##### Table of Contents









UNITED STATES

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, 2004                                       
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file
number: 000-23677

TECHNICAL OLYMPIC USA, INC.

(Exact name of Registrant as specified in its
charter)


|                                                                                                     |  |                                                   
|---------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware(State or other jurisdiction of
    incorporation or organization)                           |  | 76-0460831(I.R.S. Employer
    Identification No.)
|                                                                                                    
|4000 Hollywood Blvd., Suite 500 N
    Hollywood, Florida(Address of principal executive
    offices) |  | 33021(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: 44,856,437 shares of common stock as of
October 29, 2004.



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TECHNICAL OLYMPIC USA, INC.

INDEX

|                                              |  |                                                                                           |    |      |    | 
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                              |  |                                                                                           |    | Page
|                                              |  |                                                                                           |    |     
|PART I. Financial
    Information             |  |                                                                                           | 2  |     
|Item 1.                                       |  | Financial Statements
    (Unaudited)                                                      |    |      | 2  | 
|                                              |  | Consolidated Statements of
    Financial Condition                                        |    |      | 2  | 
|                                              |  | Consolidated Statements of
    Income                                                     |    |      | 3  | 
|                                              |  | Consolidated Statements of
    Cash Flows                                                 |    |      | 4  | 
|                                              |  | Notes to the Consolidated
    Financial Statements                                        |    |      | 5  | 
|Item 2.                                       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |      | 17 | 
|Item 3.                                       |  | Quantitative and Qualitative
    Disclosures about Market Risk                            |    |      | 28 | 
|Item 4.                                       |  | Controls and Procedures                                                                   |    |      | 28 | 
|PART II. Other
    Information                |  |                                                                                           | 29 |     
|Item 6.                                       |  | Exhibits                                                                                  |    |      | 29 | 
|Signatures                                    |  |                                                                                           | 30 |     
|Credit Agreement                             
|Revolving Credit Agreement                   
|Sec 302 Chief Executive Officer Certification
|Sec 302 Chief Financial Officer Certification
|Sec 906 Chief Executive Officer Certification
|Sec 906 Chief Financial Officer Certification



1



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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 millions, except shares and par
value)


|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |       |      | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------- | ------- | ------------ | ---- | - | ------- | ----- | ---- | 
|                                                                                                                                                                                                |                                             | September 30, |         | December 31,
|                                                                                                                                                                                                |                                             | 2004          |         | 2003        
|                                                                                                                                                                                                |                                             |               |         |             
|                                                                                                                                                                                                |                                             | (Unaudited)   |         |             
|ASSETS                                                                                                                                                                                         
|HOMEBUILDING:                                                                                                                                                                                   |                                             |               |         |              |      |   |         |      
|Cash and cash equivalents:                                                                                                                                                                      |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                |                                             | Unrestricted  |         | $            | 44.6 |   |         | $     | 73.7 | 
|                                                                                                                                                                                                |                                             | Restricted    |         |              | 2.2  |   |         |       | 21.2 | 
|Inventory                                                                                                                                                                                       |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                | Deposits                                    |               |         | 108.7        |      |   |         | 78.7  |     
|                                                                                                                                                                                                | Homesites and land under development        |               |         | 389.2        |      |   |         | 443.4 |     
|                                                                                                                                                                                                | Residences completed and under construction |               |         | 704.6        |      |   |         | 404.6 |     
|                                                                                                                                                                                                | Inventory not owned                         |               |         | 193.0        |      |   |         | 246.2 |     
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                |                                             |               | 1,395.5 |              |      |   | 1,172.9 |      
|Property and equipment, net                                                                                                                                                                     |                                             |               | 28.8    |              |      |   | 23.7    |      
|Investments in unconsolidated joint ventures                                                                                                                                                    |                                             |               | 30.6    |              |      |   | 10.5    |      
|Other assets                                                                                                                                                                                    |                                             |               | 56.5    |              |      |   | 43.7    |      
|Goodwill                                                                                                                                                                                        |                                             |               | 106.7   |              |      |   | 100.1   |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                |                                             |               | 1,664.9 |              |      |   | 1,445.8 |      
|FINANCIAL SERVICES:                                                                                                                                                                             |                                             |               |         |              |      |   |         |      
|Cash and cash equivalents:                                                                                                                                                                      |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                |                                             | Unrestricted  |         |              |     |   |         |       | 3.1  | 
|                                                                                                                                                                                                |                                             | Restricted    |         |              | 87.3 |   |         |       | 73.4 | 
|Mortgage loans held for sale                                                                                                                                                                    |                                             |               | 70.2    |              |      |   | 75.2    |      
|Other assets                                                                                                                                                                                    |                                             |               | 10.0    |              |      |   | 7.5     |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                |                                             |               | 167.5   |              |      |   | 159.2   |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|Total assets                                                                                                                                                                                    |                                             | $             | 1,832.4 |              |      | $ | 1,605.0 |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                               
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                       
|HOMEBUILDING:                                                                                                                                                                                   |                                             |               |         |              |      |   |         |      
|Accounts payable and other liabilities                                                                                                                                                          |                                             | $             | 140.5   |              |      | $ | 149.3   |      
|Customer deposits                                                                                                                                                                               |                                             |               | 69.2    |              |      |   | 35.5    |      
|Obligations for inventory not owned                                                                                                                                                             |                                             |               | 193.0   |              |      |   | 246.2   |      
|Notes payable                                                                                                                                                                                   |                                             |               | 605.6   |              |      |   | 480.0   |      
|Bank borrowings                                                                                                                                                                                 |                                             |               | 67.6    |              |      |   | 17.9    |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                |                                             |               | 1,075.9 |              |      |   | 928.9   |      
|FINANCIAL SERVICES:                                                                                                                                                                             |                                             |               |         |              |      |   |         |      
|Accounts payable and other liabilities                                                                                                                                                          |                                             |               | 87.6    |              |      |   | 75.3    |      
|Bank borrowings                                                                                                                                                                                 |                                             |               | 58.1    |              |      |   | 63.2    |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|                                                                                                                                                                                                |                                             |               | 145.7   |              |      |   | 138.5   |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|Total liabilities                                                                                                                                                                               |                                             |               | 1,221.6 |              |      |   | 1,067.4 |      
|Stockholders equity:                                                                                                                                                                           |                                             |               |         |              |      |   |         |      
|Preferred stock  $0.01 par value;
    3,000,000 shares authorized; none issued or outstanding                                                                                                  |                                             |               |        |              |      |   |        |      
|Common stock  $0.01 par value;
    97,000,000 shares authorized and 44,856,437 and 44,833,554
    shares issued and outstanding at September 30, 2004, and
    December 31, 2003, respectively |                                             |               | 0.4     |              |      |   | 0.4     |      
|Additional paid-in capital                                                                                                                                                                      |                                             |               | 392.2   |              |      |   | 379.3   |      
|Unearned compensation                                                                                                                                                                           |                                             |               | (15.8   | )            |      |   | (7.3    | )    
|Retained earnings                                                                                                                                                                               |                                             |               | 234.0   |              |      |   | 165.2   |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|Total stockholders equity                                                                                                                                                                      |                                             |               | 610.8   |              |      |   | 537.6   |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      
|Total liabilities and stockholders equity                                                                                                                                                      |                                             | $             | 1,832.4 |              |      | $ | 1,605.0 |      
|                                                                                                                                                                                                |                                             |               |         |              |      |   |         |      

See accompanying notes to consolidated financial
statements.

2



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##### Table of Contents






TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions, except share and per
share amounts)


(Unaudited)


|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |         |            | 
|--------------------------------------------------------- | ---------- | ------------------ | ----- | ----------------- | ---------- | ---- | ----- | ----- | ---------- | - | ------- | ------- | ---------- | - | ------- | ------- | ---------- | 
|                                                          |            |                    |       |                  
|                                                          |            | Three Months Ended |       | Nine Months Ended
|                                                          |            | September 30,      |       | September 30,    
|                                                          |            |                    |       |                  
|                                                          |            | 2004               |       | 2003              |            | 2004 |       | 2003 
|                                                          |            |                    |       |                   |            |      |       |      
|HOMEBUILDING:                                             |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|Revenues:                                                 |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          | Home sales |                    | $     | 500.1             |            |      | $     | 410.5 |            |   | $       | 1,369.3 |            |   | $       | 1,134.0 |           
|                                                          | Land sales |                    |       | 7.1               |            |      |       | 19.9  |            |   |         | 61.0    |            |   |         | 25.3    |           
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          |            |                    | 507.2 |                   |            |      | 430.4 |       |            |   | 1,430.3 |         |            |   | 1,159.3 |        
|Cost of sales:                                            |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          | Home sales |                    |       | 398.8             |            |      |       | 331.6 |            |   |         | 1,104.4 |            |   |         | 907.4   |           
|                                                          | Land sales |                    |       | 6.6               |            |      |       | 12.3  |            |   |         | 47.8    |            |   |         | 16.3    |           
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          |            |                    | 405.4 |                   |            |      | 343.9 |       |            |   | 1,152.2 |         |            |   | 923.7   |        
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|Gross profit                                              |            |                    | 101.8 |                   |            |      | 86.5  |       |            |   | 278.1   |         |            |   | 235.6   |        
|Selling, general and administrative expenses              |            |                    | 61.2  |                   |            |      | 58.1  |       |            |   | 176.9   |         |            |   | 153.9   |        
|Other (income) expense, net                               |            |                    | (2.9  | )                 |            |      | (0.7  | )     |            |   | (3.4    | )       |            |   | (2.7    | )      
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|Homebuilding pretax income                                |            |                    | 43.5  |                   |            |      | 29.1  |       |            |   | 104.6   |         |            |   | 84.4    |        
|                                                         
|FINANCIAL SERVICES:                                       |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|Revenues                                                  |            |                    | 10.1  |                   |            |      | 12.9  |       |            |   | 31.7    |         |            |   | 35.6    |        
|Expenses                                                  |            |                    | 9.5   |                   |            |      | 8.1   |       |            |   | 25.3    |         |            |   | 21.7    |        
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|Financial Services pretax income                          |            |                    | 0.6   |                   |            |      | 4.8   |       |            |   | 6.4     |         |            |   | 13.9    |        
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|Income before income taxes                                |            |                    | 44.1  |                   |            |      | 33.9  |       |            |   | 111.0   |         |            |   | 98.3    |        
|Provision for income taxes                                |            |                    | 16.0  |                   |            |      | 12.4  |       |            |   | 40.8    |         |            |   | 35.9    |        
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|Net income                                                |            | $                  | 28.1  |                   |            | $    | 21.5  |       |            | $ | 70.2    |         |            | $ | 62.4    |        
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|EARNINGS PER COMMON SHARE:                                |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          |            | Basic              |       | $                 | 0.63       |      |       | $     | 0.52       |   |         | $       | 1.57       |   |         | $       | 1.49       | 
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          |            | Diluted            |       | $                 | 0.61       |      |       | $     | 0.51       |   |         | $       | 1.53       |   |         | $       | 1.48       | 
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING: |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          |            | Basic              |       |                   | 44,851,652 |      |       |       | 41,833,554 |   |         |         | 44,845,554 |   |         |         | 41,830,119 | 
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|                                                          |            | Diluted            |       |                   | 45,942,000 |      |       |       | 42,346,680 |   |         |         | 45,742,799 |   |         |         | 42,082,985 | 
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        
|CASH DIVIDENDS PER SHARE                                  |            | $                  | 0.015 |                   |            |      |      |       |            | $ | 0.030   |         |            |   |        |        
|                                                          |            |                    |       |                   |            |      |       |       |            |   |         |         |            |   |         |        

See accompanying notes to consolidated financial
statements.

3



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##### Table of Contents






TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Dollars in millions)


|                                                                                                                                |                                              |                                        |        |      |        |   |       |     |        |  
|------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------- | ------ | ---- | ------ | - | ----- | --- | ------ | -
|                                                                                                                                |                                              |                                       
|                                                                                                                                |                                              | Nine Months Ended                     
|                                                                                                                                |                                              | September 30,                         
|                                                                                                                                |                                              |                                       
|                                                                                                                                |                                              | 2004                                   |        | 2003
|                                                                                                                                |                                              |                                        |        |     
|                                                                                                                                |                                              |                                       
|                                                                                                                                |                                              | (Unaudited)                           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                           |                                              |                                        |        |      |        |   |       |    
|Net income                                                                                                                      |                                              | $                                      | 70.2   |      |        | $ | 62.4  |    
|Adjustments to reconcile net income to net cash
    used in operating activities:                                               |                                              |                                        |        |      |        |   |       |    
|                                                                                                                                | Depreciation and amortization                |                                        |        | 9.5  |        |   |       | 6.1 |       
|                                                                                                                                | Non-cash compensation expense                |                                        |        | 4.0  |        |   |       | 1.1 |       
|                                                                                                                                | Changes in operating assets and liabilities: |                                        |        |      |        |   |       |     |       
|                                                                                                                                |                                              | Restricted cash                        |        |      | 5.1    |   |       |     | (5.2   | )
|                                                                                                                                |                                              | Inventory                              |        |      | (266.6 | ) |       |     | (133.7 | )
|                                                                                                                                |                                              | Other assets                           |        |      | (13.2  | ) |       |     | (6.6   | )
|                                                                                                                                |                                              | Accounts payable and other liabilities |        |      | 3.5    |   |       |     | 46.7   |  
|                                                                                                                                |                                              | Customer deposits                      |        |      | 33.7   |   |       |     | 7.8    |  
|                                                                                                                                |                                              | Mortgage loans held for sale           |        |      | 5.0    |   |       |     | 7.9    |  
|                                                                                                                                |                                              |                                        |        |      |        |   |       |    
|Net cash used in operating activities                                                                                           |                                              |                                        | (148.8 | )    |        |   | (13.5 | )  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                           |                                              |                                        |        |      |        |   |       |    
|Amounts paid for acquisitions, net of cash
    acquired                                                                         |                                              |                                        |       |      |        |   | (59.3 | )  
|Earn out consideration paid for acquisitions                                                                                    |                                              |                                        | (6.6   | )    |        |   | (18.2 | )  
|Investments in unconsolidated joint ventures                                                                                    |                                              |                                        | (20.1  | )    |        |   |      |    
|Net additions to property and equipment                                                                                         |                                              |                                        | (14.7  | )    |        |   | (13.2 | )  
|                                                                                                                                |                                              |                                        |        |      |        |   |       |    
|Net cash used in investing activities                                                                                           |                                              |                                        | (41.4  | )    |        |   | (90.7 | )  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                           |                                              |                                        |        |      |        |   |       |    
|Proceeds from notes offering                                                                                                    |                                              |                                        | 125.0  |      |        |   | 129.3 |    
|Payments for deferred financing costs                                                                                           |                                              |                                        | (2.1   | )    |        |   | (5.5  | )  
|Net borrowings from (repayments on) revolving
    credit facilities                                                             |                                              |                                        | 48.0   |      |        |   | (10.0 | )  
|Borrowings from (repayments on) Homebuilding bank
    borrowings                                                                |                                              |                                        | 1.7    |      |        |   | (1.2  | )  
|Net repayments on Financial Services bank
    borrowings                                                                        |                                              |                                        | (5.1   | )    |        |   | (5.9  | )  
|Net payments on obligations for inventory not
    owned                                                                         |                                              |                                        | (8.6   | )    |        |   | (4.3  | )  
|Cash dividend payment                                                                                                           |                                              |                                        | (1.3   | )    |        |   |      |    
|Other                                                                                                                           |                                              |                                        | 0.4    |      |        |   | (5.6  | )  
|                                                                                                                                |                                              |                                        |        |      |        |   |       |    
|Net cash provided by financing activities                                                                                       |                                              |                                        | 158.0  |      |        |   | 96.8  |    
|                                                                                                                                |                                              |                                        |        |      |        |   |       |    
|Decrease in cash and cash equivalents                                                                                           |                                              |                                        | (32.2  | )    |        |   | (7.4  | )  
|Unrestricted cash and cash equivalents at
    beginning of period                                                               |                                              |                                        | 76.8   |      |        |   | 49.2  |    
|                                                                                                                                |                                              |                                        |        |      |        |   |       |    
|Unrestricted cash and cash equivalents at end of
    period                                                                     |                                              | $                                      | 44.6   |      |        | $ | 41.8  |    
|                                                                                                                                |                                              |                                        |        |      |        |   |       |    
|SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
    ACTIVITY                                                                      |                                              |                                        |        |      |        |   |       |    
|(Decrease) increase in land bank obligations for
    inventory not owned and corresponding (decrease) increase
    in inventory |                                              | $                                      | (44.6  | )    |        | $ | 97.1  |    
|                                                                                                                                |                                              |                                        |        |      |        |   |       |    

See accompanying notes to consolidated financial
statements.

4



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##### Table of Contents






TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2004




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



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

Technical Olympic USA, Inc. is a homebuilder with
a geographically diversified national presence. We operate in 15
metropolitan markets located in four major geographic regions.
We design, build, and market detached single-family residences,
town homes and condominiums. We also provide title and mortgage
brokerage services to our homebuyers and others. Generally, we
do not retain or service the mortgages that we originate but,
rather, sell the mortgages and related servicing rights to
investors.



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

Technical Olympic S.A. owns approximately 73% of
our outstanding common stock. Technical Olympic S.A. is a
publicly-traded Greek company whose shares are traded on the
Athens Stock Exchange.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



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

The consolidated financial statements include our
accounts and those of our subsidiaries. Our accounting and
reporting policies conform to United States generally accepted
accounting principles and general practices within the
homebuilding industry. These accounting principles require
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.

All significant intercompany balances and
transactions have been eliminated in the consolidated financial
statements.

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

We have two operating segments which are
segregated in the accompanying consolidated financial statements
under Homebuilding and Financial
Services.

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



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

The accompanying unaudited consolidated financial
statements reflect all adjustments, consisting primarily of
normal recurring items that, in the opinion of management, are
considered necessary for a fair presentation of the financial
position, results from operations, and cash flows for the
periods presented. Results of operations achieved through
September 30, 2004 are not necessarily indicative of those
that may be achieved for the year ending December 31, 2004.
Certain information and footnote disclosures normally included
in financial statements presented in accordance with United
States generally accepted accounting principles have been
omitted from the accompanying financial statements. The
financial statements included as part of this Form 10-Q
should be read in conjunction with the financial statements and
notes thereto included in our December 31, 2003 Annual
Report on Form 10-K.

For the three and nine months ended
September 30, 2004 and 2003, we have eliminated
inter-segment Financial Services revenues of $1.8 million
and $1.5 million, respectively, and $5.4 million and
$4.0 million, respectively.

5



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | 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.

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

|                                                        |  |                    |            |                   |  |      |            |      |  |  |            |  |  |  |            | 
|------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                                                        |  |                    |            |                  
|                                                        |  | Three Months Ended |            | Nine Months Ended
|                                                        |  | September 30,      |            | September 30,    
|                                                        |  |                    |            |                  
|                                                        |  | 2004               |            | 2003              |  | 2004 |            | 2003
|                                                        |  |                    |            |                   |  |      |            |     
|Basic average shares outstanding                        |  |                    | 44,851,652 |                   |  |      | 41,833,554 |      |  |  | 44,845,554 |  |  |  | 41,830,119 | 
|Net effect of stock options assumed to be
    exercised |  |                    | 1,090,348  |                   |  |      | 513,126    |      |  |  | 897,245    |  |  |  | 252,866    | 
|                                                        |  |                    |            |                   |  |      |            |      |  |  |            |  |  |  |            | 
|Diluted average shares outstanding                      |  |                    | 45,942,000 |                   |  |      | 42,346,680 |      |  |  | 45,742,799 |  |  |  | 42,082,985 | 
|                                                        |  |                    |            |                   |  |      |            |      |  |  |            |  |  |  |            | 

The shares issued and outstanding and the
earnings per share amounts in the consolidated financial
statements have been adjusted to reflect a three-for-two stock
split effected in the form of a 50% stock dividend paid on
June 1, 2004.



| |                         
| | ------------------------
| | 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 is recorded on the date of grant only if
the current market price of the underlying stock exceeds the
exercise price. We have adopted the disclosure-only provisions
of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation
cost has been recognized for our stock option plan. If the
methodologies of SFAS No. 123 were applied to determine
compensation expense for our stock options based on the fair
value of our common stock at the grant dates for awards under
our option plan, our net income and earnings per share for the
three and

6



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

nine months ended September 30, 2004 and
2003, would have been reduced to the pro forma amounts indicated
below (dollars in millions, except per share amounts):

|                                                                                                         |         |                    |      |                   |  |      |      |      |  |   |      |      |  |   |      |      | 
|-------------------------------------------------------------------------------------------------------- | ------- | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                                                                                                         |         |                    |      |                  
|                                                                                                         |         | Three Months Ended |      | Nine Months Ended
|                                                                                                         |         | September 30,      |      | September 30,    
|                                                                                                         |         |                    |      |                  
|                                                                                                         |         | 2004               |      | 2003              |  | 2004 |      | 2003
|                                                                                                         |         |                    |      |                   |  |      |      |     
|Net income as reported                                                                                   |         | $                  | 28.1 |                   |  | $    | 21.5 |      |  | $ | 70.2 |      |  | $ | 62.4 |     
|Add: Stock-based employee compensation included
    in reported net income, net of tax                   |         |                    | 1.5  |                   |  |      | 0.3  |      |  |   | 2.6  |      |  |   | 0.6  |     
|Deduct: Stock-based employee compensation expense
    determined under the fair value method, net of tax |         |                    | (0.7 | )                 |  |      | (0.8 | )    |  |   | (1.8 | )    |  |   | (3.5 | )   
|                                                                                                         |         |                    |      |                   |  |      |      |      |  |   |      |      |  |   |      |     
|Pro forma net income                                                                                     |         | $                  | 28.9 |                   |  | $    | 21.0 |      |  | $ | 71.0 |      |  | $ | 59.5 |     
|                                                                                                         |         |                    |      |                   |  |      |      |      |  |   |      |      |  |   |      |     
|Reported earnings per common share:                                                                      |         |                    |      |                   |  |      |      |      |  |   |      |      |  |   |      |     
|                                                                                                         | Basic   |                    | $    | 0.63              |  |      | $    | 0.52 |  |   | $    | 1.57 |  |   | $    | 1.49 | 
|                                                                                                         | Diluted |                    | $    | 0.61              |  |      | $    | 0.51 |  |   | $    | 1.53 |  |   | $    | 1.48 | 
|Pro forma earnings per common share:                                                                     |         |                    |      |                   |  |      |      |      |  |   |      |      |  |   |      |     
|                                                                                                         | Basic   |                    | $    | 0.64              |  |      | $    | 0.50 |  |   | $    | 1.58 |  |   | $    | 1.42 | 
|                                                                                                         | Diluted |                    | $    | 0.63              |  |      | $    | 0.50 |  |   | $    | 1.55 |  |   | $    | 1.41 | 

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

|                        |  |  |               | 
|----------------------- |  |  | ------------- | 
|Expected life in years  |  |  | 4  10 years  | 
|Risk-free interest rate |  |  | 1.47%  3.20% | 
|Volatility              |  |  | 0.42%  0.48% | 
|Dividend yield          |  |  | 0.002%        | 



|   |                     
|-- | --------------------
|3. | Capitalized Interest

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

|                                          |               |                    |      |                   |   |      |      |      |   |   |      |       |   |   |      |       |  
|----------------------------------------- | ------------- | ------------------ | ---- | ----------------- | - | ---- | ---- | ---- | - | - | ---- | ----- | - | - | ---- | ----- | -
|                                          |               |                    |      |                  
|                                          |               | Three Months Ended |      | Nine Months Ended
|                                          |               | September 30,      |      | September 30,    
|                                          |               |                    |      |                  
|                                          |               | 2004               |      | 2003              |   | 2004 |      | 2003
|                                          |               |                    |      |                   |   |      |      |     
|Interest capitalized, beginning of period |               | $                  | 35.7 |                   |   | $    | 21.3 |      |   | $ | 29.7 |       |   | $ | 11.6 |      
|Interest incurred                         |               |                    | 16.7 |                   |   |      | 14.5 |      |   |   | 48.4 |       |   |   | 40.1 |      
|Less interest included in:                |               |                    |      |                   |   |      |      |      |   |   |      |       |   |   |      |      
|                                          | Cost of sales |                    |      | (12.6             | ) |      |      | (9.5 | ) |   |      | (36.1 | ) |   |      | (25.0 | )
|                                          | Other         |                    |      | (1.4              | ) |      |      | (0.5 | ) |   |      | (3.6  | ) |   |      | (0.9  | )
|                                          |               |                    |      |                   |   |      |      |      |   |   |      |       |   |   |      |      
|Interest capitalized, end of period       |               | $                  | 38.4 |                   |   | $    | 25.8 |      |   | $ | 38.4 |       |   | $ | 25.8 |      
|                                          |               |                    |      |                   |   |      |      |      |   |   |      |       |   |   |      |      



|   |                                                
|-- | -----------------------------------------------
|4. | Consolidation of Variable Interest
    Entities

In the ordinary course of business we enter into
contracts to purchase homesites and land held for development.
At September 30, 2004 and December 31, 2003, we had
refundable and nonrefundable deposits aggregating
$108.7 million and $78.7 million, respectively,
included in inventory in the accompanying consolidated
statements of financial condition. Our liability for
nonperformance under such contracts is generally limited to
forfeiture of the related deposits.

7



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
No. 46, Consolidation of Variable Interest
Entities (Interpretation No. 46). Interpretation
No. 46 addresses consolidation by business enterprises of
variable interest entities (VIEs) in which an entity absorbs a
majority of the expected losses, receives a majority of the
entitys expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the
entity.

Generally, 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. In applying Interpretation No. 46 to our
homesite option contracts and other transactions with VIEs, we
make estimates regarding cash flows and other assumptions. We
believe that our critical assumptions underlying these estimates
are reasonable based on historical evidence and industry
practice. Based on our analysis of transactions entered into
with VIEs, we determined that we are the primary beneficiary of
certain of these homesite option contracts. Consequently,
Interpretation No. 46 requires us to consolidate the assets
(homesites) at their fair value, although (1) we have
no legal title to the assets, (2) our maximum exposure to
loss is limited to the deposits or letters of credits placed
with these entities, and (3) creditors, if any, of these
entities have no recourse against us. The effect of this
consolidation at September 30, 2004 was to increase
inventory by $79.8 million, excluding deposits of
$6.0 million, which had been previously recorded, with a
corresponding increase to obligations for inventory not
owned in the accompanying consolidated statement of
financial condition. Additionally, we have entered into
arrangements with VIEs to acquire homesites whereby our variable
interest is insignificant and, therefore, we have determined
that we are not the primary beneficiary and are not required to
consolidate the assets of such VIEs.

During the nine months ended September 30,
2004, we transferred title to certain parcels of land to
unrelated third parties for net proceeds of $33.7 million. In
connection with these transactions, we entered into options with
the purchasers to acquire fully developed homesites. As we have
retained a continuing involvement in these properties, in
accordance with SFAS No. 66, Accounting for the Sales
of Real Estate, we have accounted for these transactions
as financing arrangements. As a result, we have included the
corresponding liability of $33.7 million in
obligations for inventory not owned in the
accompanying consolidated statement of financial condition as of
September 30, 2004. As of September 30, 2004,
$113.2 million of inventory not owned relates to sales with
continuing involvement.



|   |         
|-- | --------
|5. | Goodwill

The change in goodwill for the nine months ended
September 30, 2004 is as follows (dollars in millions):

|                                            |  |   |       | 
|------------------------------------------- |  | - | ----- | 
|Balance at December 31, 2003                |  | $ | 100.1 | 
|Earn out consideration paid on acquisitions |  |   | 6.6   | 
|                                            |  |   |       | 
|Balance at September 30, 2004               |  | $ | 106.7 | 
|                                            |  |   |       | 



|   |           
|-- | ----------
|6. | Borrowings

On October 26, 2004, we entered into an
unsecured revolving credit facility replacing our existing
revolving credit facility. Our new credit facility increases the
amount we are permitted to borrow to the lesser of (i)
$600.0 million or (ii) our borrowing base (calculated
in accordance with the revolving credit facility agreement)
minus our outstanding senior debt. The new facility increases
the amount of the letter of credit subfacility to $300.0
million. In addition, we have the right to increase the size of
the facility to provide up to an additional $150.0 million
of revolving loans, subject to meeting certain requirements. The
revolving credit facility expires on October 26, 2008. Provided
that we are not in default under the credit facility, we have
the right to extend this term by additional one-year terms on
each anniversary date of the credit facility. Loans outstanding
under the facility may be base rate loans or Eurodollar loans,
at our election. The revolving credit facility requires us to
maintain specified financial ratios regarding leverage, interest
coverage, adjusted tangible

8



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

net worth and certain operational measurements.
The revolving credit facility also places certain restrictions
on, among other things, our ability to pay or make dividends or
other distributions, create or permit certain liens, make equity
investments in joint ventures, enter into transactions with
affiliates and merge or consolidate with other entities. Our
obligations under the revolving credit facility are guaranteed
by our significant domestic subsidiaries, other than our
mortgage and title subsidiaries (unrestricted subsidiaries).

On October 22, 2004, our mortgage subsidiary
entered into a new $100.0 million revolving warehouse line of
credit. This new warehouse line of credit is in addition to our
previously existing $90.0 million warehouse line of credit,
which expires on December 19, 2004. Our mortgage subsidiary
has the right to increase the size of the warehouse line of
credit to provide up to an additional $50.0 million,
subject to meeting certain requirements. The new warehouse line
of credit expires on October 22, 2005 and bears interest at
the 30 day LIBOR rate plus a margin of 1.25% to 3.0%
determined based upon the type of mortgage loans being financed.
The new warehouse line of credit is secured by funded mortgages,
which are pledged as collateral and requires our mortgage
subsidiary to maintain certain financial ratios and minimums.
The new warehouse line of credit also places certain
restrictions on, among other things, our mortgage
subsidiarys ability to incur additional debt, create
liens, pay or make dividends or other distributions, make equity
investments, enter into transactions with affiliates, and merge
or consolidate with other entities.

On March 17, 2004, we issued
$125.0 million of 7 1/2% Senior Subordinated Notes due
2011. The net proceeds of $123.3 million primarily were
used to repay amounts outstanding under our revolving credit
facility and warehouse line of credit.

Our outstanding senior notes and senior
subordinated notes have call features that allow redemption, at
a premium, prior to maturity.



|   |                              
|-- | -----------------------------
|7. | 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 condition 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.

During the nine months ended September 30,
2004 and 2003, changes in our warranty accrual consisted of
(dollars in millions):

|                                                                         |  |      |      |      |  |   |      |  
|------------------------------------------------------------------------ |  | ---- | ---- | ---- |  | - | ---- | -
|                                                                         |  | 2004 |      | 2003
|                                                                         |  |      |      |     
|Accrued warranty costs at January 1                                      |  | $    | 5.2  |      |  | $ | 4.8  |  
|Estimated liability recorded for warranties
    issued during the period |  |      | 10.4 |      |  |   | 8.5  |  
|Estimated liability recorded for pre-existing
    warranties             |  |      | (3.6 | )    |  |   | (1.9 | )
|Warranty work performed                                                  |  |      | (5.7 | )    |  |   | (6.9 | )
|                                                                         |  |      |      |      |  |   |      |  
|Accrued warranty costs at September 30                                   |  | $    | 6.3  |      |  | $ | 4.5  |  
|                                                                         |  |      |      |      |  |   |      |  



|   |                                                      
|-- | -----------------------------------------------------
|8. | Stockholders Equity and Stock-Based
    Compensation

During 2001, we adopted the Technical Olympic
USA, Inc. 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
6,000,000. At September 30, 2004, 5,489,204 options and
26,290

9



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares of restricted stock had been granted. Of
the stock options granted, 1,253,662 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 months ended September 30, 2004, we
recorded compensation expense of $2.4 million and
$4.0 million, respectively, related to these accelerated
vesting options, as compared to $0.5 million and
$0.9 million, respectively, during the three and nine
months ended September 30, 2003.



|   |                                 
|-- | --------------------------------
|9. | Summarized Financial Information

Our outstanding senior notes and senior
subordinated notes are fully and unconditionally guaranteed, on
a joint and several basis, by the Guarantor Subsidiaries, which
are all of the Companys direct and indirect subsidiaries,
other than our mortgage and title operations subsidiaries and
certain other immaterial subsidiaries (the Non-guarantor
Subsidiaries). Each of the Guarantor Subsidiaries is
wholly-owned. In lieu of providing separate audited financial
statements for the Guarantor Subsidiaries, consolidated
condensed financial statements are presented below. Separate
financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented because management has
determined that they are not material to investors.

10



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL
CONDITION

September 30, 2004


|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|-------------------------------------------- |  | --------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ----- | ----- |  |  | - | ------ | - |  | - | ------- | 
|                                             |  | Technical |         |              |  | Non-         |         |              |  |      
|                                             |  | Olympic   |         | Guarantor    |  | guarantor    |         | Intercompany |  |      
|                                             |  | USA, Inc. |         | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Total
|                                             |  |           |         |              |  |              |         |              |  |      
|ASSETS                                       |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|HOMEBUILDING:                                |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Cash and cash equivalents                    |  | $         | (3.4    | )            |  | $            | 50.2    |              |  | $     |      |  |  | $ |       |   |  | $ | 46.8    | 
|Inventory                                    |  |           |        |              |  |              | 1,386.2 |              |  |       | 9.3   |  |  |   |       |   |  |   | 1,395.5 | 
|Property and equipment, net                  |  |           | 7.1     |              |  |              | 21.7    |              |  |       |      |  |  |   |       |   |  |   | 28.8    | 
|Investments in unconsolidated joint ventures |  |           |        |              |  |              | 30.6    |              |  |       |      |  |  |   |       |   |  |   | 30.6    | 
|Advances to / investments in subsidiaries    |  |           | 1,286.4 |              |  |              | (561.2  | )            |  |       | 0.3   |  |  |   | (725.5 | ) |  |   |        | 
|Other assets                                 |  |           | 23.5    |              |  |              | 33.0    |              |  |       |      |  |  |   |       |   |  |   | 56.5    | 
|Goodwill                                     |  |           |        |              |  |              | 106.7   |              |  |       |      |  |  |   |       |   |  |   | 106.7   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           | 1,313.6 |              |  |              | 1,067.2 |              |  |       | 9.6   |  |  |   | (725.5 | ) |  |   | 1,664.9 | 
|FINANCIAL SERVICES:                          |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Cash and cash equivalents                    |  |           |        |              |  |              |        |              |  |       | 87.3  |  |  |   |       |   |  |   | 87.3    | 
|Mortgage loans held for sale                 |  |           |        |              |  |              |        |              |  |       | 70.2  |  |  |   |       |   |  |   | 70.2    | 
|Other assets                                 |  |           |        |              |  |              |        |              |  |       | 10.0  |  |  |   |       |   |  |   | 10.0    | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           |        |              |  |              |        |              |  |       | 167.5 |  |  |   |       |   |  |   | 167.5   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Total assets                                 |  | $         | 1,313.6 |              |  | $            | 1,067.2 |              |  | $     | 177.1 |  |  | $ | (725.5 | ) |  | $ | 1,832.4 | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY         |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|HOMEBUILDING:                                |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Accounts payable and other liabilities       |  | $         | 39.2    |              |  | $            | 99.7    |              |  | $     | 1.6   |  |  | $ |       |   |  | $ | 140.5   | 
|Customer deposits                            |  |           |        |              |  |              | 69.2    |              |  |       |      |  |  |   |       |   |  |   | 69.2    | 
|Obligations for inventory not owned          |  |           |        |              |  |              | 193.0   |              |  |       |      |  |  |   |       |   |  |   | 193.0   | 
|Notes payable                                |  |           | 605.6   |              |  |              |        |              |  |       |      |  |  |   |       |   |  |   | 605.6   | 
|Bank borrowings                              |  |           | 58.0    |              |  |              | 5.3     |              |  |       | 4.3   |  |  |   |       |   |  |   | 67.6    | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           | 702.8   |              |  |              | 367.2   |              |  |       | 5.9   |  |  |   |       |   |  |   | 1,075.9 | 
|FINANCIAL SERVICES:                          |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Accounts payable and other liabilities       |  |           |        |              |  |              |        |              |  |       | 87.6  |  |  |   |       |   |  |   | 87.6    | 
|Bank borrowings                              |  |           |        |              |  |              |        |              |  |       | 58.1  |  |  |   |       |   |  |   | 58.1    | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           |        |              |  |              |        |              |  |       | 145.7 |  |  |   |       |   |  |   | 145.7   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Total liabilities                            |  |           | 702.8   |              |  |              | 367.2   |              |  |       | 151.6 |  |  |   |       |   |  |   | 1,221.6 | 
|Stockholders equity                         |  |           | 610.8   |              |  |              | 700.0   |              |  |       | 25.5  |  |  |   | (725.5 | ) |  |   | 610.8   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Total liabilities and stockholders equity   |  | $         | 1,313.6 |              |  | $            | 1,067.2 |              |  | $     | 177.1 |  |  | $ | (725.5 | ) |  | $ | 1,832.4 | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 

11



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF FINANCIAL
CONDITION

December 31, 2003


|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|-------------------------------------------- |  | --------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ----- | ----- |  |  | - | ------ | - |  | - | ------- | 
|                                             |  | Technical |         |              |  | Non-         |         |              |  |      
|                                             |  | Olympic   |         | Guarantor    |  | guarantor    |         | Intercompany |  |      
|                                             |  | USA, Inc. |         | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Total
|                                             |  |           |         |              |  |              |         |              |  |      
|ASSETS                                       |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|HOMEBUILDING:                                |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Cash and cash equivalents                    |  | $         | 47.5    |              |  | $            | 47.4    |              |  | $     |      |  |  | $ |       |   |  | $ | 94.9    | 
|Inventory                                    |  |           |        |              |  |              | 1,168.9 |              |  |       | 4.0   |  |  |   |       |   |  |   | 1,172.9 | 
|Property and equipment, net                  |  |           | 7.8     |              |  |              | 15.9    |              |  |       |      |  |  |   |       |   |  |   | 23.7    | 
|Investments in unconsolidated joint ventures |  |           |        |              |  |              | 10.5    |              |  |       |      |  |  |   |       |   |  |   | 10.5    | 
|Advances to / investments in subsidiaries    |  |           | 946.2   |              |  |              | (302.1  | )            |  |       | 22.1  |  |  |   | (666.2 | ) |  |   |        | 
|Other assets                                 |  |           | 68.6    |              |  |              | 28.1    |              |  |       |      |  |  |   | (53.0  | ) |  |   | 43.7    | 
|Goodwill                                     |  |           |        |              |  |              | 100.1   |              |  |       |      |  |  |   |       |   |  |   | 100.1   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           | 1,070.1 |              |  |              | 1,068.8 |              |  |       | 26.1  |  |  |   | (719.2 | ) |  |   | 1,445.8 | 
|FINANCIAL SERVICES:                          |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Cash and cash equivalents                    |  |           |        |              |  |              |        |              |  |       | 76.5  |  |  |   |       |   |  |   | 76.5    | 
|Mortgage loans held for sale                 |  |           |        |              |  |              |        |              |  |       | 75.2  |  |  |   |       |   |  |   | 75.2    | 
|Other assets                                 |  |           |        |              |  |              |        |              |  |       | 7.5   |  |  |   |       |   |  |   | 7.5     | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           |        |              |  |              |        |              |  |       | 159.2 |  |  |   |       |   |  |   | 159.2   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Total assets                                 |  | $         | 1,070.1 |              |  | $            | 1,068.8 |              |  | $     | 185.3 |  |  | $ | (719.2 | ) |  | $ | 1,605.0 | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY         |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|HOMEBUILDING:                                |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Accounts payable and other liabilities       |  | $         | 42.5    |              |  | $            | 159.4   |              |  | $     | 0.4   |  |  | $ | (53.0  | ) |  | $ | 149.3   | 
|Customer deposits                            |  |           |        |              |  |              | 35.5    |              |  |       |      |  |  |   |       |   |  |   | 35.5    | 
|Obligations for inventory not owned          |  |           |        |              |  |              | 246.2   |              |  |       |      |  |  |   |       |   |  |   | 246.2   | 
|Notes payable                                |  |           | 480.0   |              |  |              |        |              |  |       |      |  |  |   |       |   |  |   | 480.0   | 
|Bank borrowings                              |  |           | 10.0    |              |  |              | 7.1     |              |  |       | 0.8   |  |  |   |       |   |  |   | 17.9    | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           | 532.5   |              |  |              | 448.2   |              |  |       | 1.2   |  |  |   | (53.0  | ) |  |   | 928.9   | 
|FINANCIAL SERVICES:                          |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Accounts payable and other liabilities       |  |           |        |              |  |              |        |              |  |       | 75.3  |  |  |   |       |   |  |   | 75.3    | 
|Bank borrowings                              |  |           |        |              |  |              |        |              |  |       | 63.2  |  |  |   |       |   |  |   | 63.2    | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|                                             |  |           |        |              |  |              |        |              |  |       | 138.5 |  |  |   |       |   |  |   | 138.5   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Total liabilities                            |  |           | 532.5   |              |  |              | 448.2   |              |  |       | 139.7 |  |  |   | (53.0  | ) |  |   | 1,067.4 | 
|Stockholders equity                         |  |           | 537.6   |              |  |              | 620.6   |              |  |       | 45.6  |  |  |   | (666.2 | ) |  |   | 537.6   | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 
|Total liabilities and stockholders equity   |  | $         | 1,070.1 |              |  | $            | 1,068.8 |              |  | $     | 185.3 |  |  | $ | (719.2 | ) |  | $ | 1,605.0 | 
|                                             |  |           |         |              |  |              |         |              |  |       |       |  |  |   |        |   |  |   |         | 

12



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30,
2004

|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | --------- | ----- | ------------ |  | ------------ | ----- | ------------ |  | ----- | ---- |  |  | - | ----- | - |  | - | ----- | -
|                                             |  | Technical |       |              |  |              |       |              |  |      
|                                             |  | Olympic   |       |              |  | Non-         |       |              |  |      
|                                             |  | USA,      |       | Guarantor    |  | guarantor    |       | Intercompany |  |      
|                                             |  | Inc.      |       | Subsidiaries |  | Subsidiaries |       | Eliminations |  | Total
|                                             |  |           |       |              |  |              |       |              |  |      
|HOMEBUILDING:                                |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Revenues                                     |  | $         |      |              |  | $            | 506.5 |              |  | $     | 0.7  |  |  | $ |      |   |  | $ | 507.2 |  
|Cost of Sales                                |  |           |      |              |  |              | 404.8 |              |  |       | 0.6  |  |  |   |      |   |  |   | 405.4 |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Gross Profit                                 |  |           |      |              |  |              | 101.7 |              |  |       | 0.1  |  |  |   |      |   |  |   | 101.8 |  
|Selling, general and administrative expenses |  |           | (8.1  | )            |  |              | 71.1  |              |  |       |     |  |  |   | (1.8  | ) |  |   | 61.2  |  
|Other (income) expense, net                  |  |           | (13.3 | )            |  |              | (4.0  | )            |  |       |     |  |  |   | 14.4  |   |  |   | (2.9  | )
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Homebuilding pretax income                   |  |           | 21.4  |              |  |              | 34.6  |              |  |       | 0.1  |  |  |   | (12.6 | ) |  |   | 43.5  |  
|FINANCIAL SERVICES:                          |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Revenues                                     |  |           |      |              |  |              |      |              |  |       | 11.9 |  |  |   | (1.8  | ) |  |   | 10.1  |  
|Expenses                                     |  |           |      |              |  |              |      |              |  |       | 10.5 |  |  |   | (1.0  | ) |  |   | 9.5   |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Financial Services pretax income             |  |           |      |              |  |              |      |              |  |       | 1.4  |  |  |   | (0.8  | ) |  |   | 0.6   |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Income before income taxes                   |  |           | 21.4  |              |  |              | 34.6  |              |  |       | 1.5  |  |  |   | (13.4 | ) |  |   | 44.1  |  
|Income taxes                                 |  |           | 3.4   |              |  |              | 12.0  |              |  |       | 0.6  |  |  |   |      |   |  |   | 16.0  |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Net income                                   |  | $         | 18.0  |              |  | $            | 22.6  |              |  | $     | 0.9  |  |  | $ | (13.4 | ) |  | $ | 28.1  |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  

CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30,
2003

|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | --------- | ----- | ------------ |  | ------------ | ----- | ------------ |  | ----- | ---- |  |  | - | ----- | - |  | - | ----- | -
|                                             |  | Technical |       |              |  | Non-         |       |              |  |      
|                                             |  | Olympic   |       | Guarantor    |  | guarantor    |       | Intercompany |  |      
|                                             |  | USA, Inc. |       | Subsidiaries |  | Subsidiaries |       | Eliminations |  | Total
|                                             |  |           |       |              |  |              |       |              |  |      
|HOMEBUILDING:                                |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Revenues                                     |  | $         |      |              |  | $            | 430.4 |              |  | $     |     |  |  | $ |      |   |  | $ | 430.4 |  
|Cost of Sales                                |  |           |      |              |  |              | 343.9 |              |  |       |     |  |  |   |      |   |  |   | 343.9 |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Gross Profit                                 |  |           |      |              |  |              | 86.5  |              |  |       |     |  |  |   |      |   |  |   | 86.5  |  
|Selling, general and administrative expenses |  |           | 12.3  |              |  |              | 47.3  |              |  |       |     |  |  |   | (1.5  | ) |  |   | 58.1  |  
|Other (income) expense, net                  |  |           | (29.6 | )            |  |              | (3.6  | )            |  |       |     |  |  |   | 32.5  |   |  |   | (0.7  | )
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Homebuilding pretax income                   |  |           | 17.3  |              |  |              | 42.8  |              |  |       |     |  |  |   | (31.0 | ) |  |   | 29.1  |  
|FINANCIAL SERVICES:                          |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Revenues                                     |  |           |      |              |  |              |      |              |  |       | 14.4 |  |  |   | (1.5  | ) |  |   | 12.9  |  
|Expenses                                     |  |           |      |              |  |              |      |              |  |       | 11.3 |  |  |   | (3.2  | ) |  |   | 8.1   |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Financial Services pretax income             |  |           |      |              |  |              |      |              |  |       | 3.1  |  |  |   | 1.7   |   |  |   | 4.8   |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Income before income taxes                   |  |           | 17.3  |              |  |              | 42.8  |              |  |       | 3.1  |  |  |   | (29.3 | ) |  |   | 33.9  |  
|Income taxes                                 |  |           | (4.2  | )            |  |              | 15.1  |              |  |       | 1.5  |  |  |   |      |   |  |   | 12.4  |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  
|Net income                                   |  | $         | 21.5  |              |  | $            | 27.7  |              |  | $     | 1.6  |  |  | $ | (29.3 | ) |  | $ | 21.5  |  
|                                             |  |           |       |              |  |              |       |              |  |       |      |  |  |   |       |   |  |   |       |  

13



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30,
2004

|                                             |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|-------------------------------------------- |  | --------- | ----- | ------------ |  | ------------ | ------- | ------------ |  | ----- | ---- |  |  | - | ----- | - |  | - | ------- | -
|                                             |  | Technical |       |              |  | Non-         |         |              |  |      
|                                             |  | Olympic   |       | Guarantor    |  | guarantor    |         | Intercompany |  |      
|                                             |  | USA, Inc. |       | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Total
|                                             |  |           |       |              |  |              |         |              |  |      
|HOMEBUILDING:                                |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|Revenues                                     |  | $         |      |              |  | $            | 1,429.5 |              |  | $     | 0.8  |  |  | $ |      |   |  | $ | 1,430.3 |  
|Cost of Sales                                |  |           | (0.1  | )            |  |              | 1,151.6 |              |  |       | 0.7  |  |  |   |      |   |  |   | 1,152.2 |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|Gross Profit                                 |  |           | 0.1   |              |  |              | 277.9   |              |  |       | 0.1  |  |  |   |      |   |  |   | 278.1   |  
|Selling, general and administrative expenses |  |           | (20.6 | )            |  |              | 202.9   |              |  |       |     |  |  |   | (5.4  | ) |  |   | 176.9   |  
|Other (income) expense, net                  |  |           | (59.7 | )            |  |              | (6.7    | )            |  |       |     |  |  |   | 63.0  |   |  |   | (3.4    | )
|                                             |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|Homebuilding pretax income                   |  |           | 80.4  |              |  |              | 81.7    |              |  |       | 0.1  |  |  |   | (57.6 | ) |  |   | 104.6   |  
|FINANCIAL SERVICES:                          |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|Revenues                                     |  |           |      |              |  |              |        |              |  |       | 37.1 |  |  |   | (5.4  | ) |  |   | 31.7    |  
|Expenses                                     |  |           |      |              |  |              |        |              |  |       | 29.0 |  |  |   | (3.7  | ) |  |   | 25.3    |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|Financial Services pretax income             |  |           |      |              |  |              |        |              |  |       | 8.1  |  |  |   | (1.7  | ) |  |   | 6.4     |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|Income before income taxes                   |  |           | 80.4  |              |  |              | 81.7    |              |  |       | 8.2  |  |  |   | (59.3 | ) |  |   | 111.0   |  
|Income taxes                                 |  |           | 10.5  |              |  |              | 27.1    |              |  |       | 3.2  |  |  |   |      |   |  |   | 40.8    |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  
|Net income                                   |  | $         | 69.9  |              |  | $            | 54.6    |              |  | $     | 5.0  |  |  | $ | (59.3 | ) |  | $ | 70.2    |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |  |  |   |       |   |  |   |         |  

CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30,
2003

|                                             |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|-------------------------------------------- |  | --------- | ----- | ------------ |  | ------------ | ------- | ------------ |  | ----- | ---- | - |  | - | ----- | - |  | - | ------- | -
|                                             |  | Technical |       |              |  | Non-         |         |              |  |      
|                                             |  | Olympic   |       | Guarantor    |  | guarantor    |         | Intercompany |  |      
|                                             |  | USA, Inc. |       | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Total
|                                             |  |           |       |              |  |              |         |              |  |      
|HOMEBUILDING:                                |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|Revenues                                     |  | $         |      |              |  | $            | 1,159.3 |              |  | $     |     |   |  | $ |      |   |  | $ | 1,159.3 |  
|Cost of Sales                                |  |           |      |              |  |              | 923.7   |              |  |       |     |   |  |   |      |   |  |   | 923.7   |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|Gross Profit                                 |  |           |      |              |  |              | 235.6   |              |  |       |     |   |  |   |      |   |  |   | 235.6   |  
|Selling, general and administrative expenses |  |           | 26.7  |              |  |              | 131.2   |              |  |       |     |   |  |   | (4.0  | ) |  |   | 153.9   |  
|Other (income) expense, net                  |  |           | (79.3 | )            |  |              | (7.4    | )            |  |       | 0.2  |   |  |   | 83.8  |   |  |   | (2.7    | )
|                                             |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|Homebuilding pretax income                   |  |           | 52.6  |              |  |              | 111.8   |              |  |       | (0.2 | ) |  |   | (79.8 | ) |  |   | 84.4    |  
|FINANCIAL SERVICES:                          |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|Revenues                                     |  |           |      |              |  |              |        |              |  |       | 39.6 |   |  |   | (4.0  | ) |  |   | 35.6    |  
|Expenses                                     |  |           |      |              |  |              |        |              |  |       | 27.9 |   |  |   | (6.2  | ) |  |   | 21.7    |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|Financial Services pretax income             |  |           |      |              |  |              |        |              |  |       | 11.7 |   |  |   | 2.2   |   |  |   | 13.9    |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|Income before income taxes                   |  |           | 52.6  |              |  |              | 111.8   |              |  |       | 11.5 |   |  |   | (77.6 | ) |  |   | 98.3    |  
|Income taxes                                 |  |           | (9.7  | )            |  |              | 40.8    |              |  |       | 4.8  |   |  |   |      |   |  |   | 35.9    |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  
|Net income                                   |  | $         | 62.3  |              |  | $            | 71.0    |              |  | $     | 6.7  |   |  | $ | (77.6 | ) |  | $ | 62.4    |  
|                                             |  |           |       |              |  |              |         |              |  |       |      |   |  |   |       |   |  |   |         |  

14



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##### Table of Contents



TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF CASH
FLOWS

Nine Months Ended September 30,
2004

|                                                                                                |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |        |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------- | --------- | ------ | ------------ | - | ------------ | ------ | ------------ | - | ----- | ---- | ----- | - | - | ----- | ----- | - | - | ------ | ------ | -
|                                                                                                |                                              | Technical |        |              |   | Non-         |        |              |   |      
|                                                                                                |                                              | Olympic   |        | Guarantor    |   | guarantor    |        | Intercompany |   |      
|                                                                                                |                                              | USA, Inc. |        | Subsidiaries |   | Subsidiaries |        | Eliminations |   | Total
|                                                                                                |                                              |           |        |              |   |              |        |              |   |      
|Cash Flows from Operating Activities:                                                           |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Net income                                                                                      |                                              | $         | 69.9   |              |   | $            | 54.6   |              |   | $     | 5.0  |       |   | $ | (59.3 | )     |   | $ | 70.2   |       
|Adjustments to reconcile net income to net cash
    (used in) provided by operating activities: |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|                                                                                                | Depreciation and amortization                |           |        | 2.2          |   |              |        | 7.3          |   |       |      |      |   |   |       |      |   |   |        | 9.5    |  
|                                                                                                | Non-cash compensation expense                |           |        | 4.0          |   |              |        |             |   |       |      |      |   |   |       |      |   |   |        | 4.0    |  
|                                                                                                | Changes in operating assets and liabilities: |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |        |  
|                                                                                                | Restricted cash                              |           |        | 1.5          |   |              |        | 17.5         |   |       |      | (13.9 | ) |   |       |      |   |   |        | 5.1    |  
|                                                                                                | Inventory                                    |           |        |             |   |              |        | (261.4       | ) |       |      | (5.2  | ) |   |       |      |   |   |        | (266.6 | )
|                                                                                                | Other assets                                 |           |        | 47.2         |   |              |        | (4.9         | ) |       |      | (2.5  | ) |   |       | (53.0 | ) |   |        | (13.2  | )
|                                                                                                | Accounts payable and other liabilities       |           |        | (3.3         | ) |              |        | (59.7        | ) |       |      | 13.5  |   |   |       | 53.0  |   |   |        | 3.5    |  
|                                                                                                | Customer deposits                            |           |        |             |   |              |        | 33.7         |   |       |      |      |   |   |       |      |   |   |        | 33.7   |  
|                                                                                                | Mortgage loans held for sale                 |           |        |             |   |              |        |             |   |       |      | 5.0   |   |   |       |      |   |   |        | 5.0    |  
|                                                                                                |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Net cash used in operating activities                                                           |                                              |           | 121.5  |              |   |              | (212.9 | )            |   |       | 1.9  |       |   |   | (59.3 | )     |   |   | (148.8 | )     
|Cash Flows from Investing Activities:                                                           |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Additional consideration paid for acquisitions                                                  |                                              |           |       |              |   |              | (6.6   | )            |   |       |     |       |   |   |      |       |   |   | (6.6   | )     
|Investments in unconsolidated joint ventures                                                    |                                              |           |       |              |   |              | (20.1  | )            |   |       |     |       |   |   |      |       |   |   | (20.1  | )     
|Net additions to property and equipment                                                         |                                              |           | (1.5   | )            |   |              | (13.2  | )            |   |       |     |       |   |   |      |       |   |   | (14.7  | )     
|                                                                                                |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Net cash used in investing activities                                                           |                                              |           | (1.5   | )            |   |              | (39.9  | )            |   |       |     |       |   |   |      |       |   |   | (41.4  | )     
|Cash Flows from Financing Activities:                                                           |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Proceeds from notes offering                                                                    |                                              |           | 125.0  |              |   |              |       |              |   |       |     |       |   |   |      |       |   |   | 125.0  |       
|Payments for deferred financing costs                                                           |                                              |           | (2.1   | )            |   |              |       |              |   |       |     |       |   |   |      |       |   |   | (2.1   | )     
|Net repayments on (borrowings from) bank
    borrowings                                         |                                              |           | 48.0   |              |   |              | (1.8   | )            |   |       | (1.6 | )     |   |   |      |       |   |   | 44.6   |       
|Net payments on obligations for inventory not
    owned                                         |                                              |           |       |              |   |              | (8.6   | )            |   |       |     |       |   |   |      |       |   |   | (8.6   | )     
|Increase (decrease) in intercompany transactions                                                |                                              |           | (339.4 | )            |   |              | 283.5  |              |   |       | (3.4 | )     |   |   | 59.3  |       |   |   |       |       
|Other                                                                                           |                                              |           | (0.9   | )            |   |              |       |              |   |       |     |       |   |   |      |       |   |   | (0.9   | )     
|                                                                                                |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Net cash provided by financing activities                                                       |                                              |           | (169.4 | )            |   |              | 273.1  |              |   |       | (5.0 | )     |   |   | 59.3  |       |   |   | 158.0  |       
|                                                                                                |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Increase (decrease) in cash and cash
    equivalents                                            |                                              |           | (49.4  | )            |   |              | 20.3   |              |   |       | (3.1 | )     |   |   |      |       |   |   | (32.2  | )     
|Unrestricted cash at beginning of period                                                        |                                              |           | 46.0   |              |   |              | 27.7   |              |   |       | 3.1  |       |   |   |      |       |   |   | 76.8   |       
|                                                                                                |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       
|Unrestricted cash at end of period                                                              |                                              | $         | (3.4   | )            |   | $            | 48.0   |              |   | $     |     |       |   | $ |      |       |   | $ | 44.6   |       
|                                                                                                |                                              |           |        |              |   |              |        |              |   |       |      |       |   |   |       |       |   |   |        |       

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TECHNICAL OLYMPIC USA, INC. AND
SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF CASH
FLOWS

Nine Months Ended September 30,
2003


|                                                                                                |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |        |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------- | --------- | ------ | ------------ | - | ------------ | ----- | ------------ | - | ----- | ----- | ----- | - | - | ----- | - |  | - | ----- | ------ | -
|                                                                                                |                                              | Technical |        |              |   | Non-         |       |              |   |      
|                                                                                                |                                              | Olympic   |        | Guarantor    |   | guarantor    |       | Intercompany |   |      
|                                                                                                |                                              | USA, Inc. |        | Subsidiaries |   | Subsidiaries |       | Eliminations |   | Total
|                                                                                                |                                              |           |        |              |   |              |       |              |   |      
|Cash Flows from Operating Activities:                                                           |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Net income                                                                                      |                                              | $         | 62.3   |              |   | $            | 71.0  |              |   | $     | 6.7   |       |   | $ | (77.6 | ) |  | $ | 62.4  |       
|Adjustments to reconcile net income to net cash
    (used in) provided by operating activities: |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|                                                                                                | Depreciation and amortization                |           |        | 1.1          |   |              |       | 5.0          |   |       |       |      |   |   |       |  |  |   |       | 6.1    |  
|                                                                                                | Non-cash compensation expense                |           |        | 1.1          |   |              |       |             |   |       |       |      |   |   |       |  |  |   |       | 1.1    |  
|                                                                                                | Changes in operating assets and liabilities: |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |        |  
|                                                                                                | Restricted cash                              |           |        | 4.1          |   |              |       | 5.6          |   |       |       | (14.9 | ) |   |       |  |  |   |       | (5.2   | )
|                                                                                                | Inventory                                    |           |        | 0.5          |   |              |       | (133.2       | ) |       |       | (1.0  | ) |   |       |  |  |   |       | (133.7 | )
|                                                                                                | Other assets                                 |           |        | 1.1          |   |              |       | (7.4         | ) |       |       | (0.3  | ) |   |       |  |  |   |       | (6.6   | )
|                                                                                                | Accounts payable and other liabilities       |           |        | (30.8        | ) |              |       | 60.2         |   |       |       | 17.3  |   |   |       |  |  |   |       | 46.7   |  
|                                                                                                | Customer deposits                            |           |        |             |   |              |       | 7.8          |   |       |       |      |   |   |       |  |  |   |       | 7.8    |  
|                                                                                                | Mortgage loans held for sale                 |           |        |             |   |              |       |             |   |       |       | 7.9   |   |   |       |  |  |   |       | 7.9    |  
|                                                                                                |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Net cash used in operating activities                                                           |                                              |           | 39.4   |              |   |              | 9.0   |              |   |       | 15.7  |       |   |   | (77.6 | ) |  |   | (13.5 | )     
|Cash Flows from Investing Activities:                                                           |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Amounts paid for acquisitions, net of cash
    acquired                                         |                                              |           |       |              |   |              | (59.3 | )            |   |       |      |       |   |   |      |   |  |   | (59.3 | )     
|Additional consideration paid for acquisitions                                                  |                                              |           |       |              |   |              | (18.2 | )            |   |       |      |       |   |   |      |   |  |   | (18.2 | )     
|Net additions to property and equipment                                                         |                                              |           | (5.1   | )            |   |              | (8.1  | )            |   |       |      |       |   |   |      |   |  |   | (13.2 | )     
|                                                                                                |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Net cash used in investing activities                                                           |                                              |           | (5.1   | )            |   |              | (85.6 | )            |   |       |      |       |   |   |      |   |  |   | (90.7 | )     
|Cash Flows from Financing Activities:                                                           |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Proceeds from notes offering                                                                    |                                              |           | 129.3  |              |   |              |      |              |   |       |      |       |   |   |      |   |  |   | 129.3 |       
|Payments for deferred financing costs                                                           |                                              |           | (5.5   | )            |   |              |      |              |   |       |      |       |   |   |      |   |  |   | (5.5  | )     
|Net repayments on (borrowings from) bank
    borrowings                                         |                                              |           | (9.9   | )            |   |              | (2.3  | )            |   |       | (4.9  | )     |   |   |      |   |  |   | (17.1 | )     
|Net payments on obligations for inventory not
    owned                                         |                                              |           |       |              |   |              | (4.3  | )            |   |       |      |       |   |   |      |   |  |   | (4.3  | )     
|Increase (decrease) in intercompany transactions                                                |                                              |           | (174.7 | )            |   |              | 108.9 |              |   |       | (11.8 | )     |   |   | 77.6  |   |  |   |      |       
|Other                                                                                           |                                              |           |       |              |   |              | (5.6  | )            |   |       |      |       |   |   |      |   |  |   | (5.6  | )     
|                                                                                                |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Net cash provided by financing activities                                                       |                                              |           | (60.8  | )            |   |              | 96.7  |              |   |       | (16.7 | )     |   |   | 77.6  |   |  |   | 96.8  |       
|                                                                                                |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Increase (decrease) in cash and cash
    equivalents                                            |                                              |           | (26.5  | )            |   |              | 20.1  |              |   |       | (1.0  | )     |   |   |      |   |  |   | (7.4  | )     
|Unrestricted cash at beginning of period                                                        |                                              |           | 37.5   |              |   |              | 7.3   |              |   |       | 4.4   |       |   |   |      |   |  |   | 49.2  |       
|                                                                                                |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       
|Unrestricted cash at end of period                                                              |                                              | $         | 11.0   |              |   | $            | 27.4  |              |   | $     | 3.4   |       |   | $ |      |   |  | $ | 41.8  |       
|                                                                                                |                                              |           |        |              |   |              |       |              |   |       |       |       |   |   |       |   |  |   |       |       

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

Executive Summary

We generate revenues from our homebuilding
operations (Homebuilding) and financial services
operations (Financial Services) which comprise our
operating segments. Through our Homebuilding operations we
design, build and market high-quality detached single-family
residences, town homes and condominiums in 15 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           |  |  |  | Central Colorado | 
|        | Orlando           |              |  |       | Delaware                        |      |  |  | Dallas/Ft. Worth |  |  |  | Las Vegas        | 
|        | Southeast Florida |              |  |       | Nashville                       |      |  |  | Houston          |  |  |  | Phoenix          | 
|        | Southwest Florida |              |  |       | Northern Virginia               |      |  |  | San Antonio      |  |  |  |                  | 

We build homes for inventory and on a pre-sold
basis. At September 30, 2004, we owned 4,294 homes
completed or under construction, of which approximately 26% were
unsold. At September 30, 2004, we had 222 completed unsold
homes in our inventory, of which approximately 38% had been
completed for more than 90 days. We are actively working to
reduce our speculative home inventory to reduce carrying costs
and to increase our available capital.

Once a sales contract with a buyer has been
approved, we classify the transaction as a new sales
order and include the home in backlog. Such
sales orders are usually subject to certain contingencies such
as the buyers ability to qualify for financing. At
closing, title passes to the buyer and a home is considered to
be delivered and is removed from backlog. Revenue
and cost of sales are recognized at the delivery of the home,
land or lot when title is transferred to the buyer. We estimate
that the average period between the execution of a sales
contract for a home and closing is approximately six to twelve
months for presold homes. The principal expenses of our
Homebuilding operations are (i) cost of sales and
(ii) selling, general and administrative
(SG&A) expenses. Costs of home sales include
land and land development costs, home construction costs,
previously capitalized indirect costs, capitalized interest and
estimated warranty costs. SG&A expenses for our Homebuilding
operations include administrative costs, advertising expenses,
on-site marketing expenses, commission costs, and closing costs.
Sales commissions are included in selling, general and
administrative costs when the related revenue is recognized.

We were actively selling homes in 246 communities
and 206 communities at September 30, 2004 and 2003,
respectively. Additionally, we are actively selling homes in 6
communities through joint ventures. For the three months ended
September 30, 2004, total revenues increased 17%, net
income increased 30%, net sales orders increased 27% and home
deliveries increased 14% as compared to the same period in the
prior year. For the nine months ended September 30, 2004,
total revenues increased 23%, net income increased 12%, net
sales orders increased 48% and home deliveries increased 15% as
compared to the same period in the prior year. Sales value in
backlog at September 30, 2004 as compared to
September 30, 2003 increased by 92% to $1.7 billion.
Our home cancellation rate was approximately 16% for the quarter
ended September 30, 2004 and 14% for the nine months ended
September 30, 2004.

We have entered, and expect to continue to enter,
into joint ventures that acquire and develop land for our
Homebuilding operations and/or joint ventures that also build
and market homes. Through joint ventures, we mitigate and share
the risk associated with land ownership and development and
extend our capital resources. At September 30, 2004, our
investment in these joint ventures was $30.6 million. In
addition, we seek to use option contracts to acquire land
whenever feasible. Option contracts allow us to control
significant homesite positions with minimal capital investment
and substantially reduce the risks associated with land
ownership and development. At September 30, 2004, we
controlled 50,100 homesites of which 75% were controlled through
various option arrangements.

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In September 2004, we acquired certain assets of
Gilligan Homes which included control of approximately 1,100
homesites. Gilligan Homes is a regional builder with operations
in Maryland, Southern Pennsylvania and Delaware.

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

Critical Accounting Policies

There have been no significant changes to our
critical accounting policies during the nine months ended
September 30, 2004, as compared to those we disclosed in
Managements Discussion and Analysis of Financial Condition
and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2003.

Results of Operations 
Consolidated



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Three Months Ended September 30, 2004
    Compared to Three Months Ended September 30, 2003

Total revenues increased 17% to
$517.3 million for the three months ended
September 30, 2004, from $443.3 million for the
comparable period in 2003. This increase is attributable to an
increase in Homebuilding revenues of 18%, offset by a decrease
in Financial Services revenues of 22%. Delays related to the
hurricanes in Florida caused our deliveries to lag behind our
expectations. Additionally, we expect the labor and supply
shortages caused by the hurricanes to persist for some time.

Income before income taxes increased by 30% to
$44.1 million for the three months ended September 30,
2004, from $33.9 million for the comparable period in 2003.
This increase is attributable to an increase in Homebuilding
pretax income to $43.5 million for the three months ended
September 30, 2004, from $29.1 million for the three
months ended September 30, 2003. This was partially offset
by a decline in Financial Services pretax income to
$0.6 million from $4.8 million for the same periods.

Our effective tax rate was 36.4% and 36.5% for
the three months ended September 30, 2004 and 2003,
respectively.

As a result of the above, net income increased to
$28.1 million (or $0.61 per diluted share) for the three
months ended September 30, 2004 from $21.5 million (or
$0.51 per diluted share) for the three months ended
September 30, 2003.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Nine Months Ended September 30, 2004
    Compared to Nine Months Ended September 30, 2003

Total revenues increased 22% to
$1,462.0. million for the nine months ended
September 30, 2004, from $1,194.9 million for the
comparable period in 2003. This increase is attributable to an
increase in Homebuilding revenues of 23% offset by a decrease in
Financial Services revenues of 11%. Delays related to the
hurricanes in Florida caused our deliveries to lag behind our
expectations. Additionally, we expect the labor and supply
shortages caused by the hurricanes to persist for some time.

Income before income taxes increased by 13% to
$111.0 million for the nine months ended September 30,
2004, from $98.3 million for the comparable period in 2003.
This increase is attributable to an increase in Homebuilding
pretax income to $104.6 million for the nine months ended
September 30, 2004, from

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$84.4 million for the nine months ended
September 30, 2003. This was partially offset by a decline
in Financial Services pretax income to $6.4 million from
$13.9 million for the same periods.


Our effective tax rate was 36.7% and 36.5% for
the nine months ended September 30, 2004 and 2003,
respectively. This increase was due to increases in income in
states with higher tax rates which offset savings associated
with our recent tax planning initiatives.

As a result of the above, net income increased to
$70.2 million (or $1.53 per diluted share) for the nine
months ended September 30, 2004, from $62.4 million (or
$1.48 per diluted share) for the nine months ended
September 30, 2003.

Results of Operations

The following tables set forth certain operating
and financial data for our homebuilding operations in our four
major geographic regions, Florida, the Mid-Atlantic, Texas and
the West (dollars in millions, except average price in
thousands):

|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |         | 
|---------------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ----- | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | - |  |  | ----- |  |  | - | ------- |  |  |  | ----- |  |  | - | ------- | 
|                                   |  |                                  |       |                                
|                                   |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                   |  |                                  |       |                                
|                                   |  |                                  |       |                                 |  |       |       |     
|                                   |  | 2004                             |       | 2003                            |  | 2004  |       | 2003
|                                   |  |                                  |       |                                 |  |       |       |     
|                                   |  | Homes                            |       | $                               |  | Homes |       | $    |  | Homes |       | $ |  | Homes |       | $
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |  
|Deliveries:                        |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |         | 
|Florida                            |  |                                  | 541   |                                 |  | $     | 149.9 |      |  |       | 582   |   |  | $     | 143.8 |   |  |  | 1,641 |  |  | $ | 438.6   |  |  |  | 1,628 |  |  | $ | 394.5   | 
|Mid-Atlantic                       |  |                                  | 143   |                                 |  |       | 62.9  |      |  |       | 165   |   |  |       | 53.5  |   |  |  | 378   |  |  |   | 151.5   |  |  |  | 472   |  |  |   | 153.6   | 
|Texas                              |  |                                  | 489   |                                 |  |       | 127.2 |      |  |       | 404   |   |  |       | 107.8 |   |  |  | 1,378 |  |  |   | 348.5   |  |  |  | 1,127 |  |  |   | 294.8   | 
|West                               |  |                                  | 611   |                                 |  |       | 160.1 |      |  |       | 408   |   |  |       | 105.3 |   |  |  | 1,586 |  |  |   | 430.7   |  |  |  | 1,105 |  |  |   | 291.1   | 
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |         | 
|Consolidated total                 |  |                                  | 1,784 |                                 |  | $     | 500.1 |      |  |       | 1,559 |   |  | $     | 410.4 |   |  |  | 4,983 |  |  | $ | 1,369.3 |  |  |  | 4,332 |  |  | $ | 1,134.0 | 
|From unconsolidated joint ventures |  |                                  | 25    |                                 |  |       | 7.6   |      |  |       |      |   |  |       |      |   |  |  | 27    |  |  |   | 8.2     |  |  |  |      |  |  |   |        | 
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |         | 
|Total                              |  |                                  | 1,809 |                                 |  | $     | 507.7 |      |  |       | 1,559 |   |  | $     | 410.4 |   |  |  | 5,010 |  |  | $ | 1,377.5 |  |  |  | 4,332 |  |  | $ | 1,134.0 | 
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |         | 

|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |        | 
|---------------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ----- | ----- | ---- |  | ----- | ----- | - |  | ----- | ----- | - |  |  | ----- |  |  | - | ------- |  |  |  | ----- |  |  | - | ------ | 
|                                   |  |                                  |       |                                
|                                   |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                   |  |                                  |       |                                
|                                   |  |                                  |       |                                 |  |       |       |     
|                                   |  | 2004                             |       | 2003                            |  | 2004  |       | 2003
|                                   |  |                                  |       |                                 |  |       |       |     
|                                   |  | Homes                            |       | $                               |  | Homes |       | $    |  | Homes |       | $ |  | Homes |       | $
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |  
|Net Sales Orders(1):               |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |        | 
|Florida                            |  |                                  | 952   |                                 |  | $     | 301.2 |      |  |       | 743   |   |  | $     | 197.5 |   |  |  | 3,008 |  |  | $ | 890.3   |  |  |  | 2,050 |  |  | $ | 509.4  | 
|Mid-Atlantic                       |  |                                  | 83    |                                 |  |       | 31.7  |      |  |       | 155   |   |  |       | 52.9  |   |  |  | 595   |  |  |   | 252.7   |  |  |  | 503   |  |  |   | 166.8  | 
|Texas                              |  |                                  | 480   |                                 |  |       | 117.7 |      |  |       | 428   |   |  |       | 108.5 |   |  |  | 1,468 |  |  |   | 371.2   |  |  |  | 1,356 |  |  |   | 344.4  | 
|West                               |  |                                  | 828   |                                 |  |       | 243.2 |      |  |       | 520   |   |  |       | 133.8 |   |  |  | 2,646 |  |  |   | 731.2   |  |  |  | 1,322 |  |  |   | 345.3  | 
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |        | 
|Consolidated total                 |  |                                  | 2,343 |                                 |  | $     | 693.8 |      |  |       | 1,846 |   |  | $     | 492.7 |   |  |  | 7,717 |  |  | $ | 2,245.4 |  |  |  | 5,231 |  |  | $ | 1365.9 | 
|From unconsolidated joint ventures |  |                                  | 51    |                                 |  |       | 21.3  |      |  |       |      |   |  |       |      |   |  |  | 281   |  |  |   | 91.5    |  |  |  |      |  |  |   |       | 
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |        | 
|Total                              |  |                                  | 2,394 |                                 |  | $     | 715.1 |      |  |       | 1,846 |   |  | $     | 492.7 |   |  |  | 7,998 |  |  | $ | 2,336.9 |  |  |  | 5,231 |  |  | $ | 1365.9 | 
|                                   |  |                                  |       |                                 |  |       |       |      |  |       |       |   |  |       |       |   |  |  |       |  |  |   |         |  |  |  |       |  |  |   |        | 



---



|    |                     
|--- | --------------------
|(1) | Net of cancellations

19



---



##### Table of Contents



|                                    |  |                    |       |                    |  |               |         |       |  |   |     |               |  |  |       |  |  |   |       |  |  |   |     | 
|----------------------------------- |  | ------------------ | ----- | ------------------ |  | ------------- | ------- | ----- |  | - | --- | ------------- |  |  | ----- |  |  | - | ----- |  |  | - | --- | 
|                                    |  |                    |       |                   
|                                    |  | September 30, 2004 |       | September 30, 2003
|                                    |  |                    |       |                   
|                                    |  | Homes              |       | $                  |  | Average Price |         | Homes |  | $ |     | Average Price
|                                    |  |                    |       |                    |  |               |         |       |  |   |     |              
|Sales Backlog:                      |  |                    |       |                    |  |               |         |       |  |   |     |               |  |  |       |  |  |   |       |  |  |   |     | 
|Florida                             |  |                    | 2,913 |                    |  | $             | 875.5   |       |  | $ | 301 |               |  |  | 1,617 |  |  | $ | 429.2 |  |  | $ | 265 | 
|Mid-Atlantic                        |  |                    | 447   |                    |  |               | 190.3   |       |  | $ | 426 |               |  |  | 275   |  |  |   | 102.9 |  |  | $ | 374 | 
|Texas                               |  |                    | 584   |                    |  |               | 146.1   |       |  | $ | 250 |               |  |  | 607   |  |  |   | 152.6 |  |  | $ | 252 | 
|West                                |  |                    | 1,924 |                    |  |               | 521.1   |       |  | $ | 271 |               |  |  | 828   |  |  |   | 218.2 |  |  | $ | 264 | 
|                                    |  |                    |       |                    |  |               |         |       |  |   |     |               |  |  |       |  |  |   |       |  |  |   |     | 
|Consolidated total                  |  |                    | 5,868 |                    |  | $             | 1,733.0 |       |  | $ | 295 |               |  |  | 3,327 |  |  | $ | 902.9 |  |  | $ | 271 | 
|From unconsolidated joint ventures* |  |                    | 303   |                    |  |               | 95.4    |       |  | $ | 315 |               |  |  |      |  |  |   |      |  |  |   |    | 
|                                    |  |                    |       |                    |  |               |         |       |  |   |     |               |  |  |       |  |  |   |       |  |  |   |     | 
|Total                               |  |                    | 6,171 |                    |  | $             | 1,828.4 |       |  | $ | 296 |               |  |  | 3,327 |  |  | $ | 902.9 |  |  | $ | 271 | 
|                                    |  |                    |       |                    |  |               |         |       |  |   |     |               |  |  |       |  |  |   |       |  |  |   |     | 



---



|  |                                                                      
|- | ---------------------------------------------------------------------
|* | Includes 49 homes associated with the Gilligan
    Homes acquisition.

|                                   |  |                                  |     |                                 |  |            |     |        |  |            |     |        |  |            |     |        |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|---------------------------------- |  | -------------------------------- | --- | ------------------------------- |  | ---------- | --- | ------ |  | ---------- | --- | ------ |  | ---------- | --- | ------ |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- | 
|                                   |  |                                  |     |                                
|                                   |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                                   |  |                                  |     |                                
|                                   |  |                                  |     |                                 |  |            |     |       
|                                   |  | 2004                             |     | 2003                            |  | 2004       |     | 2003  
|                                   |  |                                  |     |                                 |  |            |     |       
|                                   |  |                                  |     | Sales                           |  |            |     | Sales  |  |            |     | Sales  |  |            |     | Sales 
|                                   |  | Deliveries                       |     | Orders                          |  | Deliveries |     | Orders |  | Deliveries |     | Orders |  | Deliveries |     | Orders
|                                   |  |                                  |     |                                 |  |            |     |        |  |            |     |        |  |            |     |       
|Average Price:                     |  |                                  |     |                                 |  |            |     |        |  |            |     |        |  |            |     |        |  |   |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|Florida                            |  | $                                | 277 |                                 |  | $          | 316 |        |  | $          | 247 |        |  | $          | 266 |        |  | $ | 267 |  |  | $ | 296 |  |  | $ | 242 |  |  | $ | 249 | 
|Mid-Atlantic                       |  | $                                | 440 |                                 |  | $          | 382 |        |  | $          | 324 |        |  | $          | 341 |        |  | $ | 401 |  |  | $ | 425 |  |  | $ | 325 |  |  | $ | 332 | 
|Texas                              |  | $                                | 260 |                                 |  | $          | 245 |        |  | $          | 267 |        |  | $          | 253 |        |  | $ | 253 |  |  | $ | 253 |  |  | $ | 262 |  |  | $ | 254 | 
|West                               |  | $                                | 262 |                                 |  | $          | 294 |        |  | $          | 258 |        |  | $          | 257 |        |  | $ | 272 |  |  | $ | 276 |  |  | $ | 263 |  |  | $ | 261 | 
|Consolidated total                 |  | $                                | 280 |                                 |  | $          | 296 |        |  | $          | 263 |        |  | $          | 267 |        |  | $ | 275 |  |  | $ | 291 |  |  | $ | 262 |  |  | $ | 261 | 
|From unconsolidated joint ventures |  | $                                | 304 |                                 |  | $          | 418 |        |  |            |    |        |  |            |    |        |  | $ | 304 |  |  | $ | 326 |  |  |   |    |  |  |   |    | 
|Total                              |  | $                                | 281 |                                 |  | $          | 299 |        |  | $          | 263 |        |  | $          | 267 |        |  | $ | 275 |  |  | $ | 292 |  |  | $ | 262 |  |  | $ | 261 | 

|                            |  |                                  |      |               |  |      |      |      |  |  |      |    |  |  |      |   
|--------------------------- |  | -------------------------------- | ---- | ------------- |  | ---- | ---- | ---- |  |  | ---- | -- |  |  | ---- | --
|                            |  |                                 
|                            |  | Percentage of Total Homebuilding
|                            |  | Revenues                        
|                            |  |                                 
|                            |  |                                  |      |              
|                            |  | Three Months                     |      | Nine Months  
|                            |  | Ended                            |      | Ended        
|                            |  | September 30,                    |      | September 30,
|                            |  |                                  |      |              
|                            |  | 2004                             |      | 2003          |  | 2004 |      | 2003
|                            |  |                                  |      |               |  |      |      |     
|Gross Profit                |  |                                  | 20.1 | %             |  |      | 20.1 | %    |  |  | 19.5 | %  |  |  | 20.3 | % 
|SG&A                        |  |                                  | 12.1 | %             |  |      | 13.4 | %    |  |  | 12.4 | %  |  |  | 13.2 | % 
|Other (income) expense, net |  |                                  | (0.6 | )%            |  |      | (0.1 | )%   |  |  | (0.2 | )% |  |  | (0.2 | )%
|                            |  |                                  |      |               |  |      |      |      |  |  |      |    |  |  |      |   
|Homebuilding pretax income  |  |                                  | 8.6  | %             |  |      | 6.8  | %    |  |  | 7.3  | %  |  |  | 7.3  | % 
|                            |  |                                  |      |               |  |      |      |      |  |  |      |    |  |  |      |   



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Three Months Ended September 30, 2004
    Compared to Three Months Ended September 30, 2003

Homebuilding revenues increased 18% to
$507.2 million for the three months ended
September 30, 2004, from $430.4 million for the three
months ended September 30, 2003. This increase is due
primarily to an increase in revenues from home sales to
$500.1 million for the three months ended
September 30, 2004, from $410.5 million for the
comparable period in 2003. Our home sales revenues in the
quarter were 33% of our sales backlog at the beginning of the
quarter, which is lower than 2003 and the first quarter of 2004;
however, it is consistent with our backlog conversion during the
second quarter of 2004. This decline is caused by our rapid
increase in active communities in the first half of the year and
regulatory delays in opening new communities. Revenue from home
sales increased 22% due to (1) a 14% increase in home
deliveries to 1,784 from 1,559 for the three months ended
September 30, 2004 and 2003, respectively, and (2) a
7% increase in

20



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##### Table of Contents



the average selling price on homes delivered to
$280,000 from $263,000 in the same periods. A significant
component of this increase was the 52% increase in revenues from
home sales in our West region for the three months ended
September 30, 2004 as compared to the same period in 2003.
This increase was due to the greater number of homes delivered
and the higher average selling price of such homes. The increase
in revenues from home sales was offset by a decrease in revenue
from land sales. Revenues from land sales for the three months
ended September 30, 2004 were $7.1 million as compared
to $19.9 million for the three months ended
September 30, 2003, a decrease of 64%. As part of our land
inventory management strategy we regularly review our land
portfolio. As a result of these reviews, we will seek to sell
land when we have changed our strategy for a certain property
and/or we have determined that the potential profit realizable
from a sale of a property outweighs the economics of developing
a community. Land sales are incidental to our residential
homebuilding operations and are expected to continue in the
future, but may fluctuate significantly from period to period.


Our Homebuilding gross profit increased 18% to
$101.8 million for the three months ended
September 30, 2004, from $86.5 million for the three
months ended September 30, 2003. This increase is primarily
due to an increase in the gross profit from home sales. Our
gross margin on home sales increased to 20.3% for the three
months ended September 30, 2004, from 19.2% for the three
months ended September 30, 2003. This increase from period
to period is primarily due to an increase in gross margin across
many of our markets resulting from stronger housing demand which
offset increases in land costs due to our increased use of
option contracts. For the three months ended September 30,
2004, we generated gross profit on land sales of
$0.5 million, as compared to $7.6 million for the
comparable period in 2003.

SG&A expenses increased to $61.2 million
for the three months ended September 30, 2004, from
$58.1 million for the three months ended September 30,
2003. As a percentage of Homebuilding revenues, SG&A
expenses decreased to 12.1% for the three months ended
September 30, 2004, as compared to 13.5% for the same
period in 2003. The 140 basis point improvement in SG&A
expenses as a percentage of Homebuilding revenues is primarily
attributable to the increase in homebuilding revenues and our
ability to generate higher revenue levels while leveraging fixed
SG&A costs. SG&A expenses as a percentage of revenues
from home sales for the three months ended September 30,
2004 and 2003 decreased to 12.2% from 14.1%, respectively, while
our Homebuilding pretax income as a percentage of home sales
revenues increased to 8.7% for the three months ended September
30, 2004 from 7.1% for the three months ended September 30,
2003.

For the three months ended September 30,
2004 and 2003, we recognized a compensation charge of
$2.4 million and $0.5 million, respectively, for
variable accounting of certain stock-based awards which include
accelerated vesting criteria. This amount is included in
SG&A expenses.

For the three months ended September 30,
2004, other income includes a $1.3 million gain related to
the sale of joint venture interests in Houston.

Our Homebuilding pretax income as a percentage of
Homebuilding revenues increased to 8.6% for the three months
ended September 30, 2004, from 6.8% for the three months
ended September 30, 2003. This increase is due to the
increase in our gross margin on revenue from home sales and the
improvement in SG&A as a percentage of Homebuilding revenues.



| |                             
| | ----------------------------
| | Net Sales Orders and Backlog

For the three months ended September 30,
2004, net sales orders increased by 27% and the value of net
sales orders increased by 41% as compared to the same period in
the prior year. The increase is due to strong housing demand in
the majority of our markets and the increased number of
communities in which we are marketing. We experienced a 46%
decline in net sales orders in our Mid-Atlantic region due to
our decision to temporarily suspend sales in selected
communities to preserve our margins due to delays we have
experienced in the opening of new communities. The average sales
price on net sales orders increased by 11% to $296,000 for the
three months ended September 30, 2004, as compared to
$267,000 for the three months ended September 30, 2003.

21



---



##### Table of Contents



We had 5,868 homes in backlog (representing
$1.7 billion in revenues), as compared to 3,327 homes
(representing $902.9 million in revenues) as of
September 30, 2004 and 2003, respectively. This increase in
revenue in backlog of 92% is primarily attributable to the
increased sales activity in many of our existing markets. Our
average selling price of homes in backlog has increased to
$295,000 from $271,000 as a result of the strong housing demand
in certain of our markets allowing us to increase prices in
those markets, along with a change in the product mix of our
homes in backlog.



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

Financial Services revenues decreased to
$10.1 million for the three months ended September 30,
2004, from $12.9 million for the three months ended
September 30, 2003. This 22% decrease is due primarily to a
decrease in the number of closings at both our mortgage and
title operations and reduced gains in selling mortgages in the
secondary market caused by a shift toward more adjustable rate
mortgage loans and market reductions in the interest margin. For
the three months ended September 30, 2004, our mix of
mortgage originations was 34% adjustable rate mortgages (of
which approximately half were interest only) and 66% fixed rate
mortgages which is a shift from the comparable period in the
prior year of 21% adjustable rate mortgages and 79% fixed rate
mortgages. The average FICO score of our homebuyers during the
three months ended September 30, 2004 was 728 and the
average loan to value ratio on first mortgages was 76%. For the
three months ended September 30, 2004, approximately 10% of
our homebuyers paid in cash. Our mortgage operations capture
ratio for non-cash homebuyers decreased to 58% for the three
months ended September 30, 2004 from 62% for the three
months ended September 30, 2003. The number of closings at
our mortgage operations decreased to 1,131 for the three months
ended September 30, 2004, from 1,281 for the three months
ended September 30, 2003. The decrease in mortgage closings
is primarily due to an increase in the number of homebuyers
paying in cash. Our title operations capture ratio increased to
97% for the three months ended September 30, 2004, from 81%
for the comparable period in 2003. However, the number of
closings at our title operations decreased to 4,725 for the
three months ended September 30, 2004 from 5,808 for the
same period in 2003 primarily due to a decrease in refinancing
transactions. Non-affiliated customers accounted for
approximately 73% of our title company revenues during the three
months ended September 30, 2004.

Financial Services expenses increased to
$9.5 million for the three months ended September 30,
2004, from $8.1 million for the three months ended
September 30, 2003. This 17% increase is a result of higher
staff levels and expenses incurred in connection with the
relocation of our mortgage company headquarters to Tampa,
Florida and anticipated increased loan activity.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Nine Months Ended September 30, 2004
    Compared to Nine Months Ended September 30, 2003

Homebuilding revenues increased 23% to
$1,430.3 million for the nine months ended
September 30, 2004, from $1,159.3 million for the nine
months ended September 30, 2003. This increase is due
primarily to an increase in revenues from home sales to
$1,369.3 million for the nine months ended
September 30, 2004, from $1,134.0 million for the
comparable period in 2003. The 21% increase in revenue from home
sales was due to (1) a 15% increase in home deliveries to
4,983 from 4,332 for the nine months ended September 30,
2004 and 2003, respectively, and (2) a 5% increase in the
average selling price on delivered homes to $275,000 from
$262,000 in the same periods. A significant component of this
increase was the 48% increase in revenues from home sales in our
West region for the nine months ended September 30, 2004 as
compared to the same period in 2003. This increase was due to
the greater number of homes delivered and the higher average
selling price of such homes. In addition to the increase in
revenue from home sales, we generated significant additional
revenue from land sales which increased to $61.0 million
for the nine months ended September 30, 2004, as compared
to $25.3 million for the nine months ended
September 30, 2003. As discussed above, our land sales were
a result of our regular review of our land portfolio. As a
result of these reviews we will seek to sell land when we have
changed our strategy for a certain property and/or we have
determined that the potential profit realizable from a sale of a
property outweighs the economics of developing a community.

Our Homebuilding gross profit increased 18% to
$278.1 million for the nine months ended September 30,
2004, from $235.6 million for the nine months ended
September 30, 2003. This increase is primarily due to an

22



---



##### Table of Contents



increase in revenue from home sales. Our gross
margin on home sales decreased to 19.3% for the nine months
ended September 30, 2004, from 20.0% for the nine months
ended September 30, 2003. This decrease is primarily due to the
completion in the prior year of high margin communities and
higher land costs as we have increased our use of option
contracts. Our gross margin also was negatively affected by the
cost of higher sales incentives associated with home deliveries
in portions of our Texas and Colorado markets for the nine
months ended September 30, 2004, as compared to the
corresponding period in 2003 due to the softness in these
markets during the 2003 selling season. For the nine months
ended September 30, 2004, we generated gross profit on land
sales of $13.2 million as compared to $9.0 million for
the comparable period in 2003.


SG&A expenses increased to
$176.9 million for the nine months ended September 30,
2004, from $153.9 million for the nine months ended
September 30, 2003. As a percentage of Homebuilding
revenues, SG&A expenses decreased to 12.4% for the nine
months ended September 30, 2004, as compared to 13.3% for
the same period in 2003. The 90 basis point improvement in
SG&A expenses as a percentage of Homebuilding revenues is
primarily attributable to the increase in Homebuilding revenues
and our ability to generate higher revenue levels while
leveraging fixed SG&A costs. SG&A expenses as a
percentage of revenues from home sales for the nine months ended
September 30, 2004 decreased to 12.9%, as compared to 13.6%
for the same period in the prior year, while our Homebuilding
pretax income as a percentage of home sales revenues increased
slightly to 7.6% for the nine months ended September 30,
2004 from 7.4% for the nine months ended September 30, 2003.

For the nine months ended September 30, 2004
and 2003, we recognized a compensation charge of
$4.0 million and $0.9 million, respectively, for
variable accounting of certain stock-based awards which include
accelerated vesting criteria. This amount is included in
SG&A expenses.

For the nine months ended September 30,
2004, other income includes a $1.3 million gain related to the
sale of joint venture interests in Houston.

Our Homebuilding pretax income as a percentage of
Homebuilding revenues remained consistent at 7.3% for both the
nine months ended September 30, 2004 and September 30,
2003.



| |                 
| | ----------------
| | Net Sales Orders

For the nine months ended September 30,
2004, net sales orders increased by 48% and the value of net
sales orders increased by 64%, as compared to the same period in
the prior year. The increase is due to strong housing demand in
the majority of our markets and an increase in the number of
communities in which we are marketing. The average sales price
on net sales orders increased by 11% to $291,000 for the nine
months ended September 30, 2004, as compared to $261,000
for the nine months ended September 30, 2003.



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

Financial Services revenues decreased to
$31.7 million for the nine months ended September 30,
2004, from $35.6 million for the nine months ended
September 30, 2003. This 11% decrease is due primarily to a
decrease in the number of closings at our title and mortgage
operations and reduced gains in selling mortgages in the
secondary market caused by a shift toward more adjustable rate
mortgage loans and market reductions in the interest margin. For
the nine months ended September 30, 2004, our mix of
mortgage originations was 33% adjustable rate mortgages (of
which approximately half were interest only) and 67% fixed rate
mortgages which is a shift from the comparable period in the
prior year of 17% adjustable rate mortgages and 83% fixed rate
mortgages. The average FICO score of our homebuyers during the
nine months ended September 30, 2004 was 729 and the
average loan to value ratio on first mortgages was 76%. During
the nine months ended September 30, 2004, approximately 12%
of our homebuyers paid in cash. Our mortgage operations capture
ratio for non-cash homebuyers increased to 60% for the nine
months ended September 30, 2004, from 58% for the
comparable period in 2003. The number of closings at our
mortgage operations decreased to 3,321 for the nine months ended
September 30, 2004, from 3,405 for the three months ended
September 30, 2003, primarily due to an increase in the
number of homebuyers paying in cash. Our title operations
capture ratio increased to 96% for the nine months ended
September 30, 2004, from 81% for the comparable period in
2003. However,

23



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##### Table of Contents



the number of closings at our title operations
decreased to 14,437 for the nine months ended September 30,
2004, from 16,073 for the same period in 2003 primarily due to a
decrease in refinancing transactions.


Financial Services expenses increased to
$25.3 million for the nine months ended September 30,
2004, from $21.7 million for the nine months ended
September 30, 2003. This 16% increase is a result of higher
staff levels and $0.9 million in moving costs and employee
separation expenses incurred in connection with the relocation
of our mortgage company headquarters to Tampa, Florida.

Financial Condition, Liquidity and Capital
Resources



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

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

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

At September 30, 2004, we had unrestricted
cash and cash equivalents of $44.6 million as compared to
$76.8 million at December 31, 2003.

Cash used in operating activities was
$148.8 million during the nine months ended
September 30, 2004, as compared to $13.5 million
during the nine months ended September 30, 2003. The
increase in the use of cash in operating activities primarily is
due to an increase of $119.0 million in additional
inventory, consistent with our strategy to increase the number
of active communities and our land positions. From
September 30, 2003 to September 30, 2004, our
controlled homesites increased from 47,600 to 50,100 and our
homes completed or under construction increased from 2,969 to
4,294. Our homes completed or under construction increased due
to our 76% increase in homes in backlog. These expenditures have
been financed with the issuance of $125.0 million in notes and
amounts drawn under our revolving credit facility. Because of
our rapid growth in recent periods, our operations have
generally used more cash than they have generated. We expect
this trend to continue as long as we are experiencing similar
growth.

Cash used in investing activities was
$41.4 million during the nine months ended
September 30, 2004, as compared to $90.7 million
during the nine months ended September 30, 2003. The
decrease in the use of cash in investing activities primarily is
due to the acquisitions made in Las Vegas and Colorado during
the nine months ended September 30, 2003 and the additional
consideration paid during that period with respect to those
companies acquired in the fourth quarter of 2002.



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

Our consolidated borrowings at September 30,
2004 were $731.3 million, up from $561.1 million at
December 31, 2003, resulting from an increase in
Homebuilding borrowings to $673.2 million from
$497.9 million at the same dates. At September 30,
2004, our Homebuilding borrowings included $300.0 million in 9%
senior notes due 2010, $185.0 million of 10 3/8%
senior subordinated notes due 2012 and $125.0 million of
7 1/2% senior subordinated notes due 2011. Our weighted
average debt to maturity is 5.6 years, while our average
inventory turnover is 1.2 times per year.

We issued the 7 1/2% Senior Subordinated
Notes due 2011 in March 2004 for net proceeds of
$123.3 million which were primarily used to repay amounts
outstanding under our revolving credit facility and warehouse
line of credit. We used our other Homebuilding borrowings to
fund our increased land supply, our acquisitions and the
operating costs associated with establishing an infrastructure
to support our growth. We initially funded these costs through
borrowings under our revolving credit facility and then, as
market conditions permitted, we issued fixed-rate long term
notes to refinance these borrowings and reduce the outstanding
balance under our revolving credit facility.

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Our outstanding senior notes are guaranteed, on a
joint and several basis, by the Guarantor Subsidiaries, which
are all of the Companys direct and indirect subsidiaries,
other than our mortgage and title operations subsidiaries and
certain other immaterial subsidiaries (the Non-guarantor
Subsidiaries). Our outstanding senior subordinated notes are
guaranteed on a senior subordinated basis by all of the
Guarantor Subsidiaries. The indentures governing the senior
notes 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 (other than under
our revolving credit facility), pay or make dividends or other
distributions, sell assets, enter into transactions with
affiliates, and merge or consolidate with other entities.

Our financial leverage, as measured by the ratio
of Homebuilding net debt to capital, increased to 50.7% at
September 30, 2004 from 44.1% at December 31, 2003,
due primarily to the March 2004 issuance of senior subordinated
notes and to a lesser extent, increased borrowings under our
revolving credit facility. As noted above, we have made
significant investments in inventory consistent with our growth
strategy which we have financed through debt in addition to
internally generated cash, resulting in an increase in our
financial leverage. We believe that our financial leverage is
appropriate given our industry, size and current growth strategy.

|                           |  |                          |         |              |  |   |       |  
|-------------------------- |  | ------------------------ | ------- | ------------ |  | - | ----- | -
|                           |  |                         
|                           |  | Homebuilding Net Debt to
|                           |  | Capital                 
|                           |  |                         
|                           |  | September 30,            |         | December 31,
|                           |  | 2004                     |         | 2003        
|                           |  |                          |         |             
|Notes payable              |  | $                        | 605.6   |              |  | $ | 480.0 |  
|Bank borrowings            |  |                          | 67.6    |              |  |   | 17.9  |  
|                           |  |                          |         |              |  |   |       |  
|Homebuilding borrowings(1) |  | $                        | 673.2   |              |  | $ | 497.9 |  
|Less: unrestricted cash    |  |                          | 44.6    |              |  |   | 73.7  |  
|                           |  |                          |         |              |  |   |       |  
|Homebuilding net debt      |  | $                        | 628.6   |              |  | $ | 424.2 |  
|Stockholders equity       |  |                          | 610.8   |              |  |   | 537.6 |  
|                           |  |                          |         |              |  |   |       |  
|Total capital(2)           |  | $                        | 1,239.4 |              |  | $ | 961.8 |  
|Ratio                      |  |                          | 50.7    | %            |  |   | 44.1  | %



---



|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include obligations for inventory not
    owned of $193.0 million at September 30, 2004 and
    $246.2 million at December 31, 2003, all of which are
    non-recourse to us.
|   
|(2) | Does not include Financial Services bank
    borrowings of $58.1 million at September 30, 2004 and
    $63.2 million at December 31, 2003.                                            

Homebuilding net debt to capital is not a
financial measure required by generally accepted accounting
principles (GAAP) and other companies may calculate it
differently. We have included this information as we believe
that the ratio of Homebuilding net debt to capital provides
comparability among other publicly-traded homebuilders. In
addition, management uses this information in measuring the
financial leverage of our homebuilding operations, which is our
primary business. Homebuilding net debt to capital has
limitations as a measure of financial leverage because it
excludes Financial Services bank borrowings and it reduces our
Homebuilding debt by the amount of our unrestricted cash.
Management compensates for these limitations by using
Homebuilding net debt to capital as only one of several
comparative tools, together with GAAP measurements, to assist in
the evaluation of our financial leverage. It should not be
construed as an indication of our operating performance or as a
measure of our liquidity.

From time to time, we finance our working capital
requirements with borrowings under a revolving credit facility.
Under our revolving credit facility which was in place at
September 30, 2004, we were permitted to borrow up to the
lesser of (i) $350.0 million or (ii) our borrowing
base (calculated in accordance with the revolving credit
facility agreement) minus our outstanding senior debt, and were
able to issue letters of credit up to $175.0 million. As of
September 30, 2004, we had $58.0 million outstanding
under the revolving credit facility and had issued letters of
credit of $126.8 million, with $165.2 million
remaining in availability, all of which we could have borrowed
without violating any of our debt covenants.

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##### Table of Contents



On October 26, 2004, we entered into an
unsecured revolving credit facility replacing our existing
revolving credit facility. Our new credit facility increases the
amount we are permitted to borrow to the lesser of (i)
$600.0 million or (ii) our borrowing base (calculated
in accordance with the revolving credit facility agreement)
minus our outstanding senior debt. The new facility increases
the amount of the letter of credit subfacility to $300.0
million. In addition, we have the right to increase the size of
the facility to provide up to an additional $150.0 million
of revolving loans, subject to meeting certain requirements. The
revolving credit facility expires on October 26, 2008. Provided
that we are not in default under the new credit facility, we
have the right to extend this term by additional one-year terms
on each anniversary date of the 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) Citicorps
base rate or (B) 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 base rate for the interest period.
Applicable margins will be adjusted based on the ratio of our
liabilities to our adjusted tangible net worth or our senior
debt rating. The revolving credit facility requires us to
maintain specified financial ratios regarding leverage, interest
coverage, adjusted tangible net worth and certain operational
measurements. The revolving credit facility also places certain
restrictions on, among other things, our ability to pay or make
dividends or other distributions, create or permit certain
liens, make equity investments in joint ventures, enter into
transactions with affiliates and merge or consolidate with other
entities. Our obligations under the revolving credit facility
are guaranteed by our significant domestic subsidiaries, other
than our mortgage and title subsidiaries (unrestricted
subsidiaries). As of September 30, 2004, based on the terms
of the new revolving credit facility, we would have had the
availability to borrow up to $382.9 without violating any of our
debt covenants.

To fund the origination of residential mortgage
loans, our mortgage subsidiary has a $90.0 million
warehouse line of credit secured by mortgages held for sale,
which expires on December 19, 2004 (the Existing
Warehouse Line of Credit). As of September 30, 2004,
we had $58.1 million outstanding under the Existing
Warehouse Line of Credit, which accrued interest at a blended
rate of 3.1% per annum. On October 26, 2004, our lender
under the Existing Warehouse Line of Credit terminated the
keep-well agreement between us and the lender which had
obligated us to provide financial support to our mortgage
subsidiary, if necessary, for it to maintain certain financial
ratios and minimums. We anticipate that upon expiration of the
Existing Warehouse Line of Credit, it will be replaced with a
smaller line of credit with the same lender.

On October 22, 2004, our mortgage subsidiary
entered into a new $100.0 million revolving warehouse line of
credit (the New Warehouse Line of Credit), which is
in addition to our Existing Warehouse Line of Credit. Our
mortgage subsidiary has the right to increase the size of the
New Warehouse Line of Credit to provide up to an additional
$50.0 million, subject to meeting certain requirements. The
New Warehouse Line of Credit expires on October 22, 2005.
The New Warehouse Line of Credit bears interest at the
30 day LIBOR rate plus a margin of 1.25% to 3.0% determined
based upon the type of mortgage loans being financed. The New
Warehouse Line of Credit is secured by funded mortgages, which
are pledged as collateral, and requires our mortgage subsidiary
to maintain certain financial ratios and minimums. The New
Warehouse Line of Credit also places certain restrictions on,
among other things, our mortgage subsidiarys ability to
incur additional debt, create liens, pay or make dividends or
other distributions, make equity investments, enter into
transactions with affiliates, and merge or consolidate with
other entities.

We believe that we have adequate financial
resources, including cash from operations, availability under
our current revolving credit facility and the warehouse lines of
credit, and relationships with financial partners to meet our
current and anticipated working capital, land acquisition and
development needs and our estimated consolidated annual debt
service payments of $61.4 million (at September 30, 2004,
based on the balances outstanding and interest rates as of such
date). 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 seek additional debt or equity financing to
operate and expand our business.

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



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

We enter into land and homesite option contracts
to procure land or homesites for the construction of homes.
Option contracts generally require the payment of cash or the
posting of a letter of credit for the right to acquire land or
homesites during a specified period of time at a certain price.
Option contracts allow us to control significant homesite
positions with a minimal capital investment and substantially
reduce the risk associated with land ownership and development.
At September 30, 2004, we had deposits of $108.7 million
and had issued letters of credit of $110.7 million
associated with our land purchasing activities. The financial
exposure for nonperformance on our part in these transactions is
generally limited to our deposits and/or letters of credit.

Additionally, at September 30, 2004, we have
performance / surety bonds of $142.0 million and letters of
credit of $16.1 million outstanding primarily related to
land development activities.



| |                                                 
| | ------------------------------------------------
| | Investments in Unconsolidated Joint
    Ventures

We have and expect to continue to enter into
joint ventures that acquire and develop land for our
Homebuilding operations and/or that also build and market homes
for sale to third parties. Through joint ventures, we reduce and
share our risk associated with land ownership and development
and extend our capital resources. Our partners in these joint
ventures generally are unrelated homebuilders, land sellers,
financial investors or other real estate entities. In joint
ventures where the assets are being financed with debt, the
borrowings are non-recourse to us, and we do not provide any
financial guarantees; as a result, our financial exposure is
generally limited to our investment. At September 30, 2004,
we had investments in unconsolidated joint ventures of
$30.6 million. We account for these investments under the
equity method of accounting. These unconsolidated joint ventures
are limited liability companies or limited partnerships in which
we have a limited partnership interest and a minority interest
in the general partner.

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

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 and typically include the
words anticipate, believe,
expect, estimate, project,
and future. Specifically, this Quarterly Report
contains forward-looking statements regarding:



| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our expectations regarding our continued use of
    option contracts, investments in unconsolidated joint ventures
    and other off-balance sheet arrangements to control homesites
    and manage our business and their effect on our business;
|
| |  | our expectations regarding the labor and supply
    shortages in Florida resulting from the recent hurricanes;                                                                                                                                    
|
| |  | our expectations regarding our use of cash in
    operations;                                                                                                                                                                                     
|
| |  | our expectations regarding future land sales;                                                                                                                                                                                                     
|
| |  | our estimate that we have adequate financial
    resources to meet our current and anticipated working capital,
    including our annual debt service payments, and land acquisition
    and development needs; and                               
|
| |  | our expectation that we will decrease the
    principal amount of our Existing Warehouse Line of Credit upon
    its maturity.                                                                                                                    

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##### Table of Contents



These forward-looking statements reflect our
current views about future events and are subject to risks,
uncertainties and assumptions. As a result, actual results may
differ materially from the results discussed in and anticipated
by the forward-looking statements. The most important factors
that could cause the assumptions underlying forward-looking
statements and actual results to differ materially from those
expressed in or implied by those forward-looking statements
include, but are not limited to, the following:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our significant level of debt and the impact of
    the restrictions imposed on us by the terms of this debt;                                                      
|
| |  | our ability to borrow or otherwise finance our
    business in the future;                                                                                         
|
| |  | our ability to identify and acquire, at
    anticipated prices, additional homebuilding opportunities and/or
    to effect our growth strategies;                  
|
| |  | our relationship with Technical Olympic, S.A. and
    its control over our business activities;                                                                    
|
| |  | 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;
|
| |  | any unexpected delays in the opening of new
    communities in 2004 or 2005;                                                                                       
|
| |  | an increase in interest rates;                                                                                                                                     
|
| |  | an increase in the cost, or shortages in the
    availability of, labor and materials;                                                                             
|
| |  | our ability to compete in our existing and future
    markets; and                                                                                                 
|
| |  | an increase or change in governmental
    regulations, or in the interpretation and/or enforcement of
    existing governmental regulations.                       






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

At September 30, 2004, $610.0 million
of our outstanding borrowings are based on fixed interest rates.
We are exposed to market risk primarily related to potential
adverse changes in interest rates on our existing construction
loans, warehouse lines of credit and revolving credit facility.
The interest rates relative to these borrowings fluctuate with
the prime, Federal Funds, LIBOR, and Eurodollar lending rates.
We have not entered into derivative financial instruments for
trading or speculative purposes. As of September 30, 2004,
we had an aggregate of approximately $124.7 million drawn
under our bank loan arrangements that were subject to changes in
interest rates. Consequently, an increase or decrease of 1% in
interest rates will change our annual debt service payments by
$1.2 million per year as a result of our bank loan
arrangements that are subject to changes in interest rates.

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, Federal Funds, LIBOR and Eurodollar lending rates.

Our Annual Report on Form 10-K for the year
ended December 31, 2003 contains further information
regarding our market risk. There have been no material changes
in our market risk since June 30, 2004.






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

To ensure that the information we must disclose
in our filings with the Securities and Exchange Commission is
recorded, processed, summarized, and reported on a timely basis,
we maintain disclosure controls and procedures. Our principal
executive officer and principal financial officer have reviewed
and evaluated the effectiveness of our disclosure controls and
procedures, as of September 30, 2004. Based on such
evaluation, such officers have concluded that, as of
September 30, 2004, our disclosure controls and procedures
were effective in timely alerting them to material information
relating to us (and our consolidated subsidiaries) required to
be included in our periodic Securities and Exchange Commission
filings. There has been no change in our internal control over
financial reporting during the quarter ended September 30, 2004
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION






|        |         
|------- | --------
|Item 6. | Exhibits

|        |    |             |  |                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .45         |  | Credit Agreement, dated as of October 26, 2004,
    among Technical Olympic USA, Inc., the lenders and issuers party
    thereto, Citicorp North America, Inc., Deutsche Bank Securities,
    Inc., KeyBank National Association, J.P. Morgan Securities,
    Inc., and CitiGroup Global Markets Inc.
|        | 10 | .46         |  | Revolving Credit and Security Agreement, dated as
    of October 22, 2004, among Preferred Home Mortgage Company and
    Countrywide Warehouse Lending.                                                                                                                                              
|        | 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.                                                                                                                                                                                              

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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: November 2, 2004 |  | By: /s/ DAVID J. KELLERName: David J. Keller
    Title:   Senior Vice President,
    Chief Financial Officer and Treasurer
|                      
|Date: November 2, 2004 |  | By: /s/ RANDY L. KOTLERName: Randy L. Kotler
    Title:   Vice President  Chief
    Accounting Officer                   

30