  |   | 1,630 |  |  |   | 169     | 
|Purchase Obligations                                                                   |  |                       |        |           |  |       |       |       |  |           |       |  |  |   |      |  |  |   |        | 
|Other Long-Term Liabilities Reflected on the
    Registrants Balance Sheet under GAAP |  |                       |        |           |  |       |       |       |  |           |       |  |  |   |      |  |  |   |        | 
|                                                                                       |  |                       |         |           |  |       |        |       |  |           |        |  |  |   |       |  |  |   |         | 
|Total                                                                                  |  | $                     | 583,500 |           |  | $     | 81,804 |       |  | $         | 14,897 |  |  | $ | 1,630 |  |  | $ | 485,169 | 
|                                                                                       |  |                       |         |           |  |       |        |       |  |           |        |  |  |   |       |  |  |   |         | 



| |        
| | -------
| | Backlog

As of December 31, 2003, we had 3,128 homes
in backlog representing $855.4 million in revenue, as
compared to 2,280 homes in backlog representing
$636.9 million in revenue as of December 31, 2002. The
increase in revenue in backlog of 34% is primarily attributable
to the homes in backlog of our recent acquisitions as well as
increased sales activity in several of our existing markets. Our
average selling price of homes in backlog has declined slightly
to $273,000 as of December 31, 2003 from $279,000 as of
December 31, 2002, as a result of our product
diversification.



| |          
| | ---------
| | Dividends

We did not declare or pay any dividends during
the years ended December 31, 2002 and 2003. We paid a dividend
of $0.54 per share of common stock (on a pre-restatement basis
and $0.22 per share on a restated basis) during the year ended
December 31, 2001 ($6.2 million in the aggregate).
Prior to its merger with us, Engle Homes made net distributions
of $4.8 million during the year ended December 31,
2002 and $29.5 million during year ended December 31,
2001.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In April 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 145,
Reporting Gains and Losses from Extinguishment of
Debt, which rescinded SFAS No. 4, No. 44, and
No. 64 and amended SFAS No. 13. The new standard
addresses the income statement classification of gains or losses
from the extinguishment of debt and criteria for classification
as extraordinary items. We adopted SFAS No. 145 during 2002.

36



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##### 



In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including
loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under the
guarantee and must disclose that information in its interim and
annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the
fair value of the guarantors obligations do not apply to
product warranties. The initial recognition and initial
measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The
adoption of the initial recognition and initial measurement
provisions of FIN 45 did not have a material effect on our
financial position or results of operations.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which
amends SFAS No. 123. The new standard provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. It also requires prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the affect
of the method used on reported results. We have not elected to
change to the fair value based method of accounting for
stock-based employee compensation. We adopted the disclosure
provisions of SFAS No. 148 in our first fiscal quarter
ending March 31, 2003.

In January 2003, the FASB issued FASB
Interpretation (Interpretation) No. 46,
Consolidation of Variable Interest Entities.
Interpretation No. 46 addresses consolidation by business
enterprises of variable interest entities (VIEs)
which have one or both of the following characteristics:
(1) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional
subordinated support from other parties, which is provided
through other interests that will absorb some or all of the
expected losses of the entity; or (2) the equity investors
lack one or more of the following essential characteristics of a
controlling financial interest: (a) the direct or indirect
ability to make decisions about the entities activities
through voting rights or similar rights; or (b) the
obligation to absorb the expected losses of the entity if they
occur, which makes it possible for the entity to finance its
activities; or (c) the right to receive the expected
residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses.
Interpretation No. 46 is applied immediately to VIEs
created after January 31, 2003. Pursuant to FASB revision
to Interpretation No. 46 (FSP 46-6), a
public entity need not apply the provisions of Interpretation
No. 46 to an interest held in a VIE or a potential VIE
until the end of the first interim or annual period ending after
March 15, 2004, if the VIE was created before
February 1, 2003, and the public entity has not issued
financial statements reporting that VIE as consolidated in
accordance with Interpretation No. 46.

Generally, in the homebuilding industry,
homebuilders will enter into option contracts for the purchase
of land or homesites with land sellers and third-party financial
entities, some of which may qualify as VIEs, as a method of
acquiring developed homesites. We believe that Interpretation
No. 46 must be evaluated as it relates to these and similar
types of arrangements. In applying Interpretation No. 46 to
our homesite option contracts, estimates regarding cash flows
and other assumptions have to be made. We believe that our
critical assumptions are reasonable based on historical evidence
and industry practice. Based on our analysis of contracts
entered into after January 31, 2003, we determined that we
are the primary beneficiary of certain of these homesite option
contracts. Consequently, Interpretation No. 46 requires us
to consolidate the assets (homesites) at their fair value,
although (1) we have no legal title to the assets,
(2) our maximum exposure to loss is limited to the deposits
or letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us. The effect of the consolidation was to increase
inventory by $123.7 million, excluding deposits of
$9.7 million which had been previously recorded, with a
corresponding increase to consolidated land bank obligations in
the accompanying consolidated statement of financial condition
as of December 31, 2003.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer

37



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##### 



classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003 (our quarter ended September 30,
2003) with the exception of an indefinite deferral relating to
application to limited life entities. We do not believe that the
implementation of SFAS No. 150 will have a material impact
on our financial condition, results of operations or cash flows.




| |                          
| | -------------------------
| | Seasonality of Operations

The homebuilding industry tends to be seasonal,
as generally there are more homes sold in the spring and summer
months when the weather is milder, although the rate of sales
contracts for new homes is highly dependent on the number of
active communities and the timing of new community openings. We
operate primarily in the Southwest and Southeast, where weather
conditions are more suitable to a year-round construction
process than in other parts of the country. Because new home
deliveries trail new home contracts by several months, we
typically have a greater percentage of home deliveries in the
fall.

Item 7A.Quantitative
and Qualitative Disclosures About Market Risk

As a result of the senior and senior subordinated
notes offerings, $485.0 million of our outstanding borrowings
are based on fixed interest rates. We are exposed to market risk
primarily related to potential adverse changes in interest rates
on our existing construction loans, warehouse line of credit and
revolving credit facility. The interest rates relative to these
borrowings fluctuate with the prime and LIBOR lending rates,
both upwards and downwards. We have not entered into derivative
financial instruments for trading or speculative purposes. As of
December 31, 2003, we had an aggregate of approximately
$81.1 million drawn under our bank loan arrangements that
are subject to changes in interest rates. An increase or
decrease of 1% in interest rates will change our annual debt
service payments by $0.8 million per year as a result of
our bank loan arrangements that are subject to changes in
interest rates.

The following table presents the future principal
payment obligations and weighted average interest rates
associated with our long-term debt instruments assuming our
actual level of long-term debt indebtedness as of
December 31, 2003:

|               |                                                                                                                  |                        |   |        |  |      |   |       |  |      |   |            |  |            |  |  |  |  |  |  |  |  |   |         |  |  |   |         | 
|-------------- | ---------------------------------------------------------------------------------------------------------------- | ---------------------- | - | ------ |  | ---- | - | ----- |  | ---- | - | ---------- |  | ---------- |  |  |  |  |  |  |  |  | - | ------- |  |  | - | ------- | 
|               |                                                                                                                  |                       
|               |                                                                                                                  | Expected Maturity Date
|               |                                                                                                                  |                       
|               |                                                                                                                  | 2004                   |   | 2005   |  | 2006 |   | 2007  |  | 2008 |   | Thereafter |  | Fair Value
|               |                                                                                                                  |                        |   |        |  |      |   |       |  |      |   |            |  |           
|               |                                                                                                                  |                       
|               |                                                                                                                  | (In thousands)        
|Liabilities    |                                                                                                                  |                        |   |        |  |      |   |       |  |      |   |            |  |            |  |  |  |  |  |  |  |  |   |         |  |  |   |        
|Long-term debt |                                                                                                                  |                        |   |        |  |      |   |       |  |      |   |            |  |            |  |  |  |  |  |  |  |  |   |         |  |  |   |        
|               | Fixed rate (9.0%)                                                                                                |                        |   |        |  |      |   |       |  |      |   |            |  |            |  |  |  |  |  |  |  |  | $ | 300,000 |  |  | $ | 322,500 | 
|               | Fixed rate (10 3/8%)                                                                                             |                        |   |        |  |      |   |       |  |      |   |            |  |            |  |  |  |  |  |  |  |  | $ | 185,000 |  |  | $ | 207,200 | 
|               | Revolving loan, variable rate (3.92% at
    December 31, 2003)                                                   |                        | $ | 10,000 |  |      |   |       |  |      |   |            |  |            |  |  |  |  |  |  |  |  |   |         |  |  | $ | 10,000  | 
|               | Variable rate, warehouse line of credit (2.38% at
    December 31, 2003)                                         |                        | $ | 63,243 |  |      |   |       |  |      |   |            |  |            |  |  |  |  |  |  |  |  |   |         |  |  | $ | 63,243  | 
|               | Other homebuilding borrowings (at various
    interest rates ranging from 3.9% to 6.0% at December 31,
    2003) |                        |   |        |  |      | $ | 5,351 |  |      | $ | 2,576      |  |            |  |  |  |  |  |  |  |  |   |         |  |  | $ | 7,927   | 

Our operations are interest rate sensitive.
Overall housing demand is adversely affected by increases in
interest rates. If mortgage interest rates increase
significantly, this may negatively affect the ability of
homebuyers to secure adequate financing. Higher interest rates
also increase our borrowing costs because, as indicated above,
our bank loans will fluctuate with the prime and LIBOR lending
rates, both upwards and downwards.

We may be adversely affected during periods of
high inflation, primarily because of higher land and
construction costs. In addition, inflation may result in higher
interest rates. This may significantly affect the affordability
of permanent mortgage financing for prospective purchasers,
which in turn adversely

38



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##### 



affects overall housing demand. In addition, this
may increase our interest costs. We attempt to pass through to
our customers any increases in our costs through increased
selling prices and, to date, inflation has not had a material
adverse effect on our results of operations. However, there is
no assurance that inflation will not have a material adverse
impact on our future results of operations.


Special Note Regarding Forward Looking
Statements

This annual report contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Discussions
containing forward-looking statements may be found in the
material set forth in the sections entitled Business
and Managements Discussion and Analysis of Financial
Condition and Results of Operations.

These statements concern expectations, beliefs,
projections, future plans and strategies, anticipated events or
trends and similar expressions concerning matters that are not
historical facts. Specifically, this annual report contains
forward-looking statements including those regarding:



| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our expectations regarding growth opportunities
    in the homebuilding industry and our ability to successfully
    take advantage of such opportunities to expand our operations
    and maximize our financial returns;
|
| |  | our expectations regarding population growth and
    median income growth trends and their impact on future housing
    demand in our markets;                                                                            
|
| |  | our expectation regarding the impact of
    geographic and customer diversification;                                                                                                                                      
|
| |  | our expectations that strong demand for new
    housing in our current markets will contribute to our growth;                                                                                                             
|
| |  | our belief that by leveraging our current
    operations, we will, over time, maximize our financial returns,
    strengthen our margins and increase our revenues and
    profitability;                                 
|
| |  | our intention to expand our market share by
    increasing the number of homes we deliver with lower average
    sales prices;                                                                                            
|
| |  | our ability to successfully integrate our current
    operations and any future acquisitions, and to recognize
    anticipated operating efficiencies, cost savings and revenue
    increases;                            
|
| |  | our expectations regarding our land and homesite
    acquisition strategy and its impact on our business;                                                                                                                 
|
| |  | our belief that homes in premier locations will
    continue to attract homebuyers in both strong and weak economic
    conditions;                                                                                       
|
| |  | our expectations regarding land sales in the
    future;                                                                                                                                                                  
|
| |  | our intention to grow the financial services
    business;                                                                                                                                                                
|
| |  | our belief regarding growth opportunities within
    our financial services business;                                                                                                                                     
|
| |  | our expectations regarding our capture ratios
    within our financial services business for 2004;                                                                                                                        
|
| |  | our expectations regarding the impact of our
    business initiatives on our ability to capture repeat business,
    to minimize our exposure to adverse economic conditions and to
    increase our revenue;             
|
| |  | our expectations regarding the implementation of
    the Performance Improvement Plan and best practices initiatives
    across our operating divisions;                                                                  
|
| |  | our belief that we have adequate financial
    resources to meet our current and anticipated working capital
    and land and homesite acquisition and development needs;                                                 
|
| |  | our expectations regarding the implementation of
    certain recent accounting pronouncements;                                                                                                                            

39



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##### 





| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the impact of inflation on our future results of
    operations;                                                                                                          
|
| |  | our ability to pass through to our customers any
    increases in our costs;                                                                                              
|
| |  | our expectations regarding the successful
    completion of our transition plan and the anticipated benefits
    resulting from the implementation of our transition plan;
|
| |  | our estimates regarding the costs and timing of
    completion of the various components of our transition plan;                                                          
|
| |  | our expectations regarding the timing and
    benefits of expenditures related to our transition plan;                                                                    
|
| |  | our estimates regarding SG&A expenses to be
    incurred during 2004; and                                                                                                 
|
| |  | our expectations regarding the effect of
    increased interest incurred on our gross margins in future
    periods.                                                      

These forward-looking statements reflect our
current views about future events and are subject to risks,
uncertainties and assumptions. We caution readers that certain
important factors may have affected and could in the future
affect our actual results and could cause actual results to
differ significantly from those expressed in any forward-looking
statement. The most important factors that could prevent us from
achieving our goals, and cause the assumptions underlying
forward-looking statements and the actual results to differ
materially from those expressed in or implied by those
forward-looking statements include, but are not limited to, the
following:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our significant level of debt and the impact of
    the restrictions imposed on us by the terms of this debt;                                                      
|
| |  | our ability to borrow or otherwise finance our
    business in the future;                                                                                         
|
| |  | our ability to identify and acquire, at
    anticipated prices, additional homebuilding opportunities;                                                             
|
| |  | our relationship with Technical Olympic S.A. and
    its control over our business activities;                                                                     
|
| |  | our ability to successfully integrate and to
    realize the expected benefits of recent acquisitions;                                                             
|
| |  | any delays or difficulties encountered in
    completing our transition plan or any negative effects resulting
    from the implementation of our transition plan; 
|
| |  | economic or other business conditions that affect
    the desire or ability of our customers to purchase new homes in
    markets in which we conduct our business;
|
| |  | a decline in the demand for, or the prices of,
    housing;                                                                                                        
|
| |  | a decline in the value of the land and home
    inventories we maintain;                                                                                           
|
| |  | an increase in the cost of, or shortages in the
    availability of, skilled labor or construction materials;                                                      
|
| |  | an increase in interest rates;                                                                                                                                     
|
| |  | our ability to successfully dispose of developed
    properties or undeveloped land or homesites at expected prices
    and within anticipated time frames;        
|
| |  | our ability to compete in our existing and future
    markets; and                                                                                                 
|
| |  | an increase or change in governmental regulations.                                                                                                                 

40



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##### 





|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Financial statements and supplementary data for
us are on pages F-1 through F-21.



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

In order to ensure that the information we must
disclose in our filings with the Securities and Exchange
Commission is recorded, processed, summarized, and reported on a
timely basis, we have formalized our disclosure controls and
procedures. Our principal executive officer and principal
financial officer have reviewed and evaluated the effectiveness
of our disclosure controls and procedures, as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), as of
December 31, 2003. Based on such evaluation, such officers
have concluded that, as of December 31, 2003, our
disclosure controls and procedures were effective in timely
alerting them to material information relating to us (and our
consolidated subsidiaries) required to be included in our
periodic SEC filings. There has been no change in our internal
control over financial reporting during the year ended
December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.

PART III



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The items required by Part III, Item 10
are incorporated herein by reference from the Registrants
Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed on or before April 29, 2004.

We have adopted a Code of Ethics that applies to
our Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer and Controller. The Code of Ethics is located
on our internet web site at www.tousa.com under Investor
Information  Corporate Governance and
Responsibility.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The items required by Part III, Item 11 are
incorporated herein by reference from the Registrants
Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed on or before April 29, 2004.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The items required by Part III, Item 12
are incorporated herein by reference from the Registrants
Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed on or before April 29, 2004.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The items required by Part III, Item 13
are incorporated herein by reference from the Registrants
Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed on or before April 29, 2004.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The items required by Part III, Item 14
are incorporated herein by reference from the Registrants
Proxy Statement for its 2004 Annual Meeting of Stockholders to
be filed on or before April 29, 2004.

41



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##### 





|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)Documents filed as part of this
report:



| |                        
| | -----------------------
| | (1)Financial Statements



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | See Item 8. Financial Statements and
    Supplementary Data for Financial Statements included with
    this Annual Report on Form 10-K.



| |                                 
| | --------------------------------
| | (2)Financial Statement Schedules
|
| | None.                           
|
| | (3)Exhibits                     

|       |      |                     |  |                                                                                                                                                                                                                                                                                                                      
|------ | ---- | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |      | Exhibit Description
|       |      |                    
|       | 2.1  |                     |  | Agreement and Plan of Merger dated April 8,
    2002, by and among Newmark Homes Corp., Engle Holdings Corp.,
    and Technical Olympic, Inc.(1)                                                                                                                                                                     
|       | 3.1  |                     |  | Certificate of Incorporation of Newmark Homes
    Corp.(2)                                                                                                                                                                                                                                                           
|       | 3.2  |                     |  | Certificate of Amendment to the Certificate of
    Incorporation.(3)                                                                                                                                                                                                                                                 
|       | 3.3  |                     |  | Amended and Restated Bylaws.(3)                                                                                                                                                                                                                                                                                      
|       | 4.1  |                     |  | Indenture, dated as of June 25, 2002, by and
    among Technical Olympic USA, Inc. and the subsidiaries named
    therein and Wells Fargo Bank Minnesota, National Association, as
    Trustee covering up to $200,000,000 9% Senior Notes due 2010.(4)                                                              
|       | 4.2  |                     |  | Indenture, dated as of June 25, 2002, by and
    among Technical Olympic USA, Inc., the subsidiaries name therein
    and Wells Fargo Bank Minnesota, National Association, as Trustee
    covering up to $150,000,000 10 3/8% Senior Subordinated
    Notes due 2012.(4)                                            
|       | 4.3  |                     |  | Registration Rights Agreement, dated
    June 25, 2002, among Technical Olympic USA, Inc., certain
    direct and indirect subsidiaries of Technical Olympic USA, Inc.,
    Salomon Smith Barney, Inc., Deutsche Bank Securities, Inc. and
    Fleet Securities, Inc. relating to the Senior Notes.(4)               
|       | 4.4  |                     |  | Supplemental Indenture for the 9% Senior Notes
    due 2010, dated July 24, 2002, by and among Technical
    Olympic USA, Inc. and the subsidiaries named therein and Wells
    Fargo Bank Minnesota, National Association, as Trustee.(3)                                                                           
|       | 4.5  |                     |  | Supplemental Indenture for the 10 3/8%
    Senior Subordinated Notes due 2012, dated July 24, 2002 by
    and among Technical Olympic USA, Inc. and the subsidiaries named
    therein and Wells Fargo Bank Minnesota, National Association, as
    Trustee.(3)                                                      
|       | 4.6  |                     |  | Form of Technical Olympic USA, Inc. 9% Senior
    Note due 2010 (included in Exhibit A to
    Exhibit 4.1).(4)                                                                                                                                                                                                       
|       | 4.7  |                     |  | Form of Technical Olympic USA, Inc. 10 3/8%
    Senior Subordinated Note due 2012 (included in Exhibit A of
    Exhibit 4.2).(4)                                                                                                                                                                                     
|       | 4.8  |                     |  | Registration Rights Agreement, dated
    June 25, 2002, among Technical Olympic USA, Inc., certain
    direct and indirect subsidiaries of Technical Olympic USA, Inc.,
    Salomon Smith Barney Inc., Deutsche Bank Securities Inc. and
    Fleet Securities, Inc. relating to the Senior Subordinated
    Notes.(5)
|       | 4.9  |                     |  | Registration Rights Agreement, dated
    June 25, 2002, among Technical Olympic USA, Inc. and
    Technical Olympic, Inc.(6)                                                                                                                                                                                         
|       | 4.10 |                     |  | Specimen of Stock Certificate of Technical
    Olympic USA, Inc.(7)                                                                                                                                                                                                                                                  
|       | 4.11 |                     |  | Supplemental Indenture for the 9% Senior Notes
    due 2010 issued in June 2002, dated as of February 3, 2003,
    by and among Technical Olympic USA, Inc. and the subsidiaries
    named therein and Wells Fargo Bank Minnesota, National
    Association, as Trustee.(9)                                          
|       | 4.12 |                     |  | Supplemental Indenture for the 10 3/8%
    Senior Subordinated Notes due 2012 issued in June 2002, dated as
    of February 3, 2003, by and among Technical Olympic USA,
    Inc. and the subsidiaries named therein and Wells Fargo Bank
    Minnesota, National Association, as Trustee.(9)                        

42



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##### 



|       |       |                     |  |                                                                                                                                                                                                                                                                                                           
|------ | ----- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       | Exhibit Description
|       |       |                    
|       | 4.13  |                     |  | Indenture, dated as of February 3, 2003,
    among Technical Olympic USA, Inc., the subsidiaries named
    therein, Salomon Smith Barney Inc., Deutsche Bank Securities
    Inc., Fleet Securities, Inc. and Credit Lyonnais Securities
    (USA) Inc.(9)                                                 
|       | 4.14  |                     |  | Registration Rights Agreement, dated
    February 3, 2003, among Technical Olympic USA, Inc., the
    subsidiaries named therein, Salomon Smith Barney Inc., Deutsche
    Bank Securities Inc., Fleet Securities, Inc. and Credit Lyonnais
    Securities (USA) Inc.(9)                                   
|       | 4.15  |                     |  | Form of Technical Olympic USA, Inc. 9% Senior
    Note due 2010 (included in Exhibit A to
    Exhibit 4.13).(9)                                                                                                                                                                                           
|       | 4.16  |                     |  | Supplemental Indenture for the 9% Senior Notes
    due 2010 issued in June 2002, dated as of March 31, 2003,
    by and among Technical Olympic USA, Inc. and the subsidiaries
    named therein and Wells Fargo Bank Minnesota, National
    Association, as Trustee.(10)                                
|       | 4.17  |                     |  | Supplemental Indenture for the 9% Senior Notes
    due 2010 issued in February 2003, dated as of March 31,
    2003, by and among Technical Olympic USA, Inc. and the
    subsidiaries named therein and Wells Fargo Bank Minnesota,
    National Association, as Trustee.(8)                             
|       | 4.18  |                     |  | Supplemental Indenture for the 10 3/8%
    Senior Subordinated Notes due 2012 issued in June 2002, dated as
    of March 31, 2003, by and among Technical Olympic USA,
    Inc., the subsidiaries named therein and Wells Fargo Bank
    Minnesota, National Association, as Trustee.(10)                 
|       | 4.19  |                     |  | Technical Olympic USA, Inc. 10 3/8% Senior
    Subordinated Note due 2012, dated as of April 22, 2003, in
    the amount of $35,000,000.(12)                                                                                                                                                              
|       | 4.20  |                     |  | Registration Rights Agreement, dated
    April 22, 2003, among Technical Olympic USA, Inc., the
    subsidiaries named therein, and Citigroup Global Markets Inc.(12)                                                                                                                                     
|       | 10.1* |                     |  | Form of Indemnification Agreement.                                                                                                                                                                                                                                                                        
|       | 10.2  |                     |  | Form of Tax Allocation Agreement between
    Technical Olympic, Inc. (formerly known as Technical Olympic
    USA, Inc.) and various affiliates and subsidiaries, including
    Technical Olympic USA, Inc. and its subsidiaries dated
    March 15, 2000.(13)                                            
|       | 10.3  |                     |  | Employment Agreement, effective as of
    October 12, 2000, between TOUSA Homes, Inc. (f/k/a Engle
    Homes, Inc.) and Harry Engelstein.(14)                                                                                                                                                             
|       | 10.9* |                     |  | Amended and Restated Employment Agreement between
    Technical Olympic USA, Inc. and Antonio B. Mon dated
    January 27, 2004, effective as of July 26, 2003.                                                                                                                                           
|       | 10.10 |                     |  | Employment Agreement between Technical Olympic
    USA, Inc. and Tommy L. McAden dated July 12, 2002,
    effective June 25, 2002.(16)                                                                                                                                                                    
|       | 10.11 |                     |  | Employment Agreement between Technical Olympic
    USA, Inc. and Yannis Delikanakis dated January 1, 2003.(9)                                                                                                                                                                                             
|       | 10.12 |                     |  | Credit Agreement dated June 25, 2002, among
    Technical Olympic USA, Inc., the Lenders and Issuers named
    therein, Citicorp North America, Inc. as Administrative Agent,
    Fleet National Bank as Documentation Agent and Salomon Smith
    Barney Inc. as Sole Arranger and Sole Book Manager.(11)
|       | 10.13 |                     |  | Technical Olympic USA, Inc. Annual and Long-Term
    Incentive Plan.(17)                                                                                                                                                                                                                                  
|       | 10.14 |                     |  | Credit Agreement, dated August 1, 2002,
    between Preferred Home Mortgage Company, and Guaranty Bank.(9)                                                                                                                                                                                                
|       | 10.15 |                     |  | First Amendment to Credit Agreement, dated
    October 15, 2002, between Preferred Home Mortgage Company,
    Technical Mortgage, L.P. and Guaranty Bank.(9)                                                                                                                                              
|       | 10.16 |                     |  | Second Amendment to Credit Agreement, dated
    November 22, 2002, between Preferred Home Mortgage Company,
    Technical Mortgage, L.P. and Guaranty Bank.(9)                                                                                                                                            
|       | 10.17 |                     |  | Third Amendment to Credit Agreement, dated
    January 5, 2003, between Preferred Home Mortgage Company,
    Technical Mortgage, L.P. and Guaranty Bank.(9)                                                                                                                                               
|       | 10.18 |                     |  | Guaranty of Technical Olympic USA, Inc., dated
    August 1, 2002, in favor of Guaranty Bank.(9)                                                                                                                                                                                                          
|       | 10.19 |                     |  | Mortgage Loan Purchase and Sale Agreement, dated
    August 1, 2002, between Preferred Home Mortgage Company and
    Guaranty Bank.(9)                                                                                                                                                                    

43



---



##### 



|       |        |                     |  |                                                                                                                                                                                                                  
|------ | ------ | ------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        | Exhibit Description
|       |        |                    
|       | 10.20  |                     |  | First Amendment to Mortgage Loan Purchase and
    Sale Agreement, dated October 15, 2002, between Preferred
    Home Mortgage Company and Guaranty Bank.(9)                                                      
|       | 10.21  |                     |  | Mortgage Loan Purchase and Sale Agreement, dated
    August 1, 2002, between Technical Mortgage, L.P. and
    Guaranty Bank.(9)                                                                                  
|       | 10.22  |                     |  | First Amendment to Mortgage Loan Purchase and
    Sale Agreement, dated October 15, 2002, between Technical
    Mortgage, L.P. and Guaranty Bank.(9)                                                             
|       | 10.23  |                     |  | Amended and Restated Credit Agreement, dated as
    of April 4, 2003, among Technical Olympic USA, Inc., the
    lenders and issuers party thereto, Citicorp North America, Inc.
    and Fleet National Bank.(10)
|       | 10.24  |                     |  | Facility Increase Letter, dated April 22,
    2003.(10)                                                                                                                                                          
|       | 10.25  |                     |  | Consulting Agreement, dated as of January 1,
    2003, between Technical Olympic USA, Inc. and Lonnie M.
    Fedrick.(10)                                                                                        
|       | 10.26  |                     |  | Contractor Agreement, effective as of
    November 6, 2000, between Technical Olympic USA, Inc.
    (f/k/a Newmark Homes Corp.) and Technical Olympic S.A.(12)                                                   
|       | 10.27  |                     |  | Supplemental Contractor Agreement, effective as
    of January 4, 2001, between Technical Olympic USA, Inc.
    (f/k/a Newmark Homes Corp.) and Technical Olympic S.A.(12)                                       
|       | 10.28  |                     |  | Contractor Agreement, effective as of
    November 22, 2000, between TOUSA Homes, Inc. (f/k/a Engle
    Homes, Inc.) and Technical Olympic S.A.(12)                                                              
|       | 10.29  |                     |  | Supplemental Contractor Agreement, effective as
    of January 3, 2001, between TOUSA Homes, Inc. (f/k/a Engle
    Homes Inc.) and Technical Olympic S.A.(12)                                                    
|       | 10.30  |                     |  | Employment Agreement, dated as of January 1,
    2003, between Technical Olympic USA, Inc. and Eric Rome.(12)                                                                                                    
|       | 10.31  |                     |  | Employment Agreement, dated as of
    November 12, 2000, between TOUSA Homes, Inc. and Mark
    Upton.(18)                                                                                                       
|       | 10.32  |                     |  | First Amendment to Employment Agreement, dated as
    of April 1, 2003, among Technical Olympic USA, Inc., TOUSA
    Homes, Inc. and Mark Upton.(18)                                                             
|       | 10.33  |                     |  | Amended and Restated Management Services
    Agreement, dated as of June 13, 2003, between Technical
    Olympic USA, Inc. and Technical Olympic, Inc.(12)                                                       
|       | 10.34  |                     |  | Fourth Amendment to Credit Agreement, effective
    as of June 24, 2003, between Preferred Home Mortgage
    Company and Guaranty Bank.(18)                                                                      
|       | 10.36  |                     |  | Fifth Amendment to Credit Agreement, effective as
    of September 22, 2003, between Preferred Home Mortgage
    Company and Guaranty Bank.(19)                                                                  
|       | 10.37* |                     |  | Amended and Restated Credit Agreement, dated as
    of December 19, 2003, between Preferred Home Mortgage
    Company and Guaranty Bank.                                                                         
|       | 10.38* |                     |  | Amended and Restated Security Agreement, dated as
    of December 19, 2003, between Preferred Home Mortgage
    Company and Guaranty Bank.                                                                       
|       | 10.39* |                     |  | Keep-Well Agreement made by Technical Olympic
    USA, Inc., dated as of December 19, 2003, in favor of
    Guaranty Bank.                                                                                       
|       | 10.40* |                     |  | Amended and Restated Mortgage Loan Purchase and
    Sale Agreement, dated as of December 19, 2003, between
    Preferred Home Mortgage Company and Guaranty Bank.                                                
|       | 21.0*  |                     |  | Subsidiaries of the Registrant.                                                                                                                                                                                  
|       | 23.1*  |                     |  | Consent of Ernst & Young LLP independent
    certified public accountants.                                                                                                                                       
|       | 31.1*  |                     |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          
|       | 31.2*  |                     |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          

44



---



##### 



|       |       |                     |  |                                                                                                        
|------ | ----- | ------------------- |  | -------------------------------------------------------------------------------------------------------
|Number |       | Exhibit Description
|       |       |                    
|       | 32.1* |                     |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.
|       | 32.2* |                     |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.



---



| |   |                
| | - | ---------------
| | * | Filed herewith.



| |     |                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to Exhibit 99.A to
    the Information Statement on Schedule 14-C, dated
    June 3, 2002, filed by the Registrant.              
|
| | (2) | Incorporated by reference to the Form 8-K,
    dated March 23, 2001, previously filed by the Registrant.                                                   
|
| | (3) | Incorporated by reference to the Registration
    Statement on Form S-4 previously filed by the Registrant
    (Registration Statement No. 333-100013).    
|
| | (4) | Incorporated by reference to the Form 8-K,
    dated July 9, 2002, previously filed by the Registrant.                                                     
|
| | (5) | Incorporated by reference to Exhibit 4.4 to
    the Form 8-K, dated July 9, 2002, previously filed by
    the Registrant.                                  
|
| | (6) | Incorporated by reference to Exhibit 2.2 to
    the Form 8-K, dated July 9, 2002, previously filed by
    the Registrant.                                  
|
| | (7) | Incorporated by reference to Exhibit 4.1 to
    the Registration Statement on Form S-8 previously filed by
    the Registrant (Registration No. 333-99307).
|
| | (8) | Incorporated by reference to the Registration
    Statement on Form S-4 previously filed by the Registrant
    (Registration Statement No. 333-104278).    
|
| | (9) | Incorporated by reference to the Form 10-K
    for the year ended December 31, 2002, previously filed by
    the Registrant.                               



|     |                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Form 10-Q
    for the quarter ended March 31, 2003, previously filed by
    the Registrant.                                
|    
|(11) | Incorporated by reference to Exhibit 99.2 to
    the Form 8-K, dated July 9, 2002, previously filed by
    the Registrant.                                  
|    
|(12) | Incorporated by reference to the Registration
    Statement on Form S-1 previously filed by the Registrant
    (Registration Statement No. 333-106537).     
|    
|(13) | Incorporated by reference to the Form 10-K
    for the year ended December 31, 1999, previously filed by
    the Registrant.                                
|    
|(14) | Incorporated by reference to Exhibit 99.D.4
    to the Schedule TO previously filed by Technical Olympic,
    Inc. (File No. 005-42975).                    
|    
|(15) | Incorporated by reference to Exhibit 99.E to
    the Information Statement on Schedule 14-C, dated
    June 3, 2002, previously filed by the Registrant.    
|    
|(16) | Incorporated by reference to the Form 10-Q
    for the quarter ended June 30, 2002, previously filed by
    the Registrant.                                 
|    
|(17) | Incorporated by reference to Exhibit 10.1 to
    the Registration Statement on Form S-8 previously filed by
    the Registrant (Registration No. 333-99307).
|    
|(18) | Incorporated by reference to the Registration
    Statement on Form S-4 previously filed by the Registrant
    (Registration Statement No. 333-107091).     
|    
|(19) | Incorporated by reference to the Form 10-Q
    for the quarter ended September 30, 2003, previously filed
    by the Registrant.                            

(b)Reports on Form 8-K:

On October 28, 2003, we filed a Current
Report on Form 8-K furnishing information under
Item 12 regarding certain operational data for the three
and nine months ended September 30, 2003.

45



---



##### 



On November 3, 2003, we filed a Current
Report on Form 8-K furnishing information under
Item 12 regarding financial results for the third quarter
ended September 30, 2003 and financial and operational
guidance for the full years 2003 and 2004.

46



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                            
| | ---------------------------
| | TECHNICAL OLYMPIC USA, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ ANTONIO B. MON

| |                                          
| | -----------------------------------------
| |                                          
| | Antonio B. Mon                           
| | President and Chief Executive
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                             |  |                                                                                                                          |  |                  
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | -----------------
|Signature                                    |  | Title                                                                                                                    |  | Date             
|                                             |  |                                                                                                                          |  |                  
|/s/ ANTONIO B. MONAntonio B. Mon             |  | Executive Vice Chairman, President, Chief
    Executive Officer (Principal Executive Officer) and Director               |  | February 10, 2004
|                                            
|/s/ TOMMY L. MCADENTommy L. McAden           |  | Vice President  Finance and
    Administration, Chief Financial Officer and Treasurer (Principal
    Financial Officer) |  | February 10, 2004
|                                            
|/s/ RANDY L. KOTLERRandy L. Kotler           |  | Vice President  Chief Accounting
    Officer (Principal Accounting Officer)                                             |  | February 10, 2004
|                                            
|/s/ KONSTANTINOS STENGOSKonstantinos Stengos |  | Chairman of the Board and Director                                                                                       |  | February 10, 2004
|                                            
|/s/ YANNIS DELIKANAKISYannis Delikanakis     |  | Executive Vice President and Director                                                                                    |  | February 10, 2004
|                                            
|/s/ LONNIE M. FEDRICKLonnie M. Fedrick       |  | Director                                                                                                                 |  | February 10, 2004
|                                            
|/s/ ANDREAS STENGOSAndreas Stengos           |  | Director                                                                                                                 |  | February 10, 2004
|                                            
|/s/ GEORGE STENGOSGeorge Stengos             |  | Director                                                                                                                 |  | February 10, 2004
|                                            
|/s/ LARRY D. HORNERLarry D. Horner           |  | Director                                                                                                                 |  | February 10, 2004

47



---



##### 



|                                       |  |          |  |                  
|-------------------------------------- |  | -------- |  | -----------------
|Signature                              |  | Title    |  | Date             
|                                       |  |          |  |                  
|                                      
|/s/ WILLIAM A. HASLERWilliam A. Hasler |  | Director |  | February 10, 2004
|                                      
|/s/ MICHAEL J. POULOSMichael J. Poulos |  | Director |  | February 10, 2004

48



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                                                                         |  |      |     | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                         |  | Page
|                                                                                                         |  |     
|Report of Independent Certified Public Accountants                                                       |  |      | F-2 | 
|Consolidated Statements of Financial Condition as
    of December 31, 2002 and 2003                      |  |      | F-3 | 
|Consolidated Statements of Income for the years
    ended December 31, 2001, 2002 and 2003               |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2001, 2002 and 2003 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003           |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                               |  |      | F-7 | 

F-1



---



##### 



REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

The Board of Directors and Stockholders

Technical Olympic USA, Inc.


We have audited the accompanying consolidated
statements of financial condition of Technical Olympic USA, Inc.
and subsidiaries (the Company) as of December 31, 2003 and
2002, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Technical Olympic USA, Inc.
and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

Miami, Florida

January 30, 2004


F-2



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION

|                                                                                                                                                                                |              |                        |           |        |  |   |           |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------------------- | --------- | ------ |  | - | --------- | ------ | 
|                                                                                                                                                                                |              |                       
|                                                                                                                                                                                |              | December 31,          
|                                                                                                                                                                                |              |                       
|                                                                                                                                                                                |              | 2002                   |           | 2003  
|                                                                                                                                                                                |              |                        |           |       
|                                                                                                                                                                                |              |                       
|                                                                                                                                                                                |              | (Dollars in thousands,
|                                                                                                                                                                                |              | except share data)    
|ASSETS                                                                                                                                                                         
|Homebuilding:                                                                                                                                                                   |              |                        |           |        |  |   |           |       
|Cash and cash equivalents:                                                                                                                                                      |              |                        |           |        |  |   |           |       
|                                                                                                                                                                                | Unrestricted |                        | $         | 44,825 |  |   | $         | 73,703 | 
|                                                                                                                                                                                | Restricted   |                        |           | 23,645 |  |   |           | 21,222 | 
|Inventory                                                                                                                                                                       |              |                        | 753,872   |        |  |   | 1,183,423 |       
|Property and equipment, net                                                                                                                                                     |              |                        | 13,862    |        |  |   | 23,727    |       
|Other assets                                                                                                                                                                    |              |                        | 30,681    |        |  |   | 43,653    |       
|Goodwill                                                                                                                                                                        |              |                        | 74,345    |        |  |   | 100,103   |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|                                                                                                                                                                                |              |                        | 941,230   |        |  |   | 1,445,831 |       
|Financial Services:                                                                                                                                                             |              |                        |           |        |  |   |           |       
|Cash and cash equivalents:                                                                                                                                                      |              |                        |           |        |  |   |           |       
|                                                                                                                                                                                | Unrestricted |                        |           | 4,386  |  |   |           | 3,148  | 
|                                                                                                                                                                                | Restricted   |                        |           | 22,866 |  |   |           | 73,358 | 
|Mortgage loans held for sale                                                                                                                                                    |              |                        | 58,840    |        |  |   | 75,241    |       
|Other assets                                                                                                                                                                    |              |                        | 3,659     |        |  |   | 3,544     |       
|Goodwill                                                                                                                                                                        |              |                        | 3,907     |        |  |   | 3,907     |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|                                                                                                                                                                                |              |                        | 93,658    |        |  |   | 159,198   |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|Total assets                                                                                                                                                                    |              | $                      | 1,034,888 |        |  | $ | 1,605,029 |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                       
|Homebuilding:                                                                                                                                                                   |              |                        |           |        |  |   |           |       
|Accounts payable                                                                                                                                                                |              | $                      | 18,352    |        |  | $ | 50,228    |       
|Accrued expenses and other liabilities                                                                                                                                          |              |                        | 78,468    |        |  |   | 98,711    |       
|Customer deposits                                                                                                                                                               |              |                        | 24,564    |        |  |   | 35,506    |       
|Consolidated land bank obligations                                                                                                                                              |              |                        | 16,288    |        |  |   | 242,740   |       
|Homebuilding borrowings                                                                                                                                                         |              |                        | 413,110   |        |  |   | 497,919   |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|                                                                                                                                                                                |              |                        | 550,782   |        |  |   | 925,104   |       
|Financial Services:                                                                                                                                                             |              |                        |           |        |  |   |           |       
|Accounts payable and other liabilities                                                                                                                                          |              |                        | 21,560    |        |  |   | 74,893    |       
|Financial services borrowings                                                                                                                                                   |              |                        | 48,309    |        |  |   | 63,243    |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|                                                                                                                                                                                |              |                        | 69,869    |        |  |   | 138,136   |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|Total liabilities                                                                                                                                                               |              |                        | 620,651   |        |  |   | 1,063,240 |       
|Minority interest                                                                                                                                                               |              |                        | 9,092     |        |  |   | 5,379     |       
|Commitments and contingencies                                                                                                                                                   |              |                        |          |        |  |   |          |       
|Stockholders equity:                                                                                                                                                           |              |                        |           |        |  |   |           |       
|Preferred stock  $0.01 par value;
    3,000,000 shares authorized; none issued or outstanding                                                                                  |              |                        |          |        |  |   |          |       
|Common stock  $.01 par value;
    67,000,000 shares authorized and 27,878,787 and 29,889,036
    shares issued and outstanding at December 31, 2002 and
    2003, respectively |              |                        | 279       |        |  |   | 299       |       
|Additional paid-in capital                                                                                                                                                      |              |                        | 322,400   |        |  |   | 370,926   |       
|Retained earnings                                                                                                                                                               |              |                        | 82,466    |        |  |   | 165,185   |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|Total stockholders equity                                                                                                                                                      |              |                        | 405,145   |        |  |   | 536,410   |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       
|Total liabilities and stockholders equity                                                                                                                                      |              | $                      | 1,034,888 |        |  | $ | 1,605,029 |       
|                                                                                                                                                                                |              |                        |           |        |  |   |           |       

See accompanying notes to consolidated financial
statements.

F-3



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |            | 
|--------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | --------- | ---------- |  | ---- | --------- | ---------- |  | - | --------- | ---------- | 
|                                                          |                                                   |                                          
|                                                          |                                                   | Year Ended December 31,                  
|                                                          |                                                   |                                          
|                                                          |                                                   | 2001                                      |           | 2002       |  | 2003
|                                                          |                                                   |                                           |           |            |  |     
|                                                          |                                                   |                                          
|                                                          |                                                   | (Dollars in thousands, except share data)
|Homebuilding:                                             |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Revenues:                                                 |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Homes sales                                       |                                           | $         | 1,374,551  |  |      | $         | 1,350,330  |  |   | $         | 1,604,401  | 
|                                                          | Land/lot sales                                    |                                           |           | 18,361     |  |      |           | 27,379     |  |   |           | 38,173     | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          |                                                   |                                           | 1,392,912 |            |  |      | 1,377,709 |            |  |   | 1,642,574 |           
|Cost of sales:                                            |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Home sales                                        |                                           |           | 1,091,626  |  |      |           | 1,077,133  |  |   |           | 1,291,816  | 
|                                                          | Land/lot sales                                    |                                           |           | 16,660     |  |      |           | 24,430     |  |   |           | 27,544     | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          |                                                   |                                           | 1,108,286 |            |  |      | 1,101,563 |            |  |   | 1,319,360 |           
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Gross profit                                              |                                                   |                                           | 284,626   |            |  |      | 276,146   |            |  |   | 323,214   |           
|                                                         
|Selling, general and administrative expenses              |                                                   |                                           | 148,541   |            |  |      | 156,180   |            |  |   | 200,796   |           
|Variable stock-based compensation expense                 |                                                   |                                           |          |            |  |      |          |            |  |   | 1,221     |           
|Depreciation and amortization expense                     |                                                   |                                           | 8,849     |            |  |      | 5,952     |            |  |   | 9,262     |           
|Severance and merger related expenses                     |                                                   |                                           | 2,643     |            |  |      | 19,963    |            |  |   | 775       |           
|Loss on early retirement of debt                          |                                                   |                                           |          |            |  |      | 5,411     |            |  |   |          |           
|Other income, net                                         |                                                   |                                           | (3,941    | )          |  |      | (2,569    | )          |  |   | (3,551    | )         
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Homebuilding pretax income                                |                                                   |                                           | 128,534   |            |  |      | 91,209    |            |  |   | 114,711   |           
|                                                         
|Financial Services:                                       |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Revenues                                                  |                                                   |                                           | 29,137    |            |  |      | 36,578    |            |  |   | 45,251    |           
|Expenses                                                  |                                                   |                                           | 17,688    |            |  |      | 20,846    |            |  |   | 29,696    |           
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Financial Services pretax income                          |                                                   |                                           | 11,449    |            |  |      | 15,732    |            |  |   | 15,555    |           
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Income from continuing operations before income
    taxes |                                                   |                                           | 139,983   |            |  |      | 106,941   |            |  |   | 130,266   |           
|Income tax expense                                        |                                                   |                                           | 52,218    |            |  |      | 39,900    |            |  |   | 47,547    |           
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Income from continuing operations                         |                                                   |                                           | 87,765    |            |  |      | 67,041    |            |  |   | 82,719    |           
|                                                         
|Discontinued operations:                                  |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Income from discontinued operations               |                                           |           | 10,118     |  |      |           | 7,922      |  |   |           |           | 
|                                                          | Income tax expense                                |                                           |           | 3,846      |  |      |           | 2,959      |  |   |           |           | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Income from discontinued operations, net of taxes |                                           |           | 6,272      |  |      |           | 4,963      |  |   |           |           | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Net income                                                |                                                   | $                                         | 94,037    |            |  | $    | 72,004    |            |  | $ | 82,719    |           
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Earnings per common share  basic                         |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | From continuing operations                        |                                           | $         | 3.15       |  |      | $         | 2.40       |  |   | $         | 2.94       | 
|                                                          | From discontinued operations                      |                                           |           | 0.22       |  |      |           | 0.18       |  |   |           |           | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Net income                                        |                                           | $         | 3.37       |  |      | $         | 2.58       |  |   | $         | 2.94       | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Earnings per common share  diluted                       |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | From continuing operations                        |                                           | $         | 3.15       |  |      | $         | 2.40       |  |   | $         | 2.92       | 
|                                                          | From discontinued operations                      |                                           |           | 0.22       |  |      |           | 0.18       |  |   |           |           | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Net income                                        |                                           | $         | 3.37       |  |      | $         | 2.58       |  |   | $         | 2.92       | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|Weighted average number of common shares
    outstanding: |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Basic                                             |                                           |           | 27,878,787 |  |      |           | 27,878,787 |  |   |           | 28,117,432 | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           
|                                                          | Diluted                                           |                                           |           | 27,878,787 |  |      |           | 27,878,787 |  |   |           | 28,362,768 | 
|                                                          |                                                   |                                           |           |            |  |      |           |            |  |   |           |           

See accompanying notes to consolidated financial
statements.

F-4



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                             |                                                       |                        |            |            |  |          |     |          |  |       |         |        |  |   |         |         |   |   |         |         |  
|---------------------------- | ----------------------------------------------------- | ---------------------- | ---------- | ---------- |  | -------- | --- | -------- |  | ----- | ------- | ------ |  | - | ------- | ------- | - | - | ------- | ------- | -
|                             |                                                       |                        |            |            |  |          |     |         
|                             |                                                       | Common Stock           |            | Additional |  |          |     |         
|                             |                                                       |                        |            | Paid-In    |  | Retained |     |         
|                             |                                                       | Shares                 |            | Amount     |  | Capital  |     | Earnings |  | Total
|                             |                                                       |                        |            |            |  |          |     |          |  |      
|                             |                                                       |                       
|                             |                                                       | (Dollars in thousands)
|Balance at January 1, 2001   |                                                       |                        | 27,878,787 |            |  | $        | 279 |          |  | $     | 322,400 |        |  | $ | 32,380  |         |   | $ | 355,059 |        
|                             | Distributions by Engle Holdings                       |                        |            |           |  |          |     |         |  |       |         |       |  |   |         | (29,516 | ) |   |         | (29,516 | )
|                             | Dividends paid                                        |                        |            |           |  |          |     |         |  |       |         |       |  |   |         | (6,210  | ) |   |         | (6,210  | )
|                             | Net income                                            |                        |            |           |  |          |     |         |  |       |         |       |  |   |         | 94,037  |   |   |         | 94,037  |  
|                             |                                                       |                        |            |            |  |          |     |          |  |       |         |        |  |   |         |         |   |   |         |        
|Balance at December 31, 2001 |                                                       |                        | 27,878,787 |            |  |          | 279 |          |  |       | 322,400 |        |  |   | 90,691  |         |   |   | 413,370 |        
|                             | Assumption of Technical Olympic debt (see
    Note 1) |                        |            |           |  |          |     |         |  |       |         |       |  |   |         | (75,416 | ) |   |         | (75,416 | )
|                             | Distributions by Engle Holdings                       |                        |            |           |  |          |     |         |  |       |         |       |  |   |         | (4,813  | ) |   |         | (4,813  | )
|                             | Net income                                            |                        |            |           |  |          |     |         |  |       |         |       |  |   |         | 72,004  |   |   |         | 72,004  |  
|                             |                                                       |                        |            |            |  |          |     |          |  |       |         |        |  |   |         |         |   |   |         |        
|Balance at December 31, 2002 |                                                       |                        | 27,878,787 |            |  |          | 279 |          |  |       | 322,400 |        |  |   | 82,466  |         |   |   | 405,145 |        
|                             | Common stock issued to directors                      |                        |            | 10,249     |  |          |     |         |  |       |         | 160    |  |   |         |        |   |   |         | 160     |  
|                             | Sale of common stock                                  |                        |            | 2,000,000  |  |          |     | 20       |  |       |         | 48,366 |  |   |         |        |   |   |         | 48,386  |  
|                             | Net income                                            |                        |            |           |  |          |     |         |  |       |         |       |  |   |         | 82,719  |   |   |         | 82,719  |  
|                             |                                                       |                        |            |            |  |          |     |          |  |       |         |        |  |   |         |         |   |   |         |        
|Balance at December 31, 2003 |                                                       |                        | 29,889,036 |            |  | $        | 299 |          |  | $     | 370,926 |        |  | $ | 165,185 |         |   | $ | 536,410 |        
|                             |                                                       |                        |            |            |  |          |     |          |  |       |         |        |  |   |         |         |   |   |         |        

See accompanying notes to consolidated financial
statements.

F-5



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |       |          |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------- | ------- | ------ | ------- | ---- | -------- | ------ | ------- | - | ------- | ----- | -------- | -
|                                                                                                |                                              |                                       
|                                                                                                |                                              | Year Ended December 31,               
|                                                                                                |                                              |                                       
|                                                                                                |                                              | 2001                                   |         | 2002   |         | 2003
|                                                                                                |                                              |                                        |         |        |         |     
|                                                                                                |                                              |                                       
|                                                                                                |                                              | (Dollars in thousands)                
|Cash flows from operating
    activities:                                                       |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Net income                                                                                      |                                              | $                                      | 94,037  |        |         | $    | 72,004   |        |         | $ | 82,719  |      
|Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|                                                                                                | Income from discontinued operations          |                                        |         | (6,272 | )       |      |          | (4,963 | )       |   |         |      |         
|                                                                                                | Depreciation and amortization expense        |                                        |         | 8,849  |         |      |          | 5,952  |         |   |         | 9,262 |         
|                                                                                                | Amortization of deferred finance costs       |                                        |         |       |         |      |          | 1,474  |         |   |         |      |         
|                                                                                                | Deferred income taxes                        |                                        |         | 5,121  |         |      |          | (2,061 | )       |   |         | 1,120 |         
|                                                                                                | Other adjustments                            |                                        |         | (819   | )       |      |          | 1,095  |         |   |         | 1,381 |         
|                                                                                                | Changes in operating assets and liabilities: |                                        |         |        |         |      |          |        |         |   |         |       |         
|                                                                                                |                                              | Restricted cash                        |         |        | (17,138 | )    |          |        | (19,126 | ) |         |       | (48,069  | )
|                                                                                                |                                              | Inventories                            |         |        | (25,691 | )    |          |        | (75,910 | ) |         |       | (141,663 | )
|                                                                                                |                                              | Other assets                           |         |        | (8,678  | )    |          |        | (2,359  | ) |         |       | (3,103   | )
|                                                                                                |                                              | Accounts payable and other liabilities |         |        | 12,728  |      |          |        | 39,077  |   |         |       | 98,246   |  
|                                                                                                |                                              | Customer deposits                      |         |        | (953    | )    |          |        | (1,575  | ) |         |       | 7,233    |  
|                                                                                                |                                              | Mortgage loans held for sale           |         |        | (36,527 | )    |          |        | (7,907  | ) |         |       | (16,401  | )
|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Net cash provided by (used in) operating
    activities                                         |                                              |                                        | 24,657  |        |         |      | 5,701    |        |         |   | (9,275  | )    
|Cash flows from investing
    activities:                                                       |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Net additions to property and equipment                                                         |                                              |                                        | (6,713  | )      |         |      | (8,749   | )      |         |   | (19,046 | )    
|Amounts paid for acquisitions, net of cash
    acquired                                         |                                              |                                        |        |        |         |      | (51,315  | )      |         |   | (59,625 | )    
|Additional consideration paid for acquisitions                                                  |                                              |                                        |        |        |         |      |         |        |         |   | (18,136 | )    
|Other                                                                                           |                                              |                                        | 331     |        |         |      |         |        |         |   |        |      
|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Net cash used in investing activities                                                           |                                              |                                        | (6,382  | )      |         |      | (60,064  | )      |         |   | (96,807 | )    
|Cash flows from financing
    activities:                                                       |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Net proceeds from (repayments on) revolving
    credit facilities                               |                                              |                                        | 12,026  |        |         |      | 58,574   |        |         |   | (45,183 | )    
|Proceeds from notes offering                                                                    |                                              |                                        |        |        |         |      | 350,000  |        |         |   | 129,311 |      
|Proceeds from unsecured borrowings from banks                                                   |                                              |                                        | 27,001  |        |         |      |         |        |         |   |        |      
|Principal payments on unsecured borrowings and
    senior notes                                 |                                              |                                        | (66,764 | )      |         |      | (379,577 | )      |         |   |        |      
|Principal payments on acquisition notes payable                                                 |                                              |                                        | (1,216  | )      |         |      |         |        |         |   |        |      
|Net proceeds from (payments on) consolidated land
    bank obligations                          |                                              |                                        | 30,022  |        |         |      | (13,734  | )      |         |   | (4,563  | )    
|Net proceeds from financial services borrowings                                                 |                                              |                                        | 29,618  |        |         |      | 9,620    |        |         |   | 14,934  |      
|Payments for deferred financing costs                                                           |                                              |                                        |        |        |         |      | (15,252  | )      |         |   | (5,450  | )    
|Minority interest in consolidated subsidiaries                                                  |                                              |                                        | 35,795  |        |         |      | (26,703  | )      |         |   | (3,713  | )    
|Net proceeds from sale of common stock                                                          |                                              |                                        |        |        |         |      |         |        |         |   | 48,386  |      
|Dividends paid                                                                                  |                                              |                                        | (6,210  | )      |         |      |         |        |         |   |        |      
|Distributions by Engle Holdings                                                                 |                                              |                                        | (29,516 | )      |         |      | (4,813   | )      |         |   |        |      
|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Net cash provided by (used in) financing
    activities                                         |                                              |                                        | 30,756  |        |         |      | (21,885  | )      |         |   | 133,722 |      
|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Net cash provided by (used in) operations                                                       |                                              |                                        | 49,031  |        |         |      | (76,248  | )      |         |   | 27,640  |      
|Net cash provided by discontinued operations                                                    |                                              |                                        | 1,854   |        |         |      | 50,323   |        |         |   |        |      
|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Increase (decrease) in cash and cash
    equivalents                                            |                                              |                                        | 50,885  |        |         |      | (25,925  | )      |         |   | 27,640  |      
|Cash and cash equivalents at beginning of period                                                |                                              |                                        | 24,251  |        |         |      | 75,136   |        |         |   | 49,211  |      
|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |      
|Cash and cash equivalents at end of period                                                      |                                              | $                                      | 75,136  |        |         | $    | 49,211   |        |         | $ | 76,851  |      
|                                                                                                |                                              |                                        |         |        |         |      |          |        |         |   |         |      

See accompanying notes to consolidated financial
statements.

F-6



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003




|   |                          
|-- | -------------------------
|1. | Business and Organization



| |         
| | --------
| | Business

Technical Olympic USA, Inc. is a Delaware
corporation. We are a homebuilder with a geographically
diversified national presence. We operate in 14 metropolitan
markets located in four major geographic regions: Florida, the
Mid-Atlantic, Texas, and the West. We design, build and market
detached single-family residences, town homes and condominiums.
We also provide title and mortgage brokerage services to our
homebuyers and others. Generally, we do not retain or service
the mortgages that we originate but, rather, sell the mortgages
and related servicing rights to investors.



| |             
| | ------------
| | Organization



| |                              
| | -----------------------------
| | The Merger and Notes Offering

On June 25, 2002, Engle Holdings Corp.
(Engle) merged with and into Newmark Homes Corp. (Newmark). The
combined company was renamed Technical Olympic USA, Inc. Each
issued and outstanding share of Engle common stock was exchanged
for 1,724.08294 shares of Newmark common stock (the Merger). At
the date of the Merger, there were 9,500 shares of Engle common
stock issued and outstanding, all of which were held by
Technical Olympic, Inc. (Technical Olympic). As a result of the
Merger, 16,378,787 of additional shares were issued to Technical
Olympic. In addition, we assumed $75.4 million of debt
incurred by Technical Olympic (the Technical Olympic Debt). The
Technical Olympic Debt accrued interest at rates ranging from
13.5% to 14.875% and was to mature on September 30, 2004.
As both Engle and Newmark were under the control of Technical
Olympic, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141, Business
Combinations, the Merger was accounted for in a manner
similar to a pooling of interests, whereby we recognized the
acquired assets and liabilities of Engle at their historical
carrying amounts. As both entities came under common control of
Technical Olympic on November 22, 2000, the financial
statements and other operating data have been restated to
include the operations of Engle from November 22, 2000. Our
assumption of the $75.4 million of Technical Olympic Debt
has been accounted for as a distribution.

As a result of the exchange of equity interests,
Technical Olympic owned 91.75% of our outstanding common stock.
Technical Olympic was a wholly-owned subsidiary of Technical
Olympic (UK) Limited (formerly known as Technical Olympic
(UK) PLC), a company formed under the laws of Great
Britain, which is a wholly-owned subsidiary of Technical Olympic
S.A., a Greek company that is publicly traded on the Athens
Stock Exchange. In October 2003, as part of a restructuring
transaction, all of the shares of Technical Olympic were sold by
Technical Olympic (UK) Limited to Technical Olympic, S.A.
Technical Olympic was then merged with and into TOI, LLC, a
newly formed wholly-owned subsidiary of ours. As part of the
merger, Technical Olympic, S.A. acquired the shares of our
common stock previously owned by Technical Olympic.

Concurrently with the Merger, we completed a
private placement of $200.0 million 9% senior notes and
$150.0 million 10 3/8% senior subordinated notes (the
Notes Offering). The net proceeds of approximately
$335.0 million from the Notes Offering were used to repay
certain indebtedness of both Newmark and Engle and the Technical
Olympic Debt that was assumed in connection with the Merger.
Additionally, we entered into a revolving credit facility to
fund working capital, which currently provides for loans up to
$315.0 million.

Subsequently, all outstanding privately placed
senior and senior subordinated notes were exchanged for an
equivalent amount of notes at their respective interest rates,
which are registered under the Securities Act of 1933.

F-7



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

2.     Summary of
Significant Accounting Policies

Our accounting and reporting policies conform to
accounting principles generally accepted in the United States
and general practices within the homebuilding industry. The
following summarizes the more significant of these policies.



| |                                                          
| | ---------------------------------------------------------
| | Principles of Consolidation and Basis of
    Presentation

The consolidated financial statements include our
accounts and those of our subsidiaries. All significant
intercompany balances and transactions have been eliminated in
the consolidated financial statements. As a result of the Merger
being accounted for as a reorganization of entities under common
control, the consolidated financial statements have been
restated to present our combined results as if the Merger had
been in effect from November 22, 2000, the date at which
both entities came under the control of Technical Olympic.

The preparation of financial statements in
accordance with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.

Due to our normal operating cycle being in excess
of one year, we present unclassified statements of financial
condition.



| |                  
| | -----------------
| | Segment Reporting

In accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, we have concluded that our operating segments
consist of homebuilding and financial services. These two
segments are segregated in the accompanying consolidated
financial statements under Homebuilding and
Financial Services.

For the years ended December 31, 2001, 2002,
and 2003, we have eliminated inter-segment financial services
revenues of $3.5 million, $3.6 million and
$5.9 million, respectively.



| |             
| | ------------
| | Homebuilding



| |          
| | ---------
| | Inventory

Inventory is stated at the lower of cost or fair
value. Inventory under development or held for development is
stated at an accumulated cost unless such cost would not be
recovered from the cash flows generated by future disposition.
In this instance, such inventories are recorded at fair value.
Inventory to be disposed of is carried at the lower of cost or
fair value less cost to sell. We utilize the specific
identification method of charging construction costs to cost of
sales as units are sold. Common construction project costs are
allocated to each individual home in the various subdivisions
based upon the total number of homes to be constructed in each
subdivision community. Interest, real estate taxes and certain
development costs are capitalized to land and construction costs
during the development and construction period and are amortized
to cost of sales as closings occur.



| |                        
| | -----------------------
| | Homebuilding Borrowings

Homebuilding borrowings represent financing
arrangements utilized to support our homebuilding activities.
These arrangements have been executed by subsidiaries in which
we have a 50% or greater ownership interest and generally
provide the creditor with recourse against the Company.

F-8



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                   
| | ----------------------------------
| | Consolidated Land Bank Obligations

Consolidated land bank obligations represent
liabilities associated with our land banking activities,
including obligations in special-purpose entities which have
been consolidated by us, for which we have a less than 50%
ownership interest, the creditors have no recourse against the
Company and as a result, the obligations have been specifically
excluded from the leverage ratios pursuant to the terms of our
revolving credit facility.



| |                    
| | -------------------
| | Revenue Recognition

Our primary source of revenue is the sale of
homes to homebuyers. To a lesser degree, we engage in the sale
of land to other homebuilders. Revenue is recognized on home
sales and land sales at closing when title passes to the buyer
and all of the following conditions are met: a sale is
consummated, a significant down payment is received, the
earnings process is complete and the collection of any remaining
receivables is reasonably assured.



| |               
| | --------------
| | Warranty Costs

We provide homebuyers with a limited warranty of
workmanship and materials from the date of sale for up to two
years. We generally have recourse against the subcontractors for
claims relating to workmanship and materials. We also provide up
to a ten-year homebuyers warranty which covers major
structural defects. Estimated warranty costs are recorded at the
time of sale based on historical experience and current factors.



| |                  
| | -----------------
| | Advertising Costs

Advertising costs, consisting primarily of
newspaper and trade publications, and the cost of maintaining an
internet web-site, are expensed as incurred. Advertising expense
included in selling, general and administrative expenses and
income from discontinued operations for the years ended December
31, 2001, 2002 and 2003 amounted to $16.3 million,
$15.3 million and $12.6 million, respectively.



| |                   
| | ------------------
| | Financial Services



| |                             
| | ----------------------------
| | Mortgage Loans Held for Sale

Mortgage loans held for sale are stated at the
lower of aggregate cost or fair value based upon such
commitments for loans to be delivered or prevailing market rates
for uncommitted loans. Substantially all of the loans originated
by us are sold to private investors within 30 days of
origination.

F-9



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                    
| | -------------------
| | Revenue Recognition

Fees derived from our Financial Services segment,
including title and mortgage origination services, are generally
recognized as revenue in the month of closing of the sale of the
mortgage. Financial Service revenue and expenses consist of the
following (dollars in thousands):

|                                      |                   |                         |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------- | ----------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                      |                   |                        
|                                      |                   | Year Ended December 31,
|                                      |                   |                        
|                                      |                   | 2001                    |        | 2002   |  | 2003
|                                      |                   |                         |        |        |  |     
|Revenue:                              |                   |                         |        |        |  |      |        |        |  |   |        |       
|                                      | Mortgage services |                         | $      | 16,055 |  |      | $      | 20,729 |  |   | $      | 24,536 | 
|                                      | Title services    |                         |        | 13,082 |  |      |        | 15,849 |  |   |        | 20,715 | 
|                                      |                   |                         |        |        |  |      |        |        |  |   |        |       
|Total Financial Service revenue       |                   |                         | 29,137 |        |  |      | 36,578 |        |  |   | 45,251 |       
|Expenses:                             |                   |                         |        |        |  |      |        |        |  |   |        |       
|                                      | Mortgage services |                         |        | 6,800  |  |      |        | 8,076  |  |   |        | 10,212 | 
|                                      | Title services    |                         |        | 10,888 |  |      |        | 12,770 |  |   |        | 19,484 | 
|                                      |                   |                         |        |        |  |      |        |        |  |   |        |       
|Total Financial Service expense       |                   |                         | 17,688 |        |  |      | 20,846 |        |  |   | 29,696 |       
|                                      |                   |                         |        |        |  |      |        |        |  |   |        |       
|Total Financial Service pretax income |                   | $                       | 11,449 |        |  | $    | 15,732 |        |  | $ | 15,555 |       
|                                      |                   |                         |        |        |  |      |        |        |  |   |        |       



| |        
| | -------
| | General



| |                                                
| | -----------------------------------------------
| | Cash and Supplemental Cash Flow
    Information

Cash includes amounts in transit from title
companies for home closings and highly liquid investments with
an initial maturity of three months or less.

Restricted cash consists of amounts held in
escrow as required by purchase contracts or by law for escrow
deposits held by our title company and compensating balances for
various open letters of credit.

Supplemental disclosures of cash flow information
(dollars in thousands):

|               |                                       |                         |   |        |  |      |   |        |  |  |   |        | 
|-------------- | ------------------------------------- | ----------------------- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|               |                                       |                        
|               |                                       | Year Ended December 31,
|               |                                       |                        
|               |                                       | 2001                    |   | 2002   |  | 2003
|               |                                       |                         |   |        |  |     
|Cash paid for: |                                       |                         |   |        |  |      |   |        |  |  |   |       
|               | Interest (net of amounts capitalized) |                         | $ | 2,372  |  |      | $ |       |  |  | $ |       | 
|               |                                       |                         |   |        |  |      |   |        |  |  |   |       
|               | Income taxes                          |                         | $ | 52,830 |  |      | $ | 39,245 |  |  | $ | 43,822 | 
|               |                                       |                         |   |        |  |      |   |        |  |  |   |       



| |                                                       
| | ------------------------------------------------------
| | Accounting for the Impairment of Long-Lived
    Assets

In the first quarter of 2002, we adopted SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS 144). The Statement supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, however,
it retains the fundamental provisions of that statement related
to the recognition and measurement of the impairment of
long-lived assets to be held and used. In addition,
the Statement provides more guidance on estimating cash flows
when performing a recoverability test, requires that a
long-lived asset to be disposed of other than by sale (e.g.,
abandoned) be classified as held and used until it
is disposed of, and establishes more restrictive criteria to
classify an asset as held for sale.

In accordance with SFAS 144, we carry long-lived
assets at the lower of the carrying amount or fair value.
Impairment is evaluated by estimating future undiscounted cash
flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected undiscounted
future cash flows is

F-10



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

less than the carrying amount of the assets, an
impairment loss is recognized. Fair value, for purposes of
calculating impairment, is measured based on estimated future
cash flows, discounted at a market rate of interest.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

We conduct business primarily in four
geographical regions: Florida, the Mid-Atlantic, Texas, and the
West. Accordingly, the market value of our inventory is
susceptible to changes in market conditions that may occur in
these locations. With regards to the mortgage loans held for
sale, we will generally only originate loans which have met
underwriting criteria required by purchasers of our loan
portfolios. Additionally, we generally sell our mortgage loans
held for sale within 30 days which minimizes our credit
risk.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment, consisting primarily of
office premises, transportation equipment, office furniture and
fixtures, capitalized software costs and model home furniture,
are stated at cost net of accumulated depreciation. Repairs and
maintenance are expensed as incurred.

Depreciation generally is provided using the
straight-line method over the estimated useful life of the
asset, which ranges from 18 months to 30 years. At
December 31, 2002 and 2003, accumulated depreciation
approximated $8.0 million and $13.1 million,
respectively.



| |         
| | --------
| | Goodwill

Goodwill represents the excess of the purchase
price of the Companys acquisitions over the fair value of
the net assets acquired. Additional consideration paid in
subsequent periods under the terms of purchase agreements is
included as acquisition costs.

In June 2001, the Financial Accounting Standards
Board finalized SFAS No. 141, Business Combinations(SFAS 141), and No. 142, Goodwill and Other
Intangible Assets(SFAS 142). SFAS 141 requires
the use of the purchase method of accounting and prohibits the
use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001.
SFAS 141 also requires that companies recognize acquired
intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001.
It also requires, upon adoption of SFAS 142, that companies
reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142 requires
that companies identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite
useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance
in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when
those assets were initially recognized.

We adopted SFAS 142 on January 1, 2002. We
performed the required impairment tests during 2002 and 2003 and
determined that no goodwill impairment existed. Our application
of the provisions of SFAS 142 resulted in the elimination of
goodwill amortization expense beginning in the first quarter of
2002. The following table sets forth reported net income and
earnings per share from continuing

F-11



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

operations, as adjusted to exclude goodwill
amortization expense for the year ended December 31, 2001
(dollars in thousands):

|                                                               |  |   |        | 
|-------------------------------------------------------------- |  | - | ------ | 
|Income from continuing operations, as reported                 |  | $ | 87,765 | 
|Add back of amortization expense, net of taxes                 |  |   | 1,504  | 
|                                                               |  |   |        | 
|                                                               |  | $ | 89,269 | 
|                                                               |  |   |        | 
|Earnings per common share (basic and diluted), as
    reported |  | $ | 3.15   | 
|                                                               |  |   |        | 
|Earnings per common share (basic and diluted), as
    adjusted |  | $ | 3.20   | 
|                                                               |  |   |        | 



| |                                  
| | ---------------------------------
| | Insurance and Litigation Reserves

Insurance and litigation reserves have been
established for estimated amounts based on an analysis of past
history of claims. We have, and require the majority of our
subcontractors to have, general liability insurance that
protects us against a portion of our risk of loss from
construction-related claims. We reserve for costs to cover our
self-insured retentions and deductible amounts under these
policies and for any costs in excess of our coverage limits.
Because of the high degree of judgment required in determining
these estimated reserve amounts, actual future claim costs could
differ from our currently estimated amounts.



| |             
| | ------------
| | Income Taxes

We are included in the consolidated federal
income tax return with Technical Olympic pursuant to a Tax
Allocation Agreement between Technical Olympic and us. As a
result of this Tax Allocation Agreement, income taxes are
accounted for using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Tax
Allocation Agreement was terminated as a result of the merger of
Technical Olympic into one of our wholly-owned subsidiaries
pursuant to the restructuring transaction in October 2003. After
the restructuring transaction, we continue to file a
consolidated return with our subsidiaries.

The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date.



| |                   
| | ------------------
| | Earnings Per Share

We present earnings per share data in accordance
with the provisions of SFAS No. 128, Earnings Per
Share. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted-average
number of common shares outstanding for the period.

Diluted earnings per share is computed based on
the weighted average number of shares of common stock and
dilutive securities outstanding during the period. Dilutive
securities are options that are freely exercisable into common
stock at less than market exercise prices. Dilutive securities
are not included in the weighted average number of shares when
inclusion would increase the earnings per share or decrease the
loss per share. During 2003, we had stock options which were
dilutive as the exercise price of the options was below market
value. Other than stock options, we had no other dilutive
securities. For the years ended December 31, 2001 and 2002,
we had no dilutive securities outstanding.

F-12



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table represents a reconciliation
of weighted average shares outstanding for the year ended
December 31, 2003:

|                                                        |  |  |            | 
|------------------------------------------------------- |  |  | ---------- | 
|Basic weighted average shares outstanding               |  |  | 28,117,432 | 
|Net effect of stock options assumed to be
    exercised |  |  | 245,336    | 
|                                                        |  |  |            | 
|Diluted weighted average shares outstanding             |  |  | 28,362,768 | 
|                                                        |  |  |            | 



| |                         
| | ------------------------
| | Stock-Based Compensation

We account for our stock option plan in
accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. Refer to Note 13 for the required pro forma
disclosures.



| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments

SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, requires companies to
disclose the estimated fair value of their financial instrument
assets and liabilities. Fair value estimates are made at a
specific point in time, based upon relevant market information
about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale
at one time our entire holdings of a particular instrument. The
carrying values of cash and mortgage loans held for sale
approximate their fair values due to their short-term nature.
The carrying value of homebuilding and financial service
borrowings and consolidated land bank obligations, excluding the
senior and senior subordinated notes, approximate their fair
value as substantially all of the debt has a fluctuating
interest rate based upon a current market index. The fair value
of the $300.0 million senior and $185.0 million senior
subordinated notes at December 31, 2003 is
$322.5 million and $207.2 million, respectively, as
determined by quoted market prices.



| |                                               
| | ----------------------------------------------
| | Impact of Recent Accounting
    Pronouncements

In April 2002, the FASB issued SFAS
No. 145, Rescission of SFAS Nos. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections. SFAS 145 prevents gains or losses on
extinguishment of debt not meeting the criteria of Accounting
Principles Bulletin No. 30 to be treated as extraordinary.
SFAS 145 amends SFAS No. 13, Accounting for
Leases, to eliminate inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. In
addition, SFAS 145 rescinds SFAS No. 44, Accounting
for Intangible Assets of Motor Carriers and amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability
under changed conditions. SFAS 145 is effective for fiscal
years beginning after May 15, 2002 with early adoption
encouraged. We adopted the provisions of SFAS 145 during
the quarter ended June 30, 2002. As a result of the
adoption of SFAS 145, we have included the loss associated
with the early extinguishment of debt in the determination of
income from continuing operations.

In January 2003, the FASB issued FASB
Interpretation (Interpretation) No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46
addresses consolidation by business enterprises of variable
interest entities (VIEs) which have one or both of the following
characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities
without additional subordinated support from other parties,
which is provided through other interests that will absorb some
or all of the expected losses of the entity; or (2) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
(a) the direct or indirect ability to make decisions about
the entities activities through voting rights or similar
rights; or (b) the obligation to absorb the expected losses
of the

F-13



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

entity if they occur, which makes it possible for
the entity to finance its activities; or (c) the right to
receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the
expected losses. Interpretation No. 46 is applied
immediately to VIEs created after January 31, 2003.
Pursuant to FASB revision to Interpretation No. 46
(FSP 46-6), a public entity need not apply the provisions
of Interpretation No. 46 to an interest held in a VIE or a
potential VIE until the end of the first interim or annual
period ending after March 15, 2004, if the VIE was created
before February 1, 2003, and the public entity has not
issued financial statements reporting that VIE as consolidated
in accordance with Interpretation No. 46.

Generally, in the homebuilding industry,
homebuilders will enter into option contracts for the purchase
of land or homesites with land sellers and third-party financial
entities, some of which may qualify as VIEs, as a method of
acquiring developed homesites. We believe that Interpretation
No. 46 must be evaluated as it relates to these and similar
types of arrangements. In applying Interpretation No. 46 to
our homesite option contracts, estimates regarding cash flows
and other assumptions have to be made. We believe that our
critical assumptions are reasonable based on historical evidence
and industry practice. Based on our analysis of contracts
entered into after January 31, 2003, we determined that we
are the primary beneficiary of certain of these homesite option
contracts. Consequently, Interpretation No. 46 requires us
to consolidate the assets (homesites) at their fair value,
although (1) we have no legal title to the assets,
(2) our maximum exposure to loss is limited to the deposits
or letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us. The effect of the consolidation was to increase
inventory by $123.7 million, excluding deposits of
$9.7 million which had been previously recorded, with a
corresponding increase to consolidated land bank obligations in
the accompanying consolidated statement of financial condition
as of December 31, 2003. Additionally, we have entered into
arrangements with VIEs to acquire homesites whereby our variable
interest is insignificant and, therefore, we have determined
that we are not the primary beneficiary.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. SFAS No. 150 is effective
for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003
(our quarter ended September 30, 2003) with the exception
of an indefinite deferral relating to application to limited
life entities. We do not believe that the implementation of SFAS
No. 150 will have a material impact on our financial
condition, results of operations or cash flows.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to
conform the prior periods amounts to the current
periods presentation.

F-14



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

3.     Inventory

Inventory consists of the following (dollars in
thousands):

|                                            |  |              |         |      |  |   |           | 
|------------------------------------------- |  | ------------ | ------- | ---- |  | - | --------- | 
|                                            |  |             
|                                            |  | December 31,
|                                            |  |             
|                                            |  | 2002         |         | 2003
|                                            |  |              |         |     
|Homesites and land under development        |  | $            | 315,838 |      |  | $ | 453,893   | 
|Deposits                                    |  |              | 56,146  |      |  |   | 78,725    | 
|Residences completed and under construction |  |              | 356,510 |      |  |   | 404,581   | 
|Consolidated inventory not owned            |  |              | 25,378  |      |  |   | 246,224   | 
|                                            |  |              |         |      |  |   |           | 
|                                            |  | $            | 753,872 |      |  | $ | 1,183,423 | 
|                                            |  |              |         |      |  |   |           | 

A summary of homebuilding interest capitalized in
inventory is as follows (dollars in thousands):

|                                          |               |                         |        |        |  |      |        |        |  |   |        |        | 
|----------------------------------------- | ------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                          |               |                        
|                                          |               | Year Ended December 31,
|                                          |               |                        
|                                          |               | 2001                    |        | 2002   |  | 2003
|                                          |               |                         |        |        |  |     
|Interest capitalized, beginning of period |               | $                       | 25,487 |        |  | $    | 12,226 |        |  | $ | 11,578 |       
|Interest incurred                         |               |                         | 22,067 |        |  |      | 27,742 |        |  |   | 55,139 |       
|Less interest included in:                |               |                         |        |        |  |      |        |        |  |   |        |       
|                                          | Cost of sales |                         |        | 34,241 |  |      |        | 28,133 |  |   |        | 35,348 | 
|                                          | Other         |                         |        | 1,087  |  |      |        | 257    |  |   |        | 1,673  | 
|                                          |               |                         |        |        |  |      |        |        |  |   |        |       
|Interest capitalized, end of period       |               | $                       | 12,226 |        |  | $    | 11,578 |        |  | $ | 29,696 |       
|                                          |               |                         |        |        |  |      |        |        |  |   |        |       

In the ordinary course of business, we enter into
contracts to purchase homesites and land held for development.
At December 31, 2002 and 2003, we had refundable and
nonrefundable deposits aggregating $56.1 million and
$78.7 million, respectively, included in inventory in the
accompanying consolidated statements of financial condition. Our
liability for nonperformance under such contracts is limited to
forfeiture of the related deposits.

During 2003, we sold certain parcels of land for
net proceeds of $107.3 million. In connection with these
transactions, we entered into options with the purchasers to
acquire fully developed homesites. As we have retained a
continuing involvement in these properties, in accordance with
SFAS No. 66, Accounting for the Sales of Real
Estate, we have accounted for these transactions as
financing arrangements. As a result, we have included the
corresponding liability of $107.3 million in consolidated
land bank obligations in the accompanying consolidated statement
of financial condition as of December 31, 2003.

F-15



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

4.     Accrued
Expenses and Other Liabilities

Accrued expenses and other liabilities consists
of the following (dollars in thousands):

|              |                                                |              |        |        |  |   |        |        | 
|------------- | ---------------------------------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|              |                                                |             
|              |                                                | December 31,
|              |                                                |             
|              |                                                | 2002         |        | 2003  
|              |                                                |              |        |       
|Homebuilding: |                                                |              |        |        |  |   |        |       
|              | Interest                                       |              | $      | 17,341 |  |   | $      | 23,942 | 
|              | Compensation                                   |              |        | 11,176 |  |   |        | 15,047 | 
|              | Taxes, including income and real estate        |              |        | 14,262 |  |   |        | 11,738 | 
|              | Warranty costs                                 |              |        | 4,795  |  |   |        | 5,229  | 
|              | Completion reserves                            |              |        | 6,599  |  |   |        | 18,866 | 
|              | Accrued expenses                               |              |        | 20,896 |  |   |        | 12,268 | 
|              | Deferred gain on sale-leaseback of model homes |              |        | 489    |  |   |        | 5,750  | 
|              | Other                                          |              |        | 2,910  |  |   |        | 5,871  | 
|              |                                                |              |        |        |  |   |        |       
|              |                                                | $            | 78,468 |        |  | $ | 98,711 |       
|              |                                                |              |        |        |  |   |        |       

Accounts payable and other liabilities for
Financial Services consists primarily of title company escrows.

During the years ended December 31, 2002 and
2003, changes in our warranty accrual consisted of the following
(dollars in thousands):

|                                          |  |      |        |      |  |   |        |  
|----------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                          |  | 2002 |        | 2003
|                                          |  |      |        |     
|Accrued warranty costs, beginning of year |  | $    | 2,138  |      |  | $ | 4,795  |  
|Estimated liability recorded              |  |      | 7,523  |      |  |   | 9,306  |  
|Settlements made                          |  |      | (4,866 | )    |  |   | (8,872 | )
|                                          |  |      |        |      |  |   |        |  
|Accrued warranty costs, end of year       |  | $    | 4,795  |      |  | $ | 5,229  |  
|                                          |  |      |        |      |  |   |        |  

5.     Homebuilding
and Financial Services Borrowings



| |                        
| | -----------------------
| | Homebuilding Borrowings

Homebuilding borrowings consists of the following
(dollars in thousands):

|                                                      |  |              |         |      |  |   |         |  
|----------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                      |  |             
|                                                      |  | December 31,
|                                                      |  |             
|                                                      |  | 2002         |         | 2003
|                                                      |  |              |         |     
|Senior notes due 2010, at 9%(a)                       |  | $            | 200,000 |      |  | $ | 300,000 |  
|Discount on senior notes                              |  |              |        |      |  |   | (4,526  | )
|Senior subordinated notes due 2012, at
    10 3/8%(a) |  |              | 150,000 |      |  |   | 185,000 |  
|Discount on senior subordinated notes                 |  |              |        |      |  |   | (482    | )
|Revolving credit facility(b)                          |  |              | 55,000  |      |  |   | 10,000  |  
|Other                                                 |  |              | 8,110   |      |  |   | 7,927   |  
|                                                      |  |              |         |      |  |   |         |  
|                                                      |  | $            | 413,110 |      |  | $ | 497,919 |  
|                                                      |  |              |         |      |  |   |         |  

F-16



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Maturities on homebuilding borrowings at
December 31, 2003 are as follows (dollars in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 10,000  | 
|2005       |  |   | 5,351   | 
|2006       |  |   | 2,576   | 
|2007       |  |   |        | 
|2008       |  |   |        | 
|Thereafter |  |   | 485,000 | 
|           |  |   |         | 
|           |  | $ | 502,927 | 
|           |  |   |         | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Interest on the senior and senior subordinated
    notes (the Notes) is payable semi-annually, commencing on
    January 1, 2003. The Notes are fully and unconditionally
    guaranteed by all of our material domestic subsidiaries. Any
    subsidiaries, other than the subsidiary guarantors, are minor
    and have no independent assets or operations. There are no
    restrictions on our ability to obtain funds from our
    subsidiaries by dividend or loan.



| |                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The indentures governing the Notes require us to
    maintain a minimum net worth and place certain restrictions on
    our ability to, among other things, incur additional debt, pay
    or make dividends or other distributions, sell assets and enter
    into transactions with affiliates and merge or consolidate with
    other entities.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | On April 4, 2003, we amended our revolving
    credit facility to increase the amount we are permitted to
    borrow. Our revolving credit facility permits us to borrow to
    the lesser of (i) $315.0 million, or (ii) our
    borrowing base (calculated in accordance with the revolving
    credit facility agreement) minus our outstanding senior debt,
    and to issue letters of credit up to $125.0 million. In
    addition, we have the right to increase the size of the facility
    to provide for up to an additional $10.0 million of
    revolving loans, subject to meeting certain requirements. The
    revolving credit facility expires on June 26, 2005. As of
    December 31, 2003, we had drawn down $10.0 million and
    had issued letters of credit of $92.8 million and as a
    result, had $212.2 million in availability under the
    revolving credit facility. We pay a variable commitment fee on
    the unused portion of the commitment. Loans outstanding under
    the facility may be base rate loans or Eurodollar loans, at our
    election. Base rate loans accrue interest at a rate per annum
    equal to (i) an applicable margin plus (ii) the higher
    of (A) Citibank, N.A.s base rate, (B) 0.5% plus
    the three week average of the reserve-adjusted three-month
    certificate of deposit rate and (C) 0.5% plus the Federal
    Funds Rate. Eurodollar loans accrue interest at a rate per annum
    equal to (i) an applicable margin plus (ii) the
    reserve-adjusted Eurodollar rate for the interest period.
    Applicable margins will be adjusted based on the ratio of our
    liabilities to our tangible worth. At December 31, 2003,
    our loans outstanding under the revolving credit facility
    accrued interest at a rate of 3.92% per annum. The revolving
    credit facility requires us to (1) maintain specified
    financial ratios regarding leverage, interest coverage,
    consolidated tangible net worth and certain operational
    measurements and (2) satisfy certain financial condition
    tests. The revolving credit facility also places certain
    restrictions on, among other things, our ability to incur
    additional debt or liens, pay or make dividends or other
    distributions, sell assets, enter into transactions with
    affiliates and merge or consolidate with other entities. The
    revolving credit facility is secured by a first-priority
    perfected lien on all capital stock of subsidiaries owned by us.
    Our obligations under the revolving credit facility are
    guaranteed by all our domestic subsidiaries (subject to certain
    limited exceptions).

F-17



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | Financial Services Borrowings

To fund the origination of residential mortgage
loans, our subsidiary, Preferred Home Mortgage Company
(Preferred Home) entered into a $90.0 million revolving
warehouse line of credit, which we refer to as our warehouse
line of credit. The warehouse line of credit is comprised of
(1) a credit facility (the PHMC Credit Facility) providing
for revolving loans of up to $50.0 million, subject to
meeting borrowing base requirements based on the value of
collateral provided and (2) mortgage loan purchase and sale
agreements (the Purchase Facility) which provide for the
purchase by the lender of up to $40.0 million in mortgage
loans generated by Preferred Home. At no time may the amount
outstanding under the facility plus the amount of purchased
loans pursuant to the purchase and sale agreements exceed
$90.0 million. The warehouse line of credit expires on
December 19, 2004. As of December 31, 2003, we had
$63.2 million outstanding under the warehouse line of credit.
The PHMC Credit Facility bears interest at the Eurodollar rate
plus 1.375%. Amounts outstanding under the Purchase Facility
bear interest at the Eurodollar rate plus 1.125%. As of
December 31, 2003, our loans outstanding under the
warehouse line of credit accrued interest at a blended rate of
2.38% per annum. The warehouse line of credit is secured by
funded mortgages which are pledged as collateral and requires
Preferred Home to maintain certain financial ratios and
minimums. We have entered into a keep-well agreement in favor of
the lender which obligates us to provide financial support to
Preferred Home, if necessary, in order for Preferred Home to
maintain such financial ratios and minimums.

The line of credit includes restrictions
including maintenance of certain financial covenants. We are
required to fund 2% of all mortgages originated and to sell all
funded mortgages within 90 days. As of December 31,
2003, Preferred Home was committed to selling its entire
portfolio of mortgage loans held for sale.



| |                   
| | ------------------
| | Borrowing Capacity

At December 31, 2003, we had the capacity to
borrow an additional $212.2 million under the revolving
credit facility and $26.8 million under the warehouse line
of credit, subject to us satisfying the relevant borrowing
conditions in those facilities.

6.     Acquisitions

On October 4, 2002, we acquired the net
assets of DS Ware Homes LLC, a homebuilder operating in
Jacksonville, Florida. We paid $35.6 million in cash, of
which $30.0 million was funded with proceeds from our
revolving credit facility. In addition, because certain earnings
targets were met for the five-month period after the closing, we
paid an additional $5.2 million in cash to the sellers in
April 2003. This acquisition resulted in approximately
$21.0 million of goodwill. The results of operations of DS
Ware Homes LLC for the period from October 4, 2002 through
December 31, 2002 are included in the accompanying
consolidated statement of income for the year ended
December 31, 2002.

On November 18, 2002, we acquired the net
assets of Masonry Homes, Inc., a homebuilder operating in the
northwestern suburbs of Baltimore and southern Pennsylvania. We
paid $17.1 million in cash, which was funded with proceeds
from our revolving credit facility. In addition, if certain
targets are met regarding home sale closings, the development
and/or subdivision of certain homesites and earnings for the
2003 and 2004 fiscal years, we will be obligated to pay up to an
additional $21.3 million in cash to the sellers over a
two-year period, of which $11.3 million was paid during
2003. This acquisition resulted in no material amount of
goodwill being recorded. The results of operations of Masonry
Homes, Inc. for the period from November 18, 2002 through
December 31, 2002 are included in the accompanying
consolidated statement of income for the year ended
December 31, 2002.

F-18



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On February 6, 2003, we acquired the net
assets of Trophy Homes, Inc. (Trophy), a homebuilder operating
in Las Vegas, Nevada and certain homesites for approximately
$36.2 million in cash. In addition, if certain targets are
met regarding home deliveries during 2003 and 2004, we will be
obligated to pay up to an additional $2.5 million over a
two year period. Of this amount, we paid $1.6 million of
additional consideration during the year ended December 31,
2003. This acquisition resulted in approximately
$8.9 million of goodwill. The results of operations of
Trophy for the period from February 6, 2003 through
December 31, 2003 are included in the accompanying
consolidated statement of income for the year ended
December 31, 2003.

On February 28, 2003, we acquired the net
assets of The James Construction Company (James), a homebuilder
operating in the greater Denver, Colorado area, for
approximately $22.0 million in cash. In addition, we are
obligated to pay an additional $1.4 million to the sellers
over a two-year period. This acquisition resulted in no goodwill
being recorded. The results of operations of James for the
period from February 28, 2003 through December 31,
2003 are included in the accompanying consolidated statement of
income for the year ended December 31, 2003.

7.     Severance and
Merger Related Expenses

Included in severance and merger related expenses
in the accompanying consolidated statement of income for the
year ended December 31, 2002 are costs of the merger and
integration, such as professional fees and investment banking
fees. These fees approximate $6.1 million. Additionally, we
incurred approximately $4.8 million in severance charges
attributable to former executives of the Company whose
employment was terminated in connection with the Merger and
$7.6 million for severance payments with respect to
Mr. Engelstein and Mr. Shapiro. See Note 9.

8.     Sale of
Westbrooke

During March 2002, we committed to a plan to
dispose of Westbrooke to eliminate operating redundancies in the
South Florida market and to strengthen our financial position.
Pursuant to this plan of disposition, we would sell 100% of the
common stock of Westbrooke. On April 8, 2002, we signed a
definitive agreement for the sale of Westbrooke to Standard
Pacific Corp. (Standard Pacific) for approximately
$41.0 million in cash. This sale was completed on
April 15, 2002. In addition, Standard Pacific satisfied
approximately $54.4 million of Westbrookes debt that
included approximately $14.2 million of intercompany
liabilities owed to us. Upon completion of this sale, we
realized a gain of $4.3 million. We determined that in
accordance with SFAS 144, as of March 31, 2002, the
criteria to classify the Westbrooke assets as held for sale were
met.

Results of Westbrookes operations have been
classified as discontinued operations, and prior periods have
been restated. Discontinued operations include Westbrooke
revenues, which totaled $205.7 million and
$44.2 million for the years ended December 31, 2001
and 2002, respectively.

9.     Commitments
and Contingencies

We provide homebuyers with a limited warranty of
workmanship and materials from the date of sale for up to two
years. We generally have recourse against our subcontractors for
claims relating to workmanship and materials. We also provide up
to a ten-year homeowners warranty which covers major
structural defects.

We are subject to the normal obligations
associated with entering into contracts for the purchase,
development and sale of real estate in the routine conduct of
our business. We are committed under various letters of credit
and performance bonds which are required for certain development
activities, deposits on land and homesite purchase contract
deposits. At December 31, 2003, outstanding letters of

F-19



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

credit and performance/surety bonds under these
arrangements totaled approximately $92.8 million and
$97.6 million, respectively.

The State of Texas recently began a routine sales
tax audit of one of our Texas operations. At this early stage of
the audit, it is not possible to determine whether or not the
audit will result in the assessment of additional taxes, and, if
an assessment is made, the amount of such assessment. Although
there can be no assurances that this audit will not result in
the assessment of additional taxes by the State of Texas, we
believe that the potential amount, if any, will not have a
significant effect on our financial position or results of
operations.

We entered into an agreement with an insurance
company to underwrite private mortgage insurance on certain
loans originated by our mortgage services subsidiary. Under the
terms of the agreement, we share in the premiums generated on
the loans and are exposed to losses in the event of a loan
default.

At December 31, 2003, our maximum exposure
to losses relating to loans insured is approximately
$3.6 million, which is further limited to the amounts held
in trust of approximately $810,000. We minimize the credit risk
associated with such loans through credit investigations of
customers as part of the loan origination process and by
monitoring the status of the loans and related collateral on a
continuous basis.

We are involved in various claims and legal
actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
is not expected to have a material adverse effect on our
consolidated financial position or results of operations.

In early February 2002, Alec Engelstein, then
Chief Executive Officer of Engle Homes, Inc., and David Shapiro,
then Vice President-Chief Financial Officer of Engle Homes,
Inc., resigned from their executive positions with Engle Homes,
Inc. and alleged that they were entitled to receive severance
packages in the aggregate amount of approximately
$9.4 million, plus other benefits, including a claim by
Mr. Engelstein of a monthly retirement benefit equal to
1/12th of his annual salary with such payments to continue for a
period of 60 consecutive months. During September 2002, we
reached an agreement whereby we would pay $7.6 million
which was accrued and the related expense was recorded in
severance and merger related expenses in the accompanying
consolidated statement of income for the year ended
December 31, 2002.

During the year ended December 31, 2003, we
completed various sale-leaseback transactions of model homes,
for net proceeds of $47.1 million. In connection with these
transactions, we deferred profit of $8.8 million which is
being amortized over the lease term. The lease term varies on a
per home basis and ranges from 3 to 36 months.

At December 31, 2003, we are obligated under
non-cancellable operating leases of office space, model homes
and equipment. Rent expense for the year ended December 31,
2003, amounted to $7.5 million. Minimum annual lease
payments under these leases at December 31, 2003 are as
follows (dollars in thousands):

|           |       |   |       |        | 
|---------- | ----- | - | ----- | ------ | 
|2004       |       | $ | 8,561 |       
|2005       |       |   | 4,462 |       
|2006       |       |   | 2,508 |       
|2007       |       |   | 1,024 |       
|2008       |       |   | 606   |       
|Thereafter |       |   | 169   |       
|           |       |   |       |       
|           | Total |   | $     | 17,330 | 
|           |       |   |       |       

F-20



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

10.     Related Party
Transactions

In 2000, we entered into a purchasing agreement
with our ultimate parent, Technical Olympic S.A. The agreement
provided that Technical Olympic S.A. would purchase certain of
the materials and supplies necessary for operations and sell
them to our entities, all in an effort to consolidate the
purchasing function. Although Technical Olympic S.A. would incur
certain franchise tax expense, we would not be required to pay
such additional purchasing liability. Technical Olympic S.A.
purchased $342.6 million, $191.6 million and
$203.7 million of materials and supplies on our behalf
during the years ended December 31, 2001, 2002 and 2003,
respectively. These materials and supplies bought by Technical
Olympic S.A. under the purchasing agreement are provided to us
at Technical Olympic S.A.s cost. We do not pay a fee or
other consideration to Technical Olympic S.A. under the
purchasing agreement. We may terminate the purchasing agreement
upon 60 days prior notice.

In 2000, we entered into a management services
agreement with Technical Olympic, whereby Technical Olympic will
provide certain advisory, administrative and other services. The
management services agreement was amended and restated on
June 13, 2003. For the years ended December 31, 2001
and 2002, we paid $1.9 million and $1.4 million,
respectively. For the year ended December 31, 2003, we
accrued $2.5 million which is included in accrued expenses
and other liabilities in the accompanying consolidated statement
of financial condition. These expenses are included in selling,
general and administrative expenses in the accompanying
consolidated statements of income. In connection with the
restructuring transaction, Technical Olympic assigned its
obligations and rights under the amended and restated management
agreement to Technical Olympic Services, Inc., a Delaware
corporation wholly-owned by Technical Olympic S.A., effective as
of October 29, 2003.

During 2001, Engle Homes sold certain undeveloped
real estate tracts to, and entered into a number of agreements
(including option contracts and construction contracts) with,
Equity Investments, a limited liability company controlled by
the brother of one of our executives. We made payments of
$11.9 million, $36.0 million and $7.2 million to
this entity pursuant to these agreements during the years ended
December 31, 2001, 2002 and 2003, respectively. During
2003, we entered into two additional option agreements with
Equity Investments. The two agreements provide that we purchase
homesites for a total aggregate sum of approximately
$16.1 million. We believe that the purchase prices to
acquire the homesites are market prices.

11.     Income
Taxes

Components of income tax expense
(benefit) from continuing operations consist of the
following (dollars in thousands):

|          |         |                         |        |        |  |      |        |        |   |   |        |        |  
|--------- | ------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2001                    |        | 2002   |  | 2003
|          |         |                         |        |        |  |     
|Current:  |         |                         |        |        |  |      |        |        |   |   |        |       
|          | Federal |                         | $      | 47,055 |  |      | $      | 38,272 |   |   | $      | 43,425 |  
|          | State   |                         |        | 4,343  |  |      |        | 3,689  |   |   |        | 3,002  |  
|          |         |                         |        |        |  |      |        |        |   |   |        |       
|          |         |                         | 51,398 |        |  |      | 41,961 |        |   |   | 46,427 |       
|Deferred: |         |                         |        |        |  |      |        |        |   |   |        |       
|          | Federal |                         |        | 667    |  |      |        | (1,880 | ) |   |        | 1,433  |  
|          | State   |                         |        | 153    |  |      |        | (181   | ) |   |        | (313   | )
|          |         |                         |        |        |  |      |        |        |   |   |        |       
|          |         |                         | 820    |        |  |      | (2,061 | )      |   |   | 1,120  |       
|          |         |                         |        |        |  |      |        |        |   |   |        |       
|          |         | $                       | 52,218 |        |  | $    | 39,900 |        |   | $ | 47,547 |       
|          |         |                         |        |        |  |      |        |        |   |   |        |       

F-21



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The difference between total reported income
taxes and expected income tax expense computed by applying the
federal statutory income tax rate of 35% for 2001, 2002 and 2003
to income from continuing operations is reconciled as follows
(dollars in thousands):

|                                              |  |                         |        |      |  |      |        |  |  |   |        | 
|--------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                              |  |                        
|                                              |  | Year Ended December 31,
|                                              |  |                        
|                                              |  | 2001                    |        | 2002 |  | 2003
|                                              |  |                         |        |      |  |     
|Computed income tax expense at statutory rate |  | $                       | 48,994 |      |  | $    | 37,429 |  |  | $ | 45,593 | 
|State income taxes                            |  |                         | 2,922  |      |  |      | 2,269  |  |  |   | 1,710  | 
|Other, net                                    |  |                         | 302    |      |  |      | 202    |  |  |   | 244    | 
|                                              |  |                         |        |      |  |      |        |  |  |   |        | 
|Income taxes                                  |  | $                       | 52,218 |      |  | $    | 39,900 |  |  | $ | 47,547 | 
|                                              |  |                         |        |      |  |      |        |  |  |   |        | 

Significant temporary differences that give rise
to the deferred tax assets and liabilities from continuing
operations are as follows (dollars in thousands):

|                               |                                                                            |              |        |        |   |   |         |        |  
|------------------------------ | -------------------------------------------------------------------------- | ------------ | ------ | ------ | - | - | ------- | ------ | -
|                               |                                                                            |             
|                               |                                                                            | December 31,
|                               |                                                                            |             
|                               |                                                                            | 2002         |        | 2003  
|                               |                                                                            |              |        |       
|Deferred tax assets:           |                                                                            |              |        |        |   |   |         |       
|                               | Warranty, legal and insurance reserves                                     |              | $      | 602    |   |   | $       | 3,338  |  
|                               | Property and equipment                                                     |              |        | 259    |   |   |         |       |  
|                               | Deferred gain on sale  leaseback of models                                |              |        | 184    |   |   |         | 2,053  |  
|                               | Inventory                                                                  |              |        | 4,350  |   |   |         | 4,303  |  
|                               | Accrued compensation                                                       |              |        | 3,345  |   |   |         | 1,513  |  
|                               | Net operating loss carry forward                                           |              |        |       |   |   |         | 431    |  
|                               | Other                                                                      |              |        | 94     |   |   |         | 943    |  
|                               |                                                                            |              |        |        |   |   |         |       
|Total deferred tax assets      |                                                                            |              | 8,834  |        |   |   | 12,581  |       
|Deferred tax liabilities:      |                                                                            |              |        |        |   |   |         |       
|                               | Property and equipment                                                     |              |        |       |   |   |         | (540   | )
|                               | Amortizable intangibles                                                    |              |        | (3,919 | ) |   |         | (7,289 | )
|                               | Prepaid commissions and differences in reporting
    selling and marketing |              |        | (1,433 | ) |   |         | (2,406 | )
|                               | Other                                                                      |              |        | (16    | ) |   |         |       |  
|                               |                                                                            |              |        |        |   |   |         |       
|Total deferred tax liabilities |                                                                            |              | (5,368 | )      |   |   | (10,235 | )     
|                               |                                                                            |              |        |        |   |   |         |       
|Net deferred tax asset         |                                                                            | $            | 3,466  |        |   | $ | 2,346   |       
|                               |                                                                            |              |        |        |   |   |         |       

The net deferred tax asset included in other
assets in the accompanying consolidated statements of financial
condition at December 31, 2002 and 2003 was
$3.5 million and $2.3 million, respectively. We
believe that it is more likely than not that the gross deferred
tax assets will be realized or settled due to our ability to
generate taxable income exclusive of reversing timing
differences. Accordingly, no valuation allowance has been
established at December 31, 2002 and 2003.

Payments of $47.2 million,
$37.7 million and $28.3 million were made to Technical
Olympic for federal income taxes during 2001, 2002 and 2003,
respectively.

As part of the restructuring transaction, the Tax
Allocation Agreement between Technical Olympic and us was
terminated, and tax accounts between the two companies were
required to be settled. The closing reconciliation of tax
accounts results in an estimated $4.2 million due to us
from Technical Olympic Services, Inc., a Delaware corporation
that is wholly-owned by Technical Olympic S.A. who assumed this
liability from Technical Olympic as part of the restructuring
transaction.

F-22



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

12.     Stockholders
Equity

On November 19, 2003, we sold, pursuant to
an underwritten public offering, 2.0 million shares of our
common stock at a price of $26.00 per share. The net proceeds of
the offering to us were $48.4 million, after deducting
offering costs and underwriting fees of $3.6 million. The
offering proceeds were used to pay outstanding indebtedness
under our revolving credit facility. In connection with our
offering of common stock, Technical Olympic S.A. sold
approximately 3.2 million shares of our common stock,
including 675,000 shares sold pursuant to the underwriters
exercise of their over-allotment option. As a result of these
transactions, Technical Olympic S.A. has reduced their ownership
of us to 73.95%.

13.     Stock Option
Plan

During 2001, we adopted the Technical Olympic
USA, Inc. Annual and Long-Term Incentive Plan, formerly known as
the Newmark Homes Corp. Annual and Long-Term Incentive Plan (the
Plan) pursuant to which our employees, consultants and
directors, and those of our subsidiaries and affiliated entities
are eligible to receive options to purchase shares of common
stock. Under the Plan, subject to adjustment as defined, the
maximum number of shares with respect to which awards may be
granted is 4,000,000. Pursuant to the Plan, no shares could be
granted prior to consummation of the aforementioned merger
between us and Engle. As a result, as of December 31, 2001,
no options had been granted. There were 563,509 shares of common
stock reserved for future grants at December 31, 2003.

Activity under the Plan for the years ended
December 31, 2002 and 2003 is as follows:

|                                 |  |           |           |                |  |   |       | 
|-------------------------------- |  | --------- | --------- | -------------- |  | - | ----- | 
|                                 |  |           |           | Weighted      
|                                 |  | Number of |           | Average       
|                                 |  | Options   |           | Exercise Price
|                                 |  |           |           |               
|Outstanding at January 1, 2002   |  |           |          |                |  |   |      | 
|Granted                          |  |           | 2,195,455 |                |  | $ | 19.37 | 
|                                 |  |           |           |                |  |   |       | 
|Outstanding at December 31, 2002 |  |           | 2,195,455 |                |  | $ | 19.37 | 
|Granted                          |  |           | 1,241,036 |                |  | $ | 19.73 | 
|                                 |  |           |           |                |  |   |       | 
|Outstanding at December 31, 2003 |  |           | 3,436,491 |                |  | $ | 19.50 | 
|                                 |  |           |           |                |  |   |       | 
|Exerciseable at end of year      |  |           | 916,191   |                |  | $ | 18.31 | 
|                                 |  |           |           |                |  |   |       | 

Exercise prices for options outstanding at
December 31, 2003 range from $15.61 to $22.86 and had a
weighted average remaining contractual life of nine years.

Included in the 3,436,491 options outstanding as
of December 31, 2003 are 592,776 options granted to
executives during 2002 and 243,000 options granted during 2003
which contain accelerated vesting criteria. These options are
being accounted for under the variable accounting method as
provided for by APB Opinion No. 25. During 2003, we
recognized an expense of $1.2 million as the market value
of our common stock as of December 31, 2003 was greater
than the exercise price. This expense is included in variable
stock-based compensation expense in the accompanying
consolidated statement of income for the year ended
December 31, 2003. No expense was recorded during the year
ended December 31, 2002 as the exercise price was greater
than the current market price of the stock.

We have elected to follow APB Opinion No. 25
in accounting for employee stock options. The exercise price of
our employee stock options equal or exceed the market price of
the underlying stock on the date of grant, and therefore no
compensation expense is recognized. SFAS No. 123,
Accounting For

F-23



---



##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock Based
Compensation, requires disclosure of
pro forma income and pro forma income per share as if the fair
value based method had been applied in measuring compensation
expense.

|                                                                                                               |  |              |        |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                                                                                               |  |             
|                                                                                                               |  | Year Ended  
|                                                                                                               |  | December 31,
|                                                                                                               |  |             
|                                                                                                               |  | 2002         |        | 2003
|                                                                                                               |  |              |        |     
|Net income as reported                                                                                         |  | $            | 72,004 |      |  | $ | 82,719 |  
|Add: Stock-based employee compensation included
    in reported net income, net of tax                         |  |              |       |      |  |   | 775    |  
|Deduct: Total stock-based employee compensation
    expense determined under the fair value method, net of tax |  |              | (2,293 | )    |  |   | (2,923 | )
|                                                                                                               |  |              |        |      |  |   |        |  
|Pro forma net income                                                                                           |  | $            | 69,711 |      |  | $ | 80,571 |  
|                                                                                                               |  |              |        |      |  |   |        |  
|Reported basic earnings per share                                                                              |  | $            | 2.58   |      |  | $ | 2.94   |  
|                                                                                                               |  |              |        |      |  |   |        |  
|Pro forma basic earnings per share                                                                             |  | $            | 2.50   |      |  | $ | 2.87   |  
|                                                                                                               |  |              |        |      |  |   |        |  
|Reported diluted earnings per share                                                                            |  | $            | 2.58   |      |  | $ | 2.92   |  
|                                                                                                               |  |              |        |      |  |   |        |  
|Pro forma diluted earnings per share                                                                           |  | $            | 2.50   |      |  | $ | 2.84   |  
|                                                                                                               |  |              |        |      |  |   |        |  

The fair values of options granted were estimated
on the date of their grant using the Black-Scholes option
pricing model based on the following weighted average
assumptions:

|                        |  |              
|----------------------- |  | -------------
|Expected volatility     |  | 0.42%  0.48%
|Expected dividend yield |  | 0%           
|Risk-free interest rate |  | 1.85%  4.0% 
|Expected life           |  | 4-10 years   

On March 3, 2003, we awarded 10,249 shares
of restricted common stock under the Plan to certain independent
directors as compensation for board services. In connection with
this stock award, we recognized expense of $160,000, which is
included in selling, general and administrative expenses in the
accompanying consolidated statement of income for the year ended
December 31, 2003.

14.     Employee
Benefit Plans

We have two defined contribution plans
established pursuant to Section 401(k) of the Internal Revenue
Code. Employees contribute to the plan a percentage of their
salaries, subject to certain dollar limitations, and we match a
portion of the employees contributions. Our contributions
to the plans for the years ended December 31, 2001, 2002
and 2003, amounted to $1.1 million, $1.3 million and
$1.6 million, respectively.

F-24



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##### 



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

15.     Quarterly
Results (Unaudited)

Quarterly results for the years ended
December 31, 2002 and 2003, which have been restated for
the Merger and for conformity with the year end presentation,
are reflected below (dollars in thousands):

|                                      |                                   |       |         |        |  |       |         |        |  |   |         |      |  |   |         |      | 
|------------------------------------- | --------------------------------- | ----- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- | ---- |  | - | ------- | ---- | 
|                                      |                                   | First |         | Second |  | Third |         | Fourth
|                                      |                                   |       |         |        |  |       |         |       
|2002:                                 |                                   |       |         |        |  |       |         |        |  |   |         |      |  |   |         |     
|Revenue                               |                                   | $     | 309,859 |        |  | $     | 363,051 |        |  | $ | 350,437 |      |  | $ | 390,940 |     
|Homebuilding gross profit             |                                   |       | 61,635  |        |  |       | 71,973  |        |  |   | 69,796  |      |  |   | 72,742  |     
|Income from continuing operations     |                                   |       | 8,929   |        |  |       | 11,563  |        |  |   | 26,338  |      |  |   | 20,211  |     
|Discontinued operations(a)            |                                   |       | 640     |        |  |       | 4,323   |        |  |   |        |      |  |   |        |     
|Net income                            |                                   |       | 9,569   |        |  |       | 15,886  |        |  |   | 26,338  |      |  |   | 20,211  |     
|Basic and diluted earnings per share: |                                   |       |         |        |  |       |         |        |  |   |         |      |  |   |         |     
|                                      | Income from continuing operations |       |         | 0.32   |  |       |         | 0.41   |  |   |         | 0.95 |  |   |         | 0.72 | 
|                                      | Net income                        |       |         | 0.34   |  |       |         | 0.57   |  |   |         | 0.95 |  |   |         | 0.72 | 
|2003:                                 |                                   |       |         |        |  |       |         |        |  |   |         |      |  |   |         |     
|Revenue                               |                                   | $     | 325,401 |        |  | $     | 426,265 |        |  | $ | 443,247 |      |  | $ | 492,912 |     
|Homebuilding gross profit             |                                   |       | 68,129  |        |  |       | 81,049  |        |  |   | 86,501  |      |  |   | 87,535  |     
|Income from continuing operations     |                                   |       | 17,656  |        |  |       | 23,233  |        |  |   | 21,549  |      |  |   | 20,281  |     
|Net income                            |                                   |       | 17,656  |        |  |       | 23,233  |        |  |   | 21,549  |      |  |   | 20,281  |     
|Basic earnings per share              |                                   |       | 0.63    |        |  |       | 0.83    |        |  |   | 0.77    |      |  |   | 0.70    |     
|Diluted earnings per share            |                                   |       | 0.63    |        |  |       | 0.83    |        |  |   | 0.76    |      |  |   | 0.69    |     

Quarterly and year-to-date computations of per
share amounts are made independently. Therefore, the sum of per
share amounts for the quarters may not agree with the per share
amounts for the year.



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|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|(a) | Discontinued operations include the after-tax
    operations of Westbrooke. See Note 8.

F-25