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<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 1 - us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock-->
<!-- xbrl,ns -->
<!-- xbrl,nx -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b>
</div>
<div align="left">
</div>
<div align="center" style="font-size: 10pt"><b></b></div>
<div align="center" style="font-size: 10pt"><b></b></div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Organization. </i></b>Meritage Homes is a leading designer and builder of single-family detached and
attached homes in the historically high-growth regions of the western and southern United States
based on the number of home closings. We offer first-time, move-up, active adult and luxury homes
to our targeted customer base. We have operations in three regions: West, Central and East, which
are comprised of seven metropolitan areas in Arizona, Texas, California, Nevada, Colorado, Florida
and North Carolina. In April 2011, we announced our entry into Raleigh-Durham, North Carolina. We
expect to begin our sales operations in the second half of 2011. Through our predecessors, we
commenced our homebuilding operations in 1985. Meritage Homes Corporation was incorporated in 1988
in the State of Maryland.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our homebuilding and marketing activities are conducted under the name of Meritage Homes in
each of our markets, although we also operate under the name of Monterey Homes in Arizona and
Texas. At June 30, 2011, we were actively selling homes in 145 communities, with base prices
ranging from approximately $90,000 to $620,000.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Basis of Presentation. </i></b>The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements. These financial statements should be read in conjunction
with the consolidated financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2010. The consolidated financial statements include the accounts of Meritage Homes
Corporation and those of our consolidated subsidiaries, partnerships and other entities in which we
have a controlling financial interest, and of variable interest entities (see Note 3) in which we
are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”).
Intercompany balances and transactions have been eliminated in consolidation. In the opinion of
management, the accompanying financial statements include all adjustments necessary for the fair
presentation of our results for the interim periods presented. Results for interim periods are not
necessarily indicative of results to be expected for the full year.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Restricted Cash. </i></b>Restricted cash consists of amounts held in restricted accounts as collateral
for our letter of credit arrangements. The aggregate capacity of these secured letters of credit is
approximately $40 million. These outstanding letters of credit are secured by corresponding pledges
of restricted cash accounts invested in money market accounts and United States Government
securities, totaling $10.3 million and $9.3 million at June 30, 2011 and December 31, 2010,
respectively, and are reflected as restricted cash on our consolidated balance sheets.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Investments and Securities. </i></b>Our investments and securities are comprised of both treasury
securities and deposits with banks that are FDIC-insured and secured by treasury-backed
investments. All of our investments are classified as held-to-maturity and are recorded at
amortized cost as we have both the ability and intent to hold them until their respective
maturities. The contractual lives of these investments are typically less than 18 months. The
amortized cost of the investments approximates fair value.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Real Estate. </i></b>Real estate is stated at cost unless the asset is determined to be impaired, at
which point the inventory is written down to fair value as required by Accounting Standards
Codification (“ASC”) Subtopic 360-10, <i>Property, Plant and Equipment </i>(“ASC 360-10”)<i>. </i>Inventory
includes the costs of land acquisition, land development, home construction, capitalized interest,
real estate taxes, direct overhead costs incurred during development and home construction that
benefit the entire community and impairments, if any. Land and development costs are typically
allocated and transferred to homes under construction when construction begins. Home construction
costs are accumulated on a per-home basis. Cost of home closings includes the specific construction
costs of the home and all related land acquisition, land development and other common costs (both
incurred and estimated to be incurred) that are allocated based upon the total number of homes
expected to be closed in each community or phase. Any changes to the estimated total development
costs of a community or phase are allocated to the remaining homes in the community or phase. When
a home closes, we may have incurred costs for goods and services that have not yet been paid.
Therefore, an accrual to capture such obligations is recorded in connection with the home closing
and charged directly to cost of sales.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Typically, a community’s life cycle ranges from two to five years, commencing with the
acquisition of the land continuing through the land development phase and concluding with the sale,
construction and closing of the homes. Actual community lives will vary based on the size of the
community, the sales absorption rate and whether the land purchased was raw or finished lots.
Master-planned communities encompassing several phases and super-block land parcels may have
significantly longer lives and projects involving smaller finished lot purchases may be
significantly shorter.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">All of our land inventory and related real estate assets are reviewed for recoverability
quarterly, as our inventory is considered “long-lived” in accordance with GAAP. Impairment charges
are recorded if the fair value of an asset is less than its carrying amount. Our determination of
fair value is based on projections and estimates. Changes in these expectations may lead to a
change in the outcome of our impairment analysis, and actual results may also differ from our
assumptions. Our analysis is completed on a quarterly basis with each community or land parcel
evaluated individually. For those assets deemed to be impaired, the impairment recognized is
measured as the amount by which the assets’ carrying amount exceeds their fair value. The
impairment of a community is allocated to each lot on a straight-line basis.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b>Existing and continuing communities. </b>When projections for the remaining income expected to be
earned from existing communities are no longer positive, the underlying real estate assets are
deemed not fully recoverable, and further analysis is performed to determine the required
impairment. The fair value of the community’s assets is determined using either a discounted cash
flow model for projects we intend to build out or a market-based approach for projects to be sold.
Impairments are charged to cost of home closings in the period during which it is determined that
the fair value is less than the assets’ carrying amount. If a market-based approach is used, we
determine fair value based on recent comparable purchase and sale activity in the local market,
adjusted for known variances as determined by our knowledge of the region and general real estate
expertise. If a discounted cash flow approach is used, we compute our fair value based on a
proprietary model. Our key estimates in deriving fair value under our cash flow model are (i) home
selling prices in the community adjusted for current and expected sales discounts and incentives,
(ii) costs related to the community — both land development and home construction — including
costs spent to date and budgeted remaining costs to spend, (iii) projected sales absorption rates,
reflecting any product mix change strategies implemented to stimulate the sales pace and expected
cancellation rates, (iv) alternative land uses including disposition of all or a portion of the
land owned and (v) our discount rate, which is currently 14-16% and varies based on the perceived
risk inherent in the community’s other cash flow assumptions. These assumptions vary widely across
different communities and geographies and are largely dependent on local market conditions.
Community-level factors that may impact our key estimates include:
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>The presence and significance of local competitors, including their offered product type,
comparable lot size, and competitive actions;</td>
</tr>
</table>
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>Economic and related demographic conditions for the population of the surrounding
community;</td>
</tr>
</table>
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>Desirability of the particular community, including unique amenities or other favorable
or unfavorable attributes; and</td>
</tr>
</table>
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>Existing home inventory supplies, including foreclosures and short sales.</td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">These local circumstances may significantly impact our assumptions and the resulting
computation of fair value and are, therefore, closely evaluated by our division personnel in their
creation of the discounted cash flow models. The models are also evaluated by regional and
corporate personnel for consistency and integration, as decisions that affect pricing or absorption
at one community may have resulting consequences for neighboring communities. We typically do not
project market improvements in our discounted cash flow models, but may do so in limited
circumstances in the latter years of a long-lived community. In certain cases, we may elect to stop
development and/or marketing of (mothball) an existing community if we believe the economic
performance of the community would be maximized by deferring development for a period of time to
allow market conditions to improve. The decision may be based on financial and/or operational
metrics. If we decide to mothball a project, we will impair it to its fair value as discussed above
and then cease future development and/or marketing activity until such a time where management
believes that market conditions have improved and economic performance is maximized. Quarterly, we
review all communities, including mothballed communities, for potential impairments.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b>Option deposits and pre-acquisition costs. </b>We also evaluate assets associated with future
communities for impairments on a quarterly basis. Using similar techniques described in the
Existing and continuing communities section
above, we determine if the contribution margins to be generated by our future communities are
acceptable to us. If the projections indicate that a community is still meeting our internal
investment guidelines and is generating a profit, those assets are determined to be fully
recoverable and no impairments are required. In cases where we decide to abandon a project, we will
fully impair all assets related to such project and will expense and accrue any additional costs
that we are contractually obligated to incur. In certain circumstances, we may also elect to
continue with a project because it is expected to generate positive cash flows, even though it may
not be generating an accounting profit, or due to other strategic factors. In such cases, we will
impair our pre-acquisition costs and deposits, as necessary, and record an impairment to bring the
book value to fair value. Refer to Note 2 of these consolidated financial statements for further
information regarding our impairments.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Deposits. </i></b>Deposits paid related to land options and contracts to purchase land are capitalized
when incurred and classified as deposits on real estate under option or contract until the related
land is purchased. Deposits are reclassified to a component of real estate at the time the deposit
is used to offset the acquisition price of the lots based on the terms of the underlying
agreements. To the extent they are non-refundable, deposits are charged to expense if the land
acquisition is terminated or no longer considered probable. As our exposure associated with these
non-refundable deposits is limited to the deposit amount, since the acquisition contracts typically
do not require specific performance, we do not consider the options a contractual obligation to
purchase the land. The review of the likelihood of the acquisition of contracted lots is completed
quarterly in conjunction with the real estate impairment analysis noted above and therefore, if
impaired, the deposits are recorded at the lower of cost or fair value. Our deposits were $11.8
million and $10.4 million as of June 30, 2011 and December 31, 2010, respectively.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Off-Balance-Sheet Arrangements — Joint Ventures. </i></b>Historically, we have participated in land
development joint ventures as a means of accessing larger parcels of land and lot positions,
expanding our market opportunities, managing our risk profile and leveraging our capital base;
however, in recent years, such ventures have not been a significant avenue for us to access desired
lots. We currently have only two such active ventures. We also participate in six mortgage and
title business joint ventures. The mortgage joint ventures are engaged in, or invest in mortgage
companies that engage in, mortgage brokerage activities, and they originate and provide services to
both our customers and other homebuyers.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In connection with our joint ventures, we may also provide certain types of guarantees to
associated lenders and municipalities. These guarantees can be classified into three categories:
(i) Repayment Guarantees, (ii) “Bad Boy Guarantees”, and (iii) Completion Guarantees, described in
more detail below (in thousands). Additionally, we have classified a guarantee related to our
minority ownership in the South Edge joint venture separately, as the venture’s lender group has
presented us with a demand letter for such guarantee.
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>At June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>At December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Repayment guarantees
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">410</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">733</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">“Bad Boy” guarantees
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Completion guarantees (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">South Edge guarantee (2)
</div></td>
<td> </td>
<td> </td>
<td align="right">13,243</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">11,758</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Total guarantees
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">13,653</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">12,491</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>As our completion guarantees typically require funding from a third party, we believe these
guarantees do not represent a potential cash obligation for us, as they require only
non-financial performance.</td>
</tr>
<tr style="font-size: 3pt">
<td> </td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(2)</td>
<td> </td>
<td>The increase in the balance during 2011 represents accrued interest and penalties as
reflected in a demand letter received from the venture’s lenders. We have not been provided
the calculation of such interest and penalties and have not confirmed the increase in the
balance. Based on recent events as discussed in Note 11, we no longer believe that the entire
$13.2 million of the guarantee is enforceable. However, the ultimate resolution of this
matter will be addressed through litigation and/or settlements.</td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Repayment Guarantees. </i>We and/or our land development joint venture partners occasionally
provide limited repayment guarantees on a pro rata basis on the debt of the land development joint
ventures. If such a guarantee were ever to be called or triggered, the maximum exposure to Meritage
would generally be only our pro-rata share of the amount of debt outstanding that was in excess of
the fair value of the underlying land securing the debt. Our share of these limited pro rata
repayment guarantees as of June 30, 2011 and December 31, 2010 is illustrated in the table above.
See Note 11 of these consolidated financial statements for further information regarding our
repayment guarantees.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>“Bad Boy” Guarantees. </i>In addition, we and/or our joint venture partners occasionally provide
guarantees that are only applicable if and when the joint venture directly, or indirectly through
agreement with its joint venture partners or other third parties, causes the joint venture to
voluntarily file a bankruptcy or similar liquidation or reorganization action or take other actions
that limit a lender’s right to exercise remedies against its collateral or which are fraudulent or
improper (commonly referred to as “bad boy” guarantees). These types of guarantees typically are on
a pro rata basis among the joint venture partners and are designed to protect the secured lender’s
remedies with respect to its mortgage or other secured lien on the joint venture or the joint
venture’s underlying property. We believe these guarantees, as defined, unless invoked as described
above, are not considered guarantees of indebtedness under our senior and senior subordinated
indentures. We had no such amounts classified as a “bad boy” guarantee at June 30, 2011 or
December 31, 2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Completion Guarantees. </i>If there is development work to be completed, we and our joint venture
partners are also typically obligated to the project lender(s) to complete construction of the land
development improvements if the joint venture does not perform the required development. Provided
we and the other joint venture partners are in compliance with these completion obligations, the
project lenders are generally obligated to fund these improvements through any financing
commitments available under the applicable joint venture development and construction loans. In
addition, we and our joint venture partners have from time to time provided unsecured indemnities
to joint venture project lenders. These indemnities generally obligate us to reimburse the project
lenders only for claims and losses related to matters for which such lenders are held responsible
and our exposure under these indemnities is limited to specific matters such as environmental
claims. As part of our project acquisition due diligence process to determine potential
environmental risks, we generally obtain, or the joint venture entity generally obtains, an
independent environmental review. Per the guidance of ASC 460-10, <i>Guarantees, </i>we believe these
other guarantees are either not applicable or not material to our financial results.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Surety Bonds. </i>We and our joint venture partners also indemnify third party surety providers
with respect to performance bonds issued on behalf of certain of our joint ventures. If a joint
venture does not perform its obligations, the surety bond could be called. If these surety bonds
are called and the joint venture fails to reimburse the surety, we and our joint venture partners
would be obligated to make such payments. These surety indemnity arrangements are generally joint
and several obligations with our joint venture partners. Although a majority of the required work
may have been performed, these bonds are typically not released until all development
specifications have been met. None of these bonds have been called to date and we believe it is
unlikely that any of these bonds will be called or if called, that any such amounts would be
material to us. See the table below for detail of our surety bonds.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The joint venture obligations, guarantees and indemnities discussed above are generally
provided by us or one or more of our subsidiaries. In joint ventures involving other homebuilders
or developers, support for these obligations is generally provided by the parent companies of the
joint venture partners. In connection with our periodic real estate impairment reviews, we may
accrue for any such commitments where we believe our obligation to pay is probable and can be
reasonably estimated. In such situations, our accrual represents the portion of the total joint
venture obligation related to our relative ownership percentage. In the limited cases where our
venture partners, some of whom are homebuilders or developers who may be experiencing financial
difficulties as a result of current market conditions, may be unable to fulfill their pro rata
share of a joint venture obligation, we may be fully responsible for these commitments if such
commitments are joint and several. We continue to monitor these matters and reserve for these
obligations if and when they become probable and can be reasonably estimated. Except as noted below
and in Note 11 to these consolidated financial statements, as of June 30, 2011 and December 31,
2010, we did not have any such reserves. See Note 11 regarding outstanding litigation for one of
our joint ventures and corresponding reserves.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Off-Balance-Sheet Arrangements — Other. </i></b>We often acquire lots from various development
entities pursuant to option and purchase agreements. The purchase price typically approximates the
market price at the date the contract is executed (with possible future escalators).
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We provide letters of credit and performance, maintenance and other bonds in support of our
related obligations with respect to option deposits and the development of our projects and other
corporate purposes. Letters of credit to guarantee our performance of certain development and
construction activities are generally posted in lieu of cash deposits on our option contracts. The
amount of these obligations outstanding at any time varies depending on the stage and level of our
development activities. In the event a letter of credit or bond is drawn upon, we would be
obligated to reimburse the issuer. We believe it is unlikely that any significant amounts of these
letters of credit or bonds will be drawn upon. The table below outlines our letter of credit and
surety bond obligations (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000">June 30, 2011</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000">December 31, 2010</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Estimated work</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Estimated work</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">remaining to</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">remaining to</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Outstanding</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">complete</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Outstanding</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">complete</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Sureties:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Sureties related to joint ventures
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">1,594</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">32</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,594</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">32</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Sureties related to owned projects and
lots under contract
</div></td>
<td> </td>
<td> </td>
<td align="right">54,492</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">24,750</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">57,399</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">26,968</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total sureties
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">56,086</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">24,782</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">58,993</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">27,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Letters of Credit (“LOCs”):
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">LOCs for land development
</div></td>
<td> </td>
<td> </td>
<td align="right">2,932</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,488</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">LOCs for general corporate operations
</div></td>
<td> </td>
<td> </td>
<td align="right">6,460</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,460</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total LOCs
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">9,392</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">8,948</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Accrued Liabilities. </i></b>Accrued liabilities consist of the following (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>At</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>At</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accruals related to real estate development and construction activities
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">12,761</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">10,689</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Payroll and other benefits
</div></td>
<td> </td>
<td> </td>
<td align="right">9,975</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">12,146</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued taxes
</div></td>
<td> </td>
<td> </td>
<td align="right">3,093</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,820</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Warranty reserves
</div></td>
<td> </td>
<td> </td>
<td align="right">25,929</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">29,265</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Other accruals
</div></td>
<td> </td>
<td> </td>
<td align="right">28,919</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,891</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">80,677</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">87,811</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Warranty Reserves. </i></b>We have certain obligations related to post-construction warranties and
defects for closed homes. With the assistance of an actuary, we have estimated these reserves based
on the number of home closings and historical data and trends for our communities. We also use
industry averages with respect to similar product types and geographic areas in markets where our
experience is not robust enough to facilitate a meaningful conclusion. We regularly review our
warranty reserves and adjust them, as necessary, to reflect changes in trends as information
becomes available. A summary of changes in our warranty reserves follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance, beginning of period
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">27,210</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">32,154</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">29,265</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">33,541</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Additions to reserve from new home
deliveries
</div></td>
<td> </td>
<td> </td>
<td align="right">1,591</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,215</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,848</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,692</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Warranty claims
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(2,872</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,172</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(5,795</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(5,959</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Adjustments to pre-existing reserves
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(389</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(77</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance, end of period
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">25,929</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">31,197</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">25,929</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">31,197</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Warranty reserves are included in accrued liabilities on the accompanying consolidated balance
sheets, and additions and adjustments to the reserves are included in cost of home closings within
the accompanying consolidated statements of operations. These reserves are intended to cover costs
associated with our contractual and statutory warranty obligations, which include, among other
items, claims involving defective workmanship and materials. We believe that our total reserves,
coupled with our contractual relationships and rights with our trades and the general liability
insurance we maintain, are sufficient to cover our general warranty obligations.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">During the first quarter of 2009, we became aware that a limited number of the homes we
constructed were exhibiting symptoms typical of defective Chinese drywall. Defective Chinese
drywall is an industry-wide issue that has affected many homebuilders. As of June 30, 2011, we have
confirmed that approximately 100 homes we built in 2005 and 2006 were constructed using defective
Chinese drywall installed by subcontractors. Of those homes, approximately 90 are located in
Florida and the remaining homes are located in the Houston, Texas area. We are still conducting
investigations to determine if other Texas and/or Florida homes are impacted, although it currently
appears at this time that additional exposure is limited. As of June 30, 2011, we have completed
the repair of approximately 70 homes and are in the process of repairing approximately ten
additional homes. We are seeking to obtain the necessary authorization to repair the remaining
homes. The $25.9 million of warranty reserves we have recorded as of June 30, 2011 includes
reserves that we believe are sufficient to complete our repair of the remaining affected homes and
the resulting damage related to defective Chinese drywall. If our continuing investigations reveal
other homes containing defective Chinese drywall, it may be necessary to increase our warranty
reserves. We have started to receive and continue to seek reimbursement of the costs we have
incurred or expect to incur related to defective Chinese drywall from the manufacturers, suppliers,
and installers of the defective drywall and their insurers as well as from our general liability
insurance carrier.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><b><i>Recently Issued Accounting Pronouncements. </i></b>In May 2011, the Financial Accounting Standards
Board (“FASB”) issued ASU 2011-04, which amended ASC 820, <i>Fair Value Measurements</i>, (“ASC 820”),
providing a consistent definition and measurement of fair value, as well as similar disclosure
requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes
certain fair value measurement principles, clarifies the application of existing fair value
measurement and expands the disclosure requirements. ASU 2011-04 will be effective for us beginning
January 1, 2012. The adoption of ASU 2011-04 is not expected to have a material effect on our
consolidated financial statements or disclosures.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In June 2011, the FASB issued ASU 2011-05, <i>Presentation of Comprehensive Income</i>, (“ASU
2011-05”). ASU 2011-05 requires the presentation of comprehensive income in either (1) a
continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU
2011-05 will be effective for us beginning January 1, 2012. The adoption of ASU 2011-05 is not
expected to have a material effect on our consolidated financial statements or disclosures.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 2 - us-gaap:InventoryDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Real estate consists of the following (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>At</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>At</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Homes under contract under construction (1)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">109,836</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">96,844</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Unsold homes, completed and under construction (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">82,790</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">86,869</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Model homes (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">43,999</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">36,966</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Finished home sites and home sites under development
</div></td>
<td> </td>
<td> </td>
<td align="right">474,007</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">454,718</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Land held for development or sale (2)
</div></td>
<td> </td>
<td> </td>
<td align="right">65,596</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">63,531</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">776,228</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">738,928</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left">
<div style="font-size: 10pt; margin-top: 10pt; width: 18%; border-bottom: 1px solid #000000"> 
</div>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>Also includes the allocated land and land development costs associated with each lot for
these homes.</td>
</tr>
<tr style="font-size: 3pt">
<td> </td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(2)</td>
<td> </td>
<td>Includes communities that we have decided to stop development (mothball) where we have
determined that the current economic performance would be maximized by deferring development.
In the future, such communities may either be re-opened or sold to third parties. We do not
capitalize interest for such mothballed assets, and all costs of land ownership (i.e. property
taxes, homeowner association dues, etc.) are expensed as incurred.</td>
</tr>
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As previously noted, in accordance with ASC 360-10, each of our land inventory and related
real estate assets is reviewed for recoverability when impairment indicators are present, as our
inventory is considered “long-lived” in accordance with GAAP. Due to the current economic
environment, we evaluate all of our real estate assets for impairment on a quarterly basis. ASC
360-10 requires impairment charges to be recorded if the fair value of such assets is less than
their carrying amounts. Our determination of fair value is based on projections and estimates.
Based on these reviews of all our communities, we recorded the following real-estate and
joint-venture impairment charges during the three- and six-month periods ended June 30, 2011 and
2010 (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Terminated option/purchase contracts
and related pre-acquisition costs:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">West
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Real estate inventory impairments (1):
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">West
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">57</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">257</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">93</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">432</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">293</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">767</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">753</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">99</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">228</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">588</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">304</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,252</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">846</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total impairments:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">West
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">57</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">257</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">93</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">434</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">293</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">769</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">753</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">99</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">228</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">590</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">304</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,254</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">846</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left">
<div style="font-size: 10pt; margin-top: 10pt; width: 18%; border-bottom: 1px solid #000000"> 
</div>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>Included in the real estate inventory impairments are impairments of individual homes in a
community where the underlying lots in the community were not also impaired, as follows (in
thousands):</td>
</tr>
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Individual home impairments (in thousands):
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">West
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">57</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">257</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">93</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">121</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">243</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">456</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">703</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">99</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">228</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">277</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">254</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">941</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">796</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The tables below reflect the number of communities with real estate inventory impairments for
the three- and six-month periods ended June 30, 2011 and 2010, excluding home-specific impairments
(as noted above) and the fair value of these communities as of June 30, 2011 and 2010 (dollars in
thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30, 2011</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Number of</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Communities</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Fair Value of Communities Impaired</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impaired</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impairment Charges</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">(Carrying Value less Impairments)</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">West
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">311</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,827</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">311</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6,827</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30, 2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Number of</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Communities</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Fair Value of Communities Impaired</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impaired</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impairment Charges</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">(Carrying Value less Impairments)</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">West
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">50</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">88</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">50</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">88</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30, 2011</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Number of</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Communities</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Fair Value of Communities Impaired</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impaired</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impairment Charges</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">(Carrying Value less Impairments)</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">West
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">311</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,827</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">311</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6,827</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30, 2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Number of</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Communities</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Fair Value of Communities Impaired</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impaired</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Impairment Charges</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">(Carrying Value less Impairments)</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">West
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">50</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">88</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">N/A</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">50</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">88</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Subject to sufficient qualifying assets, we capitalize interest incurred in connection with
the development and construction of real estate. Completed homes and land not actively under
development do not qualify for interest capitalization. Capitalized interest is allocated to real
estate when incurred and charged to cost of closings when the related property is delivered. A
summary of our capitalized interest is as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Capitalized interest, beginning of period
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">12,309</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">13,076</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11,679</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">14,187</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Interest incurred
</div></td>
<td> </td>
<td> </td>
<td align="right">10,848</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">11,343</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">21,697</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">21,745</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Interest expensed
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(7,496</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(8,553</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(15,519</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(16,848</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Interest amortized to cost of home, land
closings and impairments
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(2,456</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,429</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(4,652</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(6,647</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Capitalized interest, end of period
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">13,205</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">12,437</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">13,205</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">12,437</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>Approximately $750,000 of the capitalized interest is related to our joint venture
investments and is a component of “Investments in unconsolidated entities” on our consolidated
balance sheets as of June 30, 2011 and 2010.</td>
</tr>
</table>
</div>
</div>
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<!-- Begin Block Tagged Note 3 - mth:VariableInterestEntitiesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We enter into option and purchase agreements for land or lots as part of the normal course of
business. These option and purchase agreements enable us to acquire properties at one or multiple
future dates at pre-determined prices. These acquisition structures reduce our financial risk
associated with land acquisitions and holdings and allow us to better maximize our cash position.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Based on the provisions of the relevant accounting guidance, we have concluded that when we
enter into an option or purchase agreement to acquire land or lots from an entity and pay a
non-refundable deposit, a variable interest entity, or “VIE”, may be created because we are deemed
to have provided subordinated financial support that will absorb some or all of an entity’s
expected losses if they occur. We evaluate all option and purchase agreements for land to determine
whether they are a VIE. ASC 810, <i>Consolidations</i>, requires that for each VIE, we assess whether we
are the primary beneficiary and, if so, we will consolidate the VIE in our financial statements and
reflect such assets and liabilities as “Real estate not owned.” The liabilities related to
consolidated VIEs are excluded from our debt covenant calculations. At June 30, 2011 and December
31, 2010, we had $1.4 million and $866,000, respectively, of assets identified as “Real estate not
owned”. In order to assess if we are the primary beneficiary, we must first determine if we have
the ability to control the activities of the VIE that most significantly impact its economic
performance. Such activities include, but are not limited to, the ability to determine the budget
and scope of land development work, if any; the ability to control financing decisions for the VIE;
the ability to acquire additional land into the VIE or dispose of land in the VIE not under
contract with Meritage; and the ability to change or amend the existing option contract with the
VIE. If we are not determined to control such activities, we are not considered the primary
beneficiary of the VIE. If we do have the ability to control such activities, we will continue our
analysis by determining if we are also expected to absorb a potentially significant amount of the
VIE’s losses or, if no party absorbs the majority of such losses, if we will benefit from
potentially a significant amount of the VIE’s expected gains.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In substantially all cases, creditors of the entities with which we have option agreements
have no recourse against us and the maximum exposure to loss in our option agreements is limited to
non-refundable option deposits and any capitalized pre-acquisition costs. If we are the land
developer, we are at risk for items over budget related to land development on property we have
under option. In these cases, we have typically contracted to complete development at a fixed
market cost on behalf of the land owner and any budget savings or shortfalls are borne by us. Some
of our option deposits may be refundable to us if certain contractual conditions are not performed
by the party selling the lots.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The table below presents a summary of our lots under option or contract at June 30, 2011
(dollars in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Option/Earnest</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Number of</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Purchase</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Money Deposits</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Lots</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Price</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Cash</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Option contracts recorded on balance sheet as Real estate not owned (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">30</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,398</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">100</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Option contracts not recorded on balance sheet — non-refundable
deposits, committed (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">1,834</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">80,272</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">9,578</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Purchase contracts not recorded on balance sheet — non-refundable
deposits, committed (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">279</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">13,092</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,259</td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Purchase contracts not recorded on balance sheet — refundable
deposits, committed
</div></td>
<td> </td>
<td> </td>
<td align="right">616</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">27,472</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">573</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Total committed (on and off balance sheet)
</div></td>
<td> </td>
<td> </td>
<td align="right">2,759</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">122,234</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">11,510</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Purchase contracts not recorded on balance sheet — refundable
deposits, uncommitted (2)
</div></td>
<td> </td>
<td> </td>
<td align="right">1,310</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">52,788</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">400</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Total uncommitted
</div></td>
<td> </td>
<td> </td>
<td align="right">1,310</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">52,788</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">400</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total lots under option or contracts
</div></td>
<td> </td>
<td> </td>
<td align="right">4,069</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">175,022</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">11,910</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total option contracts not recorded on balance sheet
</div></td>
<td> </td>
<td> </td>
<td align="right">4,039</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">173,624</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">11,810</td>
<td nowrap="nowrap">(3)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left">
<div style="font-size: 10pt; margin-top: 10pt; width: 18%; border-bottom: 1px solid #000000"> 
</div>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>Deposits are generally non-refundable except if certain contractual conditions fail or
certain contractual obligations are not performed by the selling party.</td>
</tr>
<tr style="font-size: 3pt">
<td> </td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(2)</td>
<td> </td>
<td>Deposits are refundable at our sole discretion. We have not completed our acquisition
evaluation process and we have not internally committed to purchase these lots.</td>
</tr>
<tr style="font-size: 3pt">
<td> </td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(3)</td>
<td> </td>
<td>Amount is reflected in our consolidated balance sheet in the line item “Deposits on real
estate under option or contract” as of June 30, 2011.</td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Generally, our options to purchase lots remain effective so long as we purchase a
pre-established minimum number of lots each month or quarter, as determined by the respective
agreement. In nearly all of our option contracts, we have the right not to exercise our option to
purchase the lots and forfeit our deposit without further consequences other than termination of
the option contract. Accordingly, we do not consider the lot purchase price to be a firm
contractual obligation. Although the pre-established number is typically structured to approximate
our expected rate of home construction starts, during a weakened homebuilding market, as we have
recently been experiencing, we may purchase lots at an absorption level that exceeds our sales and
home starts pace to meet the pre-established minimum number of lots or we may try to restructure
our original contract to include terms that more accurately reflect our revised sales pace
expectations.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 4 - us-gaap:DebtDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 4 — SENIOR AND SENIOR SUBORDINATED NOTES</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Senior and senior subordinated notes consist of the following (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>At</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>At</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">6.25% senior notes due 2015. At June 30, 2011 and December 31,
2010, there was approximately $522 and $594 in unamortized
discount, respectively
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">284,478</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">284,406</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">7.731% senior subordinated notes due 2017
</div></td>
<td> </td>
<td> </td>
<td align="right">125,875</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">125,875</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">7.15% senior notes due 2020. At June 30, 2011 and December 31,
2010, there was approximately $4,258 and $4,501 in
unamortized discount, respectively
</div></td>
<td> </td>
<td> </td>
<td align="right">195,742</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">195,499</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">606,095</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">605,780</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The indentures for our 6.25% senior notes and 7.731% senior subordinated notes contain
covenants that require maintenance of certain minimum financial ratios, place limitations on
investments we can make and the payment of dividends and redemptions of equity, and limit the
incurrence of additional indebtedness, asset dispositions, mergers, certain investments and
creations of liens, among other items. As of and for the quarter ended June 30, 2011, we believe we
were in compliance with our covenants. The indenture for our 7.15% senior notes contains covenants
including, among others, limitations on the amount of secured debt we may incur, and limitations on
sale and leaseback transactions and mergers. The covenants contained in the 7.15% senior notes are
generally no more restrictive, and in many cases less restrictive, than the covenants contained in
the indentures for the 6.25% senior notes and 7.731% senior subordinated notes.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Obligations to pay principal and interest on the senior and senior subordinated notes are
guaranteed by all of our wholly-owned subsidiaries (collectively, the “Guarantor Subsidiaries”),
each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees
are full and unconditional, and joint and several. We do not provide separate financial statements
of the Guarantor Subsidiaries because Meritage (the parent company) and the guarantor subsidiaries
comprise the significant majority of our assets and operations, and the non-guarantor subsidiaries,
if any, individually and in the aggregate, minor, in both assets and operations. There are no
significant restrictions on the ability of the Company or any Guarantor Subsidiary to obtain funds
from their respective subsidiaries, as applicable, by dividend or loan.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 5 - us-gaap:FairValueDisclosuresTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 5 — FAIR VALUE DISCLOSURES</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We account for the non-recurring fair value measurements of our non-financial assets and
liabilities in accordance with ASC 820-10, <i>Fair Value Measurement and Disclosure</i>. This guidance
defines fair value, establishes a framework for measuring fair value and disclosures about fair
value measurements. This standard establishes a three-level hierarchy for fair value measurements
based upon the significant inputs used to determine fair value. Observable inputs are those which
are obtained from market participants external to the company while unobservable inputs are
generally developed internally, utilizing management’s estimates, assumptions and specific
knowledge of the assets/liabilities and related markets. The three levels are defined as follows:
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>Level 1 — Valuation is based on quoted prices in active markets for identical assets and
liabilities.</td>
</tr>
</table>
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>Level 2 — Valuation is determined from quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar instruments in markets that are
not active, or by model-based techniques in which all significant inputs are observable in
the market.</td>
</tr>
</table>
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>Level 3 — Valuation is derived from model-based techniques in which at least one
significant input is unobservable and based on the company’s own estimates about the
assumptions that market participants would use to value the asset or liability.</td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">If the only observable inputs are from inactive markets or for transactions which the company
evaluates as “distressed”, the use of Level 1 inputs should be modified by the company to properly
address these factors, or the reliance of such inputs may be limited, with a greater weight
attributed to Level 3 inputs.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">A summary of our long-lived real-estate assets re-measured at fair value on June 30, 2011 and
2010 is as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>Fair Value Measurements of Reporting Date Using</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>As of June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Level 1</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Level 2</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Level 3</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Description:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Long-lived real-estate assets
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">12,556</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">12,556</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000"><b>Fair Value Measurements of Reporting Date Using</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>As of June 30, 2010</b><sup style="font-size: 85%; vertical-align: text-top"><b>(1)</b></sup></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Level 1</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Level 2</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Level 3</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Description:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Long-lived real-estate assets
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">4,294</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">4,294</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>The carrying values for these communities may have increased or decreased from the fair value
reported due to activities that have occurred since the measurement date.</td>
</tr>
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Of the total $776.2 million of long-lived real-estate assets as of June 30, 2011, some of
which have previously been written down to fair value, long-lived assets held and used with an
initial basis of $13.2 million were impaired and written down to their fair value of $12.6 million
during the three months ended June 30, 2011, resulting in an impairment of $588,000, which is
included in our consolidated statement of operations for the three months ended June 30, 2011.
During
the six months ended June 30, 2011, long-lived assets with an initial basis of $15.2 million
were impaired by $1.3 million and written down to their fair value of $13.9 million.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">During the quarter ended June 30, 2010, long-lived assets held and used with an initial basis
of $4.6 million were impaired and written down to their fair value of $4.3 million, resulting in an
impairment of $304,000, which is included in our consolidated statement of operations for the three
months ended June 30, 2010. For the six months ended June 30, 2010, long-lived assets were written
down to their fair value of $7.6 million, resulting in an impairment of $846,000.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Financial Instruments. </i>The fair value of our fixed-rate debt is derived from quoted market
prices by independent dealers and is as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Aggregate</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Estimated</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Aggregate</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Estimated</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Principal</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Fair Value</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Principal</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Fair Value</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Financial Liabilities:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">6.25% senior notes
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">285,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">282,521</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">285,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">285,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">7.731% senior subordinated notes
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">125,875</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">117,378</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">125,875</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">114,861</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">7.15% senior notes
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">200,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">197,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">200,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">198,500</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Due to the short-term nature of other financial assets and liabilities, we consider the
carrying amounts of our other short-term financial instruments to approximate fair value.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 6 - us-gaap:EarningsPerShareTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 6 — EARNINGS/(LOSS) PER SHARE</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Basic and diluted earnings/(loss) per common share were calculated as follows (in thousands,
except per share amounts):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Basic weighted average number of shares
outstanding
</div></td>
<td> </td>
<td> </td>
<td align="right">32,395</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,077</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,328</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,009</td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Effect of dilutive securities:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Stock options and restricted stock (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">243</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">210</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">249</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Diluted weighted average shares outstanding
</div></td>
<td> </td>
<td> </td>
<td align="right">32,638</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,287</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,328</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,258</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Net income/(loss)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">562</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">4,166</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(6,097</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">6,826</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Basic income/(loss) per share
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0.02</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0.13</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.19</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">0.21</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Diluted income/(loss) per share (1)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0.02</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0.13</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.19</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">0.21</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Antidilutive stock options not included in
the calculation of diluted income per
share
</div></td>
<td> </td>
<td> </td>
<td align="right">637</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">782</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,822</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">715</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>For periods with a net loss, basic weighted average shares outstanding are used for diluted
calculations as required by GAAP because all options and non-vested shares outstanding are
considered anti-dilutive.</td>
</tr>
</table>
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 7 - us-gaap:DisclosureOfCompensationRelatedCostsShareBasedPaymentsTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 7 — STOCK-BASED COMPENSATION</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have two stock compensation plans, the Meritage Stock Option Plan, which was adopted in
1997 and amended from time to time (the “1997 Plan”), and the 2006 Stock Incentive Plan that was
adopted in 2006 and amended from time to time (the “2006 Plan” and together with the 1997 Plan, the
“Plans”). The Plans were approved by our stockholders and are administered by our Board of
Directors. The provisions of the Plans are generally consistent with the exception that the
2006 Plan allows for the grant of stock appreciation rights, restricted stock awards,
performance share awards and performance-based awards in addition to the non-qualified and
incentive stock options allowed under the 1997 Plan.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Compensation cost related to stock-based compensation arrangements granted under the Plans are
recognized on a straight-line basis over the remaining respective vesting periods. Below is a
summary of compensation expense and stock award activity (dollars in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Stock-based compensation expense
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">1,388</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,239</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3,101</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2,496</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Non-vested shares granted
</div></td>
<td> </td>
<td> </td>
<td align="right">13,250</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">13,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">357,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">313,500</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Performance-based non-vested shares granted
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">56,250</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">67,500</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The expense associated with the performance-based non-vested shares will only be recognized
when it is determined to be probable that the target performance thresholds will be met and the
shares will vest. We did not grant any stock option awards during the three and six months ended
June 30, 2011 and June 30, 2010. The following table includes additional information regarding our
Plans (dollars in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>As of</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Unrecognized stock-based compensation cost
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">11,714</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">7,816</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted average years remaining vesting period
</div></td>
<td> </td>
<td> </td>
<td align="right">2.45</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2.16</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total equity awards outstanding (vested and unvested shares)
</div></td>
<td> </td>
<td> </td>
<td align="right">1,838,851</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,000,518</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The Plans authorize awards to officers, key employees, non-employee directors and consultants
for up to 7,750,000 shares of common stock, of which 697,286 shares remain available for grant at
June 30, 2011. We believe that such awards provide a means of performance-based compensation to
attract and retain qualified employees and better align the interests of our employees with those
of our stockholders. Non-vested stock awards are usually granted with either a three-year or
five-year ratable vesting period.
</div>
</div>
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<!-- Begin Block Tagged Note 8 - us-gaap:IncomeTaxDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 8 — INCOME TAXES</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Components of the income tax provision are as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Federal
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(63</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(70</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">State
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(185</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(162</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(400</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(276</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(185</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(225</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(400</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(346</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Due to the effects of the deferred tax asset valuation allowance, federal and state tax NOLs,
and changes in unrecognized tax benefits, the effective tax rates in 2011 and 2010 are not
meaningful as there is no correlation between effective tax rates and the amount of pre-tax income
or losses for those periods.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At June 30, 2011 and December 31, 2010, we have no unrecognized tax benefits due to the lapse
of the statute of limitations and completion of audits for prior years. We believe that our current
income tax filing positions and deductions will be sustained on audit and do not anticipate any
adjustments that will result in a material change. Our policy is to accrue interest and penalties
on unrecognized tax benefits and include in federal income tax expense.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In accordance with ASC 740-10, <i>Income Taxes</i>, we evaluate our deferred tax assets, including
the benefit from net operating losses (“NOLs”), to determine if a valuation allowance is required.
Companies must assess whether a valuation allowance should be established based on the
consideration of all available evidence using a “more likely than not”
standard with significant weight being given to evidence that can be objectively verified.
This assessment considers, among other matters, the nature, frequency and severity of current and
cumulative losses, forecasts of future profitability, the length of statutory carryforward periods,
our experience with operating losses and our experience of utilizing tax credit carryforwards and
tax planning alternatives. Given the downturn in the homebuilding industry over the past several
years, the degree of the economic recession, the instability and deterioration of the financial
markets, and the resulting uncertainty in projections of our future taxable income, we recorded a
full valuation allowance against our deferred tax assets during 2008. We continue to maintain a
full non-cash valuation allowance against the entire amount of our remaining net deferred tax
assets at June 30, 2011 as we have determined that the weight of the negative evidence exceeds that
of the positive evidence at this time.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At June 30, 2011 and December 31, 2010, we had a valuation allowance of against deferred tax
assets as follows (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Federal
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">65,372</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">63,409</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">State
</div></td>
<td> </td>
<td> </td>
<td align="right">26,049</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">26,591</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total Valuation Allowance
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">91,421</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">90,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our future deferred tax asset realization depends on sufficient taxable income in the
carryforward periods under existing tax laws. Federal net operating loss carryforwards may be used
to offset future taxable income for 20 years and expire in 2030. State net operating loss
carryforwards may be used to offset future taxable income for a period of time ranging from 5 to 20
years, depending on the state, and begin to expire in 2012. Deferred tax assets include
tax-effected federal and state net operating loss carryforwards. On an ongoing basis, we will
continue to review all available evidence to determine if and when we expect to realize our
deferred tax assets and NOL carryovers.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At June 30, 2011, we have income taxes payable of $2.1 million, which primarily consists of
current state tax accruals as well as tax and interest amounts that we expect to pay within one
year for having amended a prior-year federal tax return. The federal loss carryback period reverted
back to two years for our 2011 fiscal year and there is no available taxable income in the two-year
carryback period for us to utilize any tax loss coming out of 2011.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We conduct business and are subject to tax in the U.S. and several states. With few
exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by
taxing authorities for years prior to 2006. There are no ongoing federal or state income tax audits
at this time.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The tax benefits from our net operating losses, built-in losses, and tax credits would be
materially reduced or potentially eliminated if the Company experienced an “ownership change” as
defined under Internal Revenue Code (“IRC”) §382. Based on our analysis performed as of June 30,
2011, we do not believe that we have experienced an ownership change. As a protective measure, our
stockholders held a Special Meeting of Stockholders on February 16, 2009 and approved an amendment
to our Articles of Incorporation that restricts certain transfers of our common stock. The
amendment helps us avoid an unintended ownership change and thereby preserve the value of our tax
benefits for future utilization.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 9 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following presents certain supplemental cash flow information (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cash paid during the period for:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Interest, net of interest capitalized
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">14,766</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">15,792</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Income taxes
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">862</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Non-cash operating activities:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Real estate not owned
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">532</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3,688</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Non-cash investing activities:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Distributions from unconsolidated entities
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">294</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
</div>
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<!-- Begin Block Tagged Note 10 - us-gaap:SegmentReportingDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 10 — OPERATING AND REPORTING SEGMENTS</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As defined in ASC 280-10, <i>Segment Reporting</i>, we have seven operating segments (the seven
states in which we operate). These segments are engaged in the business of acquiring and developing
land, constructing homes, marketing and selling those homes, and providing warranty and customer
service. We aggregate our operating segments into a reporting segment based on similar long-term
economic characteristics and geographical proximity. Our reporting segments are as follows:
</div>
<div align="right">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="8%"> </td>
<td width="2%"> </td>
<td width="90%"> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"><i>West</i>:
</div></td>
<td> </td>
<td align="left" valign="top">California and Nevada</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"><i>Central</i>:
</div></td>
<td> </td>
<td align="left" valign="top">Texas, Arizona and Colorado</td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"><i>East</i>:
</div></td>
<td> </td>
<td align="left" valign="top">Florida and North Carolina</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Management’s evaluation of segment performance is based on segment operating income/(loss),
which we define as homebuilding and land revenue less cost of home construction, commissions and
other sales costs, land development and other land sales costs and other costs incurred by or
allocated to each segment, including impairments. Each reportable segment follows the same
accounting policies described in Note 1, “Organization and Basis of Presentation,” to the
consolidated financial statements in our 2010 Annual Report on Form 10-K. Operating results for
each segment may not be indicative of the results for such segment had it been an independent,
stand-alone entity. The following is our segment information (in thousands):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Revenue (1):
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">West
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">31,210</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">38,515</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">55,360</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">79,919</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">169,182</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">228,870</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">301,688</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">374,024</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">19,739</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">24,020</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">40,672</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">39,266</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Consolidated total
</div></td>
<td> </td>
<td> </td>
<td align="right">220,131</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">291,405</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">397,720</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">493,209</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Operating income/(loss) (2):
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">West
</div></td>
<td> </td>
<td> </td>
<td align="right">537</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">217</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(447</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">3,158</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Central
</div></td>
<td> </td>
<td> </td>
<td align="right">7,849</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">18,530</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">12,075</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">25,616</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">East
</div></td>
<td> </td>
<td> </td>
<td align="right">2,004</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,807</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4,241</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,115</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Segment operating income
</div></td>
<td> </td>
<td> </td>
<td align="right">10,390</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">20,554</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">15,869</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">31,889</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Corporate and unallocated (3)
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(4,646</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(5,993</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(10,177</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(10,987</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Earnings from unconsolidated entities, net
</div></td>
<td> </td>
<td> </td>
<td align="right">1,226</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,786</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,134</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,589</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Interest expense
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(7,496</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(8,553</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(15,519</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(16,848</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Other income, net
</div></td>
<td> </td>
<td> </td>
<td align="right">1,273</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">51</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,996</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,983</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Loss on extinguishment of debt
</div></td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,454</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,454</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Income/(loss) before income taxes
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">747</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">4,391</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(5,697</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">7,172</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left">
<div style="font-size: 10pt; margin-top: 10pt; width: 18%; border-bottom: 1px solid #000000"> 
</div>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>Revenue includes the following land closing revenue, by segment: six months ended June 30,
2011 — $100,000 in Central Region; six months ended June 30, 2010 — $1.2 million in Central
Region.</td>
</tr>
<tr style="font-size: 3pt">
<td> </td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(2)</td>
<td> </td>
<td>See Note 2 of this Quarterly Report on Form 10-Q for a breakout of real estate-related
impairments by region.</td>
</tr>
<tr style="font-size: 3pt">
<td> </td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(3)</td>
<td> </td>
<td>Balance consists primarily of corporate costs and numerous shared service functions such as
finance and treasury that are not allocated to the reporting segments.</td>
</tr>
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="30%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="18" style="border-bottom: 1px solid #000000"><b>At June 30, 2011</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Corporate and</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>West</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Central</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>East</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Unallocated (1)</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Total</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Deposits on real estate under option
or contract
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">975</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">10,028</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">807</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11,810</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Real estate
</div></td>
<td> </td>
<td> </td>
<td align="right">202,364</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">515,158</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">58,706</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">776,228</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Investments in unconsolidated entities
</div></td>
<td> </td>
<td> </td>
<td align="right">176</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,382</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">30</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">351</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,939</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Other assets
</div></td>
<td> </td>
<td> </td>
<td align="right">6,942</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">36,814</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">9,920</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">373,116</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">426,792</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total assets
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">210,457</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">572,382</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">69,463</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">373,467</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,225,769</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="30%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="18" style="border-bottom: 1px solid #000000"><b>At December 31, 2010</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Corporate and</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>West</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Central</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>East</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Unallocated (1)</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Total</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Deposits on real estate under option
or contract
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">50</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">9,754</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">555</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">10,359</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Real estate
</div></td>
<td> </td>
<td> </td>
<td align="right">191,882</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">499,176</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">47,870</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">738,928</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Investments in unconsolidated entities
</div></td>
<td> </td>
<td> </td>
<td align="right">110</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,507</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">29</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">341</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,987</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Other assets
</div></td>
<td> </td>
<td> </td>
<td align="right">3,501</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,961</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7,873</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">420,329</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">464,664</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total assets
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">195,543</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">552,398</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">56,327</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">420,670</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,224,938</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left">
<div style="font-size: 10pt; margin-top: 10pt; width: 18%; border-bottom: 1px solid #000000"> 
</div>
</div>
<div style="margin-top: 3pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr>
<td width="3%"></td>
<td width="1%"></td>
<td width="96%"></td>
</tr>
<tr valign="top">
<td nowrap="nowrap" align="left">(1)</td>
<td> </td>
<td>Balance consists primarily of cash and other corporate assets not allocated to the reporting
segments.</td>
</tr>
</table>
</div>
</div>
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<!-- Begin Block Tagged Note 11 - us-gaap:CommitmentsAndContingenciesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>NOTE 11 — COMMITMENTS AND CONTINGENCIES</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We are involved in various routine legal proceedings incidental to our business, some of which
are covered by insurance. With respect to the majority of pending litigation matters, our ultimate
legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases,
any potential losses related to those matters are not considered probable. We evaluate our accruals
for litigation at least quarterly and, as appropriate, adjust them to reflect (i) facts and
circumstances known to us at the time; (ii) advice and analyses of outside counsel (if applicable);
and (iii) assumptions and judgment of management. We have reserved approximately $10.1 million for
losses related to litigation and asserted claims where our ultimate exposure is considered probable
and the potential loss can be reasonably estimated, which is classified within accrued liabilities,
“other” accruals, on our June 30, 2011 balance sheet as discussed in Note 1 to these financial
statements. Additionally, we have $25.9 million of warranty reserves, primarily relating to the
correction of home construction defects and general customer warranty claims. Historically, most of
these matters are resolved prior to litigation. We believe that none of these matters will have a
material adverse impact upon our consolidated financial condition, results of operations, or cash
flows.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b><i>Joint Venture Litigation</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We and our co-venturers in a project known as “South Edge” are defendants in a lawsuit filed
by the lenders to this project and an appeal from an arbitration proceeding instituted by a
co-venturer in the project. The project involves a large master-planned community located in
Henderson, Nevada, which was acquired by an unconsolidated joint venture with capital supplied by
the co-venturers, and a syndicated loan on the project, which at June 30, 2011 had a principal
balance of $328 million (a reconciliation of additional past due obligations, if any, related to
interest and penalties have not been provided to us). In connection with the general operations of
the venture, we provided various guarantees relating to the project, covering our pro rata amount
of the project financing.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">On December 9, 2010, three of the lenders filed a petition seeking to place the venture into
an involuntary bankruptcy. On June 6, 2011, we received a demand letter from the lenders,
requesting full payment of $13.2 million associated with the springing repayment guarantee,
including past-due interest and penalties. The lenders claim that the involuntary bankruptcy filed
by three of the lenders triggered the “springing” repayment guarantee. We do not believe the
lenders have an enforceable position associated with their $13.2 million claim and do not believe
we will be required to pay such amount. In connection with the on-going legal proceedings, we have
established reserves for amounts that we believe are appropriate for both potential settlements and
legal costs. The amount we have reserved is less than the aggregate amount of our guarantees and
our pro rata share of a damage claim entered in the arbitration proceeding that is currently
subject to appeal, because it takes into account: (i) defenses we believe we possess, many of which
are unique to our position in the
venture, as well as (ii) potential claims we may have against the joint venture, the lenders,
and our co-venturers. At June 30, 2011, our maximum pro rata exposure under the repayment
guarantee was $13.2 million. Our 3.53% investment in the venture has been previously fully
impaired. We do not believe that the ultimate disposition of these matters will have a material
adverse affect on our financial condition. See Part II, Item 1, Legal Proceedings, for additional
discussion regarding these proceedings.
</div>
</div>
Meritage Homes CORP