##### 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
    September 30, 2003                                       
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from             to                                           

Commission File
Number: 000-23677



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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  þ     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  þ

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: 27,889,036 shares of common stock as of
October 29, 2003.



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---

TABLE OF CONTENTS



|                                                                                              |                                                |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                                                                 
|                                                                                              | Item 1. Financial Statements                  
|                                                                                              | CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|CONSOLIDATED STATEMENTS OF INCOME                                                            
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                        
|NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS                                         
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS                                              
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION                                                                    
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|AMENDMENT TO EMPLOYMENT AGREEMENT                                                            
|5TH AMENDMENT TO CREDIT AGREEMENT                                                            
|CERTIFICATION OF CEO PURSUANT SECTION 302                                                    
|CERTIFICATION OF CFO PURSUANT SECTION 302                                                    
|CERTIFICATION OF CEO PURSUANT SECTION 906                                                    
|CERTIFICATION OF CFO PURSUANT SECTION 906                                                    



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC.

INDEX

|           |  |                                                                                           |    |      |    | 
|---------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                           |    | Page
|           |  |                                                                                           |    |     
|PART I.    |  | Financial Information                                                                     |    |      | 1  | 
|ITEM 1.    |  | Financial Statements                                                                      |    |      | 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 |    |      | 12 | 
|ITEM 3.    |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |    |      | 26 | 
|ITEM 4.    |  | Controls and Procedures                                                                   |    |      | 27 | 
|PART II.   |  | Other Information                                                                         |    |      | 28 | 
|ITEM 6.    |  | Exhibits and Reports on Form 8-K                                                          |    |      | 28 | 
|           |  | Exhibits                                                                                  |    |      | 28 | 
|           |  | Reports on Form 8-K                                                                       |    |      | 28 | 
|Signatures |  |                                                                                           | 29 |     

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


(DOLLARS IN THOUSANDS, EXCEPT SHARE
AMOUNTS)


|                                                                                                                                                                                              |              |              |           |               |  |   |           |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------------ | --------- | ------------- |  | - | --------- | ------ | 
|                                                                                                                                                                                              |              | December 31, |           | September 30,
|                                                                                                                                                                                              |              | 2002         |           | 2003         
|                                                                                                                                                                                              |              |              |           |              
|                                                                                                                                                                                              |              |              |           |              
|                                                                                                                                                                                              |              |              |           | (unaudited)  
|ASSETS                                                                                                                                                                                       
|HOMEBUILDING:                                                                                                                                                                                 |              |              |           |               |  |   |           |       
|Cash and cash equivalents:                                                                                                                                                                    |              |              |           |               |  |   |           |       
|                                                                                                                                                                                              | Unrestricted |              | $         | 44,825        |  |   | $         | 38,335 | 
|                                                                                                                                                                                              | Restricted   |              |           | 23,645        |  |   |           | 13,923 | 
|Inventory                                                                                                                                                                                     |              |              | 753,872   |               |  |   | 1,041,350 |       
|Property and equipment, net                                                                                                                                                                   |              |              | 13,862    |               |  |   | 21,026    |       
|Other assets                                                                                                                                                                                  |              |              | 30,681    |               |  |   | 46,006    |       
|Goodwill, net                                                                                                                                                                                 |              |              | 78,252    |               |  |   | 103,720   |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|                                                                                                                                                                                              |              |              | 945,137   |               |  |   | 1,264,360 |       
|FINANCIAL SERVICES:                                                                                                                                                                           |              |              |           |               |  |   |           |       
|Cash and cash equivalents:                                                                                                                                                                    |              |              |           |               |  |   |           |       
|                                                                                                                                                                                              | Unrestricted |              |           | 4,386         |  |   |           | 3,514  | 
|                                                                                                                                                                                              | Restricted   |              |           | 22,866        |  |   |           | 37,840 | 
|Mortgage loans held for sale                                                                                                                                                                  |              |              | 58,840    |               |  |   | 50,963    |       
|Other assets                                                                                                                                                                                  |              |              | 3,659     |               |  |   | 3,939     |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|                                                                                                                                                                                              |              |              | 89,751    |               |  |   | 96,256    |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|Total assets                                                                                                                                                                                  |              | $            | 1,034,888 |               |  | $ | 1,360,616 |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                     
|HOMEBUILDING:                                                                                                                                                                                 |              |              |           |               |  |   |           |       
|Accounts payable                                                                                                                                                                              |              | $            | 24,951    |               |  | $ | 51,092    |       
|Accrued and other liabilities                                                                                                                                                                 |              |              | 71,869    |               |  |   | 80,520    |       
|Customer deposits                                                                                                                                                                             |              |              | 24,564    |               |  |   | 36,050    |       
|Consolidated land bank obligations                                                                                                                                                            |              |              | 16,288    |               |  |   | 109,135   |       
|Homebuilding borrowings                                                                                                                                                                       |              |              | 413,110   |               |  |   | 531,671   |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|                                                                                                                                                                                              |              |              | 550,782   |               |  |   | 808,468   |       
|FINANCIAL SERVICES:                                                                                                                                                                           |              |              |           |               |  |   |           |       
|Accounts payable and other liabilities                                                                                                                                                        |              |              | 21,560    |               |  |   | 38,530    |       
|Financial services borrowings                                                                                                                                                                 |              |              | 48,309    |               |  |   | 42,374    |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|                                                                                                                                                                                              |              |              | 69,869    |               |  |   | 80,904    |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|Total liabilities                                                                                                                                                                             |              |              | 620,651   |               |  |   | 889,372   |       
|Minority interest                                                                                                                                                                             |              |              | 9,092     |               |  |   | 3,501     |       
|Commitments and contingencies                                                                                                                                                                 |              |              |          |               |  |   |          |       
|Stockholders equity:                                                                                                                                                                         |              |              |           |               |  |   |           |       
|Common stock  $.01 par value;
    67,000,000 shares authorized and 27,878,787 and 27,889,036
    shares issued and outstanding at December 31, 2002 and
    September 30, 2003, respectively |              |              | 279       |               |  |   | 279       |       
|Additional paid-in capital                                                                                                                                                                    |              |              | 322,400   |               |  |   | 322,560   |       
|Retained earnings                                                                                                                                                                             |              |              | 82,466    |               |  |   | 144,904   |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|Total stockholders equity                                                                                                                                                                    |              |              | 405,145   |               |  |   | 467,743   |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       
|Total liabilities and stockholders equity                                                                                                                                                    |              | $            | 1,034,888 |               |  | $ | 1,360,616 |       
|                                                                                                                                                                                              |              |              |           |               |  |   |           |       

See accompanying notes to unaudited consolidated
financial statements.

1



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)


(unaudited)


|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |            | 
|--------------------------------------------------------- | ------------------------------------------------- | ------------------ | ------- | ----------------- |  | ---- | ------- | ---------- |  | - | ------- | ---------- |  | - | --------- | ---------- | 
|                                                          |                                                   |                    |         |                  
|                                                          |                                                   | Three Months Ended |         | Nine Months Ended
|                                                          |                                                   | September 30,      |         | September 30,    
|                                                          |                                                   |                    |         |                  
|                                                          |                                                   | 2002               |         | 2003              |  | 2002 |         | 2003      
|                                                          |                                                   |                    |         |                   |  |      |         |           
|HOMEBUILDING:                                             |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Revenues:                                                 |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | Home sales                                        |                    | $       | 330,759           |  |      | $       | 410,446    |  |   | $       | 985,243    |  |   | $         | 1,133,967  | 
|                                                          | Land sales                                        |                    |         | 9,540             |  |      |         | 19,915     |  |   |         | 11,956     |  |   |           | 25,357     | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          |                                                   |                    | 340,299 |                   |  |      | 430,361 |            |  |   | 997,199 |            |  |   | 1,159,324 |           
|Cost of sales:                                            |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | Home sales                                        |                    |         | 262,009           |  |      |         | 331,616    |  |   |         | 783,009    |  |   |           | 907,392    | 
|                                                          | Land sales                                        |                    |         | 8,494             |  |      |         | 12,244     |  |   |         | 10,785     |  |   |           | 16,248     | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          |                                                   |                    | 270,503 |                   |  |      | 343,860 |            |  |   | 793,794 |            |  |   | 923,640   |           
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Gross profit                                              |                                                   |                    | 69,796  |                   |  |      | 86,501  |            |  |   | 203,405 |            |  |   | 235,684   |           
|Selling, general and administrative expenses              |                                                   |                    | 36,204  |                   |  |      | 53,932  |            |  |   | 112,871 |            |  |   | 146,355   |           
|Variable stock-based compensation expense                 |                                                   |                    |        |                   |  |      | 518     |            |  |   |        |            |  |   | 925       |           
|Depreciation and amortization expense                     |                                                   |                    | 1,300   |                   |  |      | 2,510   |            |  |   | 4,540   |            |  |   | 6,125     |           
|Severance and merger related expenses                     |                                                   |                    | (5,874  | )                 |  |      | 1,111   |            |  |   | 18,593  |            |  |   | 534       |           
|Loss on early retirement of debt                          |                                                   |                    |        |                   |  |      |        |            |  |   | 5,411   |            |  |   |          |           
|Other income, net                                         |                                                   |                    | (475    | )                 |  |      | (752    | )          |  |   | (1,826  | )          |  |   | (2,719    | )         
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Homebuilding pretax income                                |                                                   |                    | 38,641  |                   |  |      | 29,182  |            |  |   | 63,816  |            |  |   | 84,464    |           
|                                                         
|FINANCIAL SERVICES:                                       |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Revenues                                                  |                                                   |                    | 10,138  |                   |  |      | 12,886  |            |  |   | 26,147  |            |  |   | 35,591    |           
|Expenses                                                  |                                                   |                    | 6,439   |                   |  |      | 8,132   |            |  |   | 15,254  |            |  |   | 21,726    |           
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Financial Services pretax income                          |                                                   |                    | 3,699   |                   |  |      | 4,754   |            |  |   | 10,893  |            |  |   | 13,865    |           
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Income from continuing operations before income
    taxes |                                                   |                    | 42,340  |                   |  |      | 33,936  |            |  |   | 74,709  |            |  |   | 98,329    |           
|Income tax expense                                        |                                                   |                    | 16,002  |                   |  |      | 12,387  |            |  |   | 27,879  |            |  |   | 35,891    |           
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Income from continuing operations                         |                                                   |                    | 26,338  |                   |  |      | 21,549  |            |  |   | 46,830  |            |  |   | 62,438    |           
|Discontinued operations:                                  |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | Income from discontinued operations               |                    |         |                  |  |      |         |           |  |   |         | 7,922      |  |   |           |           | 
|                                                          | Income tax expense                                |                    |         |                  |  |      |         |           |  |   |         | 2,959      |  |   |           |           | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | Income from discontinued operations, net of taxes |                    |         |                  |  |      |         |           |  |   |         | 4,963      |  |   |           |           | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Net income                                                |                                                   | $                  | 26,338  |                   |  | $    | 21,549  |            |  | $ | 51,793  |            |  | $ | 62,438    |           
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|EARNINGS PER COMMON SHARE:                                |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Basic:                                                    |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | From continuing operations                        |                    | $       | 0.95              |  |      | $       | 0.77       |  |   | $       | 1.68       |  |   | $         | 2.24       | 
|                                                          | From discontinued operations                      |                    |         |                  |  |      |         |           |  |   |         | 0.18       |  |   |           |           | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | Net income                                        |                    | $       | 0.95              |  |      | $       | 0.77       |  |   | $       | 1.86       |  |   | $         | 2.24       | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|Diluted                                                   |                                                   | $                  | 0.95    |                   |  | $    | 0.76    |            |  | $ | 1.86    |            |  | $ | 2.23      |           
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING: |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | Basic                                             |                    |         | 27,878,787        |  |      |         | 27,889,036 |  |   |         | 27,878,787 |  |   |           | 27,886,746 | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           
|                                                          | Diluted                                           |                    |         | 27,878,787        |  |      |         | 28,231,120 |  |   |         | 27,878,787 |  |   |           | 28,055,323 | 
|                                                          |                                                   |                    |         |                   |  |      |         |            |  |   |         |            |  |   |           |           

See accompanying notes to unaudited 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)


|                                                                                  |                                                                     |                                                    |         |          |         |   |         |         |          |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------- | -------------------------------------------------- | ------- | -------- | ------- | - | ------- | ------- | -------- | -
|                                                                                  |                                                                     |                                                   
|                                                                                  |                                                                     | Nine Months Ended                                 
|                                                                                  |                                                                     | September 30,                                     
|                                                                                  |                                                                     |                                                   
|                                                                                  |                                                                     | 2002                                               |         | 2003    
|                                                                                  |                                                                     |                                                    |         |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                                                     |                                                    |         |          |         |   |         |        
|Net income                                                                        |                                                                     | $                                                  | 51,793  |          |         | $ | 62,438  |        
|Adjustments to reconcile net income to net cash
    used in operating activities: |                                                                     |                                                    |         |          |         |   |         |        
|                                                                                  | Income from discontinued operations                                 |                                                    |         | (4,963   | )       |   |         |        |         
|                                                                                  | Depreciation and amortization expense                               |                                                    |         | 4,540    |         |   |         | 6,125   |         
|                                                                                  | Write-off of deferred financing costs                               |                                                    |         | 1,095    |         |   |         |        |         
|                                                                                  | Deferred income taxes                                               |                                                    |         | (5,518   | )       |   |         |        |         
|                                                                                  | Non-cash compensation expense                                       |                                                    |         |         |         |   |         | 1,085   |         
|                                                                                  | Changes in operating assets and liabilities:                        |                                                    |         |          |         |   |         |         |         
|                                                                                  |                                                                     | Restricted cash                                    |         |          | (23,048 | ) |         |         | (5,252   | )
|                                                                                  |                                                                     | Inventory                                          |         |          | (71,703 | ) |         |         | (133,657 | )
|                                                                                  |                                                                     | Other assets                                       |         |          | (3,604  | ) |         |         | (6,584   | )
|                                                                                  |                                                                     | Accounts payable and accrued and other liabilities |         |          | 40,908  |   |         |         | 46,705   |  
|                                                                                  |                                                                     | Customer deposits                                  |         |          | 528     |   |         |         | 7,777    |  
|                                                                                  |                                                                     | Mortgage loans held for sale                       |         |          | 2,496   |   |         |         | 7,877    |  
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        
|Net cash used in operating activities                                             |                                                                     |                                                    | (7,476  | )        |         |   | (13,486 | )      
|                                                                                 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                                     |                                                    |         |          |         |   |         |        
|                                                                                  | Amounts paid for acquisitions, net of cash
    acquired             |                                                    |         |         |         |   |         | (59,335 | )       
|                                                                                  | Additional consideration paid for acquisitions                      |                                                    |         |         |         |   |         | (18,136 | )       
|                                                                                  | Net additions to property and equipment                             |                                                    |         | (6,346   | )       |   |         | (13,208 | )       
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        
|Net cash used in investing activities                                             |                                                                     |                                                    | (6,346  | )        |         |   | (90,679 | )      
|                                                                                 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |                                                                     |                                                    |         |          |         |   |         |        
|                                                                                  | Net proceeds from notes offering                                    |                                                    |         | 350,000  |         |   |         | 129,311 |         
|                                                                                  | Payments for deferred financing costs                               |                                                    |         | (15,252  | )       |   |         | (5,450  | )       
|                                                                                  | Net proceeds from (repayments on) revolving
    credit facilities   |                                                    |         | 12,888   |         |   |         | (10,000 | )       
|                                                                                  | Repayments on Homebuilding borrowings                               |                                                    |         | (379,577 | )       |   |         | (1,243  | )       
|                                                                                  | Net proceeds from (repayments on) Financial
    Services borrowings |                                                    |         | 3,005    |         |   |         | (5,935  | )       
|                                                                                  | Minority interest in consolidated subsidiaries                      |                                                    |         | (18,722  | )       |   |         | (5,591  | )       
|                                                                                  | Net payments on consolidated land bank obligations                  |                                                    |         |         |         |   |         | (4,289  | )       
|                                                                                  | Distributions by Engle                                              |                                                    |         | (4,813   | )       |   |         |        |         
|                                                                                  | Other                                                               |                                                    |         | (6,482   | )       |   |         |        |         
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        
|Net cash (used in) provided by financing
    activities                           |                                                                     |                                                    | (58,953 | )        |         |   | 96,803  |        
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        
|Net cash used in operations                                                       |                                                                     |                                                    | (72,775 | )        |         |   | (7,362  | )      
|Net cash provided by discontinued operations                                      |                                                                     |                                                    | 50,323  |          |         |   |        |        
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        
|Decrease in cash and cash equivalents                                             |                                                                     |                                                    | (22,452 | )        |         |   | (7,362  | )      
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        
|Cash and cash equivalents at beginning of period                                  |                                                                     |                                                    | 75,136  |          |         |   | 49,211  |        
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        
|Cash and cash equivalents at end of period                                        |                                                                     | $                                                  | 52,684  |          |         | $ | 41,849  |        
|                                                                                  |                                                                     |                                                    |         |          |         |   |         |        

See accompanying notes to unaudited consolidated
financial statements.

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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES






NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


SEPTEMBER 30, 2003


1.     Business and
Organization

Business

Technical Olympic USA, Inc. (we or
the Company) is a Delaware corporation. We generate
our revenues from our homebuilding operations and financial
services operations. 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. In addition to our
homebuilding operations, we offer a variety of financial
services, including mortgage financing, title insurance, and
closing services, to homebuyers and others in the majority of
our markets. We do not retain or service the mortgages that we
originate but, rather, sell the mortgages and related servicing
rights to investors.

Organization

The
Merger and Notes Offering

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

As a result of the exchange of equity interests,
Technical Olympic owned 91.75% of our outstanding common stock.
Technical Olympic is a wholly-owned subsidiary of Technical
Olympic (UK) Ltd., a company formed under the laws of the
United Kingdom, which is a wholly-owned subsidiary of Technical
Olympic S.A., a publicly-traded Greek company that is traded on
the Athens Stock Exchange. As of September 30, 2003,
Technical Olympic owned 90.68% of our outstanding common stock.

Concurrently with the Merger, we issued $200.0
million 9% senior notes (the June 2002 Senior Notes)
and $150.0 million 10 3/8% senior subordinated notes due
2012 (the June 2002 Senior Subordinated Notes, and
together they are called the Notes Offering). The
net proceeds of approximately $335.0 million from the Notes
Offering were used to repay certain indebtedness of both Newmark
and Engle and the Technical Olympic Debt that was assumed in
connection with the Merger. Additionally, we entered into a
revolving credit facility to fund working capital, which
provided for loans up to $220.0 million.

Subsequently, these notes issued pursuant to the
Notes Offering were exchanged for an equivalent amount of notes
at their respective interest rates, which are registered under
the Securities Act of 1933.

Technical
Olympic Restructuring

In October 2003, as part of a restructuring
transaction, all of the shares of Technical Olympic were sold by
Technical Olympic (UK) Ltd. to Technical Olympic, S.A.
Technical Olympic was then merged with and

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

into TOI, LLC, a newly formed wholly-owned
subsidiary of ours. As part of the merger, Technical Olympic
S.A. acquired the shares of our common stock previously owned by
Technical Olympic.

Engle
Acquisition

On November 22, 2000, Engle became a
wholly-owned subsidiary of Technical Olympic. Engles
stockholders received $19.10 for each share of Engles
common stock at the time of acquisition. Following the
acquisition, the common stock of Engle ceased to be publicly
traded. The acquisition of Engle was accounted for using the
purchase method of accounting. Total consideration for the
acquisition approximated $542.0 million, including $216.0
million in cash and the assumption of $326.0 million of
liabilities. The push down basis of accounting
resulted in us allocating approximately $527.0 million to
inventories and other identifiable assets and $15.0 million to
goodwill.

As a result of the change in control of Engle,
Engle was required by the indentures governing its senior notes
to offer to repurchase all of its outstanding senior notes at a
price of 101% of the principal plus accrued interest. Upon
termination of the offer to repurchase in January 2001, Engle
repurchased approximately $237.0 million of its senior notes.
Approximately $13.0 million of the senior notes were not
tendered and remained outstanding as of December 31, 2001.
These notes were discharged with the proceeds from the Notes
Offering.

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 statements. Management believes
the disclosures made are adequate to make the information
presented not misleading. However, the financial statements
included as part of this 10-Q filing should be read in
conjunction with the financial statements and notes thereto
included in our December 31, 2002 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 of operations, and cash flows
for the periods presented. Results of operations achieved
through September 30, 2003 are not necessarily indicative
of those that may be achieved for the year ending
December 31, 2003.

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Segment
Reporting

In accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, we have concluded that our operating segments
consist of homebuilding and financial services. These two
segments are segregated in the accompanying consolidated
financial statements under Homebuilding and
Financial Services, 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 or
decrease the loss per share. For the three and nine month
periods ended September 30, 2002, we had no dilutive
securities outstanding.

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

|                                                        |  |                    |            |                    |  |  |            | 
|------------------------------------------------------- |  | ------------------ | ---------- | ------------------ |  |  | ---------- | 
|                                                        |  | Three Months       |            | Nine Months       
|                                                        |  | Ended              |            | Ended             
|                                                        |  | September 30, 2003 |            | September 30, 2003
|                                                        |  |                    |            |                   
|Basic weighted average shares outstanding               |  |                    | 27,889,036 |                    |  |  | 27,886,746 | 
|Net effect of stock options assumed to be
    exercised |  |                    | 342,084    |                    |  |  | 168,577    | 
|                                                        |  |                    |            |                    |  |  |            | 
|Diluted weighted average shares outstanding             |  |                    | 28,231,120 |                    |  |  | 28,055,323 | 
|                                                        |  |                    |            |                    |  |  |            | 

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.

Reclassifications

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

New
Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
(Interpretation) No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 is
applied immediately to variable interest entities
(VIEs) created after January 31, 2003, and with
respect to variable interests held before February 1, 2003,
Interpretation No. 46 will apply beginning with interim and
annual periods ending on or after December 15, 2003.
Interpretation No. 46 addresses consolidation by business
enterprises of VIEs which have one or both of the following
characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities
without additional subordinated support from other parties,
which is provided through other interests that will absorb some
or all of the expected losses of the entity; or (2) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest: (a) the
direct or indirect ability to make decisions about the
entitys activities through voting rights or similar
rights; or (b) the obligation to absorb the expected losses
of the entity if they occur,

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 will enter into option contracts for the purchase
of land or homesites with land sellers and third-party financial
entities, some of which may qualify as VIEs, as a method of
acquiring developed homesites. We believe that Interpretation
No. 46 will have to be evaluated as it relates to these and
similar types of arrangements. In applying Interpretation
No. 46 to our homesite option contracts, estimates
regarding cash flows and other assumptions have to be made.
Based on our analysis of contracts entered into after
January 31, 2003, we determined that we are the primary
beneficiary of certain of these homesite option contracts.
Consequently, Interpretation No. 46 requires us to
consolidate the assets (homesites) at their fair value,
although (1) we have no legal title to the assets,
(2) our maximum exposure to loss is limited to the deposits
or letters of credit placed with these entities and
(3) creditors, if any, of these entities have no recourse
against us. The effect of the consolidation of VIEs was to
increase inventory by $55.5 million, excluding deposits of $4.6
million, which had been previously recorded, with a
corresponding increase to consolidated land bank obligations in
the accompanying consolidated statement of financial condition
as of September 30, 2003.

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

3.     Inventory

Inventory consists of the following (dollars in
thousands):

|                                                  |  |              |         |               |  |   |           | 
|------------------------------------------------- |  | ------------ | ------- | ------------- |  | - | --------- | 
|                                                  |  | December 31, |         | September 30,
|                                                  |  | 2002         |         | 2003         
|                                                  |  |              |         |              
|Deposits and homesites and land under development |  | $            | 397,362 |               |  | $ | 579,643   | 
|Residences completed and under construction       |  |              | 356,510 |               |  |   | 461,707   | 
|                                                  |  |              |         |               |  |   |           | 
|                                                  |  | $            | 753,872 |               |  | $ | 1,041,350 | 
|                                                  |  |              |         |               |  |   |           | 

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

|                                          |                  |                    |       |                   |   |      |        |        |   |   |        |         |   |   |        |         |  
|----------------------------------------- | ---------------- | ------------------ | ----- | ----------------- | - | ---- | ------ | ------ | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                          |                  |                    |       |                  
|                                          |                  | Three Months Ended |       | Nine Months Ended
|                                          |                  | September 30,      |       | September 30,    
|                                          |                  |                    |       |                  
|                                          |                  | 2002               |       | 2003              |   | 2002 |        | 2003  
|                                          |                  |                    |       |                   |   |      |        |       
|Interest capitalized, beginning of period |                  | $                  | 6,029 |                   |   | $    | 21,339 |        |   | $ | 12,226 |         |   | $ | 11,578 |        
|Interest incurred                         |                  |                    | 8,944 |                   |   |      | 14,495 |        |   |   | 17,053 |         |   |   | 40,138 |        
|Less interest included in:                |                  |                    |       |                   |   |      |        |        |   |   |        |         |   |   |        |        
|                                          | Cost of sales    |                    |       | (6,306            | ) |      |        | (9,562 | ) |   |        | (20,542 | ) |   |        | (24,991 | )
|                                          | Interest expense |                    |       |                  |   |      |        |       |   |   |        | (20     | ) |   |        |        |  
|                                          | Other            |                    |       | 50                |   |      |        | (454   | ) |   |        |        |   |   |        | (907    | )
|                                          |                  |                    |       |                   |   |      |        |        |   |   |        |         |   |   |        |        
|Interest capitalized, end of period       |                  | $                  | 8,717 |                   |   | $    | 25,818 |        |   | $ | 8,717  |         |   | $ | 25,818 |        
|                                          |                  |                    |       |                   |   |      |        |        |   |   |        |         |   |   |        |        

During the three months ended September 30,
2003, we sold certain parcels of land for net proceeds of $41.6
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

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with SFAS No. 66, Accounting for the
Sales of Real Estate, we have accounted for these
transactions as a financing arrangement. As a result, we have
included the corresponding liability of $41.6 million in
consolidated land bank obligations in the accompanying
consolidated statement of financial condition as of
September 30, 2003.

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. This acquisition resulted in no goodwill
being recorded. The results of operations of James for the
period from February 28, 2003 through September 30,
2003 are included in the accompanying consolidated statements of
income for the periods ended September 30, 2003.

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 to
the sellers over a two-year period. Of this amount, we paid $1.3
million of additional consideration during the nine months ended
September 30, 2003. Based on our preliminary allocation of
the purchase price, this acquisition resulted in approximately
$8.6 million of goodwill. The results of operations of Trophy
for the period from February 6, 2003 through
September 30, 2003 are included in the accompanying
consolidated statements of income for the periods ended
September 30, 2003.

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 to the sellers over a two-year period. Of this amount,
we paid additional consideration of $11.3 million in cash during
the nine months ended September 30, 2003, all of which was
recorded as goodwill.

On October 4, 2002, we acquired the net
assets of DS Ware Homes LLC, a homebuilder operating in
Jacksonville, Florida, for approximately $35.6 million in cash.
In addition, if certain earnings targets were met for the
five-month period after the closing, we were obligated to pay up
to an additional $5.2 million to the sellers in 2003. Of this
amount, we paid additional consideration of $4.9 million in cash
during the nine months ended September 30, 2003, all of which
was recorded as goodwill.

5.     Borrowings

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

On April 4, 2003, we amended our revolving
credit facility to increase the amount we are permitted to
borrow to the lesser of (i) $305.0 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 $80.0 million. Subsequently, we increased the size of the
facility to provide up to an additional $10.0 million of
revolving loans. In addition, we have the right to increase the
size of the facility to provide for up to an additional $10.0
million of revolving loans, subject to meeting certain
requirements.

On February 3, 2003, we issued $100.0
million of 9% Senior Notes due 2010 at a price of 94.836% of the
principal amount plus interest accrued since January 1,
2003. The net proceeds of approximately $93.6

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

million were primarily used to repay amounts
outstanding under our credit facility. These securities were
issued pursuant to an indenture with substantially the same
terms and conditions as the indenture pursuant to which we
issued our June 2002 Senior Notes.

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.

We have established warranty reserves for homes
in amounts estimated to cover potential costs for materials and
labor. Reserves are based on historical trends, adjusted as
appropriate for current quantitative and qualitative factors.
The following table sets forth the activity in our warranty
reserve for the nine months ended September 30, 2003
(dollars in thousands):

|                                             |  |   |        |  
|-------------------------------------------- |  | - | ------ | -
|Accrued warranty costs at December 31, 2002  |  | $ | 4,795  |  
|Estimated liability recorded                 |  |   | 6,553  |  
|Settlements made                             |  |   | (6,871 | )
|                                             |  |   |        |  
|Accrued warranty costs at September 30, 2003 |  | $ | 4,477  |  
|                                             |  |   |        |  

During the nine months ended September 30,
2003, we completed a sale-leaseback transaction of 76 of our
model homes, for net proceeds of $26.2 million. In connection
with this transaction, we deferred profit of $4.2 million which
is being amortized over the lease term. The lease term varies on
a per home basis and ranges from 3 to 36 months.

In connection with our announcement in March 2001
of our proposed merger with Engle, there was a class action suit
filed in District Court, Clark County, Nevada, and a class
action suit filed in the 80th Judicial District Court of Harris
County, Texas, each of which challenged the merger as a breach
of fiduciary duty. In addition, two interveners filed
interventions in the Texas class action. In March 2002, we
reached an agreement in principle for the settlement of the
class actions and interventions. Under the terms of the
settlement, we agreed to pay the plaintiffs
attorneys fees and expenses in an amount not to exceed
$350,000 in the aggregate. The parties originally contemplated
that the settlement would be consummated in the Texas action. In
the third quarter of 2002, the parties learned that the
anticipated Texas forum was unavailable due to a prior
dismissal. On April 28, 2003, the Nevada court entered an
Order and Final Judgment approving the settlement relating to
the Nevada action. After payments made by our insurance
provider, we paid approximately $139,000 in connection with the
settlement of this litigation. This amount was accrued at
December 31, 2002.

7.     Sale of
Westbrooke

During March 2002, we committed to a plan to
dispose of Westbrooke Acquisition Corp. and its subsidiaries
(Westbrooke) to eliminate operating redundancies in
the South Florida market and to strengthen our financial
position. Pursuant to this plan of disposition, we would sell
100% of the common stock of Westbrooke. On April 8, 2002,
we signed a definitive agreement for the sale of Westbrooke to
Standard Pacific Corp. (Standard Pacific) for
approximately $41.0 million in cash. This sale was completed on
April 15, 2002. In addition, Standard Pacific satisfied
approximately $54.4 million of Westbrookes debt that
included approximately $14.2 million of intercompany liabilities
owed to us. Upon completion of this sale, we recognized a gain
of $4.3 million. We determined that in accordance with SFAS
No. 144, Accounting for

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Impairment or Disposal of Long-Lived
Assets, as of March 31, 2002, the criteria to
classify the Westbrooke assets as held for sale were met.
Results of Westbrookes operations have been classified as
discontinued operations, which includes revenues of $44.2
million for the nine months ended September 30, 2002.

8.     Severance and
Merger Related Expenses

In early February 2002, certain former executive
officers resigned from their positions with Engle Homes, Inc.
and alleged that they were entitled to receive severance
packages in the aggregate amount of approximately $9.4 million,
plus other benefits, including a claim by one of these officers
of a monthly retirement benefit equal to 1/12th of his annual
salary with such payments to continue for a period of 60
consecutive months. We accrued $13.7 million in connection with
this matter during the three months ended June 30, 2002,
based on our estimate of our probable exposure at the time.
During September 2002, we reached an agreement whereby we would
pay $7.6 million. As a result, we recognized a $6.1 million
reduction of this accrual during the three months ended
September 30, 2002.

Included in severance and merger related expenses
in the accompanying consolidated statements of income for the
three and nine month periods ended September 30, 2002, are
costs of the merger and integration, such as professional fees,
investment banking fees and printing fees. These fees
approximate $5.5 million. Additionally, we incurred
approximately $5.3 million in severance charges attributable to
former executives whose employment was terminated in connection
with the Merger.

During the three and nine month periods ended
September 30, 2003, we recorded a charge of $1.1 million
and a reversal of $0.6 million, respectively, related to accrued
merger and severance expenses.

9.     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.

During the year ended December 31, 2002, we
granted 2,195,455 options to executives under the Plan. During
the nine months ended September 30, 2003, we granted
900,000 options to one executive, 327,000 options to employees
and 14,036 options to certain independent directors. Of the
3,436,491 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 and nine month periods ended September 30, 2003,
we have recorded compensation expense in the amount of $518,000
and $925,000, respectively, related to these accelerated vesting
options, as the market price of the stock as of
September 30, 2003, 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 of SFAS No. 123, the Companys
net income and earnings per share for the three and nine

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

month periods ended September 30, 2003,
would have been reduced to the pro forma amounts indicated below
(dollars in thousands):

|                                                                |         |                    |        |                    |  |   |        |      | 
|--------------------------------------------------------------- | ------- | ------------------ | ------ | ------------------ |  | - | ------ | ---- | 
|                                                                |         | Three Months       |        | Nine Months       
|                                                                |         | Ended              |        | Ended             
|                                                                |         | September 30, 2003 |        | September 30, 2003
|                                                                |         |                    |        |                   
|Net income as reported                                          |         | $                  | 21,549 |                    |  | $ | 62,438 |     
|Fair value method of stock based compensation,
    net of taxes |         |                    | (831   | )                  |  |   | (3,537 | )   
|                                                                |         |                    |        |                    |  |   |        |     
|Proforma net income                                             |         | $                  | 20,718 |                    |  | $ | 58,901 |     
|                                                                |         |                    |        |                    |  |   |        |     
|Reported earnings per common share:                             |         |                    |        |                    |  |   |        |     
|                                                                | Basic   |                    | $      | 0.77               |  |   | $      | 2.24 | 
|                                                                | Diluted |                    | $      | 0.76               |  |   | $      | 2.23 | 
|Proforma earnings per common share:                             |         |                    |        |                    |  |   |        |     
|                                                                | Basic   |                    | $      | 0.74               |  |   | $      | 2.11 | 
|                                                                | Diluted |                    | $      | 0.73               |  |   | $      | 2.10 | 

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 |  |  | 1.85%  3.20% | 
|Volatility              |  |  | 0.42%  0.48% | 
|Dividend yield          |  |  | 0%            | 

On March 3, 2003, we awarded 10,249 shares
of restricted common stock under the Plan to certain independent
directors as compensation for board services. In connection with
this stock award, we recognized expense of $160,000, which is
included in selling, general and administrative expenses in the
accompanying consolidated statement of income for the nine
months ended September 30, 2003.

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

Overview

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      |      |  |  |           | 

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

At September 30, 2003, we were marketing
homes in 206 communities; by comparison, at September 30,
2002 we were marketing homes in 145 communities.

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

Recent Transactions

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

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Subordinated Notes due 2012 that we issued in
June 2002, which we refer to as the June 2002 Senior
Subordinated Notes.


On April 4, 2003, we amended our revolving
credit facility to increase the amount we are permitted to
borrow to the lesser of (i) $305.0 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 $80.0 million. Subsequently, we increased the size of the
facility to provide up to an additional $10.0 million of
revolving loans. In addition, we have the right to increase the
size of the facility to provide for up to an additional $10.0
million of revolving loans, subject to meeting certain
requirements.

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

On February 6, 2003, we acquired the net
assets of Trophy Homes, Inc., a homebuilder operating in Las
Vegas, Nevada, and certain homesites for approximately $36.2
million in cash. In addition, if certain targets are met
regarding home deliveries during 2003 and 2004, we will be
obligated to pay up to an additional $2.5 million to the sellers
over a two-year period. Of this amount, we paid $1.3 million of
additional consideration during the nine months ended
September 30, 2003.

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

Critical Accounting Policies

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

Homebuilding
Revenues and Cost of Sales

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

Financial
Services Revenues and Expenses

Our Financial Services operations generate their
revenues from their mortgage financing and title operations. Our
mortgage financing operations revenues consist primarily
of origination and premium fee income, interest income, and the
gain on the sale of the mortgages. Revenue from our mortgage
financing operations is generally recognized when the mortgage
loans and related servicing rights are sold to third-party

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investors. Substantially all of our mortgages are
sold to private investors within 30 days of closing. Title
operations revenues consist primarily of title insurance agency
and closing services, which are recognized as homes are closed.
As a result, our revenue recognition process does not involve
significant judgments or estimates.


Impairment of
Long-Lived Assets

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

Goodwill

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

Homesite
Option Contracts and Consolidation of Variable Interest
Entities

We enter into option contracts with land sellers
and third-party financial entities as a method of acquiring
developed homesites. From time to time to leverage our ability
to acquire and finance the development of these homesites, we
transfer our option right to third parties. Option contracts
generally require the payment of a non-refundable cash deposit
or the issuance of a letter of credit for the right to acquire
homesites over a specified period of time at predetermined
prices. Typically, our deposits or letters of credit are less
than 20% of the underlying purchase price. We generally have the
right at our discretion to terminate our obligations under these
option agreements by forfeiting our cash deposit or repaying
amounts drawn under the letter of credit with no further
financial responsibility. We do not have legal title to these
assets. Additionally, we do not have an investment in the
third-party acquirer and do not guarantee their liabilities.
However, if certain conditions are met, including the deposit
and/or letters of credit exceeding certain significance levels
as compared to the remaining homesites under the option
contract, we will include the homesites in inventory with a
corresponding liability in consolidated land bank obligations.
At September 30, 2003, we owned 13,796 homesites, or 29% of
our homesite supply, and had option contracts on 33,822
homesites, or 71% of our homesite supply.

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB
Interpretation (Interpretation) No. 46,
Consolidation of Variable Interest Entities.
Interpretation No. 46 is applied immediately to variable
interest entities (VIEs) created after
January 31, 2003, and with respect to variable interests
held before February 1, 2003, Interpretation No. 46
will apply beginning with interim and annual periods ending on
or after December 15, 2003. Interpretation No. 46 addresses
consolidation by business enterprises of VIEs which have one or
both of the following characteristics: (1) the equity
investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated support
from

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other parties, which is provided through other
interests that will absorb some or all of the expected losses of
the entity; or (2) the equity investors lack one or more of
the following essential characteristics of a controlling
financial interest: (a) the direct or indirect ability to make
decisions about the entitys activities through voting
rights or similar rights; or (b) the obligation to absorb
the expected losses of the entity if they occur, which makes it
possible for the entity to finance its activities; or
(c) the right to receive the expected residual returns of
the entity if they occur, which is the compensation for the risk
of absorbing the expected losses.


Generally, in the homebuilding industry,
homebuilders will enter into option contracts for the purchase
of land or homesites with entities that may qualify as VIEs. We
believe that Interpretation No. 46 will have to be
evaluated as it relates to these and similar types of
arrangements. In applying Interpretation No. 46 to our
homesite option contracts, estimates regarding cash flows and
other assumptions have to be made. We believe that our critical
assumptions are reasonable based on historical evidence and
industry practice. Based on our analysis of contracts entered
into after January 31, 2003, we determined that we are the
primary beneficiary of certain of these homesite option
contracts. Consequently, Interpretation No. 46 requires us
to consolidate the assets (homesites) at their fair value,
although (1) we have no legal title to the assets,
(2) our maximum exposure to loss is limited to the deposits
or letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us. The effect of the consolidation was to increase
inventory by $55.5 million, excluding deposits of $4.6 million
which had been previously recorded, with a corresponding
increase to consolidated land bank obligations in the
accompanying consolidated statement of financial condition as of
September 30, 2003.

Warranty
Reserves

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

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RESULTS OF OPERATIONS

Selected Financial and Other
Information

The following table includes selected
consolidated statement of income and related data:

|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |           | 
|---------------------------------------------------------------- | ---------- | ---------------------- | ------- | ----------------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | - | --------- | --------- | 
|                                                                 |            |                        |         |                  
|                                                                 |            | Three Months Ended     |         | Nine Months Ended
|                                                                 |            | September 30,          |         | September 30,    
|                                                                 |            |                        |         |                  
|                                                                 |            | 2002                   |         | 2003              |  | 2002 |         | 2003   
|                                                                 |            |                        |         |                   |  |      |         |        
|                                                                 |            |                       
|                                                                 |            | (Dollars in thousands)
|HOMEBUILDING:                                                    |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|Revenues:                                                        |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|                                                                 | Home sales |                        | $       | 330,759           |  |      | $       | 410,446 |  |   | $       | 985,243 |  |   | $         | 1,133,967 | 
|                                                                 | Land sales |                        |         | 9,540             |  |      |         | 19,915  |  |   |         | 11,956  |  |   |           | 25,357    | 
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|                                                                 |            |                        | 340,299 |                   |  |      | 430,361 |         |  |   | 997,199 |         |  |   | 1,159,324 |          
|Cost of sales:                                                   |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|                                                                 | Home sales |                        |         | 262,009           |  |      |         | 331,616 |  |   |         | 783,009 |  |   |           | 907,392   | 
|                                                                 | Land sales |                        |         | 8,494             |  |      |         | 12,244  |  |   |         | 10,785  |  |   |           | 16,248    | 
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|                                                                 |            |                        | 270,503 |                   |  |      | 343,860 |         |  |   | 793,794 |         |  |   | 923,640   |          
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|Gross profit                                                     |            |                        | 69,796  |                   |  |      | 86,501  |         |  |   | 203,405 |         |  |   | 235,684   |          
|Selling, general and administrative expenses                     |            |                        | 36,204  |                   |  |      | 53,932  |         |  |   | 112,871 |         |  |   | 146,355   |          
|Variable stock-based compensation expense                        |            |                        |        |                   |  |      | 518     |         |  |   |        |         |  |   | 925       |          
|Depreciation and amortization expense                            |            |                        | 1,300   |                   |  |      | 2,510   |         |  |   | 4,540   |         |  |   | 6,125     |          
|Severance and merger related expenses                            |            |                        | (5,874  | )                 |  |      | 1,111   |         |  |   | 18,593  |         |  |   | 534       |          
|Loss on early retirement of debt                                 |            |                        |        |                   |  |      |        |         |  |   | 5,411   |         |  |   |          |          
|Other income, net                                                |            |                        | (475    | )                 |  |      | (752    | )       |  |   | (1,826  | )       |  |   | (2,719    | )        
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|Homebuilding pretax income                                       |            |                        | 38,641  |                   |  |      | 29,182  |         |  |   | 63,816  |         |  |   | 84,464    |          
|                                                                
|FINANCIAL SERVICES:                                              |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|Revenues                                                         |            |                        | 10,138  |                   |  |      | 12,886  |         |  |   | 26,147  |         |  |   | 35,591    |          
|Expenses                                                         |            |                        | 6,439   |                   |  |      | 8,132   |         |  |   | 15,254  |         |  |   | 21,726    |          
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|Financial Services pretax income                                 |            |                        | 3,699   |                   |  |      | 4,754   |         |  |   | 10,893  |         |  |   | 13,865    |          
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|Income from continuing operations before income
    taxes        |            |                        | 42,340  |                   |  |      | 33,936  |         |  |   | 74,709  |         |  |   | 98,329    |          
|Income tax expense                                               |            |                        | 16,002  |                   |  |      | 12,387  |         |  |   | 27,879  |         |  |   | 35,891    |          
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|Income from continuing operations                                |            | $                      | 26,338  |                   |  | $    | 21,549  |         |  | $ | 46,830  |         |  | $ | 62,438    |          
|                                                                 |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|                                                                
|OTHER DATA:                                                      |            |                        |         |                   |  |      |         |         |  |   |         |         |  |   |           |          
|EBITDA (1)                                                       |            | $                      | 50,680  |                   |  | $    | 46,009  |         |  | $ | 100,545 |         |  | $ | 129,445   |          
|Gross margin on revenue from home sales                          |            |                        | 20.8%   |                   |  |      | 19.2%   |         |  |   | 20.5%   |         |  |   | 20.0%     |          
|Ratio of SG&A expenses to Homebuilding
    revenues              |            |                        | 10.6%   |                   |  |      | 12.5%   |         |  |   | 11.3%   |         |  |   | 12.6%     |          
|Ratio of Homebuilding pretax income to
    Homebuilding revenues |            |                        | 11.4%   |                   |  |      | 6.8%    |         |  |   | 6.4%    |         |  |   | 7.3%      |          
|Total active communities at period end                           |            |                        | 145     |                   |  |      | 206     |         |  |   | 145     |         |  |   | 206       |          
|Homes delivered                                                  |            |                        | 1,252   |                   |  |      | 1,559   |         |  |   | 3,713   |         |  |   | 4,332     |          
|Average sales price per home delivered                           |            | $                      | 264     |                   |  | $    | 263     |         |  | $ | 265     |         |  | $ | 262       |          
|Sales value of homes in backlog at end of period                 |            | $                      | 659,893 |                   |  | $    | 902,890 |         |  | $ | 659,893 |         |  | $ | 902,890   |          
|Homes in backlog at end of period                                |            |                        | 2,337   |                   |  |      | 3,327   |         |  |   | 2,337   |         |  |   | 3,327     |          






|    |                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA represents earnings from continuing
    operations before interest, taxes, depreciation, and
    amortization and consists of the sum of income from continuing
    operations before: (a) income taxes, (b) amortization of
    capitalized interest in cost of sales, (c) Homebuilding
    interest expense and (d) depreciation and amortization. We
    have included information concerning EBITDA because we

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 no not believe it is a meaningful
    indication of our cash flow. EBITDA is not required by generally
    accepted accounting principles, or GAAP, and other companies may
    calculate EBITDA differently. EBITDA should not be considered as
    an alternative to operating income or to cash flows from
    operating activities (as determined in accordance with GAAP) and
    should not be construed as an indication of our operating
    performance or a measure of our liquidity. A reconciliation of
    EBITDA to net income, the most directly comparable GAAP measure,
    is provided below (dollars in thousands):

|                                                            |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         | 
|----------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | 
|                                                            |  |                    |        |                  
|                                                            |  | Three Months Ended |        | Nine Months Ended
|                                                            |  | September 30,      |        | September 30,    
|                                                            |  |                    |        |                  
|                                                            |  | 2002               |        | 2003              |  | 2002 |        | 2003
|                                                            |  |                    |        |                   |  |      |        |     
|Net income                                                  |  | $                  | 26,338 |                   |  | $    | 21,549 |      |  | $ | 51,793  |   |  | $ | 62,438  | 
|Less: income from discontinued operations, net of
    taxes |  |                    |       |                   |  |      |       |      |  |   | (4,963  | ) |  |   |        | 
|                                                            |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         | 
|Income from continuing operations                           |  |                    | 26,338 |                   |  |      | 21,549 |      |  |   | 46,830  |   |  |   | 62,438  | 
|Add: income taxes                                           |  |                    | 16,002 |                   |  |      | 12,387 |      |  |   | 27,879  |   |  |   | 35,891  | 
|Add: interest in cost of sales                              |  |                    | 6,306  |                   |  |      | 9,563  |      |  |   | 20,542  |   |  |   | 24,991  | 
|Add: interest expense                                       |  |                    | 734    |                   |  |      |       |      |  |   | 754     |   |  |   |        | 
|Add: depreciation and amortization expense                  |  |                    | 1,300  |                   |  |      | 2,510  |      |  |   | 4,540   |   |  |   | 6,125   | 
|                                                            |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         | 
|EBITDA                                                      |  | $                  | 50,680 |                   |  | $    | 46,009 |      |  | $ | 100,545 |   |  | $ | 129,445 | 
|                                                            |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         | 

Selected Homebuilding Operating Data

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

|                                            |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 
|------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | --------- | 
|                                            |  |                    |         |                  
|                                            |  | Three Months Ended |         | Nine Months Ended
|                                            |  | September 30,      |         | September 30,    
|                                            |  |                    |         |                  
|                                            |  | 2002               |         | 2003              |  | 2002 |         | 2003
|                                            |  |                    |         |                   |  |      |         |     
|HOMES DELIVERED:                            |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 
|Florida                                     |  |                    | 427     |                   |  |      | 582     |      |  |   | 1,477   |  |  |   | 1,628     | 
|Mid-Atlantic                                |  |                    | 135     |                   |  |      | 165     |      |  |   | 416     |  |  |   | 472       | 
|Texas                                       |  |                    | 430     |                   |  |      | 404     |      |  |   | 1,141   |  |  |   | 1,127     | 
|West                                        |  |                    | 260     |                   |  |      | 408     |      |  |   | 679     |  |  |   | 1,105     | 
|                                            |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 
|Total                                       |  |                    | 1,252   |                   |  |      | 1,559   |      |  |   | 3,713   |  |  |   | 4,332     | 
|                                            |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 
|                                           
|AVERAGE SALES PRICE PER HOME
    DELIVERED: |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 
|Florida                                     |  | $                  | 246     |                   |  | $    | 247     |      |  | $ | 246     |  |  | $ | 242       | 
|Mid-Atlantic                                |  | $                  | 335     |                   |  | $    | 324     |      |  | $ | 339     |  |  | $ | 325       | 
|Texas                                       |  | $                  | 258     |                   |  | $    | 267     |      |  | $ | 261     |  |  | $ | 262       | 
|West                                        |  | $                  | 268     |                   |  | $    | 258     |      |  | $ | 269     |  |  | $ | 263       | 
|Company Average                             |  | $                  | 264     |                   |  | $    | 263     |      |  | $ | 265     |  |  | $ | 262       | 
|                                           
|REVENUES FROM HOME SALES:                   |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 
|Florida                                     |  | $                  | 104,851 |                   |  | $    | 143,824 |      |  | $ | 363,668 |  |  | $ | 394,536   | 
|Mid-Atlantic                                |  |                    | 45,221  |                   |  |      | 53,452  |      |  |   | 141,161 |  |  |   | 153,563   | 
|Texas                                       |  |                    | 111,051 |                   |  |      | 107,847 |      |  |   | 297,511 |  |  |   | 294,750   | 
|West                                        |  |                    | 69,636  |                   |  |      | 105,323 |      |  |   | 182,903 |  |  |   | 291,118   | 
|                                            |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 
|Total                                       |  | $                  | 330,759 |                   |  | $    | 410,446 |      |  | $ | 985,243 |  |  | $ | 1,133,967 | 
|                                            |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |           | 

17



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|                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|----------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                      |  |                    |         |                  
|                                                      |  | Three Months Ended |         | Nine Months Ended
|                                                      |  | September 30,      |         | September 30,    
|                                                      |  |                    |         |                  
|                                                      |  | 2002               |         | 2003              |  | 2002 |         | 2003
|                                                      |  |                    |         |                   |  |      |         |     
|NEW SALES CONTRACTS, NET OF
    CANCELLATIONS:        |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Florida                                               |  |                    | 424     |                   |  |      | 743     |      |  |   | 1,342   |  |  |   | 2,050   | 
|Mid-Atlantic                                          |  |                    | 90      |                   |  |      | 155     |      |  |   | 470     |  |  |   | 503     | 
|Texas                                                 |  |                    | 397     |                   |  |      | 428     |      |  |   | 1,240   |  |  |   | 1,356   | 
|West                                                  |  |                    | 284     |                   |  |      | 520     |      |  |   | 849     |  |  |   | 1,322   | 
|                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Total                                                 |  |                    | 1,195   |                   |  |      | 1,846   |      |  |   | 3,901   |  |  |   | 5,231   | 
|                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|                                                     
|HOMES IN BACKLOG AT END OF PERIOD:                    |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Florida                                               |  |                    | 1,138   |                   |  |      | 1,617   |      |  |   | 1,138   |  |  |   | 1,617   | 
|Mid-Atlantic                                          |  |                    | 223     |                   |  |      | 275     |      |  |   | 223     |  |  |   | 275     | 
|Texas                                                 |  |                    | 501     |                   |  |      | 607     |      |  |   | 501     |  |  |   | 607     | 
|West                                                  |  |                    | 475     |                   |  |      | 828     |      |  |   | 475     |  |  |   | 828     | 
|                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Total                                                 |  |                    | 2,337   |                   |  |      | 3,327   |      |  |   | 2,337   |  |  |   | 3,327   | 
|                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|                                                     
|SALES VALUE OF HOMES IN BACKLOG AT END OF
    PERIOD: |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Florida                                               |  | $                  | 312,137 |                   |  | $    | 429,156 |      |  | $ | 312,137 |  |  | $ | 429,156 | 
|Mid-Atlantic                                          |  |                    | 93,332  |                   |  |      | 102,880 |      |  |   | 93,332  |  |  |   | 102,880 | 
|Texas                                                 |  |                    | 125,659 |                   |  |      | 152,631 |      |  |   | 125,659 |  |  |   | 152,631 | 
|West                                                  |  |                    | 128,765 |                   |  |      | 218,223 |      |  |   | 128,765 |  |  |   | 218,223 | 
|                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|Total                                                 |  | $                  | 659,893 |                   |  | $    | 902,890 |      |  | $ | 659,893 |  |  | $ | 902,890 | 
|                                                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 

Discussion of Results of Operations

Income from continuing operations decreased to
$21.5 million (or $0.76 per diluted share) during the three
months ended September 30, 2003 from $26.3 million (or
$0.95 per diluted share) during the three months ended September
30, 2002. The decrease in income from continuing operations is
attributable to a decrease in Homebuilding pretax income to
$29.2 million during the three months ended September 30,
2003 from $38.6 million during the three months ended
September 30, 2002. This was partially offset by an
increase in Financial Services pretax income to $4.8 million
during the three months ended September 30, 2003 from $3.7
million during the three months ended September 30, 2002.

Income from continuing operations increased to
$62.4 million (or $2.23 per diluted share) during the nine
months ended September 30, 2003, from $46.8 million (or
$1.68 per diluted share) during the nine months ended
September 30, 2002. The increase in income from continuing
operations is attributable to an increase in Homebuilding pretax
income to $84.5 million during the nine months ended
September 30, 2003, from $63.8 million during the nine
months ended September 30, 2002. Additionally, we
experienced an increase in Financial Services pretax income to
$13.9 million during the nine months ended September 30, 2003,
from $10.9 million during the nine months ended
September 30, 2002.

Total revenues increased to $443.2 million during
the three months ended September 30, 2003, from $350.4
million during the three months ended September 30, 2002. The
increase of 27% is attributable to increases in Homebuilding
revenues and Financial Services revenues of 27% and 28%,
respectively. Total revenues increased to $1.19 billion during
the nine months ended September 30, 2003, from $1.02
billion during the nine months ended September 30, 2002.
The increase of 17% is attributable to increases in Homebuilding
revenues and Financial Services revenues of 16% and 36%,
respectively.

Our effective tax rate attributable to income
from continuing operations decreased to 36.5% during the three
and nine months ended September 30, 2003, from 37.8% and
37.3% during the three and nine months

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ended September 30, 2002, respectively. The
decrease is due primarily to expected reductions in state taxes
as a result of modifying our corporate structure and other tax
planning initiatives.


Homebuilding

During the three months ended September 30,
2003, Homebuilding revenues increased to $430.4 million from
$340.3 million during the three months ended September 30,
2002. The increase of 27% was due primarily to the increase in
revenues from home sales to $410.4 million during the three
months ended September 30, 2003, from $330.8 million during
the three months ended September 30, 2002. This increase of 24%
is due to an increase in home deliveries to 1,559 during the
three months ended September 30, 2003, from 1,252 during
the three months ended September 30, 2002. The 25% increase
in home deliveries was partially offset by a slight decline in
the average selling price on delivered homes to $263,000 from
$264,000. In addition to the increase in revenue from home
sales, we generated additional revenue from land sales. For the
three months ended September 30, 2003, our revenues from
land sales were $19.9 million, as compared to $9.5 million for
the three months ended September 30, 2002. For the nine
months ended September 30, 2003, Homebuilding revenues
increased to $1.16 billion from $997.2 million for the nine
months ended September 30, 2002. This increase of 16% is
primarily attributable to an increase in revenues from home
sales to $1.13 billion during the nine months ended
September 30, 2003, from $985.2 million during the nine
months ended September 30, 2002. This increase of 15% is
due to a 17% increase in home deliveries to 4,332 for the nine
months ended September 30, 2003, from 3,713 during the nine
months ended September 30, 2002. This increase was
partially offset by a slight decrease in our average selling
price on homes delivered to $262,000 during the nine months
ended September 30, 2003, from $265,000 during the nine
months ended September 30, 2002. In addition, we generated
higher revenues from land sales. For the nine months ended
September 30, 2003, we generated revenues from land sales
of $25.4 million as compared to $12.0 million for the nine
months ended September 30, 2002.

Our Florida region realized an increase in
revenue from home sales of $30.8 million, or 8%, to $394.5
million during the nine months ended September 30, 2003. This
increase is primarily due to a 10% increase in home deliveries
to 1,628, which was partially offset by a slight decrease in the
average selling price of homes delivered to $242,000 during the
nine months ended September 30, 2003, as compared to 1,477
home deliveries and an average selling price of homes delivered
of $246,000 during the nine months ended September 30,
2002. The increase in home deliveries is primarily due to the
deliveries generated by our Jacksonville division, which was
acquired during the fourth quarter of 2002.

Our Mid-Atlantic region realized an increase in
revenue from home sales of $12.4 million, or 9%, to $153.6
million during the nine months ended September 30, 2003. This
increase is primarily due to a 13% increase in home deliveries
to 472, which was partially offset by a decline in our average
selling price to $325,000 during the nine months ended
September 30, 2003, as compared to 416 home deliveries and
an average selling price of homes delivered of $339,000 during
the nine months ended September 30, 2002. The increase in
home deliveries is primarily attributable to the deliveries
generated by our Baltimore division, which was acquired during
the fourth quarter of 2002. This increase in home deliveries by
our Baltimore division was partially offset by a decline in home
deliveries by our Virginia division, which had a shortage of
available product during the period as compared to the prior
year due to the timing of new community openings.

Our Texas region realized a slight decline in
revenue from home sales of $2.7 million, or 1%, to $294.8
million during the nine months ended September 30, 2003. This
decrease is primarily due to a 1% decline in home deliveries to
1,127 during the nine months ended September 30, 2003, as
compared to 1,141 home deliveries during the nine months ended
September 30, 2002. The unit volume for the nine months
ended September 30, 2003 continues to reflect the slower
demand for new housing in several of our Texas markets. The
decline in home deliveries was partially offset by a slight
increase in our average selling price in this region to $262,000
for the nine months ended September 30, 2003, as compared to
$261,000 for the nine months ended September 30, 2002.

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Our West region realized an increase in revenue
from home sales of $108.2 million, or 59%, to $291.1 million for
the nine months ended September 30, 2003. This increase is
due to a 63% increase in home deliveries to 1,105 during the
nine months ended September 30, 2003, from 679 home
deliveries during the nine months ended September 30, 2002.
The increase in home deliveries is primarily due to the
deliveries generated by our acquisitions in Las Vegas and
Colorado which occurred during the first quarter of 2003. The
increase in home deliveries was partially offset by a decline in
our average selling price in this region to $263,000 from
$269,000 as a result of the diversification of our product mix
in this region due to our recent acquisitions.

Our Homebuilding gross profit increased to $86.5
million for the three months ended September 30, 2003, from
$69.8 million for the three months ended September 30,
2002. This increase of 24% is primarily due to an increase in
revenue from home sales. Our gross margin on home sales
decreased to 19.2% during the three months ended
September 30, 2003, from 20.8% during the three months
ended September 30, 2002. This decrease is primarily due to
an increase in the cost of homesites. We believe that our gross
margin has stabilized. Additionally, for the three months ended
September 30, 2003, we generated gross profit on land sales of
$7.7 million as compared to $1.0 million for the comparable
period in the prior year. For the nine months ended
September 30, 2003, our Homebuilding gross profit increased
by $32.3 million, or 16%, to $235.7 million from $203.4 million
during the nine months ended September 30, 2002. This
increase was primarily due to an increase in revenue from home
sales and to a lesser degree to an increase in the gross profit
generated from land sales. Our gross margin on home sales
declined slightly to 20.0% during the nine months ended
September 30, 2003, from 20.5% during the nine months ended
September 30, 2002. For the nine months ended
September 30, 2003, we generated gross profit on land sales
of $9.2 million, as compared to $1.2 million for the comparable
period in the prior year.

SG&A expenses increased to $53.9 million
during the three months ended September 30, 2003, from
$36.2 million during the three months ended September 30, 2002.
As a percentage of Homebuilding revenues, SG&A expenses
increased to 12.5% for the three months ended September 30,
2003, as compared to 10.6% for the three months ended
September 30, 2002. For the nine months ended September 30,
2003, SG&A expenses increased to $146.4 million,
approximately 50% of which was general and administrative
expenses, from $112.9 million during the nine months ended
September 30, 2002. As a percentage of Homebuilding
revenues, SG&A expenses increased to 12.6% for the nine
months ended September 30, 2003 as compared to 11.3% for the
nine months ended September 30, 2002. A significant portion
of the increase in SG&A expenses during 2003 is attributable
to the general and administrative expenses necessary to effect
our transition from two separately operated homebuilders to a
single national homebuilder and to implement our core strategy
of obtaining critical mass in existing markets. We have begun to
see the results of this transition as we have increased the
number of active communities and homes in backlog as of
September 30, 2003, by 42% to 206 and 3,327, respectively,
as compared to 145 and 2,337, respectively, as of
September 30, 2002. The remainder of the increase in
SG&A expenses is primarily attributable to expenses
associated with recently acquired companies.

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



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

Since the merger, we have substantially
strengthened our management and operational resources and
streamlined our operational and corporate structure. This plan
consisted of placing experienced controllers in our divisions
and regional offices as well as developing a corporate center to
efficiently manage our finance, operations, legal and corporate
governance functions. The creation of our corporate center has
resulted in the development of an internal audit function,
centralization of our treasury function and creation of a
centralized shared services organization to oversee and manage
our land acquisition, supply management, product development and
building science functions. We believe that the development of a
strong corporate center is

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a key component of improving the effectiveness of
our critical business processes and strengthening our internal
control structure and corporate governance. In connection with
this initiative we incurred recruiting fees and other costs of
$0.7 million, which are not expected to be incurred in future
periods. By the middle of 2004, we expect to have completed this
portion of our transition plan.


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

Beginning shortly after our merger, one of our
primary initiatives was to integrate our information systems
into one enterprise-wide platform and to enhance our internal
financial and operational reporting. These enhancements included
developing a company-wide point-of-sale system, an intranet
site, which has become the information distribution network for
our divisions, and a should cost model, which will
be used to benchmark the cost/benefit of design and construction
decisions. We believe that these enhancements will enable us to
effectively operate as a large-scale homebuilder and support our
anticipated growth. As a result of our systems integration,
during the nine months ended September 30, 2003, we
experienced a $0.8 million increase in non-capitalizable
information technology expenses consisting primarily of
consulting fees, systems training and other related expenses.
Our information systems integration is expected to be completed
during the fourth quarter of 2003.

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

During the three months and nine months ended
September 30, 2003, we recognized a compensation charge of
$0.5 million and $0.9 million, respectively, 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
September 30, 2003, being greater than the exercise price.
During 2002 there was no stock-based compensation expense.

During the three months ended September 30,
2003, we incurred $1.1 million in severance charges as compared
to the reversal of an accrual for severance charges of $5.9
million during the corresponding period of the prior year.

During the nine months ended September 30,
2003, we incurred a net charge of $0.5 million in severance
charges, as compared to $18.6 million in severance and merger
related charges during the nine months ended September 30,
2002. The charges during 2002 included severance accrued related
to former executives of both Newmark and Engle and $5.5 million
in legal, consulting and advisory fees.

During the nine months ended September 30,
2002, in connection with our June 2002 Notes Offering, we
recognized a loss on the early retirement of debt of $5.4
million. This charge relates to the exit fees incurred and the
write off of unamortized deferred finance costs associated with
the then existing borrowings.

Financial
Services

Financial Services revenues increased to $12.9
million during the three months ended September 30, 2003,
from $10.1 million during the three months ended
September 30, 2002. Our Financial Services revenues
increased to $35.6 million during the nine months ended
September 30, 2003, from $26.1 million during the nine
months ended September 30, 2002. The increase in Financial
Services revenues is primarily attributable to an increase in
the number of closings by our mortgage and title operations. The
number of closings at our mortgage operations increased to 1,281
and 3,405 for the three and nine months ended September 30,
2003, respectively, from 1,030 and 2,716 for the three and nine
months ended September 30, 2002, respectively.

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The number of closings at our title operations
increased to 5,808 and 16,073 for the three and nine months
ended September 30, 2003, respectively, from 4,435 and
12,567 for the three and nine months ended September 30,
2002, respectively. Our Financial Services segment capture
ratios have remained relatively consistent with the
corresponding quarter in the prior year. Our mortgage operations
capture ratio was 58% for the nine months ended
September 30, 2003, as compared to 60% for the nine months
ended September 30, 2002. Our title operations capture
ratio was 81% for the nine months ended September 30, 2003,
as compared to 83% for the nine months ended September 30,
2002.


Financial Services expenses increased to $8.1
million for the three months ended September 30, 2003, from
$6.4 million for the three months ended September 30, 2002.
For the nine months ended September 30, 2003, Financial
Services expenses increased to $21.7 million from $15.3 million
for the nine months ended September 30, 2002. The increases
in Financial Services expenses of 26% and 42%, for the three and
nine months ended September 30, 2003, respectively, are
primarily attributable to the increased revenues and the
expansion into new markets.

EBITDA

During the three months ended September 30,
2003, we generated EBITDA of $46.0 million as compared to $50.7
million during the three months ended September 30, 2002.
The decrease in EBITDA is primarily a result of $1.1 million in
severance charges incurred during the three months ended
September 30, 2003, and a $5.9 million reversal of accrued
merger expenses during the three months ended September 30,
2002. During the nine months ended September 30, 2003, we
generated EBITDA of $129.4 million, as compared to $100.5
million during the nine months ended September 30, 2002.
The increase in EBITDA is primarily a result of $18.6 million in
severance and merger related charges and a $5.4 million loss on
the early retirement of debt incurred during the nine months
ended September 30, 2002, as compared to severance charges
of $0.5 million incurred during the nine months ended
September 30, 2003.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES

Consolidated Statement of Financial Condition
and Related Data

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

|                                                 |  |                     |         |      |  |   |           | 
|------------------------------------------------ |  | ------------------- | ------- | ---- |  | - | --------- | 
|                                                 |  |                    
|                                                 |  | As of September 30,
|                                                 |  |                    
|                                                 |  | 2002                |         | 2003
|                                                 |  |                     |         |     
|Cash  unrestricted                              |  | $                   | 52,684  |      |  | $ | 41,849    | 
|Inventory                                        |  | $                   | 717,689 |      |  | $ | 1,041,350 | 
|Total assets                                     |  | $                   | 976,898 |      |  | $ | 1,360,616 | 
|Homebuilding borrowings                          |  | $                   | 367,424 |      |  | $ | 531,671   | 
|Total borrowings (1)                             |  | $                   | 409,118 |      |  | $ | 574,045   | 
|Stockholders equity                             |  | $                   | 384,934 |      |  | $ | 467,743   | 
|Ratio of Homebuilding borrowings to total assets |  |                     | 37.6%   |      |  |   | 39.1%     | 
|Ratio of Homebuilding borrowings to capital (2)  |  |                     | 48.8%   |      |  |   | 53.2%     | 






|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(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

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 borrowed under our credit
facilities. Our Financial

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##### Table of Contents



Services segment relies 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 our operations.


At September 30, 2003, we had unrestricted
cash and cash equivalents of $41.8 million as compared to $49.2
million at December 31, 2002.

During the nine months ended September 30,
2003, cash used in operating activities was $13.5 million as
compared to cash used in operating activities of $7.5 million
for the nine months ended September 30, 2002. This increase
is primarily a result of an increase in inventory of $133.7
million, excluding the impact of our acquisitions, as compared
to a $71.7 million increase in inventory for the nine months
ended September 30, 2002. This increase in inventory is
part of our strategy to increase the number of active
communities and our land positions. During the nine months ended
September 30, 2003, including the impact of our
acquisitions, our controlled homesites increased to 47,618 from
26,320.

Cash used in investing activities was $90.7
million during the nine months ended September 30, 2003, as
compared to $6.3 million during the nine months ended
September 30, 2002. The increase in the use of cash in
investing activities is primarily due to the acquisitions made
during the nine months ended September 30, 2003 and $18.1
million in additional consideration.

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

On February 6, 2003, we acquired the net
assets of Trophy Homes, Inc., a homebuilder operating in Las
Vegas, Nevada, and certain homesites for approximately $36.2
million in cash. In addition, if certain targets are met
regarding home deliveries during 2003 and 2004, we will be
obligated to pay up to an additional $2.5 million to the sellers
over a two year period. Of this amount, we paid $1.3 million of
additional consideration during the nine months ended
September 30, 2003.

As a result of the increases in our land
positions and the recent acquisitions, our ratio of Homebuilding
borrowings to total assets was 39.1% at September 30, 2003
as compared to 37.6% at September 30, 2002. Our ratio of
Homebuilding borrowings to capital was 53.2% at
September 30, 2003 as compared to 48.8% at
September 30, 2002.

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

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

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

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the assumption of approximately $75 million of
Technical Olympics debt in connection with the merger of
Engle Holdings, we anticipate that interest incurred will exceed
the amounts which would have been incurred under the prior
borrowings. Therefore, the increased interest incurred will have
an effect on gross margins in future periods.


On April 4, 2003, we amended our revolving
credit facility to increase the amount we are permitted to
borrow. Our revolving credit facility permits us to borrow to
the lesser of (i) $315.0 million, or (ii) our borrowing
base (calculated in accordance with the revolving credit
facility agreement) minus our outstanding senior debt, and to
issue letters of credit up to $80.0 million. In addition, we
have the right to increase the size of the facility to provide
for up to an additional $10.0 million of revolving loans,
subject to meeting certain requirements. The revolving credit
facility expires on June 26, 2005. As of September 30,
2003, we had drawn down $45.0 million and had issued letters of
credit of $67.8 million and as a result, had $202.2 million in
availability under the revolving credit facility. Loans
outstanding under the facility may be base rate loans or
Eurodollar loans, at our election. Base rate loans accrue
interest at a rate per annum equal to (i) an applicable
margin plus (ii) the higher of (A) Citibank,
N.A.s base rate, (B) 0.5% plus the three week average
of the reserve-adjusted three-month certificate of deposit rate
and (C) 0.5% plus the Federal Funds Rate. Eurodollar loans
accrue interest at a rate per annum equal to (i) an
applicable margin plus (ii) the reserve-adjusted Eurodollar
rate for the interest period. Applicable margins will be
adjusted based on the ratio of our liabilities to our tangible
worth. At September 30, 2003, our loans outstanding under
the revolving credit facility accrued interest at a rate of
5.12% per annum. The revolving credit facility requires us to
(1) maintain specified financial ratios regarding leverage,
interest coverage, consolidated tangible net worth and certain
operational measurements and (2) satisfy certain financial
condition tests. The revolving credit facility also places
certain restrictions on, among other things, our ability to
incur additional debt or liens, pay or make dividends or other
distributions, sell assets, enter into transactions with
affiliates and merge or consolidate with other entities. The
revolving credit facility is secured by a first-priority
perfected lien on all capital stock of subsidiaries owned by us.
Our obligations under the revolving credit facility are
guaranteed by all our domestic subsidiaries (subject to certain
limited exceptions).

To fund the origination of residential mortgage
loans, our subsidiary, Preferred Home Mortgage Company
(Preferred Home) entered into a $65.0 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 $40.0
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 $25.0
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 $65.0 million. The warehouse line of credit
expires on November 21, 2003. As of September 30,
2003, we had $42.4 million outstanding under the warehouse line
of credit. The PHMC Credit Facility bears interest, at Preferred
Homes option, at either, (1) the Federal Funds rate
plus 1.375% or (2) the Eurodollar rate plus 1.25%. Amounts
outstanding under the Purchase Facility bear interest at the
Eurodollar rate plus 1.125%. As of September 30, 2003, our
loans outstanding under the warehouse line of credit accrued
interest at a blended rate of 2.46% per annum. The warehouse
line of credit requires Preferred Home to maintain certain
financial ratios and minimums. The warehouse line of credit is
guaranteed by us and secured by funded mortgages which are
pledged as collateral.

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

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At September 30, 2003, the amount of our
annual debt service payments was $49.9 million. This amount
included annual debt service payments on the senior and senior
subordinated notes of $46.2 million and interest payments on the
revolving credit facility, the warehouse line of credit, and
other notes of $3.7 million based on the balances outstanding as
of September 30, 2003. The amount of our annual debt
service payments on the revolving credit facility fluctuates
based on the principal outstanding under the facility and the
interest rate. An increase or decrease of 1% in interest rates
will change our annual debt service payments by $0.9 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.

Backlog

As of September 30, 2003, we had 3,327 units
in backlog representing $902.9 million in revenue, as compared
to 2,337 units in backlog representing $659.9 million in revenue
as of September 30, 2002. This increase in revenue in
backlog of 37% is primarily attributable to the units in backlog
of our recent acquisitions as well as increased sales activity
in several of our existing markets. Our average selling price of
units in backlog has declined slightly to $271,000 from $282,000
as a result of our product diversification.




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 expectations regarding the successful
    completion of our transition plan and the anticipated benefits
    resulting from the implementation of our transition plan;
|
| |  | our estimates regarding the timing of completion
    of the various components of our transition plan;                                                                    
|
| |  | our expectations regarding the timing and
    benefits of expenditures related to our transition plan;                                                                    
|
| |  | our estimates regarding SG&A expenses to be
    incurred during 2004;                                                                                                     
|
| |  | our expectations regarding the effect of
    increased interest on our gross margins 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;
    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

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to differ materially from those expressed in or
implied by those forward-looking statements include, but are not
limited to, the following:




| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our significant level of debt and the impact of
    the restrictions imposed on us by the terms of this debt;                                                      
|
| |  | our ability to borrow or otherwise finance our
    business in the future;                                                                                         
|
| |  | our ability to identify and acquire, at
    anticipated prices, additional homebuilding opportunities;                                                             
|
| |  | our relationship with Technical Olympic S.A. and
    its control over our business activities;                                                                     
|
| |  | our ability to successfully integrate and to
    realize the expected benefits of recent acquisitions;                                                             
|
| |  | any delays or difficulties encountered in
    completing our transition plan or any negative effects resulting
    from the implementation of our transition plan; 
|
| |  | economic or other business conditions that affect
    the desire or ability of our customers to purchase new homes in
    markets in which we conduct our business;
|
| |  | a decline in the demand for, or the prices of,
    housing;                                                                                                        
|
| |  | a decline in the value of the land and home
    inventories we maintain;                                                                                           
|
| |  | an increase in the cost of, or shortages in the
    availability of, skilled labor or construction materials;                                                      
|
| |  | an increase in interest rates;                                                                                                                                     
|
| |  | our ability to successfully dispose of developed
    properties or undeveloped land or 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
September 30, 2003, $485.0 million of our outstanding
borrowings are based on fixed interest rates. We are exposed to
market risk primarily related to potential adverse changes in
interest rates on our existing construction loans, warehouse
line of credit, and revolving credit facility. The interest
rates relative to these borrowings fluctuate with the prime and
LIBOR lending rates, both upwards and downwards. We have not
entered into derivative financial instruments for trading or
speculative purposes. As of September 30, 2003, we had an
aggregate of approximately $94.2 million drawn under our bank
loan arrangements that are subject to changes in interest rates.
An increase or decrease of 1% in interest rates will change our
annual debt service payments by $0.9 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
September 30, 2003:

|               |                                                                                         |                        |   |        |  |      |   |      |  |      |   |            |  |            |   |   |  |  |   |   |  |  |   |         |  |  |   |         | 
|-------------- | --------------------------------------------------------------------------------------- | ---------------------- | - | ------ |  | ---- | - | ---- |  | ---- | - | ---------- |  | ---------- | - | - |  |  | - | - |  |  | - | ------- |  |  | - | ------- | 
|               |                                                                                         |                       
|               |                                                                                         | Expected Maturity Date
|               |                                                                                         | (in thousands)        
|               |                                                                                         |                       
|Liabilities    |                                                                                         | 2003                   |   | 2004   |  | 2005 |   | 2006 |  | 2007 |   | Thereafter |  | Fair Value
|               |                                                                                         |                        |   |        |  |      |   |      |  |      |   |            |  |           
|Long-term debt |                                                                                         |                        |  |        |  |      |  |      |  |      |  |            |  |            |  |   |  |  |  |   |  |  |  |         |  |  |  |        
|               | Fixed rate (9.0%)                                                                       |                        |   |       |  |      |   |     |  |      |   |           |  |            |   |  |  |  |   |  |  |  | $ | 300,000 |  |  | $ | 322,680 | 
|               | Fixed rate (10 3/8%)                                                                    |                        |   |       |  |      |   |     |  |      |   |           |  |            |   |  |  |  |   |  |  |  | $ | 185,000 |  |  | $ | 189,181 | 
|               | Variable rate, revolving loan (5.12% at
    September 30, 2003)                         |                        |   |       |  |      |   |     |  |      | $ | 45,000     |  |            |   |  |  |  |   |  |  |  |   |        |  |  | $ | 45,000  | 
|               | Variable rate, warehouse line of credit (2.64% at
    September 30, 2003)               |                        | $ | 42,374 |  |      |   |     |  |      |   |           |  |            |   |  |  |  |   |  |  |  |   |        |  |  | $ | 42,374  | 
|               | Other homebuilding borrowings (at various
    interest rates ranging from 4.0% to 6.0%) |                        | $ | 811    |  |      | $ | 392  |  |      | $ | 5,633      |  |            |   |  |  |  |   |  |  |  |   |        |  |  | $ | 6,836   | 

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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, both upwards and downwards.

We may be adversely affected during periods of
high inflation, primarily because of higher land and
construction costs. In addition, inflation may result in higher
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

In order to ensure that the information we must
disclose in our filings with the Securities and Exchange
Commission is recorded, processed, summarized, and reported on a
timely basis, we have formalized our disclosure controls and
procedures. Our principal executive officer and principal
financial officer have reviewed and evaluated the effectiveness
of our disclosure controls and procedures, as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), as of
September 30, 2003. Based on such evaluation, such officers
have concluded that, as of September 30, 2003, our
disclosure controls and procedures were effective in timely
alerting them to material information relating to us (and our
consolidated subsidiaries) required to be included in our
periodic SEC filings. There has been no change in our internal
control over financial reporting during the quarter ended
September 30, 2003 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
|        | 10. | 35 |  |             |  | Amendment to Employment Agreement, dated as of
    July 15, 2003, between Technical Olympic USA, Inc. and
    Antonio B. Mon.              
|       
|        | 10. | 36 |  |             |  | Fifth Amendment to Credit Agreement, effective as
    of September 22, 2003, 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 July 24, 2003, we filed a Current Report
on Form 8-K furnishing information under Items 7 and 12
regarding certain operational data for the quarter ended
June 30, 2003, and to reaffirm previous earnings guidance.

On August 6, 2003, we filed a Current Report
on Form 8-K furnishing information under Items 7 and 12
regarding operational and financial results for the three and
six months ended June 30, 2003.

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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: October 31, 2003 |  | By: /s/ TOMMY L. MCADEN TOMMY L. MCADENVice President  Finance and Administration
    and
    Chief Financial Officer
|                      
|Date: October 31, 2003 |  | By: /s/ RANDY L. KOTLER RANDY L. KOTLERVice President  Chief Accounting Officer                                      

29