##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




---

Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended March 31,
    2004                                           
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from             to                                           

Commission File
Number: 000-23677



---

Technical Olympic USA, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 76-0460831                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|4000 Hollywood Blvd., Suite 500 N
    Hollywood, Florida           |  | 33021                                   
|(Address of principal executive
    offices)                       |  | (ZIP code)                              

(954) 364-4000

(Registrants telephone number, including
area code)


(Former name, former address and former fiscal
year, if changed since last report)

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

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

APPLICABLE ONLY TO CORPORATE
ISSUERS:

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date: 29,898,837 shares of common stock as of
May 7, 2004.



---






---










TECHNICAL OLYMPIC USA, INC.

INDEX

|                                              |  |                                                                                           |    |      |    | 
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                              |  |                                                                                           |    | Page
|                                              |  |                                                                                           |    |     
|PART I.                                       |  | Financial Information                                                                     |    |      | 1  | 
|                                             
|ITEM 1.                                       |  | Financial Statements
    (Unaudited)                                                      |    |      | 1  | 
|                                             
|                                              |  | Consolidated Statements of
    Financial Condition                                        |    |      | 1  | 
|                                             
|                                              |  | Consolidated Statements of
    Income                                                     |    |      | 2  | 
|                                             
|                                              |  | Consolidated Statements of
    Cash Flows                                                 |    |      | 3  | 
|                                             
|                                              |  | Notes to the Consolidated
    Financial Statements                                        |    |      | 4  | 
|                                             
|ITEM 2.                                       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |      | 10 | 
|                                             
|ITEM 3.                                       |  | Quantitative and Qualitative
    Disclosures about Market Risk                            |    |      | 20 | 
|                                             
|ITEM 4.                                       |  | Controls and Procedures                                                                   |    |      | 21 | 
|                                             
|PART II.                                      |  | Other Information                                                                         |    |      | 22 | 
|                                             
|ITEM 6.                                       |  | Exhibits and Reports on
    Form 8-K                                                      |    |      | 22 | 
|                                             
|Signatures                                    |  |                                                                                           | 23 |     
|Certificate of Amendment                     
|Employment Agreement w/ Harry Engelstein     
|Amended & Restated Credit Agreement          
|Sec 302 Chief Executive Officer Certification
|Sec 302 Chief Financial Officer Certification
|Sec 906 Chief Executive Officer Certification
|Sec 906 Chief Financial Officer Certification



i



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##### Table of Contents






PART I

FINANCIAL INFORMATION



Item 1.  Financial
Statements

TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION


(IN THOUSANDS, EXCEPT PAR VALUE)


|                                                                                                                                                                               |              |              |           |             |  |   |           |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | ------------ | --------- | ----------- |  | - | --------- | ------- | 
|                                                                                                                                                                               |              | December 31, |           | March 31,  
|                                                                                                                                                                               |              | 2003         |           | 2004       
|                                                                                                                                                                               |              |              |           |            
|                                                                                                                                                                               |              |              |           | (unaudited)
|ASSETS                                                                                                                                                                        
|HOMEBUILDING:                                                                                                                                                                  |              |              |           |             |  |   |           |        
|Cash and cash equivalents:                                                                                                                                                     |              |              |           |             |  |   |           |        
|                                                                                                                                                                               | Unrestricted |              | $         | 73,703      |  |   | $         | 103,419 | 
|                                                                                                                                                                               | Restricted   |              |           | 21,222      |  |   |           | 28,339  | 
|Inventory                                                                                                                                                                      |              |              | 1,183,423 |             |  |   | 1,197,839 |        
|Property and equipment, net                                                                                                                                                    |              |              | 23,727    |             |  |   | 25,524    |        
|Other assets                                                                                                                                                                   |              |              | 43,653    |             |  |   | 75,825    |        
|Goodwill                                                                                                                                                                       |              |              | 100,103   |             |  |   | 106,425   |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|                                                                                                                                                                               |              |              | 1,445,831 |             |  |   | 1,537,371 |        
|FINANCIAL SERVICES:                                                                                                                                                            |              |              |           |             |  |   |           |        
|Cash and cash equivalents:                                                                                                                                                     |              |              |           |             |  |   |           |        
|                                                                                                                                                                               | Unrestricted |              |           | 3,148       |  |   |           | 4,352   | 
|                                                                                                                                                                               | Restricted   |              |           | 73,358      |  |   |           | 177,682 | 
|Mortgage loans held for sale                                                                                                                                                   |              |              | 75,241    |             |  |   | 61,971    |        
|Other assets                                                                                                                                                                   |              |              | 3,544     |             |  |   | 3,976     |        
|Goodwill                                                                                                                                                                       |              |              | 3,907     |             |  |   | 3,907     |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|                                                                                                                                                                               |              |              | 159,198   |             |  |   | 251,888   |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|Total assets                                                                                                                                                                   |              | $            | 1,605,029 |             |  | $ | 1,789,259 |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                      
|HOMEBUILDING:                                                                                                                                                                  |              |              |           |             |  |   |           |        
|Accounts payable                                                                                                                                                               |              | $            | 50,228    |             |  | $ | 41,422    |        
|Accrued expenses and other liabilities                                                                                                                                         |              |              | 98,711    |             |  |   | 85,879    |        
|Customer deposits                                                                                                                                                              |              |              | 35,506    |             |  |   | 45,101    |        
|Consolidated obligations for inventory not owned                                                                                                                               |              |              | 242,740   |             |  |   | 245,852   |        
|Homebuilding borrowings                                                                                                                                                        |              |              | 497,919   |             |  |   | 614,587   |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|                                                                                                                                                                               |              |              | 925,104   |             |  |   | 1,032,841 |        
|FINANCIAL SERVICES:                                                                                                                                                            |              |              |           |             |  |   |           |        
|Accounts payable and other liabilities                                                                                                                                         |              |              | 74,893    |             |  |   | 178,134   |        
|Financial services borrowings                                                                                                                                                  |              |              | 63,243    |             |  |   | 20,063    |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|                                                                                                                                                                               |              |              | 138,136   |             |  |   | 198,197   |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|Total liabilities                                                                                                                                                              |              |              | 1,063,240 |             |  |   | 1,231,038 |        
|Minority interest                                                                                                                                                              |              |              | 5,379     |             |  |   | 3,671     |        
|Commitments and contingencies                                                                                                                                                  |              |              |          |             |  |   |          |        
|                                                                                                                                                                              
|Stockholders equity:                                                                                                                                                          |              |              |           |             |  |   |           |        
|Preferred stock  $0.01 par value;
    3,000 shares authorized; none issued or outstanding                                                                                     |              |              |          |             |  |   |          |        
|Common stock  $0.01 par value; 67,000
    shares authorized and 29,889 and 29,896 shares issued and
    outstanding at December 31, 2003 and March 31, 2004,
    respectively |              |              | 299       |             |  |   | 299       |        
|Additional paid-in capital                                                                                                                                                     |              |              | 370,926   |             |  |   | 370,985   |        
|Retained earnings                                                                                                                                                              |              |              | 165,185   |             |  |   | 183,266   |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|Total stockholders equity                                                                                                                                                     |              |              | 536,410   |             |  |   | 554,550   |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        
|Total liabilities and stockholders equity                                                                                                                                     |              | $            | 1,605,029 |             |  | $ | 1,789,259 |        
|                                                                                                                                                                               |              |              |           |             |  |   |           |        

See accompanying notes to consolidated financial
statements.

1



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)


(unaudited)


|                                                          |            |                    |         |         |  |   |         |         | 
|--------------------------------------------------------- | ---------- | ------------------ | ------- | ------- |  | - | ------- | ------- | 
|                                                          |            |                   
|                                                          |            | Three Months Ended
|                                                          |            | March 31,         
|                                                          |            |                   
|                                                          |            | 2003               |         | 2004   
|                                                          |            |                    |         |        
|HOMEBUILDING:                                             |            |                    |         |         |  |   |         |        
|Revenues:                                                 |            |                    |         |         |  |   |         |        
|                                                          | Home sales |                    | $       | 313,820 |  |   | $       | 406,738 | 
|                                                          | Land sales |                    |         | 1,403   |  |   |         | 18,175  | 
|                                                          |            |                    |         |         |  |   |         |        
|                                                          |            |                    | 315,223 |         |  |   | 424,913 |        
|Cost of sales:                                            |            |                    |         |         |  |   |         |        
|                                                          | Home sales |                    |         | 247,048 |  |   |         | 331,607 | 
|                                                          | Land sales |                    |         | 1,196   |  |   |         | 12,675  | 
|                                                          |            |                    |         |         |  |   |         |        
|                                                          |            |                    | 248,244 |         |  |   | 344,282 |        
|                                                          |            |                    |         |         |  |   |         |        
|Gross profit                                              |            |                    | 66,979  |         |  |   | 80,631  |        
|Selling, general and administrative expenses              |            |                    | 41,789  |         |  |   | 52,031  |        
|Variable stock-based compensation expense                 |            |                    |        |         |  |   | 992     |        
|Depreciation and amortization expense                     |            |                    | 1,646   |         |  |   | 3,285   |        
|Other income, net                                         |            |                    | (922    | )       |  |   | (1,147  | )      
|                                                          |            |                    |         |         |  |   |         |        
|Homebuilding pretax income                                |            |                    | 24,466  |         |  |   | 25,470  |        
|                                                         
|FINANCIAL SERVICES:                                       |            |                    |         |         |  |   |         |        
|Revenues                                                  |            |                    | 9,521   |         |  |   | 10,326  |        
|Expenses                                                  |            |                    | 6,160   |         |  |   | 7,141   |        
|                                                          |            |                    |         |         |  |   |         |        
|Financial Services pretax income                          |            |                    | 3,361   |         |  |   | 3,185   |        
|                                                          |            |                    |         |         |  |   |         |        
|Income before income taxes                                |            |                    | 27,827  |         |  |   | 28,655  |        
|Provision for income taxes                                |            |                    | 10,171  |         |  |   | 10,574  |        
|                                                          |            |                    |         |         |  |   |         |        
|Net income                                                |            | $                  | 17,656  |         |  | $ | 18,081  |        
|                                                          |            |                    |         |         |  |   |         |        
|EARNINGS PER COMMON SHARE:                                |            |                    |         |         |  |   |         |        
|Basic and Diluted                                         |            | $                  | 0.63    |         |  | $ | 0.60    |        
|                                                          |            |                    |         |         |  |   |         |        
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING: |            |                    |         |         |  |   |         |        
|                                                          | Basic      |                    |         | 27,882  |  |   |         | 29,891  | 
|                                                          |            |                    |         |         |  |   |         |        
|                                                          | Diluted    |                    |         | 27,882  |  |   |         | 30,353  | 
|                                                          |            |                    |         |         |  |   |         |        

See accompanying notes to consolidated financial
statements.

2



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH
FLOWS

(DOLLARS IN THOUSANDS)


(unaudited)


|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |         |          |  
|------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------- | -------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | -------- | -
|                                                                                                                   |                                                                      |                                                   
|                                                                                                                   |                                                                      | Three Months Ended                                
|                                                                                                                   |                                                                      | March 31,                                         
|                                                                                                                   |                                                                      |                                                   
|                                                                                                                   |                                                                      | 2003                                               |         | 2004   
|                                                                                                                   |                                                                      |                                                    |         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                              |                                                                      |                                                    |         |         |         |   |         |        
|Net income                                                                                                         |                                                                      | $                                                  | 17,656  |         |         | $ | 18,081  |        
|Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:                    |                                                                      |                                                    |         |         |         |   |         |        
|                                                                                                                   | Depreciation and amortization                                        |                                                    |         | 1,646   |         |   |         | 3,285   |         
|                                                                                                                   | Non-cash compensation expense                                        |                                                    |         | 160     |         |   |         | 1,192   |         
|                                                                                                                   | Changes in operating assets and liabilities:                         |                                                    |         |         |         |   |         |         |         
|                                                                                                                   |                                                                      | Restricted cash                                    |         |         | 8,660   |   |         |         | (111,441 | )
|                                                                                                                   |                                                                      | Inventory                                          |         |         | (44,610 | ) |         |         | (9,969   | )
|                                                                                                                   |                                                                      | Other assets                                       |         |         | (6,761  | ) |         |         | (30,941  | )
|                                                                                                                   |                                                                      | Accounts payable and accrued and other liabilities |         |         | 9,423   |   |         |         | 80,611   |  
|                                                                                                                   |                                                                      | Customer deposits                                  |         |         | 676     |   |         |         | 9,595    |  
|                                                                                                                   |                                                                      | Mortgage loans held for sale                       |         |         | 14,775  |   |         |         | 13,270   |  
|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |        
|Net cash provided by (used in) operating
    activities                                                            |                                                                      |                                                    | 1,625   |         |         |   | (26,317 | )      
|                                                                                                                  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                              |                                                                      |                                                    |         |         |         |   |         |        
|                                                                                                                   | Amounts paid for acquisitions, net of cash
    acquired              |                                                    |         | (58,968 | )       |   |         |        |         
|                                                                                                                   | Additional consideration paid for acquisitions                       |                                                    |         | (11,594 | )       |   |         | (6,322  | )       
|                                                                                                                   | Net additions to property and equipment                              |                                                    |         | (4,068  | )       |   |         | (5,082  | )       
|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |        
|Net cash used in investing activities                                                                              |                                                                      |                                                    | (74,630 | )       |         |   | (11,404 | )      
|                                                                                                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                              |                                                                      |                                                    |         |         |         |   |         |        
|                                                                                                                   | Proceeds from notes offering                                         |                                                    |         | 94,836  |         |   |         | 125,000 |         
|                                                                                                                   | Payments for deferred financing costs                                |                                                    |         | (2,597  | )       |   |         | (1,663  | )       
|                                                                                                                   | Net repayments on revolving credit facilities                        |                                                    |         | (2,420  | )       |   |         | (10,000 | )       
|                                                                                                                   | Proceeds from Homebuilding borrowings                                |                                                    |         |        |         |   |         | 1,480   |         
|                                                                                                                   | Net repayments on Financial Services borrowings                      |                                                    |         | (13,705 | )       |   |         | (43,180 | )       
|                                                                                                                   | Minority interest in consolidated subsidiaries                       |                                                    |         | 146     |         |   |         | (1,708  | )       
|                                                                                                                   | Net payments on consolidated obligations for
    inventory not owned |                                                    |         | (3,387  | )       |   |         | (1,147  | )       
|                                                                                                                   | Other                                                                |                                                    |         |        |         |   |         | (141    | )       
|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |        
|Net cash provided by financing activities                                                                          |                                                                      |                                                    | 72,873  |         |         |   | 68,641  |        
|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |        
|(Decrease) increase in cash and cash equivalents                                                                   |                                                                      |                                                    | (132    | )       |         |   | 30,920  |        
|Cash and cash equivalents at beginning of period                                                                   |                                                                      |                                                    | 49,211  |         |         |   | 76,851  |        
|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |        
|Cash and cash equivalents at end of period                                                                         |                                                                      | $                                                  | 49,079  |         |         | $ | 107,771 |        
|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |        
|SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
    ACTIVITY                                                         |                                                                      |                                                    |         |         |         |   |         |        
|Increase in consolidated land bank obligations
    for inventory not owned and corresponding increase in inventory |                                                                      | $                                                  |        |         |         | $ | 4,259   |        
|                                                                                                                   |                                                                      |                                                    |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

3



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


MARCH 31, 2004


1. Business and Organization



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

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



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

Technical Olympic S.A. owns 73.95% of our
outstanding common stock. Technical Olympic S.A. is a
publicly-traded Greek company whose shares are traded on the
Athens Stock Exchange.

2. Summary of Significant Accounting
Policies



| |                      
| | ---------------------
| | Basis of Presentation

The consolidated financial statements include our
accounts and those of our subsidiaries. Our accounting and
reporting policies conform to accounting principles generally
accepted in the United States and general practices within the
homebuilding industry. All significant intercompany balances and
transactions have been eliminated in the consolidated financial
statements.

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

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



| |                     
| | --------------------
| | Interim Presentation

The accompanying consolidated financial
statements have been prepared by us and are unaudited. Certain
information and footnote disclosures normally included in
financial statements presented in accordance with accounting
principles generally accepted in the United States have been
omitted from the accompanying financial statements. Management
believes that the disclosures made are adequate to make the
information presented not misleading. However, the financial
statements included as part of this Form 10-Q should be
read in conjunction with the financial statements and notes
thereto included in our December 31, 2003 Annual Report on
Form 10-K. The accompanying unaudited consolidated
financial statements reflect all adjustments, consisting
primarily of normal recurring items that, in the opinion of
management, are considered necessary for a fair presentation of
the financial position, results from operations, and cash flows
for the periods presented. Results of operations achieved
through March 31, 2004 are not necessarily indicative of
those that may be achieved for the year ending December 31,
2004.



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

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

4



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For the three months ended March 31, 2003
and 2004, we have eliminated inter-segment Financial Services
revenues of $1.1 million and $1.8 million, respectively.



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

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

Diluted earnings per share is computed based on
the weighted average number of shares of common stock and
dilutive securities outstanding during the period. Dilutive
securities are not included in the weighted average number of
shares when inclusion would increase the earnings per share. For
the three months ended March 31, 2003, we had no dilutive
securities outstanding as all of the vested options granted were
anti-dilutive because their exercise prices were above market.
For the three months ended March 31, 2004, we had stock
options that were dilutive as the exercise prices of the options
were below market value. Other than stock options, we had no
other dilutive securities.

The following table represents a reconciliation
of weighted average shares outstanding:

|                                                        |  |                    |            |      |  |  |            | 
|------------------------------------------------------- |  | ------------------ | ---------- | ---- |  |  | ---------- | 
|                                                        |  |                   
|                                                        |  | Three Months Ended
|                                                        |  | March 31,         
|                                                        |  |                   
|                                                        |  | 2003               |            | 2004
|                                                        |  |                    |            |     
|Basic average shares outstanding                        |  |                    | 27,882,090 |      |  |  | 29,891,152 | 
|Net effect of stock options assumed to be
    exercised |  |                    |           |      |  |  | 462,259    | 
|                                                        |  |                    |            |      |  |  |            | 
|Diluted average shares outstanding                      |  |                    | 27,882,090 |      |  |  | 30,353,411 | 
|                                                        |  |                    |            |      |  |  |            | 



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

We account for our stock option plan in
accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. Refer to Note 7 for the required pro forma
disclosures.



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

Certain prior period amounts have been
reclassified to conform with the current periods
presentation.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

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

Generally, in the homebuilding industry,
homebuilders enter into option contracts for the purchase of
land or homesites with land sellers and third-party financial
entities, some of which may qualify as VIEs, as a

5



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

method of acquiring developed homesites. We
believe that Interpretation No. 46 must be evaluated as it
relates to these and similar types of arrangements. In applying
Interpretation No. 46 to our homesite option contracts and
other transactions with VIEs, we need to make estimates
regarding cash flows and other assumptions. We believe that our
critical assumptions underlying these estimates are reasonable
based on historical evidence and industry practice. Based on our
analysis of transactions entered into with VIEs, we determined
that we are the primary beneficiary of certain of these homesite
option contracts. Consequently, Interpretation No. 46
requires us to consolidate the assets (homesites) at their
fair value, although (1) we have no legal title to the
assets, (2) our maximum exposure to loss is limited to the
deposits or letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us. The effect of this consolidation at March 31,
2004 was to increase inventory by $94.3 million, excluding
deposits of $7.6 million, which had been previously recorded,
with a corresponding increase to consolidated obligations for
inventory not owned in the accompanying consolidated statements
of financial condition. Additionally, we have entered into
arrangements with VIEs to acquire homesites whereby our variable
interest is insignificant and, therefore, we have determined
that we are not the primary beneficiary and are not required to
consolidate the assets of such VIEs.



|   |          
|-- | ---------
|3. | Inventory

Inventory consists of (dollars in thousands):

|                                            |  |              |           |           |  |   |           | 
|------------------------------------------- |  | ------------ | --------- | --------- |  | - | --------- | 
|                                            |  | December 31, |           | March 31,
|                                            |  | 2003         |           | 2004     
|                                            |  |              |           |          
|Homesites and land under development        |  | $            | 453,893   |           |  | $ | 327,664   | 
|Deposits                                    |  |              | 78,725    |           |  |   | 88,468    | 
|Residences completed and under construction |  |              | 404,581   |           |  |   | 532,371   | 
|Consolidated inventory not owned            |  |              | 246,224   |           |  |   | 249,336   | 
|                                            |  |              |           |           |  |   |           | 
|                                            |  | $            | 1,183,423 |           |  | $ | 1,197,839 | 
|                                            |  |              |           |           |  |   |           | 

A summary of Homebuilding interest capitalized in
inventory is (dollars in thousands):

|                                          |               |                    |        |        |   |   |        |         |  
|----------------------------------------- | ------------- | ------------------ | ------ | ------ | - | - | ------ | ------- | -
|                                          |               |                   
|                                          |               | Three Months Ended
|                                          |               | March 31,         
|                                          |               |                   
|                                          |               | 2003               |        | 2004  
|                                          |               |                    |        |       
|Interest capitalized, beginning of period |               | $                  | 11,578 |        |   | $ | 29,696 |        
|Interest incurred                         |               |                    | 11,045 |        |   |   | 14,959 |        
|Less interest included in:                |               |                    |        |        |   |   |        |        
|                                          | Cost of sales |                    |        | (7,382 | ) |   |        | (10,693 | )
|                                          | Other         |                    |        |       |   |   |        | (1,983  | )
|                                          |               |                    |        |        |   |   |        |        
|Interest capitalized, end of period       |               | $                  | 15,241 |        |   | $ | 31,979 |        
|                                          |               |                    |        |        |   |   |        |        

In the ordinary course of business we enter into
contracts to purchase homesites and land held for development.
At December 31, 2003 and March 31, 2004, we had
refundable and nonrefundable deposits aggregating $78.7 million
and $88.5 million, respectively, included in inventory in
the accompanying consolidated statements of financial condition.
Our liability for nonperformance under such contracts is
generally limited to forfeiture of the related deposits.

During the three months ended March 31,
2004, we sold certain parcels of land for net proceeds of $33.7
million. In connection with these transactions, we entered into
options with the purchasers to acquire fully developed
homesites. As we have retained a continuing involvement in these
properties, in accordance with SFAS No. 66,
Accounting for the Sales of Real Estate, we have
accounted for these transactions as

6



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

financing arrangements. As a result, we have
included the corresponding liability of $33.7 million in
consolidated obligations for inventory not owned in the
accompanying consolidated statement of financial condition as of
March 31, 2004. As of March 31, 2004, $141.0 million
of consolidated inventory not owned relates to sales with
continuing involvement.



|   |             
|-- | ------------
|4. | Acquisitions

On February 28, 2003, we acquired the net
assets of The James Construction Company (James), a homebuilder
operating in the greater Denver, Colorado area, for
approximately $22.0 million in cash. In addition, we are
obligated to pay an additional $1.4 million to the sellers over
a two-year period, of which $0.7 million has been paid as of
March 31, 2004. This acquisition resulted in no goodwill
being recorded.

On February 6, 2003, we acquired the net
assets of Trophy Homes, Inc. (Trophy), a homebuilder operating
in Las Vegas, Nevada, and certain homesites for approximately
$36.2 million in cash. In addition, if certain targets are met
regarding home deliveries during 2003 and 2004, we will be
obligated to pay up to an additional $2.5 million over a
two-year period. Of this amount, $1.9 million has been paid as
of March 31, 2004. This acquisition resulted in
approximately $9.2 million of goodwill.

On November 18, 2002, we acquired the net
assets of Masonry Homes, Inc., a homebuilder operating in the
northwestern suburbs of Baltimore, for approximately $17.1
million in cash. In addition, if certain targets are met
regarding home deliveries, the development and/or subdivision of
certain homesites and earnings for the 2003 and 2004 fiscal
years, we will be obligated to pay up to an additional $21.3
million in cash to the sellers over a two-year period. Of this
amount (i) we paid $11.3 million during the year ended
December 31, 2003, and (ii) we accrued additional
consideration of $6.0 million during the three months ended
March 31, 2004, which was paid in April 2004. This
acquisition resulted in approximately $17.2 million of goodwill.



|   |           
|-- | ----------
|5. | Borrowings

Effective as of April 12, 2004, we amended
our revolving credit facility to, among other things, increase
the amount we are permitted to borrow to the lesser of (i)
$350.0 million or (ii) our borrowing base (calculated in
accordance with the revolving credit facility agreement) minus
our outstanding senior debt. In addition, the amendment to our
revolving credit facility increased our letter of credit
sub-facility provided under our revolving credit facility from
$125.0 million to $175.0 million.

On March 17, 2004, we issued $125.0 million
of our 7 1/2% Senior Subordinated Notes due 2011 at a price
of 100% of the principal amount. The net proceeds of $123.3
million were primarily used to repay amounts outstanding under
our revolving credit facility and Preferred Home Mortgage
Companys warehouse line of credit.

On February 3, 2003, we issued $100.0
million of our 9% Senior Notes due 2010 at a price of 94.836% of
the principal amount plus interest accrued since January 1,
2003. The net proceeds of approximately $93.6 million were
primarily used to repay amounts outstanding under our revolving
credit facility.



|   |                              
|-- | -----------------------------
|6. | Commitments and Contingencies

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

We provide homebuyers with a one-year or two-year
limited warranty of workmanship and materials, and an eight-year
or ten-year limited warranty covering major structural defects.
We generally have recourse against our subcontractors for claims
relating to workmanship and materials.

7



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the three months ended March 31, 2003
and 2004, changes in our warranty accrual consisted of the
following (dollars in thousands):

|                                    |  |      |        |      |  |   |        |  
|----------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                    |  | 2003 |        | 2004
|                                    |  |      |        |     
|Accrued warranty costs at January 1 |  | $    | 4,795  |      |  | $ | 5,229  |  
|Estimated liability recorded        |  |      | 1,686  |      |  |   | 2,364  |  
|Settlements made                    |  |      | (1,803 | )    |  |   | (2,513 | )
|                                    |  |      |        |      |  |   |        |  
|Accrued warranty costs at March 31  |  | $    | 4,678  |      |  | $ | 5,080  |  
|                                    |  |      |        |      |  |   |        |  

In late 2003, The State of Texas began a routine
sales tax audit of one of our Texas operations. At this early
stage of the audit, it is not possible to determine whether or
not the audit will result in the assessment of additional taxes,
and, if an assessment is made, the amount of such assessment.
Although there can be no assurances that this audit will not
result in the assessment of additional taxes by the State of
Texas, we believe that the potential amount, if any, will not
have a significant effect on our financial position or results
of operations.



|   |                                                      
|-- | -----------------------------------------------------
|7. | Stockholders Equity and Stock-Based
    Compensation

During 2001, we adopted the Technical Olympic
USA, Inc. Annual and Long-Term Incentive Plan, formerly known as
the Newmark Homes Corp. Annual and Long-Term Incentive Plan (the
Plan) pursuant to which our employees, consultants
and directors, and those of our subsidiaries and affiliated
entities, are eligible to receive shares of restricted common
stock and/or options to purchase shares of common stock. Under
the Plan, subject to adjustment as defined, the maximum number
of shares with respect to which awards may be granted is
4,000,000.

As of December 31, 2003, we had 3,429,473
options outstanding. During the three months ended
March 31, 2004, we granted an additional 190,000 options to
employees under the Plan. Of the total number of options
granted, 839,776 contain accelerated vesting criteria that are
being accounted for under the variable accounting method as
provided by APB Opinion No. 25. During the three months
ended March 31, 2004, we recorded compensation expense in
the amount of $1.0 million, related to these accelerated vesting
options, as the market price of the stock as of March 31,
2004, was greater than the exercise price.

We have elected to follow APB Opinion No. 25
in accounting for our employee stock options. The exercise price
of our employee stock options equal or exceed the market price
of the underlying stock on the date of grant, and therefore no
compensation expense is recognized, unless the stock options
contain accelerated vesting criteria as described above. SFAS
No. 123, as amended by SFAS No. 148, requires
disclosure of pro forma income and pro forma income per share as
if the fair value based method had been applied in measuring
compensation expense. Had compensation expense for the
Companys shares been based on fair value at the grant
dates for awards under the Companys option plan consistent
with the methodologies

8



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of SFAS No. 123, the Companys net
income and earnings per share for the three months ended March
31, 2003 and 2004, would have been reduced to the pro forma
amounts indicated below (dollars in thousands):

|                                                                                                               |         |                    |        |      |  |   |        |      | 
|-------------------------------------------------------------------------------------------------------------- | ------- | ------------------ | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                               |         |                   
|                                                                                                               |         | Three Months Ended
|                                                                                                               |         | March 31,         
|                                                                                                               |         |                   
|                                                                                                               |         | 2003               |        | 2004
|                                                                                                               |         |                    |        |     
|Net income as reported                                                                                         |         | $                  | 17,656 |      |  | $ | 18,081 |     
|Add: Stock based employee compensation included
    in reported net income, net of tax                         |         |                    |       |      |  |   | 662    |     
|Deduct: Total stock-based employee compensation
    expense determined under the fair value method, net of tax |         |                    | (2,004 | )    |  |   | (507   | )   
|                                                                                                               |         |                    |        |      |  |   |        |     
|Pro forma net income                                                                                           |         | $                  | 15,652 |      |  | $ | 18,236 |     
|                                                                                                               |         |                    |        |      |  |   |        |     
|                                                                                                              
|Reported earnings per common share:                                                                            |         |                    |        |      |  |   |        |     
|                                                                                                               | Basic   |                    | $      | 0.63 |  |   | $      | 0.60 | 
|                                                                                                               | Diluted |                    | $      | 0.63 |  |   | $      | 0.60 | 
|                                                                                                              
|Pro forma earnings per common share:                                                                           |         |                    |        |      |  |   |        |     
|                                                                                                               | Basic   |                    | $      | 0.56 |  |   | $      | 0.61 | 
|                                                                                                               | Diluted |                    | $      | 0.56 |  |   | $      | 0.60 | 

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

|                        |  |  |               | 
|----------------------- |  |  | ------------- | 
|Expected life in years  |  |  | 4  10 years  | 
|Risk-free interest rate |  |  | 1.47%  3.20% | 
|Volatility              |  |  | 0.42%  0.48% | 
|Dividend yield          |  |  | 0%            | 

On April 27, 2004, our shareholders approved
an amendment to our certificate of incorporation to increase the
number of our authorized common shares from 67,000,000 to
97,000,000 shares, and our Board of Directors authorized a
three-for-two stock split on all shares of our common stock. The
stock split will be effected in the form of a 50% stock dividend
to shareholders of record at the close of business on
May 14, 2004. The following pro forma data for the three
months ended March 31, 2003 and 2004 have been prepared to
reflect such stock split:

|                                                                         |         |                    |   |        |  |  |   |        | 
|------------------------------------------------------------------------ | ------- | ------------------ | - | ------ |  |  | - | ------ | 
|                                                                         |         |                   
|                                                                         |         | Three Months Ended
|                                                                         |         | March 31,         
|                                                                         |         |                   
|                                                                         |         | 2003               |   | 2004  
|                                                                         |         |                    |   |       
|Earnings per common share:                                               |         |                    |   |        |  |  |   |       
|                                                                         | Basic   |                    | $ | 0.42   |  |  | $ | 0.40   | 
|                                                                         | Diluted |                    | $ | 0.42   |  |  | $ | 0.40   | 
|                                                                        
|Weighted average number of common shares
    outstanding (in thousands): |         |                    |   |        |  |  |   |       
|                                                                         | Basic   |                    |   | 41,823 |  |  |   | 44,837 | 
|                                                                         | Diluted |                    |   | 41,823 |  |  |   | 45,530 | 

9



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##### Table of Contents








|         |                                                                                          
|-------- | -----------------------------------------------------------------------------------------
|ITEM  2. | Managements Discussion and Analysis
    of Fianncial Condition and Results of Operations

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

Executive Summary

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

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

At March 31, 2004, we were marketing homes
in 227 communities; by comparison, at March 31, 2003 we
were marketing homes in 176 communities.

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

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

Critical Accounting Policies

We believe that there have been no significant
changes to our critical accounting policies during the three
months ended March 31, 2004, as compared to those we
disclosed in Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual
Report on Form 10-K for the year ended December 31,
2003.

10



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##### Table of Contents



RESULTS OF OPERATIONS

Selected Financial and Other
Information

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

|                                                                  |            |                              |            |         |  |   |            |         | 
|----------------------------------------------------------------- | ---------- | ---------------------------- | ---------- | ------- |  | - | ---------- | ------- | 
|                                                                  |            |                             
|                                                                  |            | Three Months Ended March 31,
|                                                                  |            |                             
|                                                                  |            | 2003                         |            | 2004   
|                                                                  |            |                              |            |        
|HOMEBUILDING:                                                     |            |                              |            |         |  |   |            |        
|Revenues:                                                         |            |                              |            |         |  |   |            |        
|                                                                  | Home sales |                              | $          | 313,820 |  |   | $          | 406,738 | 
|                                                                  | Land sales |                              |            | 1,403   |  |   |            | 18,175  | 
|                                                                  |            |                              |            |         |  |   |            |        
|                                                                  |            |                              | 315,223    |         |  |   | 424,913    |        
|Cost of Sales:                                                    |            |                              |            |         |  |   |            |        
|                                                                  | Home sales |                              |            | 247,048 |  |   |            | 331,607 | 
|                                                                  | Land sales |                              |            | 1,196   |  |   |            | 12,675  | 
|                                                                  |            |                              |            |         |  |   |            |        
|                                                                  |            |                              | 248,244    |         |  |   | 344,282    |        
|                                                                  |            |                              |            |         |  |   |            |        
|Gross profit                                                      |            |                              | 66,979     |         |  |   | 80,631     |        
|Selling, general and administrative expenses                      |            |                              | 41,789     |         |  |   | 52,031     |        
|Variable stock-based compensation expense                         |            |                              |           |         |  |   | 992        |        
|Depreciation and amortization                                     |            |                              | 1,646      |         |  |   | 3,285      |        
|Other income, net                                                 |            |                              | (922       | )       |  |   | (1,147     | )      
|                                                                  |            |                              |            |         |  |   |            |        
|Homebuilding pretax income                                        |            |                              | 24,466     |         |  |   | 25,470     |        
|                                                                 
|FINANCIAL SERVICES:                                               |            |                              |            |         |  |   |            |        
|Revenues                                                          |            |                              | 9,521      |         |  |   | 10,326     |        
|Expenses                                                          |            |                              | 6,160      |         |  |   | 7,141      |        
|                                                                  |            |                              |            |         |  |   |            |        
|Financial Services pretax income                                  |            |                              | 3,361      |         |  |   | 3,185      |        
|                                                                  |            |                              |            |         |  |   |            |        
|Income before income taxes                                        |            |                              | 27,827     |         |  |   | 28,655     |        
|Income tax expense                                                |            |                              | 10,171     |         |  |   | 10,574     |        
|                                                                  |            |                              |            |         |  |   |            |        
|Net income                                                        |            | $                            | 17,656     |         |  | $ | 18,081     |        
|                                                                  |            |                              |            |         |  |   |            |        
|Earnings per common share  diluted                               |            | $                            | 0.63       |         |  | $ | 0.60       |        
|                                                                  |            |                              |            |         |  |   |            |        
|Weighed average number of common shares
    outstanding  diluted |            |                              | 27,882,090 |         |  |   | 30,353,411 |        
|                                                                  |            |                              |            |         |  |   |            |        
|OTHER DATA:                                                       |            |                              |            |         |  |   |            |        
|EBITDA (1)                                                        |            | $                            | 36,855     |         |  | $ | 42,633     |        
|Homes delivered                                                   |            |                              | 1,234      |         |  |   | 1,517      |        
|Average sales price per home delivered                            |            | $                            | 254        |         |  | $ | 268        |        
|Gross margin on revenue from home sales                           |            |                              | 21.3%      |         |  |   | 18.5%      |        
|Ratio of SG&A expenses to Homebuilding
    revenues               |            |                              | 13.3%      |         |  |   | 12.2%      |        
|Ratio of Homebuilding pretax income to
    Homebuilding revenues  |            |                              | 7.8%       |         |  |   | 6.0%       |        
|Homes in backlog at end of period                                 |            |                              | 2,826      |         |  |   | 4,432      |        
|Sales value of homes in backlog at end of period                  |            | $                            | 763,965    |         |  | $ | 1,244,857  |        
|Total active communities at period end                            |            |                              | 176        |         |  |   | 227        |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA is the sum of net income before:
    (a) income taxes, (b) amortization of capitalized interest
    in cost of sales, (c) Homebuilding interest expense and
    (d) depreciation and amortization. We have included
    information concerning EBITDA because we believe that it is an
    indication of the profitability of our core operations and
    reflects the changes in our operating results. We do not use
    EBITDA as a measure of our liquidity because we do not believe
    it is a meaningful indication of our cash flow.

11



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | EBITDA is not required by accounting principles
    generally accepted in the United States (GAAP), and other
    companies may calculate EBITDA differently. EBITDA should not be
    considered as an alternative to operating income or to cash
    flows from operating activities (as determined in accordance
    with GAAP) and should not be construed as an indication of our
    operating performance or a measure of our liquidity. A
    reconciliation of EBITDA to net income, the most directly
    comparable GAAP performance measure, is provided below (dollars
    in thousands):

|                                           |  |                    |        |      |  |   |        | 
|------------------------------------------ |  | ------------------ | ------ | ---- |  | - | ------ | 
|                                           |  |                   
|                                           |  | Three Months Ended
|                                           |  | March 31,         
|                                           |  |                   
|                                           |  | 2003               |        | 2004
|                                           |  |                    |        |     
|Net income                                 |  | $                  | 17,656 |      |  | $ | 18,081 | 
|Add: income taxes                          |  |                    | 10,171 |      |  |   | 10,574 | 
|Add: interest in cost of sales             |  |                    | 7,382  |      |  |   | 10,693 | 
|Add: depreciation and amortization expense |  |                    | 1,646  |      |  |   | 3,285  | 
|                                           |  |                    |        |      |  |   |        | 
|EBITDA                                     |  | $                  | 36,855 |      |  | $ | 42,633 | 
|                                           |  |                    |        |      |  |   |        | 

Selected Homebuilding Operating Data

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

|                                               |  |                    |         |      |  |   |         | 
|---------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | 
|                                               |  |                   
|                                               |  | Three Months Ended
|                                               |  | March 31,         
|                                               |  |                   
|                                               |  | 2003               |         | 2004
|                                               |  |                    |         |     
|HOMES DELIVERED:                               |  |                    |         |      |  |   |         | 
|Florida                                        |  |                    | 521     |      |  |   | 544     | 
|Mid-Atlantic                                   |  |                    | 137     |      |  |   | 120     | 
|Texas                                          |  |                    | 300     |      |  |   | 419     | 
|West                                           |  |                    | 276     |      |  |   | 434     | 
|                                               |  |                    |         |      |  |   |         | 
|Total                                          |  |                    | 1,234   |      |  |   | 1,517   | 
|                                               |  |                    |         |      |  |   |         | 
|                                              
|AVERAGE SALES PRICE PER HOME
    DELIVERED:    |  |                    |         |      |  |   |         | 
|Florida                                        |  | $                  | 233     |      |  | $ | 260     | 
|Mid-Atlantic                                   |  | $                  | 289     |      |  | $ | 376     | 
|Texas                                          |  | $                  | 260     |      |  | $ | 241     | 
|West                                           |  | $                  | 270     |      |  | $ | 274     | 
|Company Average                                |  | $                  | 254     |      |  | $ | 268     | 
|                                              
|REVENUES FROM HOME SALES:                      |  |                    |         |      |  |   |         | 
|Florida                                        |  | $                  | 121,574 |      |  | $ | 141,548 | 
|Mid-Atlantic                                   |  |                    | 39,653  |      |  |   | 45,170  | 
|Texas                                          |  |                    | 77,941  |      |  |   | 101,092 | 
|West                                           |  |                    | 74,652  |      |  |   | 118,928 | 
|                                               |  |                    |         |      |  |   |         | 
|Total                                          |  | $                  | 313,820 |      |  | $ | 406,738 | 
|                                               |  |                    |         |      |  |   |         | 
|                                              
|NEW SALES CONTRACTS, NET OF
    CANCELLATIONS: |  |                    |         |      |  |   |         | 
|Florida                                        |  |                    | 642     |      |  |   | 1,085   | 
|Mid-Atlantic                                   |  |                    | 195     |      |  |   | 262     | 
|Texas                                          |  |                    | 418     |      |  |   | 535     | 
|West                                           |  |                    | 377     |      |  |   | 847     | 
|                                               |  |                    |         |      |  |   |         | 
|Consolidated total                             |  |                    | 1,632   |      |  |   | 2,729   | 
|From unconsolidated partnerships               |  |                    |        |      |  |   | 92      | 
|                                               |  |                    |         |      |  |   |         | 
|Total                                          |  |                    | 1,632   |      |  |   | 2,821   | 
|                                               |  |                    |         |      |  |   |         | 

12



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|                                                      |  |                    |         |      |  |   |           | 
|----------------------------------------------------- |  | ------------------ | ------- | ---- |  | - | --------- | 
|                                                      |  |                   
|                                                      |  | Three Months Ended
|                                                      |  | March 31,         
|                                                      |  |                   
|                                                      |  | 2003               |         | 2004
|                                                      |  |                    |         |     
|HOMES IN BACKLOG AT END OF PERIOD:                    |  |                    |         |      |  |   |           | 
|Florida                                               |  |                    | 1,316   |      |  |   | 2,087     | 
|Mid-Atlantic                                          |  |                    | 302     |      |  |   | 366       | 
|Texas                                                 |  |                    | 496     |      |  |   | 610       | 
|West                                                  |  |                    | 712     |      |  |   | 1,277     | 
|                                                      |  |                    |         |      |  |   |           | 
|Consolidated total                                    |  |                    | 2,826   |      |  |   | 4,340     | 
|From unconsolidated partnerships                      |  |                    |        |      |  |   | 92        | 
|                                                      |  |                    |         |      |  |   |           | 
|Total                                                 |  |                    | 2,826   |      |  |   | 4,432     | 
|                                                      |  |                    |         |      |  |   |           | 
|                                                     
|SALES VALUE OF HOMES IN BACKLOG AT END OF
    PERIOD: |  |                    |         |      |  |   |           | 
|Florida                                               |  | $                  | 339,139 |      |  | $ | 582,270   | 
|Mid-Atlantic                                          |  |                    | 107,778 |      |  |   | 153,099   | 
|Texas                                                 |  |                    | 128,524 |      |  |   | 159,393   | 
|West                                                  |  |                    | 188,524 |      |  |   | 322,624   | 
|                                                      |  |                    |         |      |  |   |           | 
|Consolidated total                                    |  |                    | 763,965 |      |  |   | 1,217,386 | 
|From unconsolidated partnerships                      |  |                    |        |      |  |   | 27,471    | 
|                                                      |  |                    |         |      |  |   |           | 
|Total                                                 |  | $                  | 763,965 |      |  | $ | 1,244,857 | 
|                                                      |  |                    |         |      |  |   |           | 
|                                                     
|CONTROLLED HOMESITES:                                 |  |                    |         |      |  |   |           | 
|Florida                                               |  |                    | 10,900  |      |  |   | 19,100    | 
|Mid-Atlantic                                          |  |                    | 5,000   |      |  |   | 5,600     | 
|Texas                                                 |  |                    | 5,500   |      |  |   | 8,100     | 
|West                                                  |  |                    | 10,300  |      |  |   | 14,100    | 
|                                                      |  |                    |         |      |  |   |           | 
|Total                                                 |  |                    | 31,700  |      |  |   | 46,900    | 
|                                                      |  |                    |         |      |  |   |           | 

Discussion of Results of Operations

Net income increased to $18.1 million (or $0.60
per diluted share) during the three months ended March 31,
2004 from $17.7 million (or $0.63 per diluted share) during the
three months ended March 31, 2003. The increase in net
income is attributable to an increase in Homebuilding pretax
income to $25.5 million during the three months ended
March 31, 2004, from $24.5 million during the three months
ended March 31, 2003. This was partially offset by a slight
decline in Financial Services pretax income to $3.2 million
during the three months ended March 31, 2004, from $3.4
million during the three months ended March 31, 2003.

Total revenues increased 34% to $435.2 million
during the three months ended March 31, 2004, from $324.7
million during the three months ended March 31, 2003. This
increase is attributable to increases in Homebuilding revenues
and Financial Services revenues of 35% and 9%, respectively.

Our effective tax rate increased slightly to
36.9% during the three months ended March 31, 2004, from
36.5% during the three months ended March 31, 2003.



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

During the three months ended March 31,
2004, Homebuilding revenues increased 35% to $424.9 million from
$315.2 million during the three months ended March 31,
2003. This increase is due primarily to an increase in revenues
from home sales to $406.7 million during the three months ended
March 31, 2004, from $313.8 million during the three months
ended March 31, 2003. The 30% increase in revenue from home
sales was a result of (1) a 23% increase in home deliveries
to 1,517 during the three months ended March 31, 2004, from
1,234 during the three months ended March 31, 2003 and
(2) a 5% increase in the average selling price on delivered
homes to $268,000 from $254,000 in the same periods. In addition
to the increase in revenue from home sales, we generated
additional revenue from land sales. For the three months ended
March 31, 2004, our revenues from land sales were $18.2
million, as compared to $1.4 million for the three months ended

13



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March 31, 2003. Land sales are incidental to
our residential homebuilding operations and are expected to
continue in the future, but may significantly fluctuate from
period to period.


Revenues from home sales increased as a result of
the following activity within our Homebuilding regions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our Florida region realized an increase in
    revenue from home sales of $20.0 million, or 16%, to $141.5
    million during the three months ended March 31, 2004. This
    increase is primarily due to a 12% increase in the average sales
    price of homes delivered to $260,000 during the three months
    ended March 31, 2004, from $233,000 during the
    corresponding period in the prior year. This increase in average
    sales price is primarily due to the high demand for housing in
    certain markets in the region allowing us to increase prices in
    those markets, along with a change in the product mix of home
    deliveries in this region. In addition, we realized a 4%
    increase in home deliveries to 544 during the three months ended
    March 31, 2004.                                                                                                                                                                                                                                                                                                                                        
|
| |  | Our Mid-Atlantic region realized an increase in
    revenue from home sales of $5.5 million, or 14%, to $45.2
    million during the three months ended March 31, 2004. This
    increase is primarily due to a 30% increase in the average sales
    price of homes delivered to $376,000 during the three months
    ended March 31, 2004, from $289,000 during the three months
    ended March 31, 2003. This increase in average sales price
    is primarily due to a change in product mix within this region.
    This increase in average sales price was partially offset by a
    decline in home deliveries to 120 from 137 during the three
    month periods ended March 31, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Our Texas region realized an increase in revenue
    from home sales of $23.2 million, or 30%, to $101.1 million
    during the three months ended March 31, 2004. This increase
    is primarily due to a 40% increase in home deliveries to 419 as
    compared to 300 during the three month periods ended
    March 31, 2004 and 2003, respectively. The increase in home
    deliveries was partially offset by a decline in our average
    sales price in this region to $241,000 for the three months
    ended March 31, 2004, as compared to $260,000 for the three
    months ended March 31, 2003. The decline in the average
    sales price is primarily due to the diversification of our
    product mix within this region. We have continued to experience
    a weakness in certain of our Texas markets, most notably our
    Dallas market. As a result, we are targeting lower price points
    in this region to offset the slower demand for new housing at
    our existing price points. We believe that this strategy of
    diversifying our price points will allow us to improve our
    returns in this region.
|
| |  | Our West region experienced the greatest increase
    in revenue from home sales of any of our regions. Revenues from
    home sales rose $44.3 million, or 59%, to $118.9 million for the
    three months ended March 31, 2004. This increase is due to
    a 57% increase in home deliveries to 434 during the three months
    ended March 31, 2004, from 276 home deliveries during the
    three months ended March 31, 2003. The increase in home
    deliveries is primarily due to the high demand for housing in
    several of our markets in the West region. Our average sales
    price in the West region has remained relatively constant at
    $274,000 for the three months ended March 31, 2004, as
    compared to $270,000 for the three months ended March 31,
    2003.                                                                                                                                                                                                                                                                                                                                               

Our Homebuilding gross profit increased 20% to
$80.6 million for the three months ended March 31, 2004,
from $67.0 million for the three months ended March 31,
2003. This increase is primarily due to an increase in revenue
from home sales. Our gross margin on home sales decreased to
18.5% during the three months ended March 31, 2004, from
21.3% during the three months ended March 31, 2003. This
decrease is primarily due to an increase in the cost of
homesites. Additionally, as a result of softness in portions of
our Texas and Colorado markets during the 2003 selling season,
we have realized higher incentives in our deliveries during the
three months ended March 31, 2004, as compared to the
corresponding period in the prior year. Additionally, for the
three months ended March 31, 2004, we generated gross
profit on land sales of $5.5 million as compared to $0.2 million
for the comparable period in the prior year.

SG&A expenses increased to $52.0 million
during the three months ended March 31, 2004, from $41.8
million during the three months ended March 31, 2003. As a
percentage of Homebuilding revenues, SG&A

14



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##### Table of Contents



expenses decreased to 12.2% for the three months
ended March 31, 2004, as compared to 13.3% for the three
months ended March 31, 2003. The 110 basis point
improvement in SG&A expenses as a percentage of Homebuilding
revenues is primarily attributable to our ability to generate
higher revenue levels while leveraging existing fixed SG&A
costs. During the three months ended March 31, 2004, we
recognized a compensation charge of $1.0 million for variable
accounting of certain stock-based awards, which include
accelerated vesting criteria. We recognized this expense as a
result of the market price of our common stock, as of March 31,
2004, being greater than the exercise price. During the
comparable period in the prior year there was no stock-based
compensation expense.




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

Financial Services revenues increased to $10.3
million during the three months ended March 31, 2004, from
$9.5 million during the three months ended March 31, 2003.
The 8% increase in Financial Services revenues is due primarily
to an increase in the capture ratio of our Homebuilding
deliveries. During the three months ended March 31, 2004,
approximately 14% of our homebuyers paid in cash. Our mortgage
operations capture ratio for non-cash homebuyers was 63% for the
three months ended March 31, 2004, as compared to 53% for
the three months ended March 31, 2003. Our title operations
capture ratio was 90% for the three months ended March 31,
2004, as compared to 81% for the corresponding period in the
prior year. The number of closings at our mortgage operations
increased to 1,049 for the three months ended March 31,
2004, from 880 for the three months ended March 31, 2003.
The number of closings at our title operations decreased to
4,373 for the three months ended March 31, 2004, from 4,668
for the three months ended March 31, 2003. The decline in
the closings of our title operations is due primarily to a
decrease in refinancing transactions.

Financial Services expenses increased to $7.1
million for the three months ended March 31, 2004, from
$6.2 million for the comparable period in the prior year. The
16% increase in Financial Services expenses is primarily a
result of higher general and administrative expenses due to
higher staff levels to accommodate the increased activity in our
Homebuilding business and the expansion of our Financial
Services operations into new markets.



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

During the three months ended March 31,
2004, we generated EBITDA of $42.6 million as compared to $36.9
million during the three months ended March 31, 2003. The
increase of 15% is primarily a result of an increase in earnings
before the cost of financing (interest).

15



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##### Table of Contents



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES

Statement of Financial Condition and Related
Data

The following table includes selected statement
of financial condition and related data (dollars in thousands):

|                                                 |  |                 |           |      |  |   |           |  
|------------------------------------------------ |  | --------------- | --------- | ---- |  | - | --------- | -
|                                                 |  |                
|                                                 |  | As of March 31,
|                                                 |  |                
|                                                 |  | 2003            |           | 2004
|                                                 |  |                 |           |     
|Cash and cash equivalents  unrestricted         |  | $               | 49,079    |      |  | $ | 107,771   |  
|Inventory                                        |  | $               | 853,841   |      |  | $ | 1,197,839 |  
|Total assets                                     |  | $               | 1,148,923 |      |  | $ | 1,789,259 |  
|Homebuilding borrowings                          |  | $               | 505,642   |      |  | $ | 614,587   |  
|Total borrowings (1)                             |  | $               | 540,246   |      |  | $ | 634,650   |  
|Stockholders equity                             |  | $               | 422,961   |      |  | $ | 554,550   |  
|Ratio of Homebuilding borrowings to total assets |  |                 | 44.0      | %    |  |   | 34.3      | %
|Ratio of Homebuilding borrowings to Capital (2)  |  |                 | 54.5      | %    |  |   | 52.6      | %






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

Discussion of Financial Condition, Liquidity
and Capital Resources



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

Our Homebuilding operations primary uses of
cash have been for land acquisitions, construction and
development expenditures, and SG&A expenditures. Our sources
of cash to finance these requirements have been primarily cash
generated from operations and cash from our financing activities.

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

At March 31, 2004, we had unrestricted cash
and cash equivalents of $107.8 million as compared to $76.9
million at December 31, 2003.

During the three months ended March 31,
2004, cash used in operating activities was $26.3 million as
compared to cash provided by operating activities of $1.6
million for the three months ended March 31, 2003. This
increase is primarily a result of a net increase in restricted
cash and associated liabilities of our Financial Services
business as compared to the prior year.

Cash used in investing activities was $11.4
million during the three months ended March 31, 2004, as
compared to $74.6 million during the three months ended
March 31, 2003. The decrease in the use of cash in
investing activities is primarily due to the acquisitions made
in Las Vegas and Colorado during the three months ended
March 31, 2003 and the additional consideration paid with
respect to those companies acquired in the fourth quarter of
2002.

Our ratio of Homebuilding borrowings to total
assets was 34.3% at March 31, 2004, as compared to 44.0% at
March 31, 2003. Our ratio of Homebuilding borrowings to
capital was 52.6% at March 31, 2004, as compared to 54.5%
at March 31, 2003. The improvement in both of these ratios
is primarily due to the completion of our public offering of
common stock during November 2003 which resulted in net proceeds
of $48.4 million. The offering proceeds were used to pay
outstanding borrowings under our revolving credit facility and
for general working capital purposes. In connection with our
offering of common stock, Technical Olympic S.A. sold
approximately 3.2 million shares of our common stock, including
675,000 shares sold pursuant to the underwriters exercise
of their over-allotment option. As a result of these
transactions, Technical Olympic S.A. has reduced its ownership
of us to 73.95%.

16



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##### Table of Contents





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

We increased our total borrowings to $634.7
million at March 31, 2004 from $561.2 million at
December 31, 2003, which included an increase in
homebuilding borrowings to $614.6 million from $497.9 million.
We used these new borrowings to fund our increased land supply
and the operating costs associated with establishing an
infrastructure to support our anticipated growth. We initially
funded these costs through borrowings under our revolving credit
facility and then, as market conditions permitted, we issued
fixed-rate long term notes to refinance these borrowings and
reduce the outstanding balance under our revolving credit
facility. On March 17, 2004, we issued $125.0 million of 7
1/2% Senior Subordinated Notes due 2011 at a price of 100% of
the principal amount. The net proceeds of $123.3 million
primarily were used to repay amounts outstanding under our
revolving credit facility and Preferred Home Mortgage
Companys warehouse line of credit.

Interest on our outstanding senior notes is
payable on January 1 and July 1 of each year. The senior notes
are guaranteed by all of our material domestic subsidiaries. The
senior notes rank pari passuin right of payment with all
of our existing and future unsecured senior debt and senior in
right of payment to the senior subordinated notes and any future
subordinated debt. Interest on our 10 3/8% senior
subordinated notes is payable on January 1 and July 1 of each
year. Interest on our outstanding 7 1/2% senior
subordinated notes is payable on March 15 and
September 15 of each year. The senior subordinated notes
rank pari passuin right of payment with all of our
existing and future unsecured subordinated debt and are
guaranteed on a senior subordinated basis by all of our material
domestic subsidiaries. The indentures governing the senior and
senior subordinated notes require us to maintain a minimum net
worth and place certain restrictions on our ability, among other
things, to incur additional debt, pay or make dividends or other
distributions, sell assets, enter into transactions with
affiliates, and merge or consolidate with other entities.

Effective as of April 12, 2004, we amended
our revolving credit facility to increase the amount we are
permitted to borrow to the lesser of (i) $350.0 million or
(ii) our borrowing base (calculated in accordance with the
revolving credit facility agreement) minus our outstanding
senior debt, and to increase the amount of the letter of credit
subfacility to $175.0 million. The revolving credit facility
expires on June 26, 2005. As of March 31, 2004, we had
no amounts outstanding under the revolving credit facility and
had issued letters of credit of $111.5 million, and as a result,
had $203.6 million in availability under the revolving credit
facility. Loans outstanding under the facility may be base rate
loans or Eurodollar loans, at our election. Base rate loans
accrue interest at a rate per annum equal to (i) an
applicable margin plus (ii) the higher of
(A) Citibank, N.A.s base rate, (B) 0.5% plus the
three week average of reserve-adjusted three-month certificate
of deposit rate and (C) 0.5% plus the Federal Funds Rate.
Eurodollar loans accrue interest at a rate per annum equal to
(i) an applicable margin plus (ii) the
reserve-adjusted Eurodollar rate for the interest period.
Applicable margins will be adjusted based on the ratio of our
liabilities to our tangible worth. The revolving credit facility
requires us to (1) maintain specified financial ratios
regarding leverage, interest coverage, consolidated tangible net
worth and certain operational measurements and (2) satisfy
certain financial condition tests. The revolving credit facility
also places certain restrictions on, among other things, our
ability to incur additional debt or liens, pay or make dividends
or other distributions, create or permit certain liens, make
equity investments in certain land-holding joint ventures, sell
assets, enter into transactions with affiliates and merge or
consolidate with other entities. The revolving credit facility
is secured by a first-priority perfected lien on all capital
stock of subsidiaries owned by us. Our obligations under the
revolving credit facility are guaranteed by all our domestic
subsidiaries (subject to certain limited restrictions).

To fund the origination of residential mortgage
loans, our subsidiary, Preferred Home Mortgage Company
(Preferred Home) entered into a $90.0 million
revolving warehouse line of credit, which we refer to as our
warehouse line of credit. The warehouse line of credit is
comprised of (1) a credit facility (the PHMC Credit
Facility) providing for revolving loans of up to $50.0
million, subject to meeting borrowing base requirements based on
the value of collateral provided and (2) mortgage loan
purchase and sale agreements (the Purchase Facility)
which provide for the purchase by the lender of up to $40.0
million in mortgage loans generated by Preferred Home. At no
time may the amount outstanding under the facility plus the
amount of purchased loans pursuant to the purchase and sale
agreements exceed $90.0 million. The warehouse line of credit
expires on December 19, 2004. As of March 31, 2004, we
had $20.1 million

17



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##### Table of Contents



outstanding under the warehouse line of credit.
The PHMC Credit Facility bears interest at the Eurodollar rate
plus 1.375%. Amounts outstanding under the Purchase Facility
bear interest at the Eurodollar rate plus 1.125%. As of March
31, 2004, our loans outstanding under the warehouse line of
credit accrued interest at a blended rate of 2.42% per annum.
The warehouse line of credit is secured by funded mortgages
which are pledged as collateral and requires Preferred Home to
maintain certain financial ratios and minimums. We have entered
into a keep-well agreement in favor of the lender which
obligates us to provide financial support to Preferred Home, if
necessary, in order for Preferred Home to maintain such
financial ratios and minimums.


We believe that as a result of our offering of
common stock during November 2003, our offering of senior
subordinated notes in March 2004 and the increase in our
revolving credit facility, we will have adequate financial
resources, including cash from operations and availability under
the revolving credit facility and the warehouse line of credit,
to meet our current and anticipated working capital and land
acquisition and development needs based on current market
conditions. However, there can be no assurance that the amounts
available from such sources will be sufficient. If we identify
new acquisition opportunities, or if our operations do not
generate sufficient cash from operations at levels currently
anticipated, we may need to seek additional debt or equity
financing to operate and expand our business.

At March 31, 2004, based on the balances
outstanding as of such date, the amount of our consolidated
annual debt service payments was $56.6 million. This amount
included annual debt service payments on the senior and senior
subordinated notes of $55.6 million and interest payments on the
revolving credit facility, the warehouse line of credit, and
other notes of $1.0 million. The amount of our annual debt
service payments on the revolving credit facility fluctuates
based on the principal outstanding under the facility and the
interest rate. Consequently, an increase or decrease of 1% in
interest rates will change our annual debt service payments by
$0.3 million per year. The revolving credit facility terminates
in June 2005 at which time we will be required to repay all
outstanding principal. Under certain circumstances, we may
extend the facility in one-year increments, for up to two
additional years.



| |                                   
| | ----------------------------------
| | Off Balance Sheet
    Arrangements



| |                                   
| | ----------------------------------
| | Land and Homesite Option Contracts

We enter into land and homesite option contracts
to procure land or homesites for the construction of homes.
Option contracts generally require the payment of cash or the
posting of a letter of credit for the right to acquire land or
homesites during a specified period of time at a certain price.
Option contracts allow us to control significant homesite
positions with a minimal capital investment and substantially
reduce the risk associated with land ownership and development.
At March 31, 2004, we had deposits of $88.5 million
and had issued letters of credit of $111.5 million associated
with our land purchasing activities. The financial exposure for
nonperformance on our part in these transactions is generally
limited to our deposits and/or letters of credit.



| |                                               
| | ----------------------------------------------
| | Investments in Unconsolidated
    Partnerships

We have and expect to continue to enter into
partnerships that acquire and develop land for our Homebuilding
operations and/or that also build homes for sale to third
parties. Through partnerships, we reduce and share our risk
associated with land ownership and development. Our partners in
these partnerships generally are unrelated homebuilders, land
sellers or other real estate entities. In partnerships in which
the assets are being financed with debt, the borrowings are
non-recourse, and we do not provide any financial guarantees; as
a result, our financial exposure is generally limited to our
investment.

We believe that the use of off-balance sheet
arrangements enables us to acquire rights in land which we may
not have otherwise been able to acquire at favorable terms. As a
result, we view the use of off-balance sheet arrangements as
beneficial to our Homebuilding activities; however, we do not
view off-balance sheet arrangements as essential to those
activities.

18



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##### Table of Contents



Backlog

As of March 31, 2004, we had 4,432 homes in
backlog representing $1.24 billion in revenue, as compared to
2,826 homes in backlog representing $764.0 million in revenue as
of March 31, 2003. This increase in revenue in backlog of
63% is primarily attributable to the increased sales activity in
several of our existing markets. Our average selling price of
homes in backlog has increased to $281,000 from $270,000 as a
result of the high demand for housing in certain of our markets
allowing us to increase prices in those markets, along with a
change in the product mix of our homes in backlog. Substantially
all of the homes included in backlog as of March 31, 2004
are expected to be delivered during 2004; however, cancellation
rates could increase, particularly if market conditions
deteriorate or mortgage interest rates increase, thereby
decreasing backlog and related future revenues.

DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS

This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Discussions containing forward-looking statements may
be found throughout this Quarterly Report and specifically in
the material set forth in the section, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative
Disclosures about Market Risk.

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



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our estimate that we have adequate financial
    resources to meet our current and anticipated working capital
    and land acquisition and development needs;
|
| |  | our expectation that targeting lower price points
    in most of our Texas markets will offset slower demand for new
    housing at our existing price points;
|
| |  | our expectation that diversifying our price
    points will allow us to improve our returns;                                                                  
|
| |  | our expectations regarding the effect of
    increased interest on our revenues, gross margins and net income
    in future periods;                          
|
| |  | the impact of inflation on our future results of
    operations;                                                                                              
|
| |  | our ability to pass through to our customers in
    the form of increased sales prices any increases in our costs;                                            
|
| |  | our belief that off-balance sheet arrangements
    enable us to acquire land that we may not otherwise be able to
    acquire on favorable terms;             
|
| |  | the results and possible impact of any assessment
    arising from the Texas sales tax audit; and                                                             
|
| |  | our estimates regarding the financial impact of
    adopting certain recently issued accounting pronouncements.                                               

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



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | our significant level of debt and the impact of
    the restrictions imposed on us by the terms of this debt;
|
| |  | our ability to borrow or otherwise finance our
    business in the future;                                   

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






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

As a result of our notes offerings, at
March 31, 2004, $610.0 million of our outstanding
borrowings are based on fixed interest rates. We are exposed to
market risk primarily related to potential adverse changes in
interest rates on our existing construction loans, warehouse
line of credit and revolving credit facility. The interest rates
relative to these borrowings fluctuate with the prime and LIBOR
lending rates. We have not entered into derivative financial
instruments for trading or speculative purposes. As of
March 31, 2004, we had an aggregate of approximately $29.4
million drawn under our bank loan arrangements that are subject
to changes in interest rates. Consequently, an increase or
decrease of 1% in interest rates will change our annual debt
service payments by $0.3 million per year as a result of our
bank loan arrangements that are subject to changes in interest
rates.

The following table presents the future principal
payment obligations and weighted average interest rates
associated with our long-term debt instruments assuming our
actual level of long-term debt indebtedness as of March 31,
2004:

|               |                                                                                     |                        |   |        |  |      |   |       |  |      |   |            |  |            |   |   |  |  |   |   |  |  |   |         |  |  |   |         | 
|-------------- | ----------------------------------------------------------------------------------- | ---------------------- | - | ------ |  | ---- | - | ----- |  | ---- | - | ---------- |  | ---------- | - | - |  |  | - | - |  |  | - | ------- |  |  | - | ------- | 
|               |                                                                                     |                       
|               |                                                                                     | Expected Maturity Date
|               |                                                                                     | (in thousands)        
|               |                                                                                     |                       
|Liabilities    |                                                                                     | 2004                   |   | 2005   |  | 2006 |   | 2007  |  | 2008 |   | Thereafter |  | Fair Value
|               |                                                                                     |                        |   |        |  |      |   |       |  |      |   |            |  |           
|Long-term debt |                                                                                     |                        |  |        |  |      |  |       |  |      |  |            |  |            |  |   |  |  |  |   |  |  |  |         |  |  |  |        
|               | Fixed rate (9%)                                                                     |                        |   |       |  |      |   |      |  |      |   |           |  |            |   |  |  |  |   |  |  |  | $ | 300,000 |  |  | $ | 332,100 | 
|               | Fixed rate (10 3/8%)                                                                |                        |   |       |  |      |   |      |  |      |   |           |  |            |   |  |  |  |   |  |  |  | $ | 185,000 |  |  | $ | 208,588 | 
|               | Fixed rate (7 1/2%)                                                                 |                        |   |       |  |      |   |      |  |      |   |           |  |            |   |  |  |  |   |  |  |  | $ | 125,000 |  |  | $ | 124,844 | 
|               | Variable rate, revolving loan                                                       |                        |   |       |  |      |   |      |  |      |   |           |  |            |   |  |  |  |   |  |  |  |   |        |  |  |   |        | 
|               | Variable rate, warehouse line of credit, (2.42%
    at March 31, 2004)              |                        | $ | 20,063 |  |      |   |      |  |      |   |           |  |            |   |  |  |  |   |  |  |  |   |        |  |  | $ | 20,063  | 
|               | Other homebuilding borrowings (at various
    interest rates ranging from 4% to 6%) |                        | $ | 2,084  |  |      | $ | 7,323 |  |      |   |           |  |            |   |  |  |  |   |  |  |  |   |        |  |  | $ | 9,407   | 

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

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| |          
| | ---------
| | Inflation

We may be adversely affected during periods of
high inflation, primarily because of higher land and
construction costs. In addition, inflation may result in higher
mortgage interest rates, which may significantly affect the
affordability of permanent mortgage financing for prospective
purchasers. Inflation also increases our interest costs. We
attempt to pass through to our customers any increases in our
costs through increased selling prices and, to date, inflation
has not had a material adverse effect on our results of
operations. However, there is no assurance that inflation will
not have a material adverse impact on our future results of
operations.






|         |                        
|-------- | -----------------------
|ITEM  4. | Controls and Procedures

To ensure that the information we must disclose
in our filings with the Securities and Exchange Commission is
recorded, processed, summarized, and reported on a timely basis,
we maintain disclosure controls and procedures. Our principal
executive officer and principal financial officer have reviewed
and evaluated the effectiveness of our disclosure controls and
procedures, as of March 31, 2004. Based on such evaluation,
such officers have concluded that, as of March 31, 2004,
our disclosure controls and procedures were effective in timely
alerting them to material information relating to us (and our
consolidated subsidiaries) required to be included in our
periodic SEC filings. There has been no change in our internal
control over financial reporting during the quarter ended
March 31, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.

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PART II OTHER INFORMATION






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

(a) Exhibits:

|        |     |    |  |             |  |                                                                                                                                                         
|------- | --- | -- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |    |  |            
|Number  |     |    |  |            
|        |     |    |  | Description
|        | 3.  | 4  |  |             |  | Certificate of Amendment to the Certificate of
    Incorporation, filed on April 28, 2004.                                                              
|        | 10. | 42 |  |             |  | Employment Agreement, dated as of January 1,
    2004, between Harry Engelstein and Technical Olympic USA, Inc.                                         
|        | 10. | 43 |  |             |  | First Amendment to Amended and Restated Credit
    Agreement, dated as of March 15, 2004, between Preferred
    Home Mortgage Company and Guaranty Bank.
|        | 31. | 1  |  |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                 
|        | 31. | 2  |  |             |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                 
|        | 32. | 1  |  |             |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                 
|        | 32. | 2  |  |             |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                 

(b) Reports on Form 8-K:The
following reports on Form 8-K were filed during the period
covered by this report.

On February 10, 2004, we filed a Current
Report on Form 8-K (Items 5, 7 and 12) to release certain
operational data and earnings for the quarter and year ended
December 31, 2003, and to reaffirm previous financial and
operational guidance for 2004.

On March 10, 2004, we filed a Current Report
on Form 8-K (Items 5 and 7) to announce our offering of
$125.0 million in aggregate principal amount of our Senior
Subordinated Notes due 2011 pursuant to Rule 144A and
Regulation S under the Securities Act of 1933.

On March 11, 2004, we filed a Current Report
on Form 8-K (Items 5 and 7) to announce the pricing of our
offering of $125.0 million in aggregate principal amount of our
7  1/2% Senior Subordinated Notes due 2011.

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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.

|                   |  |                                                                                                         
|------------------ |  | --------------------------------------------------------------------------------------------------------
|                   |  | TECHNICAL OLYMPIC USA, INC.                                                                             
|                  
|Date: May 10, 2004 |  | By: /s/ DAVID J. KELLER DAVID J. KELLERSenior Vice President  Chief Financial
    Officer and Treasurer
|                  
|Date: May 10, 2004 |  | By: /s/ RANDY L. KOTLER RANDY L. KOTLERVice President  Chief Accounting Officer                        

23