##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q



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|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended August 31,
    2003                                              
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-09911



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Capital Pacific Holdings, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 95-2956559                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)
|                                                                  
|4100 MacArthur Blvd.,
    Newport Beach, CA                        |  | 92660(Zip Code)                            
|(Address of principal executive
    offices)                       |  |                                            

Registrants telephone number, including
area code

(949) 622-8400




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Indicate by check mark whether the Registrant
(1) 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 the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date.

|                                         |  |                         
|---------------------------------------- |  | ------------------------
|Class and Title of                       |  | Shares Outstanding as of
|Capital Stock                            |  | September 30, 2003      
|                                         |  |                         
|Common Stock, $0.10 Par Value            |  | 12,788,250              
|Non-Voting Common Stock, $0.10 Par Value |  | 2,007,312               








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TABLE OF CONTENTS



|                                      |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION      
|                                      | Item 1. Financial Statements                                                                 
|                                      |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                      |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME         
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                      |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                      | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|                                      | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                      | Item 4. Controls and Procedures                                                              
|                                      | Item 5. Other Information                                                                    
|PART II -- OTHER INFORMATION         
|                                      | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                           
|EXHIBIT 32.1                         



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##### Table of Contents



CAPITAL PACIFIC HOLDINGS, INC.

INDEX TO FORM 10-Q

|                                   |  |                                                                                                       |    |      |    | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                   |  |                                                                                                       |    | Page
|                                   |  |                                                                                                       |    |     
|PART I  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements                                                                                  |    |      |    | 
|                                   |  | Consolidated Balance Sheets 
    August 31, 2003 and February 28, 2003                               |    |      | 1  | 
|                                   |  | Consolidated Statements of Income for the Three
    and Six Months Ended August 31, 2003 and 2002     |    |      | 2  | 
|                                   |  | Consolidated Statements of Cash Flows for the
    Three and Six Months Ended August 31, 2003 and 2002 |    |      | 3  | 
|                                   |  | Notes to Consolidated Financial Statements                                                            |    |      | 4  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Results of Operations and Financial Condition             |    |      | 12 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                        |    |      | 18 | 
|Item 4.                            |  | Controls and Procedures                                                                               |    |      | 19 | 
|Item 5.                            |  | Other Information                                                                                     |    |      | 19 | 
|PART II  OTHER
    INFORMATION   
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                      |    |      | 20 | 
|SIGNATURES                         |  |                                                                                                       | 21 |     
|CERTIFICATIONS                     |  |                                                                                                       | 22 |     

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##### Table of Contents






PART I  FINANCIAL
INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)


|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |          |         | 
|--------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | -------- | ------- | 
|                                                                |                                                                                                                                        | August 31,                                 |         | February 28,
|                                                                |                                                                                                                                        | 2003                                       |         | 2003        
|                                                                |                                                                                                                                        |                                            |         |             
|                                                                |                                                                                                                                        | (Unaudited)                                |         |             
|ASSETS                                                         
|Cash and cash equivalents                                       |                                                                                                                                        | $                                          | 4,680   |              |         | $ | 6,231   |         
|Restricted cash                                                 |                                                                                                                                        |                                            | 362     |              |         |   | 495     |         
|Accounts and notes receivable                                   |                                                                                                                                        |                                            | 17,071  |              |         |   | 16,192  |         
|Real estate projects                                            |                                                                                                                                        |                                            | 220,312 |              |         |   | 184,891 |         
|Consolidated inventory not owned                                |                                                                                                                                        |                                            | 41,164  |              |         |   |        |         
|Property and equipment                                          |                                                                                                                                        |                                            | 7,570   |              |         |   | 7,679   |         
|Investment in and advances to unconsolidated
    joint ventures |                                                                                                                                        |                                            | 12,872  |              |         |   | 14,303  |         
|Prepaid expenses and other assets                               |                                                                                                                                        |                                            | 21,105  |              |         |   | 21,956  |         
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         
|                                                                |                                                                                                                                        | Total assets                               |         | $            | 325,136 |   |         | $        | 251,747 | 
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY                       
|Accounts payable and accrued liabilities                        |                                                                                                                                        | $                                          | 18,483  |              |         | $ | 20,141  |         
|Notes payable                                                   |                                                                                                                                        |                                            | 168,375 |              |         |   | 126,563 |         
|Consolidated liabilities from inventory not owned               |                                                                                                                                        |                                            | 22,741  |              |         |   |        |         
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         
|                                                                |                                                                                                                                        | Total liabilities                          |         |              | 209,599 |   |         |          | 146,704 | 
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         
|Minority interest                                               |                                                                                                                                        |                                            | 12,373  |              |         |   | 4,644   |         
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         
|Stockholders equity:                                           |                                                                                                                                        |                                            |         |              |         |   |         |         
|                                                                | Common stock, par value $0.10 per share,
    60,000,000 shares authorized; 16,230,000 shares issued;
    14,914,362 shares outstanding |                                            |         | 1,635        |         |   |         | 1,635    |        
|                                                                | Additional paid-in capital                                                                                                             |                                            |         | 217,249      |         |   |         | 217,249  |        
|                                                                | Accumulated deficit                                                                                                                    |                                            |         | (109,195     | )       |   |         | (111,098 | )      
|                                                                | Treasury stock                                                                                                                         |                                            |         | (4,875       | )       |   |         | (4,875   | )      
|                                                                | Accumulated other comprehensive income (loss)                                                                                          |                                            |         | (1,650       | )       |   |         | (2,512   | )      
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         
|                                                                |                                                                                                                                        | Total stockholders equity                 |         |              | 103,164 |   |         |          | 100,399 | 
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         
|                                                                |                                                                                                                                        | Total liabilities and stockholders equity |         | $            | 325,136 |   |         | $        | 251,747 | 
|                                                                |                                                                                                                                        |                                            |         |              |         |   |         |         

See accompanying notes to financial statements.

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##### Table of Contents



CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


(In thousands, except share data)


|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |       |       | 
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------ | ------- | ---------------- | ----- | ---- | ------- | ---- | --- | - | ------- | ----- | ----- | - | ------- | ----- | ----- | 
|                                                                                               |                                                                                                      |                    |         |                 
|                                                                                               |                                                                                                      | Three Months Ended |         | Six Months Ended
|                                                                                               |                                                                                                      | August 31,         |         | August 31,      
|                                                                                               |                                                                                                      |                    |         |                 
|                                                                                               |                                                                                                      | 2003               |         | 2002             |       | 2003 |         | 2002
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |     
|Sales of homes and land                                                                        |                                                                                                      | $                  | 47,584  |                  |       | $    | 47,020  |      |     | $ | 91,055  |       |       | $ | 91,866  |      
|Cost of sales                                                                                  |                                                                                                      |                    | (35,980 | )                |       |      | (34,814 | )    |     |   | (70,209 | )     |       |   | (69,057 | )    
|Interest expense                                                                               |                                                                                                      |                    | (3,001  | )                |       |      | (3,260  | )    |     |   | (5,860  | )     |       |   | (6,578  | )    
|Selling, general and administrative expenses                                                   |                                                                                                      |                    | (8,512  | )                |       |      | (8,591  | )    |     |   | (16,242 | )     |       |   | (15,298 | )    
|Income from unconsolidated joint ventures                                                      |                                                                                                      |                    | 1,546   |                  |       |      | 156     |      |     |   | 3,186   |       |       |   | 512     |      
|Interest and other income, net                                                                 |                                                                                                      |                    | 174     |                  |       |      | 102     |      |     |   | 1,242   |       |       |   | 319     |      
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|                                                                                               | Income before provision for income taxes and
    cumulative effect of change in accounting principle |                    |         | 1,811            |       |      |         | 613  |     |   |         | 3,172 |       |   |         | 1,764 |      
|Provision for income taxes                                                                     |                                                                                                      |                    | (725    | )                |       |      | (219    | )    |     |   | (1,269  | )     |       |   | (618    | )    
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|                                                                                               | Income before cumulative effect of change in
    accounting principle                                |                    |         | 1,086            |       |      |         | 394  |     |   |         | 1,903 |       |   |         | 1,146 |      
|Cumulative effect of change in accounting
    principle  negative goodwill, net of tax effect |                                                                                                      |                    |        |                  |       |      |        |      |     |   |        |       |       |   | 5,447   |      
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|                                                                                               |                                                                                                      | Net income         |         | $                | 1,086 |      |         | $    | 394 |   |         | $     | 1,903 |   |         | $     | 6,593 | 
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|Earnings per common share  basic and
    diluted:                                             |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|                                                                                               | Income before cumulative effect of change in
    accounting principle                                |                    | $       | 0.07             |       |      | $       | 0.03 |     |   | $       | 0.13  |       |   | $       | 0.08  |      
|                                                                                               | Cumulative effect of change in accounting
    principle  negative goodwill, net of tax effect       |                    |         |                 |       |      |         |     |     |   |         |      |       |   |         | 0.36  |      
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|                                                                                               | Net income                                                                                           |                    | $       | 0.07             |       |      | $       | 0.03 |     |   | $       | 0.13  |       |   | $       | 0.44  |      
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|Weighted average common shares  basic                                                         |                                                                                                      |                    | 14,914  |                  |       |      | 14,923  |      |     |   | 14,914  |       |       |   | 14,898  |      
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      
|Weighted average common shares  diluted                                                       |                                                                                                      |                    | 14,971  |                  |       |      | 14,983  |      |     |   | 14,960  |       |       |   | 14,964  |      
|                                                                                               |                                                                                                      |                    |         |                  |       |      |         |      |     |   |         |       |       |   |         |      

See accompanying notes to financial statements.

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CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Unaudited)


(In thousands)


|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |         |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | - | ----- | ------- | ------- | -
|                                                                                  |                                                                                             |                                                        
|                                                                                  |                                                                                             | For the                                                
|                                                                                  |                                                                                             | Six Months Ended                                       
|                                                                                  |                                                                                             | August 31,                                             
|                                                                                  |                                                                                             |                                                        
|                                                                                  |                                                                                             | 2003                                                    |        | 2002   
|                                                                                  |                                                                                             |                                                         |        |        
|Operating activities:                                                             |                                                                                             |                                                         |        |         |         |   |       |        
|Net income                                                                        |                                                                                             | $                                                       | 1,903  |         |         | $ | 6,593 |        
|Adjustments to reconcile net income to net cash
    used in operating activities: |                                                                                             |                                                         |        |         |         |   |       |        
|                                                                                  | Gain on sale of assets                                                                      |                                                         |        | (854    | )       |   |       |        |        
|                                                                                  | Depreciation and amortization                                                               |                                                         |        | 709     |         |   |       | 239     |        
|                                                                                  | Accretion of deferred gain                                                                  |                                                         |        | (142    | )       |   |       | (354    | )      
|                                                                                  | Cumulative effect of change in accounting
    principle                                     |                                                         |        |        |         |   |       | (5,447  | )      
|                                                                                  | Increase in real estate projects                                                            |                                                         |        | (35,421 | )       |   |       | (1,962  | )      
|                                                                                  | (Increase) decrease in receivables, prepaid
    expenses and other assets                   |                                                         |        | (11,164 | )       |   |       | 2,351   |        
|                                                                                  | Decrease in accounts payable and accrued
    liabilities                                    |                                                         |        | (79     | )       |   |       | (11,991 | )      
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        
|                                                                                  |                                                                                             | Net cash used in operating activities                   |        |         | (45,048 | ) |       |         | (10,571 | )
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        
|Investing activities:                                                             |                                                                                             |                                                         |        |         |         |   |       |        
|                                                                                  | Proceeds from sale of assets                                                                |                                                         |        | 854     |         |   |       |        |        
|                                                                                  | Purchases of property and equipment, net                                                    |                                                         |        | (600    | )       |   |       | (7,075  | )      
|                                                                                  | Decrease (increase) in investment in and advances
    to unconsolidated joint ventures, net |                                                         |        | 1,431   |         |   |       | (3,881  | )      
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        
|                                                                                  |                                                                                             | Net cash provided by (used in) investing
    activities |        |         | 1,685   |   |       |         | (10,956 | )
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        
|Financing activities:                                                             |                                                                                             |                                                         |        |         |         |   |       |        
|                                                                                  | Borrowings (payments) on notes payable, net                                                 |                                                         |        | 41,812  |         |   |       | 21,704  |        
|                                                                                  | Issuance of common stock                                                                    |                                                         |        |        |         |   |       | 408     |        
|                                                                                  | Repurchase of common stock and warrants                                                     |                                                         |        |        |         |   |       | (773    | )      
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        
|                                                                                  |                                                                                             | Net cash provided by financing activities               |        |         | 41,812  |   |       |         | 21,339  |  
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        
|Net decrease in cash and cash equivalents                                         |                                                                                             |                                                         | (1,551 | )       |         |   | (188  | )      
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                                         | 6,231  |         |         |   | 5,080 |        
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                                       | 4,680  |         |         | $ | 4,892 |        
|                                                                                  |                                                                                             |                                                         |        |         |         |   |       |        

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##### Table of Contents



CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


1.     Basis of
Presentation

The unaudited financial statements presented
herein have been prepared in accordance with the instructions to
Form 10-Q and do not include all of the information and
note disclosures required by accounting principles generally
accepted in the United States. These statements should be read
in conjunction with the consolidated financial statements and
notes thereto, included in the Form 10-K for the fiscal
year ended February 28, 2003, of Capital Pacific Holdings,
Inc. (the Company or CPH, Inc.). In the
opinion of management, the financial statements presented herein
include all adjustments (which are solely of a normal recurring
nature) necessary to present fairly the Companys financial
position and results of operations. The results of operations
for the three and six month periods ended August 31, 2003,
are not necessarily indicative of the results that may be
expected for the year ending February 29, 2004. The
consolidated financial statements include the accounts of the
Company, wholly-owned subsidiaries and certain majority owned
joint ventures, as well as the accounts of Capital Pacific
Holdings, LLC (CPH LLC), which is wholly owned by
the Company. All other investments are accounted for on the
equity method. All significant intercompany balances and
transactions have been eliminated in consolidation.

2.     Reclassifications

Certain items in prior period financial
statements have been reclassified in order to conform with the
current year presentation.

3.     Company
Organization and Operations

The Company is a regional builder and developer
with operations throughout selected metropolitan areas of
California, Texas, Arizona and Colorado. The Companys
principal business activities are to build and sell
single-family homes. The Companys single-family homes are
targeted to entry-level, move-up and luxury buyers.

In fiscal year 1998, the Company consummated an
equity and restructuring transaction whereby CPH, Inc. and
certain of its subsidiaries transferred to CPH LLC substantially
all of their respective assets and CPH LLC assumed all the
liabilities of CPH, Inc. and its subsidiaries. An unaffiliated
investment company, California Housing Finance, L.P.
(CHF) then acquired a minority interest in CPH LLC
as a result of a cash investment in CPH LLC. From fiscal 1998
through fiscal 2001, CPH, Inc. and CHF entered into various
joint ventures.

In February and May of 2001, CPH, Inc. and CHF
consummated an interest exchange transaction (the Exchange
Transaction), whereby CPH, Inc. exchanged its interests in
the majority of the joint ventures capitalized by CHF, including
certain entities which were previously consolidated (the
Divested Joint Ventures), for CHFs interest in
CPH LLC and certain residential joint ventures. The
consideration for the Exchange Transaction included CHFs
acquisition of 1,235,000 shares of non-voting Common Stock of
CPH, Inc. at the equivalent of approximately $6.40 per share. As
a result of the Exchange Transaction, CPH, Inc. owns 100% of CPH
LLC, and obtained an increment of CPH LLCs total capital
of $35.1 million. In addition, Capital Pacific Homes, Inc.,
a wholly-owned subsidiary of CPH, Inc., has entered into
construction, management and marketing agreements relating to
certain of the Divested Joint Ventures with residential
components (the Managed Projects), whereby the
Company is compensated for performing such services through a
management fee arrangement, including reimbursement of all
project costs. As a result of the Exchange Transaction, the
Company has no further exposure to the economic or entitlement
risks associated with the Divested Joint Ventures or the Managed
Projects, including no obligation to provide any capital.

The Exchange Transaction was accounted for as the
simultaneous acquisition of CHFs minority interest in CPH
LLC and certain other residential joint ventures and the
disposition of the Companys interest in the

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##### Table of Contents



CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Divested Joint Ventures. As a result, no gain was
initially recognized, the remaining balance of the
Companys property and equipment was adjusted to zero, a
deferred gain of approximately $3.5 million was recorded on
the disposition of one of the Divested Joint Ventures, and the
balance of the transaction was recorded as negative goodwill in
the amount of $6.8 million. Negative goodwill represents a
portion of the positive difference between the Companys
basis in the assets acquired in the Exchange Transaction as
compared to the assets which were divested which was not
otherwise accounted for as an adjustment to property and
equipment or as a deferred gain. Both negative goodwill and the
deferred gain were being accreted over five years, which
accretion was included as a reduction in selling, general and
administrative expenses. As further discussed in Note 13
below, due to a recently promulgated change in accounting
principles, the remaining $5.4 million in unaccreted
negative goodwill as of February 28, 2002 increased net
income in the quarter ended May 31, 2002 through a
cumulative effect of change in accounting principle. The
remaining deferred gain was being accreted over the four years
of its remaining expected life. However, in fiscal 2003, the
Company terminated a portion of its lease from the Divested
Joint Venture noted above and did not renew a consulting
agreement covering all of the Divested Joint Ventures, thus
eliminating its continuing involvement on a portion of the
deferred gain resulting in an acceleration of the accretion of
the deferred gain in the amount of $1.3 million in the
fourth quarter of fiscal 2003. The remaining deferred gain of
$707,000 at August 31, 2003 is being accreted over its
remaining expected life.

Assets under management, including assets owned
by unconsolidated joint ventures and Managed Projects, totaled
$537 million at August 31, 2003 in 65 residential
projects. At August 31, 2003, CPH LLC, which is wholly
owned by the Company, had $314 million in assets and a net
worth of $110 million. The Company and its subsidiaries
perform their respective management functions for CPH LLC and
the Managed Projects pursuant to management agreements, which
include provisions for the reimbursement of Company and
subsidiary costs and a management fee. CPH LLC, the Managed
Projects and certain other project-specific entities indemnify
CPH, Inc. and its subsidiaries against liabilities arising from
the projects owned by such entities. The Company maintains
certain licenses and other assets as are necessary to fulfill
its obligations as managing member and under management
agreements.

References to the Company are, unless the context
indicates otherwise, also references to CPH LLC and the
project-specific entities in which the Company has an equity
ownership interest. At the current time, all material financing
transactions and arrangements are incurred either by CPH LLC or
by the project-specific entities.

4.     Consolidation
of Variable Interest Entities

In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 addresses
the consolidation of Variable Interest Entities
(VIEs). Under FIN 46, arrangements that are not
controlled through voting or similar rights are accounted for as
VIEs. An enterprise is required to consolidate a VIE if it is
the primary beneficiary of the VIE. FIN 46 applies
immediately to arrangements created after January 31, 2003
and, with respect to arrangements created before
February 1, 2003, the interpretation will apply to the
Company beginning on December 1, 2003. Arrangements entered
into subsequent to January 31, 2003 have been evaluated
under FIN 46 and, if applicable, accounted for in
accordance with FIN 46.

Under FIN 46, a VIE is created when (i) the
equity investment at risk is not sufficient to permit the entity
to finance its activities without additional subordinated
financial support from other parties or (ii) equity holders
either (a) lack direct or indirect ability to make
decisions about the entity, (b) are not obligated to absorb
expected losses of the entity or (c) do not have the right
to receive expected residual returns of the entity if they
occur. If an entity is deemed to be a VIE, pursuant to
FIN 46, an enterprise that absorbs a majority of the
expected losses or residual returns of the VIE is considered the
primary beneficiary and must consolidate the VIE.

5



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##### Table of Contents



CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Based on the provisions of FIN 46, the
Company has concluded that under certain circumstances when the
Company options land or lots from an entity and pays a
non-refundable deposit, a VIE is created under condition (ii)
(b) of the previous paragraph. The Company has been deemed
to have provided subordinated financial support, which refers to
variable interests that will absorb some or all of an
entitys expected theoretical losses if they occur. For
each VIE created, the Company will compute expected losses and
residual returns based on the probability of future cash flows
as outlined in FIN 46. If the Company is deemed to be the
primary beneficiary of the VIE, it will be consolidated on the
balance sheet. The fair value of each applicable VIEs
inventory is reported as consolidated inventory not
owned in the accompanying consolidated balance sheet at
August 31, 2003.

At August 31, 2003 the Company has
consolidated four VIEs created between February 1,
2003 and August 31, 2003 as a result of options to purchase
land or lots from the selling entities. The Company paid cash or
letter of credit deposits to these four VIEs totaling
$10.5 million. Other than normal due diligence and
transaction expenses, the Companys option deposits
represent the Companys maximum exposure to loss. At
August 31, 2003, the fair value of the property owned by
the VIEs was approximately $41.2 million. To the extent the
amount of any debt held by the selling entities could be
determined, it has been reflected as consolidated
liabilities from inventory not owned in the accompanying
consolidated balance sheet at August 31, 2003. The fair
value of the optioned property less these liabilities and the
cash deposits, which totaled $12.4 million, was reported on
the accompanying consolidated balance sheet as minority
interest. Creditors of these VIEs have no recourse against the
Company.

The Company has not yet determined the
anticipated impact of adopting FIN 46 for arrangements
existing as of January 31, 2003. However, it will require
the consolidation in the Companys fourth quarter financial
statements as of February 29, 2004 of the assets,
liabilities and operations of certain existing homebuilding and
land development joint ventures, as well as option contracts
with land sellers or third-party financial entities. Since the
Company already recognizes its proportionate share of joint
venture earnings and losses under the equity method of
accounting, the adoption of FIN 46 will not affect the
Companys consolidated net income.

5.     Investments in
and Advances to Unconsolidated Entities

The Company is a general partner or a direct or
indirect managing member in 12 unconsolidated entities at
August 31, 2003. The Companys net investment in and
advances to unconsolidated entities are as follows at
August 31, 2003 and February 28, 2003 (in thousands):

|                               |                               |          |         |            |        |              |  |   |        |       | 
|------------------------------ | ----------------------------- | -------- | ------- | ---------- | ------ | ------------ |  | - | ------ | ----- | 
|                               |                               | Capital  |         | August 31, |        | February 28,
|                               |                               | Interest |         | 2003       |        | 2003        
|                               |                               |          |         |            |        |             
|Unconsolidated Joint Ventures: |                               |          |         |            |        |              |  |   |        |      
|                               | CPH Daily Ranch, L.P.         |          | 10%     |            | $      | 3,728        |  |   | $      | 3,251 | 
|                               | CPH Sierra Peak, L.P.         |          | 50%     |            |        | 5,328        |  |   |        | 4,650 | 
|                               | CPH Banning-Lewis Ranch, LLC  |          |        |            |        | 2,165        |  |   |        | 1,062 | 
|                               | LB/L  CPH Providence, LLC    |          | 10%     |            |        | 158          |  |   |        | 151   | 
|                               | LB/L  CPH Longmont, LLC      |          | 10%     |            |        |             |  |   |        | 2,529 | 
|                               | LB/L  CPH Laguna Street, LLC |          | 10%     |            |        |             |  |   |        | 1,119 | 
|                               | Other                         |          | Various |            |        | 1,493        |  |   |        | 1,541 | 
|                               |                               |          |         |            |        |              |  |   |        |      
|                               |                               |          |         | $          | 12,872 |              |  | $ | 14,303 |      
|                               |                               |          |         |            |        |              |  |   |        |      

The Companys economic interests in the
unconsolidated joint ventures vary. Generally, the Company
receives a portion of earnings after repayment of invested
capital and payment of a preferred return on invested capital is
provided. Typically, the majority of capital is provided by
capital partners. In addition, the Company

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CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

is typically required to contribute the full
amount of its capital obligation at the commencement of the
joint ventures business, but in some cases the Company may
have a contingent obligation to contribute additional capital.
The Company is typically the direct or indirect managing entity
pursuant to terms in each ventures agreement. In the case
of Divested Joint Ventures which are now Managed Projects, the
Company or a subsidiary manages the development of the project
under a management contract. Such management contracts as well
as the unconsolidated joint venture agreements typically provide
for the payment of a fee to compensate the Company for overhead
expenditures as well as reimbursement of all direct project
costs. The Company provides for income taxes currently on its
share of distributed and undistributed earnings and losses from
the investments.

The Company uses the equity method of accounting
for its investments in the unconsolidated entities. The
accounting policies of the entities are substantially the same
as those of the Company.

Following is summarized, combined financial
information for the unconsolidated entities at August 31,
2003 and February 28, 2003 and for the three and six month
periods ended August 31, 2003 and 2002, respectively (in
thousands). This information includes in each case the interest
of all equity owners of the entities, not just that of the
Company and its subsidiaries.

Assets

|                     |  |            |         |              |  |   |         | 
|-------------------- |  | ---------- | ------- | ------------ |  | - | ------- | 
|                     |  | August 31, |         | February 28,
|                     |  | 2003       |         | 2003        
|                     |  |            |         |             
|Cash                 |  | $          | 2,640   |              |  | $ | 299     | 
|Real estate projects |  |            | 104,520 |              |  |   | 120,313 | 
|Other assets         |  |            | 933     |              |  |   | 2,997   | 
|                     |  |            |         |              |  |   |         | 
|                     |  | $          | 108,093 |              |  | $ | 123,609 | 
|                     |  |            |         |              |  |   |         | 

Liabilities and Equity

|                                       |  |            |         |              |  |   |         | 
|-------------------------------------- |  | ---------- | ------- | ------------ |  | - | ------- | 
|                                       |  | August 31, |         | February 28,
|                                       |  | 2003       |         | 2003        
|                                       |  |            |         |             
|Accounts payable and other liabilities |  | $          | 11,231  |              |  | $ | 9,510   | 
|Notes payable                          |  |            | 6,852   |              |  |   | 7,014   | 
|                                       |  |            |         |              |  |   |         | 
|                                       |  |            | 18,083  |              |  |   | 16,524  | 
|                                       |  |            |         |              |  |   |         | 
|Equity                                 |  |            | 90,010  |              |  |   | 107,085 | 
|                                       |  |            |         |              |  |   |         | 
|                                       |  | $          | 108,093 |              |  | $ | 123,609 | 
|                                       |  |            |         |              |  |   |         | 

Income Statement

|                               |  |                    |        |                  |  |            |       |            |  |   |        |  |  |   |        | 
|------------------------------ |  | ------------------ | ------ | ---------------- |  | ---------- | ----- | ---------- |  | - | ------ |  |  | - | ------ | 
|                               |  |                    |        |                 
|                               |  | Three Months Ended |        | Six Months Ended
|                               |  |                    |        |                 
|                               |  | August 31,         |        | August 31,       |  | August 31, |       | August 31,
|                               |  | 2003               |        | 2002             |  | 2003       |       | 2002      
|                               |  |                    |        |                  |  |            |       |           
|Sales of homes and land        |  | $                  | 13,726 |                  |  | $          | 1,595 |            |  | $ | 24,914 |  |  | $ | 11,112 | 
|Interest and other income, net |  |                    | 403    |                  |  |            | 163   |            |  |   | 549    |  |  |   | 411    | 
|                               |  |                    |        |                  |  |            |       |            |  |   |        |  |  |   |        | 
|                               |  |                    | 14,129 |                  |  |            | 1,758 |            |  |   | 25,463 |  |  |   | 11,523 | 
|Costs and expenses             |  |                    | 9,964  |                  |  |            | 1,450 |            |  |   | 18,288 |  |  |   | 10,101 | 
|                               |  |                    |        |                  |  |            |       |            |  |   |        |  |  |   |        | 
|Net income                     |  | $                  | 4,165  |                  |  | $          | 308   |            |  | $ | 7,175  |  |  | $ | 1,422  | 
|                               |  |                    |        |                  |  |            |       |            |  |   |        |  |  |   |        | 

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CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Warranty
Costs

Estimated future warranty costs are accrued and
charged to cost of sales for each home concurrent with the
recognition of revenue upon satisfaction of the requirements of
SFAS 66. Amounts accrued are based upon historical experience
rates. Accrued warranty reserve is included in accounts payable
and accrued liabilities in the accompanying consolidated balance
sheets. Changes in the Companys warranty reserve are
detailed in the table set forth below (in thousands):

|                                                  |  |                  |       |      |  |   |       |  
|------------------------------------------------- |  | ---------------- | ----- | ---- |  | - | ----- | -
|                                                  |  |                 
|                                                  |  | Six Months Ended
|                                                  |  | August 31,      
|                                                  |  |                 
|                                                  |  | 2003             |       | 2002
|                                                  |  |                  |       |     
|Accrued warranty reserve, beginning of the period |  | $                | 1,242 |      |  | $ | 1,923 |  
|Warranty costs accrued during the period          |  |                  | 567   |      |  |   | 653   |  
|Warranty costs paid during the period             |  |                  | (759  | )    |  |   | (899  | )
|                                                  |  |                  |       |      |  |   |       |  
|Accrued warranty reserve, end of the period       |  | $                | 1,050 |      |  | $ | 1,677 |  
|                                                  |  |                  |       |      |  |   |       |  

7.     Notes
Payable

Notes payable at August 31, 2003 and
February 28, 2003, are summarized as follows (in thousands):

|                                                                                                                                                      |  |            |         |              |  |   |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ------- | ------------ |  | - | ------- | 
|                                                                                                                                                      |  | August 31, |         | February 28,
|                                                                                                                                                      |  | 2003       |         | 2003        
|                                                                                                                                                      |  |            |         |             
|Senior unsecured revolving credit facility,
    bearing interest varying from LIBOR to prime, as selected by the
    Company, plus applicable margins |  | $          | 125,126 |              |  | $ | 97,626  | 
|Senior subordinated note, bearing interest at
    LIBOR plus applicable margin, maturing October 31, 2007.                                            |  |            | 20,000  |              |  |   | 20,000  | 
|Purchase money obligations related to real estate
    acquisitions                                                                                    |  |            | 18,600  |              |  |   | 950     | 
|Non-recourse notes payable to banks                                                                                                                   |  |            |        |              |  |   | 1,900   | 
|Other                                                                                                                                                 |  |            | 4,649   |              |  |   | 6,087   | 
|                                                                                                                                                      |  |            |         |              |  |   |         | 
|                                                                                                                                                      |  | $          | 168,375 |              |  | $ | 126,563 | 
|                                                                                                                                                      |  |            |         |              |  |   |         | 

During fiscal 2003, CPH LLC renewed and extended
its senior unsecured revolving credit facility (the Senior
Facility) with several participant banks. As of
August 31, 2003, the facility had a maximum commitment of
$150 million and a three year revolving term. Subsequent to
August 31, 2003, the maximum commitment was increased to
$160 million, with an accordion provision up to
$175 million. At the option of the Company, borrowings
under the agreement bear interest at LIBOR plus applicable
margin (3.6 percent at August 31, 2003) or at prime
plus applicable margin (4.5 percent at August 31,
2003). Initial proceeds from this facility were used to pay down
certain of CPH LLCs existing facilities and retire the
remaining $55.6 million of its previously issued
12 3/4% Senior Notes (Senior Notes) at face
value during fiscal 2002. In addition, the Company has fixed the
interest rate on $75 million of borrowings at 5.9% until
October 2005 through an interest rate swap agreement with a bank
which was required by the terms of the Senior Facility. The
Company also entered into a Senior Subordinated Credit Agreement
in the initial amount of $20 million, with a maturity date
in October 2007, and also entered into an interest swap as
required by the terms of the Senior Subordinated Credit
Agreement effectively fixing the interest rate on that
obligation at 9.5% through its maturity in October 2007. The
Senior Subordinated Credit Agreement has a maximum commitment of
$50 million. Subsequent to August 31, 2003, the amount
outstanding under the Senior Subordinated Credit Agreement was
increased to $30 million at the same interest rate.

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CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Earnings Per
Common Share

Basic earnings per common share is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding. Diluted earnings
per common share includes the effect of the potential shares
outstanding, including dilutive securities using the treasury
stock method. The table below reconciles the components of the
basic earnings per common share calculation to diluted earnings
per common share (in thousands, except per share data):

|                                                                                                 |                                                                                                        |                    |       |                 |  |     |        |        |  |        |      |      |  |   |     |     |  |  |        |        |  |   |      |      | 
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------ | ------------------ | ----- | --------------- |  | --- | ------ | ------ |  | ------ | ---- | ---- |  | - | --- | --- |  |  | ------ | ------ |  | - | ---- | ---- | 
|                                                                                                 |                                                                                                        |                   
|                                                                                                 |                                                                                                        | Three Months Ended
|                                                                                                 |                                                                                                        |                   
|                                                                                                 |                                                                                                        |                    |       |                
|                                                                                                 |                                                                                                        | August 31, 2003    |       | August 31, 2002
|                                                                                                 |                                                                                                        |                    |       |                
|                                                                                                 |                                                                                                        | Income             |       | Shares          |  | EPS |        | Income |  | Shares |      | EPS 
|                                                                                                 |                                                                                                        |                    |       |                 |  |     |        |        |  |        |      |     
|Basic earnings per common share:                                                                 |                                                                                                        |                    |       |                 |  |     |        |        |  |        |      |      |  |   |     |     |  |  |        |        |  |   |      |     
|                                                                                                 | Income available to common stockholders before
    cumulative effect of change in accounting principle |                    | $     | 1,086           |  |     |        | 14,914 |  |        | $    | 0.07 |  |   | $   | 394 |  |  |        | 14,923 |  |   | $    | 0.03 | 
|Effect of dilutive securities:                                                                   |                                                                                                        |                    |       |                 |  |     |        |        |  |        |      |      |  |   |     |     |  |  |        |        |  |   |      |     
|                                                                                                 | Stock options                                                                                          |                    |       |                |  |     |        | 57     |  |        |      |     |  |   |     |    |  |  |        | 60     |  |   |      |     | 
|                                                                                                 |                                                                                                        |                    |       |                 |  |     |        |        |  |        |      |      |  |   |     |     |  |  |        |        |  |   |      |     
|Diluted earnings per common share before
    cumulative effect of change in accounting principle |                                                                                                        | $                  | 1,086 |                 |  |     | 14,971 |        |  | $      | 0.07 |      |  | $ | 394 |     |  |  | 14,983 |        |  | $ | 0.03 |     
|                                                                                                 |                                                                                                        |                    |       |                 |  |     |        |        |  |        |      |      |  |   |     |     |  |  |        |        |  |   |      |     

|                                                                                                 |                                                                                                        |                  |       |                 |  |     |        |        |  |        |      |      |  |   |       |       |  |  |        |        |  |   |      |      | 
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------ | ---------------- | ----- | --------------- |  | --- | ------ | ------ |  | ------ | ---- | ---- |  | - | ----- | ----- |  |  | ------ | ------ |  | - | ---- | ---- | 
|                                                                                                 |                                                                                                        |                 
|                                                                                                 |                                                                                                        | Six Months Ended
|                                                                                                 |                                                                                                        |                 
|                                                                                                 |                                                                                                        |                  |       |                
|                                                                                                 |                                                                                                        | August 31, 2003  |       | August 31, 2002
|                                                                                                 |                                                                                                        |                  |       |                
|                                                                                                 |                                                                                                        | Income           |       | Shares          |  | EPS |        | Income |  | Shares |      | EPS 
|                                                                                                 |                                                                                                        |                  |       |                 |  |     |        |        |  |        |      |     
|Basic earnings per common share:                                                                 |                                                                                                        |                  |       |                 |  |     |        |        |  |        |      |      |  |   |       |       |  |  |        |        |  |   |      |     
|                                                                                                 | Income available to common stockholders before
    cumulative effect of change in accounting principle |                  | $     | 1,903           |  |     |        | 14,914 |  |        | $    | 0.13 |  |   | $     | 1,146 |  |  |        | 14,898 |  |   | $    | 0.08 | 
|Effect of dilutive securities:                                                                   |                                                                                                        |                  |       |                 |  |     |        |        |  |        |      |      |  |   |       |       |  |  |        |        |  |   |      |     
|                                                                                                 | Stock options                                                                                          |                  |       |                |  |     |        | 46     |  |        |      |     |  |   |       |      |  |  |        | 66     |  |   |      |     | 
|                                                                                                 |                                                                                                        |                  |       |                 |  |     |        |        |  |        |      |      |  |   |       |       |  |  |        |        |  |   |      |     
|Diluted earnings per common share before
    cumulative effect of change in accounting principle |                                                                                                        | $                | 1,903 |                 |  |     | 14,960 |        |  | $      | 0.13 |      |  | $ | 1,146 |       |  |  | 14,964 |        |  | $ | 0.08 |     
|                                                                                                 |                                                                                                        |                  |       |                 |  |     |        |        |  |        |      |      |  |   |       |       |  |  |        |        |  |   |      |     

9.     Stockholders
Equity

The Company has a stock repurchase program in
place whereby up to 1,000,000 shares of the Companys
outstanding common stock may be repurchased. As of
August 31, 2003, 750,100 shares have been repurchased
cumulatively under this program. In addition, as of
August 31, 2003, the Company has repurchased on a
cumulative basis 657,095 of the 790,000 warrants originally
issued in connection with the issuance of the Senior Notes. Of
the remaining warrants, 123,951 were exercised and 8,954 expired
unexercised. Subsequent to August 31, 2003, the Company
increased the stock repurchase program to a total of 2,000,000
shares. In addition, subsequent to August 31, 2003, the
Company repurchased an additional 118,800 shares for a total of
868,900 repurchased cumulatively under this program as of
September 30, 2003.

10.     Comprehensive
Income and Implementation of SFAS No. 133

Effective March 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended.
SFAS 133

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CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

establishes accounting and reporting standards
for derivative instruments and for hedging activities by
requiring that all derivatives be recognized in the balance
sheet and measured at fair value. The Companys policy is
to designate at a derivatives inception the specific
assets, liabilities, or future commitments being hedged and
monitor the derivative to determine if it remains an effective
hedge.

The Company has various interest rate swap
agreements which effectively fix the variable interest rate on a
notional amount of $95 million of its Senior Facility and
Senior Subordinated Credit Agreement. The swap agreements have
been designated as cash flow hedges and, accordingly, are
reflected at their fair value in the consolidated balance sheets
at August 31, 2003 and February 28, 2003.

The unrealized loss, net of income tax benefit,
as of August 31, 2003 and February 28, 2003, of
$1,650,000 and $2,512,000, respectively, is recorded in
stockholders equity as accumulated other comprehensive
loss.

Amounts to be received or paid as a result of the
swap agreements are recognized as adjustments to interest
incurred on the related debt instruments. The Company believes
that there will be no ineffectiveness related to the interest
rate swaps and therefore no portion of the accumulated other
comprehensive loss would be reclassified into future earnings.
The net effect on the Companys operating results is that
interest on the variable-rate debt being hedged is recorded and
paid based on fixed interest rates.

11.     Commitments
and Contingencies

Approximately $45.5 million and
$41.8 million of performance bonds which have been issued
on behalf of both CPH LLC and certain joint ventures, to secure
the relevant entitys performance of development conditions
imposed by municipalities, were outstanding at August 31,
2003 and February 28, 2003, respectively. The estimated
cost to complete the development work related to the performance
bonds was $9.8 million and $5.6 million at
August 31, 2003 and February 28, 2003, respectively.
The beneficiaries of these bonds are certain municipalities.
Additionally, at August 31, 2003 and February 28,
2003, CPH LLC had outstanding letters of credit with banks
totaling $6.7 million and $1.5 million, respectively.

The Company is subject to customary obligations
associated with entering into contracts for the purchase of land
and improved homesites. These purchase contracts typically
require a cash deposit and the purchase of properties under
these contracts is generally contingent upon satisfaction of
certain requirements by the sellers, including in some cases
obtaining applicable property entitlements. In addition, the
Company utilizes option contracts with land sellers and
third-party financial entities as a method of acquiring land.
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 lots over a specified period of
time at predetermined prices. The Company generally has the
right at its discretion to terminate its obligations under these
option agreements by forfeiting its cash deposit or repaying
amounts drawn under the letter of credit with no further
financial responsibility. As of August 31, 2003, the
Company had cash deposits outstanding of approximately
$9.7 million on land purchase and option contracts having a
total remaining purchase price of approximately
$142.7 million, of which approximately $6.1 million is
included in consolidated inventory not owned in the accompanying
consolidated balance sheet at August 31, 2003 related to 4
option contracts, as discussed in Note 4.

The Company also enters into land development and
homebuilding joint ventures. Certain of these joint ventures
obtain secured acquisition, development and construction
financing. At August 31, 2003, the Companys
unconsolidated joint ventures had borrowings of
$6.9 million. The Company is generally obligated to the
project lenders to complete land development improvements and
the construction of planned homes if the joint venture does not
perform the required construction. Provided that the Company is
in compliance with these completion obligations, the project
lenders would be obligated to fund the required construction and
improvements through any financing commitments available under
the applicable joint venture development and construction loans.

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CAPITAL PACIFIC HOLDINGS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Additionally, the Company has agreed to indemnify
third-party surety providers with respect to performance bonds
issued on behalf of certain unconsolidated joint ventures. If a
joint venture does not perform its obligations, the surety bond
could be called. If these surety bonds are called, and the joint
venture fails to reimburse the surety, the Company would be
obligated to indemnify the surety. As of August 31, 2003,
the Companys unconsolidated joint ventures had
approximately $19.7 million of surety bonds outstanding
subject to such indemnity arrangements.

CPH LLC is a general partner in certain joint
venture partnerships that have completed operations. As a
general partner, CPH LLC is liable for all debts of these
partnerships without limitation to the respective partnership
interest.

12.     Accounting
for Guarantees

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). The
disclosure requirements of FIN 45 are effective as of
December 31, 2002, and the Company adopted that portion of
the pronouncement as of that date. The initial recognition and
measurement requirements of FIN 45 are effective on a
prospective basis to guarantees issued or modified after
December 31, 2002. Recognition of a liability is recorded
at its estimated fair value based on the present value of the
expected contingent payments under the guarantee arrangement.
The adoption of the initial recognition and measurement
requirements of FIN 45 did not have a material impact on
the Companys financial position or results of operations.

The types of guarantees that the Company provides
that are subject to FIN 45 generally are made to third-parties
on behalf of unconsolidated homebuilding and land development
joint ventures. As of August 31, 2003, these guarantees
included, but were not limited to, construction completion
agreements and surety bond indemnities (see Note 11 for further
discussion).

13.     Other Recent
Accounting Pronouncements

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 142
addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion
No. 17, Intangible Assets. This pronouncement
addresses, among other things, how goodwill and other intangible
assets should be accounted for after they have been initially
recognized in the financial statements. Goodwill will no longer
be amortized but will be assessed at least annually for
impairment using a fair value methodology. The Company has
adopted this statement for all goodwill and other intangible
assets acquired after June 30, 2001 and for all existing
goodwill and other intangible assets beginning March 1,
2002. Upon adoption of this standard on March 1, 2002, the
Company was required to accrete the remaining balance of
negative goodwill through a cumulative effect of change in
accounting principle, which increased net income in the first
quarter of fiscal 2003 by $5.4 million, or $0.37 per
diluted share. Other than the accretion of the remaining
negative goodwill, the Company does not anticipate that the
adoption of SFAS 142 will have a material impact on the
Companys financial position or results of operations.

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150, Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS 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. Accordingly, the Company adopted
SFAS 150 effective September 1, 2003 and is currently
evaluating its potential impact on the Companys financial
position and results of operations.

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Item 2.     Managements
Discussion and Analysis of Results of Operations and Financial
Condition

Forward-Looking Information is Subject to Risk
and Uncertainty

Certain statements in the financial discussion
and analysis by management contain forward-looking
information (as defined in the Private Securities Litigation
Reform Act of 1995 and within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended) that involves risk
and uncertainty, including projections and assumptions regarding
the business environment in which the Company operates. Actual
future results and trends may differ materially depending on a
variety of factors, including the Companys successful
execution of internal performance strategies; changes in general
national and regional economic conditions, such as levels of
employment, consumer confidence and income; uncertainty arising
from acts of war and terrorism and similar factors; availability
to homebuilders of financing for acquisitions, development and
construction; availability to homebuyers of permanent mortgages;
interest rate levels; the demand for housing; supply levels of
land, utilities and other services, labor and materials;
difficulties in obtaining permits or approvals from governmental
authorities; difficulties in marketing homes; regulatory changes
and weather and other environmental uncertainties; competitive
influences; and the outcome of pending and future legal claims
and proceedings.

Results of Operations 
General

As is noted in Note 1 to the financial
statements presented herein, the Company is reporting its
results on a consolidated basis with the results of its
wholly-owned subsidiaries, including CPH LLC. References to the
Company in this Item 2 are, unless the context indicates
otherwise, also references to such subsidiaries. At the current
time, all material financing transactions and arrangements are
incurred either by CPH LLC or by project-specific entities, or
in the case of Managed Projects, by the owner of such projects.

The following table illustrates the actual
results of the Companys operations, as well as the results
including the Companys unconsolidated joint ventures and
the Managed Projects, for the three and six months ended
August 31, 2003 and 2002. The actual results have been
adjusted to reflect the inclusion of the operating results of
the Companys unconsolidated joint ventures, including the
portion attributable to the Companys Joint Venture
partners, in order to facilitate the discussion of the overall
results in certain portions of the discussion below. During the
three and six month periods ended August 31, 2003 and 2002,
the Company was responsible for construction and marketing
activity in the Managed Projects and the Companys sole
economic interest is through management arrangements.

Results of Operations

(Amounts in thousands)


|                        |              |                    |        |                 |  |             |        |                |  |                |        |             |  |   |        |        |  |   |        |        |  |   |        |        | 
|----------------------- | ------------ | ------------------ | ------ | --------------- |  | ----------- | ------ | -------------- |  | -------------- | ------ | ----------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                        |              |                   
|                        |              | Three Months Ended
|                        |              |                   
|                        |              |                    |        |                
|                        |              | August 31, 2003    |        | August 31, 2002
|                        |              |                    |        |                
|                        |              |                    |        | Including       |  |             |        | Including     
|                        |              |                    |        | Joint Ventures  |  |             |        | Joint Ventures
|                        |              |                    |        | Including       |  | and Managed |        |                |  | Including      |        | and Managed
|                        |              | Consolidated       |        | Joint Ventures  |  | Projects    |        | Consolidated   |  | Joint Ventures |        | Projects   
|                        |              |                    |        |                 |  |             |        |                |  |                |        |            
|Sales of homes and land |              | $                  | 47,584 |                 |  | $           | 61,310 |                |  | $              | 81,335 |             |  | $ | 47,020 |        |  | $ | 48,614 |        |  | $ | 58,020 |       
|Cost of sales           |              |                    | 35,980 |                 |  |             | 45,542 |                |  |                | 64,783 |             |  |   | 34,814 |        |  |   | 36,078 |        |  |   | 43,840 |       
|                        |              |                    |        |                 |  |             |        |                |  |                |        |             |  |   |        |        |  |   |        |        |  |   |        |       
|                        | Gross margin |                    | $      | 11,604          |  |             | $      | 15,768         |  |                | $      | 16,552      |  |   | $      | 12,206 |  |   | $      | 12,536 |  |   | $      | 14,180 | 
|                        |              |                    |        |                 |  |             |        |                |  |                |        |             |  |   |        |        |  |   |        |        |  |   |        |       

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|                        |              |                  |        |                 |  |             |         |                |  |                |         |             |  |   |        |        |  |   |         |        |  |   |         |        | 
|----------------------- | ------------ | ---------------- | ------ | --------------- |  | ----------- | ------- | -------------- |  | -------------- | ------- | ----------- |  | - | ------ | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                        |              |                 
|                        |              | Six Months Ended
|                        |              |                 
|                        |              |                  |        |                
|                        |              | August 31, 2003  |        | August 31, 2002
|                        |              |                  |        |                
|                        |              |                  |        | Including       |  |             |         | Including     
|                        |              |                  |        | Joint Ventures  |  |             |         | Joint Ventures
|                        |              |                  |        | Including       |  | and Managed |         |                |  | Including      |         | and Managed
|                        |              | Consolidated     |        | Joint Ventures  |  | Projects    |         | Consolidated   |  | Joint Ventures |         | Projects   
|                        |              |                  |        |                 |  |             |         |                |  |                |         |            
|Sales of homes and land |              | $                | 91,055 |                 |  | $           | 115,969 |                |  | $              | 164,272 |             |  | $ | 91,866 |        |  | $ | 102,978 |        |  | $ | 117,158 |       
|Cost of sales           |              |                  | 70,209 |                 |  |             | 87,648  |                |  |                | 127,267 |             |  |   | 69,057 |        |  |   | 78,293  |        |  |   | 90,289  |       
|                        |              |                  |        |                 |  |             |         |                |  |                |         |             |  |   |        |        |  |   |         |        |  |   |         |       
|                        | Gross margin |                  | $      | 20,846          |  |             | $       | 28,321         |  |                | $       | 37,005      |  |   | $      | 22,809 |  |   | $       | 24,685 |  |   | $       | 26,869 | 
|                        |              |                  |        |                 |  |             |         |                |  |                |         |             |  |   |        |        |  |   |         |        |  |   |         |       

Cost of sales, as shown above, does not include
the amount of previously capitalized interest costs which are
included in interest expense. As a result, the gross margin also
does not reflect the impact of previously capitalized interest
cost included in current interest expense. Industry practice
among homebuilders varies, but Company management feels that
gross margin, exclusive of interest expense, is the most
relevant comparable measure, given the Companys historical
capital structure.

Operating Data

The following table shows new home deliveries,
lot deliveries, net new orders and average sales prices for the
three and six months ended August 31, 2003 and 2002,
including unconsolidated joint ventures but excluding Managed
Projects:

|                               |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |         |     |     | 
|------------------------------ | ------------------------------------------ | ------------------ | --------------------- | ---------------- | --- | ---------- | --- | ---------- | --- | --- | --- | ------- | --- | --- | --- | ------- | --- | --- | 
|                               |                                            |                    |                       |                 
|                               |                                            | Three Months Ended |                       | Six Months Ended
|                               |                                            |                    |                       |                 
|                               |                                            | August 31,         |                       | August 31,       |     | August 31, |     | August 31,
|                               |                                            | 2003               |                       | 2002             |     | 2003       |     | 2002      
|                               |                                            |                    |                       |                  |     |            |     |           
|New homes delivered:           |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |        
|                               | California                                 |                    |                       | 49               |     |            |     | 28         |     |     |     | 102     |     |     |     | 53      |    
|                               | Texas                                      |                    |                       | 34               |     |            |     | 49         |     |     |     | 63      |     |     |     | 85      |    
|                               | Arizona                                    |                    |                       | 50               |     |            |     | 31         |     |     |     | 83      |     |     |     | 50      |    
|                               | Colorado                                   |                    |                       | 32               |     |            |     | 17         |     |     |     | 60      |     |     |     | 44      |    
|                               |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |        
|                               |                                            | Subtotal           |                       |                  | 165 |            |     |            | 125 |     |     |         | 308 |     |     |         | 232 |    
|                               | Unconsolidated Joint Ventures (California) |                    |                       | 34               |     |            |     | 5          |     |     |     | 62      |     |     |     | 38      |    
|                               |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |        
|                               |                                            |                    | Total homes delivered |                  |     | 199        |     |            |     | 130 |     |         |     | 370 |     |         |     | 270 | 
|Lots delivered                 |                                            |                    | 12                    |                  |     |            | 26  |            |     |     | 38  |         |     |     | 88  |        
|                               |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |        
|Total homes and lots delivered |                                            |                    | 211                   |                  |     |            | 156 |            |     |     | 408 |         |     |     | 358 |        
|                               |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |        
|Net new orders                 |                                            |                    | 285                   |                  |     |            | 220 |            |     |     | 593 |         |     |     | 443 |        
|                               |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |        
|Average home sales price:      |                                            |                    |                       |                  |     |            |     |            |     |     |     |         |     |     |     |        
|                               | California                                 |                    | $                     | 432,000          |     |            | $   | 864,000    |     |     | $   | 435,000 |     |     | $   | 809,000 |    
|                               | Texas                                      |                    |                       | 199,000          |     |            |     | 229,000    |     |     |     | 204,000 |     |     |     | 270,000 |    
|                               | Arizona                                    |                    |                       | 185,000          |     |            |     | 148,000    |     |     |     | 177,000 |     |     |     | 145,000 |    
|                               | Colorado                                   |                    |                       | 257,000          |     |            |     | 245,000    |     |     |     | 240,000 |     |     |     | 252,000 |    
|                               | Combined                                   |                    |                       | 302,000          |     |            |     | 352,000    |     |     |     | 306,000 |     |     |     | 353,000 |    

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The following table shows backlog in units and
dollars at August 31, 2003 and 2002 for each of the
Companys operations, including unconsolidated joint
ventures:

|           |       |                 |     |                 |  |       |        |         |  |  |     |     |  |   |        |         | 
|---------- | ----- | --------------- | --- | --------------- |  | ----- | ------ | ------- |  |  | --- | --- |  | - | ------ | ------- | 
|           |       |                
|           |       | Ending Backlog 
|           |       |                
|           |       |                 |     |                
|           |       | August 31, 2003 |     | August 31, 2002
|           |       |                 |     |                
|           |       | Units           |     | ($000s)         |  | Units |        | ($000s)
|           |       |                 |     |                 |  |       |        |        
|California |       |                 | 217 |                 |  | $     | 98,484 |         |  |  | 135 |     |  | $ | 68,500 |        
|Texas      |       |                 | 85  |                 |  |       | 20,199 |         |  |  | 96  |     |  |   | 20,600 |        
|Arizona    |       |                 | 87  |                 |  |       | 19,444 |         |  |  | 60  |     |  |   | 9,000  |        
|Colorado   |       |                 | 107 |                 |  |       | 28,683 |         |  |  | 60  |     |  |   | 11,600 |        
|           |       |                 |     |                 |  |       |        |         |  |  |     |     |  |   |        |        
|           | Total |                 |     | 496             |  |       | $      | 166,810 |  |  |     | 351 |  |   | $      | 109,700 | 
|           |       |                 |     |                 |  |       |        |         |  |  |     |     |  |   |        |        



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Second Quarter of Fiscal 2004 (ended
    August 31, 2003) Compared to Second Quarter of Fiscal 2003
    (ended August 31, 2002)

The Company reported net income of
$1.1 million, or $0.07 per share, in the second quarter of
fiscal 2004, as compared to net income of $394,000, or $0.03 per
share, in the second quarter of fiscal 2003.

On a consolidated basis, sales of homes and land
increased slightly to $47.6 million for the second quarter
of fiscal 2004 compared to $47.0 million for the second
quarter of fiscal 2003. This increase is primarily due to a
higher number of home closings in the second quarter of fiscal
2004 than in the second quarter of fiscal 2003, partially offset
by a decrease in the Companys average sales price per home
to $302,000 in the second quarter of fiscal 2004 from $352,000
in the second quarter of fiscal 2003 as well as fewer lot
deliveries. Sales of homes and land including unconsolidated
joint ventures, but excluding Managed Projects, increased to
$61.3 million from $48.6 million for the respective
quarters. Total home closings increased from 130 in the second
quarter of fiscal 2003 to 199 in the second quarter of fiscal
2004, including 5 and 34 homes, respectively, closed in
unconsolidated joint ventures. This was partially offset by a
decrease in lot closings from 26 in the second quarter of fiscal
2003 to 12 in the second quarter of fiscal 2004. The substantial
increase in the Companys backlog from 351 units to 496
units between quarters is primarily due to an increase in demand
and backlog units in substantially all of the Companys
markets, including a 44% rise in backlog in dollar terms in
California, a 147% increase in Colorado and a 116% rise in
Arizona, which affected both backlog and net new orders. The
Company anticipates opening between 10 and 12 net new
communities over the next few quarters.

The Companys gross margin on home and lot
closings decreased to 24.4% for the second quarter of fiscal
2004 as compared to 26.0% for the second quarter of fiscal 2003,
due to a change in the mix of closings to certain higher-volume,
lower-margin projects and the close-out of certain less
profitable projects. The Companys gross margin including
unconsolidated joint ventures, decreased slightly from 25.8% in
the second quarter of fiscal 2003 to 25.7% in the second quarter
of fiscal 2004. The Companys measure of gross margin may
differ from other homebuilders, as discussed above.

Selling, general and administrative expense of
$8.5 million for the second quarter of fiscal 2004
decreased slightly from $8.6 million in the second quarter
of fiscal 2003. As a percentage of revenue, selling, general and
administrative expense decreased from 18.3% for the second
quarter of fiscal 2003 to 17.9% for the second quarter of fiscal
2004.

Income from unconsolidated joint ventures
increased from $156,000 in the second quarter of fiscal 2003 to
$1.5 million in the second quarter of fiscal 2004, due to
an increased level of profit participation and a higher level of
closings in the active joint ventures in the current quarter.

Interest and other income increased from $102,000
in the second quarter of fiscal 2003 to $174,000 in the second
quarter of fiscal 2004.

Interest incurred was $3.2 million in the
second quarter of fiscal 2004, as compared to $2.7 million
in the second quarter of fiscal 2003, while previously
capitalized interest expensed was $3.0 million during the
second quarter of fiscal 2004, as compared to $3.3 million
in the second quarter of fiscal 2003.

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The Company recorded a provision for income taxes
of $725,000 in the second quarter of fiscal 2004, utilizing an
effective tax rate of 40.0%, as compared to $219,000 in the
second quarter of fiscal 2003, with an effective tax rate of
35.7%.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | First Six Months of Fiscal 2004 (ended
    August 31, 2003) Compared to First Six Months of Fiscal
    2003 (ended August 31, 2002)

Net income increased to $1.9 million in the
first six months of fiscal 2004 from $1.1 million in the
first six months of fiscal 2003, excluding the effect of a
cumulative change in accounting principle in fiscal 2003. Income
for the six months ended August 31, 2002 included a
cumulative effect of change in accounting principle which
increased income by $5.4 million, or $0.36 per share. The
Company reported net income of $1.9 million, or $0.13 per
share, in the first six months of fiscal 2004, as compared to
net income of $6.6 million, or $0.44 per share, in the
first six months of fiscal 2003.

On a consolidated basis, sales of homes and land
decreased slightly to $91.0 million for the first six
months of fiscal 2004 compared to $91.9 million for the
first six months of fiscal 2003. This decrease is primarily due
to a decrease in the Companys average sales price per home
to $306,000 in the first six months of fiscal 2004 from $353,000
in the first six months of fiscal 2003 and fewer lot deliveries,
partially offset by higher home closings. Sales of homes and
land including unconsolidated joint ventures, but excluding
Managed Projects, increased to $116.0 million from
$103.0 million for the respective periods. Total home
closings increased from 270 in the first six months of fiscal
2003 to 370 in the first six months of fiscal 2004, including 38
and 62 homes, respectively, closed in unconsolidated joint
ventures. This was partially offset by a decrease in lot
closings from 88 in the first six months of fiscal 2003 to 38 in
the first six months of fiscal 2004.

The Companys gross margin on home and lot
closings decreased to 22.9% for the first six months of fiscal
2004 as compared to 24.8% for the first six months of fiscal
2003, due to a change in the mix of closings to certain
higher-volume, lower-margin projects and the close-out of
certain less profitable projects. The Companys gross
margin including unconsolidated joint ventures, increased from
24.0% in the first six months of fiscal 2003 to 24.4% in the
first six months of fiscal 2004. The Companys measure of
gross margin may differ from other homebuilders, as discussed
above.

Selling, general and administrative expense of
$16.2 million for the first six months of fiscal 2004
increased $944,000 as compared to the first six months of fiscal
2003 due principally to selling and marketing expense in advance
of closing revenue in several new communities in certain
markets, primarily during the first quarter, as well as a lower
level of construction overhead reimbursements from
unconsolidated joint ventures and managed projects in the
current period. As a percentage of revenue, selling, general and
administrative expense decreased from 16.7% for the first six
months of fiscal 2003 to 17.8% for the first six months of
fiscal 2004.

Income from unconsolidated joint ventures
increased from $512,000 in the first six months of fiscal 2003
to $3.2 million in the first six months of fiscal 2004, due
to an increased level of profit participation and a higher level
of closings in the active joint ventures in the current period.

Interest and other income increased from $319,000
in the first six months of fiscal 2003 to $1.2 million in
the first six months of fiscal 2004, primarily due to gains on
the sale of certain assets.

Interest incurred was $6.3 million in the
first six months of fiscal 2004, as compared to
$4.9 million in the first six months of fiscal 2003, while
previously capitalized interest expensed was $5.9 million
during the first six months of fiscal 2004, as compared to
$6.6 million in the first six months of fiscal 2003.

The Company recorded a provision for income taxes
of $1.3 million in the first six months of fiscal 2004,
utilizing an effective tax rate of 40.0%, as compared to
$618,000 in the first six months of fiscal 2003, with an
effective tax rate of 35.0%.

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##### Table of Contents



Liquidity and Capital Resources

The Companys principal cash requirements
are for the acquisition, development, construction, marketing
and overhead of its projects. When building inventory, the
Company uses substantial amounts of cash that are generally
obtained from borrowings, available cash flow from operations
and partners contributions to joint ventures.

At the current time, all material financing
transactions and arrangements are incurred either by CPH LLC or
by certain project specific entities. During the fiscal 2003,
CPH LLC renewed and extended its senior unsecured revolving
credit facility (the Senior Facility) with several
participant banks. As of August 31, 2003, the facility had
a maximum commitment of $150 million and a three year
revolving term. Subsequent to August 31, 2003, the maximum
commitment was increased to $160 million, with an accordion
provision up to $175 million. At the option of the Company,
borrowings under the agreement bear interest at LIBOR plus
applicable margin (3.6 percent at August 31, 2003) or
at prime plus applicable margin (4.5 percent at August 31,
2003). Initial proceeds from this facility were used to pay down
certain of CPH LLCs existing facilities and retire the
remaining $55.6 million of its previously issued
12 3/4% Senior Notes (Senior Notes) at face
value during fiscal 2002. In addition, the Company has fixed the
interest rate on $75 million of borrowings at 5.9% until
October 2005 through an interest rate swap agreement with a bank
which was required by the terms of the Senior Facility (see Note
10). The Company also entered into a Senior Subordinated Credit
Agreement in the initial amount of $20 million, with a
maturity date in October 2007, and also entered into an interest
swap as required by the terms of the Senior Subordinated Credit
Agreement effectively fixing the interest rate on that
obligation at 9.5% through its maturity in October 2007. The
Senior Subordinated Credit Agreement has a maximum commitment of
$50 million. Subsequent to August 31, 2003, the amount
outstanding under the Senior Subordinated Credit Agreement was
increased to $30 million.

As of August 31, 2003, the Company has in
place certain credit facilities, including the Senior Facility,
totaling $200 million (the Facilities) with
various bank lenders (the Banks), of which
approximately $145 million was outstanding. Pursuant to the
Facilities, the Company is subject to certain covenants, which
require, among other things, the maintenance of a consolidated
liabilities to net worth ratio, minimum liquidity, minimum net
worth and loss limitations, all as defined in the documents that
evidence the Facilities. At August 31, 2003, the Company
was in compliance with these covenants. The Facilities also
define certain events that constitute events of default. As of
August 31, 2003, no such event had occurred. Commitment
fees are payable annually on some of the Facilities.

Homebuilding activity is being financed out of
CPH LLC cash, bank financing, and the existing joint ventures,
including joint ventures with institutional investors.
Development work undertaken in certain of the Companys
joint ventures is financed through various non-recourse lending
arrangements. Additional lot development activity is enhanced
through various arrangements outside the Senior Facility. The
Company anticipates that it will continue to utilize both third
party financing and joint ventures to cover financing needs in
excess of internally generated cash flow.

Management expects that cash flow generated from
operations and from bank financing will be sufficient to cover
the debt service and to fund CPH LLCs current development
and homebuilding activities for the reasonably foreseeable
future, and expects that capital commitments from its joint
venture partners and other bank facilities will provide
sufficient financing for the operation of its joint ventures.

The Company is subject to customary obligations
associated with entering into contracts for the purchase of land
and improved homesites. These purchase contracts typically
require a cash deposit and the purchase of properties under
these contracts is generally contingent upon satisfaction of
certain requirements by the sellers, including obtaining
applicable property and development entitlements.

The Company also utilizes option contracts with
land sellers and third-party financial entities as a method of
acquiring land in staged takedowns and minimizing the use of
funds from the Senior Facility and other corporate financing
sources. These option contracts also help the Company manage the
financial and market risk associated with land holdings. 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 lots over a specified period of time at

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##### Table of Contents



predetermined prices. The Company generally has
the right at its discretion to terminate its obligations under
these option agreements by forfeiting its cash deposit or
repaying amounts drawn under the letter of credit with no
further financial responsibility. As of August 31, 2003,
the Company had cash deposits outstanding of approximately
$9.7 million on option contracts having a total remaining
purchase price of approximately $142.7 million, of which
approximately $6.1 million is included in consolidated
inventory not owned in the accompanying consolidated balance
sheet at August 31, 2003 related to two land option
contracts. The Companys utilization of option contracts is
dependent on, among other things, the availability of capital to
the option provider, general housing market conditions and
geographic preferences. Options may be more difficult to procure
from land sellers in strong housing market conditions and are
more prevalent in certain geographic regions.


The Company enters into land development and
homebuilding joint ventures from time to time as a means of
accessing lot positions, expanding its market opportunities,
managing its risk profile and leveraging its capital base.
Certain of these joint ventures obtain secured acquisition,
development and construction financing, which minimizes the use
of funds from the Senior Facility and other corporate financing
sources. The Company plans to continue using these types of
arrangements to finance the development of properties as
opportunities arise. At August 31, 2003, these
unconsolidated joint ventures and certain Managed Projects had
borrowings which totaled $21.0 million which, in accordance
with generally accepted accounting principles, are not recorded
in the accompanying consolidated balance sheet. The Company is
generally obligated to the project lenders to complete land
development improvements and the construction of planned homes
if the joint venture or Managed Project does not perform the
required development and construction. Provided that the Company
is in compliance with these completion obligations, the project
lenders would be obligated to fund these improvements through
any financing commitments available under the applicable
development and construction loans.

Critical Accounting Policies

The Companys financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and costs and expenses during the
reporting period. Management evaluates its estimates and
judgments, including those which impact its most critical
accounting policies on an ongoing basis. Management bases its
estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the
circumstances, within the framework of current accounting
literature. Actual results may differ from these estimates under
different assumptions or conditions. The Companys key
accounting policies are discussed in detail in the
Companys Form 10-K for the fiscal year ended
February 28, 2003.

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 145 Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections (SFAS
145). SFAS 145 provides that gains or losses resulting
from the extinguishment of debt not be classified as an
extraordinary item unless it meets the criteria of Accounting
Principles Board Opinion No. 30. SFAS 145 is effective
for fiscal years beginning after May 15, 2002. The adoption
of SFAS 145 did not have any impact on the Companys
financial position or results of operations.

In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including certain costs incurred in a
restructuring). SFAS 146 requires recognition of a
liability for a cost associated with an exit or disposal
activity when the liability is incurred as opposed to when the
entity commits to an exit plan as prescribed under EITF
No. 94-3. SFAS 146 is effective for exit or

17



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##### Table of Contents



disposal activities initiated after
December 31, 2002. The adoption of SFAS 146 did not
have a material impact on the Companys financial position
or results of operations.


In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). The
disclosure requirements of FIN 45 are effective as of
December 31, 2002, and the Company adopted that portion of
the pronouncement as of that date. The initial recognition and
measurement requirements of FIN 45 are effective on a
prospective basis to guarantees issued or modified after
December 31, 2002. Recognition of a liability is recorded
at its estimated fair value based on the present value of the
expected contingent payments under the guarantee arrangement.
The adoption of the initial recognition and measurement
requirements of FIN 45 did not have a material impact on
the Companys financial position or results of operations.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 addresses
the consolidation of variable interest entities. Under
FIN 46, arrangements that are not controlled through voting
or similar rights are accounted for as variable interest
entities. An enterprise is required to consolidate a variable
interest entity if it is the primary beneficiary. FIN 46
applies immediately to arrangements created after
January 31, 2003 and, with respect to arrangements created
before February 1, 2003, the interpretation will apply
beginning on December 1, 2003. Arrangements entered into
subsequent to January 31, 2003 have been evaluated under
FIN 46 and, if applicable, accounted for in accordance with
FIN 46. The Company has not yet determined the anticipated
impact of adopting FIN 46 for arrangements existing as of
January 31, 2003. However, it will require the
consolidation in the Companys fourth quarter financial
statements as of February 29, 2004 of the assets,
liabilities and operations of certain homebuilding and land
development joint ventures, as well as option contracts with
land sellers or third-party financial entities. Since the
Company already recognizes its proportionate share of joint
venture earnings and losses under the equity method of
accounting, the adoption of FIN 46 will not affect the
Companys consolidated net income.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

The Market Risk Exposure paragraphs
are presented to provide an update about material changes to the
Quantitative and Qualitative Disclosures about Market
Risk paragraphs included in the Companys 2003 Annual
Report on Form 10-K filed with the Securities and Exchange
Commission and should be read in conjunction with those
paragraphs.

The Company is exposed to market risks related to
fluctuations in interest rates on its debt. Under the Senior
Facility and the Senior Subordinated Credit Agreement, the
Company has utilized interest rate swaps in order to fix the
interest rate on $95 million of its variable rate debt. The
Company has not used forward or option contracts on foreign
currencies or commodities, or other types of derivative
financial instruments.

The Company uses debt financing primarily for the
purpose of acquiring and developing land and constructing and
selling homes. Historically, the Company has made short-term
borrowings under its revolving credit facilities to fund those
expenditures. In addition, the Company had previously issued
$100 million in fixed-rate 12 3/4% Senior Notes
(Senior Notes) to provide longer-term financing.
Prior to the third quarter of fiscal 2002, the Company had
repurchased Senior Notes with a face value of
$44.4 million. During the third quarter of fiscal 2002, the
Company redeemed at face value the remaining $55.6 million
of the Senior Notes.

For fixed rate debt, changes in interest rates
generally affect the fair market value, but not the
Companys earnings or cash flows. Conversely, for variable
rate debt, changes in interest rates generally do not have an
impact on fair market value, but do affect the Companys
future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a
result, interest rate risk and changes in fair market value
should not have a significant impact on such debt until the
Company would be required to refinance such debt. Based upon the
amount of variable rate debt outstanding at the end of the first
quarter, and holding the variable rate debt balance constant,
each one percentage point increase in interest rates

18



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##### Table of Contents



occurring on the first day of an annual period
would result in an increase in interest incurred for the coming
year of approximately $500,000.


The Company does not believe that future market
interest rate risks related to its debt obligations will have a
material impact on the Companys financial position,
results of operations or liquidity.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

As of August 31, 2003, an evaluation was
performed under the supervision and with the participation of
the Companys management, including the CEO, CFO, COO and
CLO, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based on that
evaluation, the Companys management, including the CEO,
CFO, COO and CLO, concluded that the Companys significant
disclosure controls and procedures were effective as of
August 31, 2003. There have been no significant changes in
the Companys internal controls or in other factors that
could significantly affect internal controls subsequent to
August 31, 2003.






|        |                  
|------- | -----------------
|Item 5. | Other Information

On October 15, 2003, the Company filed an
application to voluntarily withdraw its Common Stock from
listing on the American Stock Exchange and to deregister its
Common Stock under Section 12(d) of the Exchange Act. The
Company does not expect to be obligated to register its Common
Stock under Section 12(g) of the Exchange Act at the
effectiveness of the delisting because of the small number of
shareholders of record of the Companys Common Stock. Prior
to the effectiveness of the deregistration, the Company will
remain obligated to file periodic disclosures including
Forms 10-K and 10-Q. The Company made the decision to
deregister principally on the basis of the increased compliance
costs associated with the Sarbanes-Oxley Act and the lack of a
compensating benefit of listing to the Company and its
shareholders. The deregistration may have an effect on the
trading price of the Companys Common Stock. The Company is
currently seeking to identify a market maker to facilitate
trading in the Companys stock after the deregistration
becomes effective.

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##### Table of Contents






PART II  OTHER
INFORMATION






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

|        |      |             |  |                                                                                                                               
|------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 32.1 |             |  | Certification of Hadi Makarechian and Steven O.
    Spelman, Jr. pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002

(b) Reports on Form 8-K

None Filed.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements 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.



| |     |                     
| | --- | --------------------
| | By: | /s/ HADI MAKARECHIAN

| |                                          
| | -----------------------------------------
| |                                          
| | Hadi Makarechian                         
| | Chairman of the Board,                   
| | Chief Executive Officer and
    President
| | (Principal Executive Officer)            

Date: October 15, 2003



| |     |                           
| | --- | --------------------------
| | By: | /s/ STEVEN O. SPELMAN, JR.

| |                                                    
| | ---------------------------------------------------
| |                                                    
| | Steven O. Spelman, Jr.                             
| | Chief Financial Officer and Corporate
    Secretary
| | (Principal Financial Officer)                      

Date: October 15, 2003

21



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##### Table of Contents



CERTIFICATIONS

I, Hadi Makarechian, certify that:

1.     I have reviewed
this quarterly report on Form 10-Q of Capital Pacific
Holdings, Inc.:



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.     Based on my
    knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to
    make the statements made, in light of the circumstances under
    which such statements were made, not misleading with respect to
    the period covered by this report;                               
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this report, fairly present in all
    material respects the financial condition, results of operations
    and cash flows of the registrant as of, and for, the periods
    presented in this report;                                                  
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-15(e)
    and 15d-15(e)) and internal control over financial reporting (as
    defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
    the registrant and have:



| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    quarterly report is being prepared;
|
| | b) Designed such internal control over
    financial reporting, or caused such internal control over
    financial reporting to be designed under our supervision, to
    provide reasonable assurance regarding the reliability of
    financial reporting and the preparation of financial statements
    for external purposes in accordance with generally accepted
    accounting principles;                 
|
| | c) Evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this report our conclusions about the effectiveness
    of the disclosure controls and procedures as of the end of the
    period covered by this report based on such evaluation; and                                                                                                              
|
| | d) Disclosed in this report any change in
    the registrants internal control over financial reporting
    that occurred during the registrants most recent fiscal
    quarter (the registrants fourth fiscal quarter in the case
    of an annual report) that has materially affected, or is
    reasonably likely to materially affect, the registrants
    internal control over financial reporting; and 



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies and material
    weaknesses in the design or operation of internal control over
    financial reporting which are reasonably likely to affect the
    registrants ability to record, process, summarize and
    report financial information; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal control over financial
    reporting.                                                                                         



| |     |                     
| | --- | --------------------
| | By: | /s/ HADI MAKARECHIAN

| |                                          
| | -----------------------------------------
| |                                          
| | Hadi Makarechian                         
| | Chairman of the Board,                   
| | Chief Executive Officer and
    President
| | (Principal Executive Officer)            

Date: October 15, 2003


22



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##### Table of Contents





I, Steven O. Spelman, Jr., certify that:

1.     I have reviewed
this quarterly report on Form 10-Q of Capital Pacific
Holdings, Inc.:



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.     Based on my
    knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to
    make the statements made, in light of the circumstances under
    which such statements were made, not misleading with respect to
    the period covered by this report;                               
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this report, fairly present in all
    material respects the financial condition, results of operations
    and cash flows of the registrant as of, and for, the periods
    presented in this report;                                                  
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-15(e)
    and 15d-15(e)) and internal control over financial reporting (as
    defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
    the registrant and have:



| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    quarterly report is being prepared;
|
| | b) Designed such internal control over
    financial reporting, or caused such internal control over
    financial reporting to be designed under our supervision, to
    provide reasonable assurance regarding the reliability of
    financial reporting and the preparation of financial statements
    for external purposes in accordance with generally accepted
    accounting principles;                 
|
| | c) Evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this report our conclusions about the effectiveness
    of the disclosure controls and procedures as of the end of the
    period covered by this report based on such evaluation; and                                                                                                              
|
| | d) Disclosed in this report any change in
    the registrants internal control over financial reporting
    that occurred during the registrants most recent fiscal
    quarter (the registrants fourth fiscal quarter in the case
    of an annual report) that has materially affected, or is
    reasonably likely to materially affect, the registrants
    internal control over financial reporting; and 



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies and material
    weaknesses in the design or operation of internal control over
    financial reporting which are reasonably likely to affect the
    registrants ability to record, process, summarize and
    report financial information; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal control over financial
    reporting.                                                                                         



| |     |                           
| | --- | --------------------------
| | By: | /s/ STEVEN O. SPELMAN, JR.

| |                                                    
| | ---------------------------------------------------
| |                                                    
| | Steven O. Spelman, Jr.                             
| | Chief Financial Officer and Corporate
    Secretary
| | (Principal Financial Officer)                      



Date: October 15, 2003


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EXHIBIT INDEX

|        |      |             |  |                                                                                                                               
|------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 32.1 |             |  | Certification of Hadi Makarechian and Steven O.
    Spelman, Jr. pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002