NVR INC - Quarter Report: 2008 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

NVR, Inc.

 

(Exact name of registrant as specified in its charter)

Virginia		54-1394360
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11700 Plaza America Drive, Suite 500
Reston, Virginia 20190
(703) 956-4000

(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

(Not Applicable)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 25, 2008 there were 5,427,022 total shares of common stock outstanding.

 

 

NVR, Inc.
Form 10-Q
INDEX

 

				Page
PART I		FINANCIAL INFORMATION
Item 1.		NVR, Inc. Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007			3
		Condensed Consolidated Statements of Income for the Three Months Ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) and the Six Months Ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited)			5
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited)			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			36
Item 4.		Controls and Procedures			36
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			37
Item 1A.		Risk Factors			37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 4.		Submission of Matters to a Vote of Security Holders			39
Item 6.		Exhibits			40
		Signature			41
		Exhibit Index			42

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NVR, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)

		June 30, 2008				December 31, 2007
		(unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	867,329			$	660,709
Receivables			16,189				10,855
Inventory:
Lots and housing units, covered under sales agreements with customers			549,540				573,895
Unsold lots and housing units			69,127				105,838
Manufacturing materials and other			6,970				9,121
			625,637				688,854
Assets not owned, consolidated per FIN 46R			145,141				180,206
Property, plant and equipment, net			29,077				32,911
Reorganization value in excess of amounts allocable to identifiable assets, net			41,580				41,580
Goodwill and indefinite life intangibles, net			11,686				11,686
Definite life intangibles, net			42				96
Contract land deposits, net			173,123				188,528
Other assets			248,782				252,461
			2,158,586				2,067,886
Mortgage Banking:
Cash and cash equivalents			810				3,500
Mortgage loans held for sale, net			134,714				107,338
Property and equipment, net			1,020				881
Reorganization value in excess of amounts allocable to identifiable assets, net			7,347				7,347
Other assets			11,378				7,464
			155,269				126,530
Total assets		$	2,313,855			$	2,194,416

See notes to condensed consolidated financial statements.

(Continued)

NVR, Inc.
Condensed Consolidated Balance Sheets (Continued)
(in thousands, except share and per share data)

		June 30, 2008				December 31, 2007
		(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Homebuilding:
Accounts payable		$	191,158			$	219,048
Accrued expenses and other liabilities			232,625				251,475
Liabilities related to assets not owned, consolidated per FIN 46R			134,686				164,369
Customer deposits			108,379				125,315
Other term debt			2,703				2,820
Senior notes			200,000				200,000
			869,551				963,027
Mortgage Banking:
Accounts payable and other liabilities			12,152				18,551
Notes payable			116,199				83,463
			128,351				102,014
Total liabilities			997,902				1,065,041
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,561,187 and 20,592,640 shares issued as of June 30, 2008 and December 31, 2007, respectively			206				206
Additional paid-in-capital			692,152				663,631
Deferred compensation trust — 515,888 and 516,085 shares of NVR, Inc. common stock as of June 30, 2008 and December 31, 2007, respectively			(75,461	)			(75,636	)
Deferred compensation liability			75,461				75,636
Retained earnings			3,624,793				3,529,995
Less treasury stock at cost — 15,136,930 and 15,455,086 shares at June 30, 2008 and December 31, 2007, respectively			(3,001,198	)			(3,064,457	)
Total shareholders’ equity			1,315,953				1,129,375
Total liabilities and shareholders’ equity		$	2,313,855			$	2,194,416

See notes to condensed consolidated financial statements.

NVR, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Homebuilding:
Revenues		$	941,033			$	1,297,140			$	1,810,902			$	2,372,250
Other income			3,701				5,251				10,100				12,216
Cost of sales			(772,369	)			(1,061,937	)			(1,499,300	)			(1,915,347	)
Selling, general and administrative			(89,871	)			(101,198	)			(174,037	)			(198,604	)
Operating income			82,494				139,256				147,665				270,515
Interest expense			(3,232	)			(3,298	)			(6,471	)			(6,620	)
Homebuilding income			79,262				135,958				141,194				263,895
Mortgage Banking:
Mortgage banking fees			14,690				19,528				32,752				37,607
Interest income			869				1,030				1,679				2,337
Other income			184				276				343				460
General and administrative			(8,408	)			(8,954	)			(16,062	)			(18,277	)
Interest expense			(180	)			(161	)			(314	)			(313	)
Mortgage banking income			7,155				11,719				18,398				21,814
Income before taxes			86,417				147,677				159,592				285,709
Income tax expense			(35,085	)			(56,930	)			(64,794	)			(110,141	)
Net income		$	51,332			$	90,747			$	94,798			$	175,568
Basic earnings per share		$	9.58			$	16.19			$	17.92			$	31.16
Diluted earnings per share		$	8.64			$	14.14			$	16.10			$	27.11
Basic average shares outstanding			5,357				5,606				5,290				5,634
Diluted average shares outstanding			5,938				6,420				5,888				6,477

See notes to condensed consolidated financial statements.

NVR, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

		Six Months Ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	94,798			$	175,568
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			7,463				8,632
Stock option compensation expense			18,432				28,509
Excess income tax benefit from exercise of stock options			(33,184	)			(66,659	)
Contract land deposit impairments			12,410				67,239
Deferred tax expense (benefit)			10,524				(23,372	)
Mortgage loans closed			(966,798	)			(1,076,375	)
Proceeds from sales of mortgage loans			962,615				1,118,579
Principal payments on mortgage loans held for sale			2,105				4,745
Gain on sale of loans			(25,175	)			(27,402	)
Net change in assets and liabilities:
Decrease (increase) in inventories			63,217				(152,946	)
Increase in receivables			(5,137	)			(63	)
Decrease in contract land deposits			5,060				12,383
(Increase) decrease in accounts payable, customer deposits and accrued expenses			(37,857	)			56,131
Other, net			(7,525	)			(10,102	)
Net cash provided by operating activities			100,948				114,867
Cash flows from investing activities:
Purchase of property, plant and equipment			(3,750	)			(4,078	)
Other, net			765				1,259
Net cash used in investing activities			(2,985	)			(2,819	)
Cash flows from financing activities:
Net borrowings (repayments) under notes payable and other term debt			32,619				(17,554	)
Purchase of treasury stock			—				(209,613	)
Excess income tax benefit from exercise of stock options			33,184				66,659
Proceeds from exercise of stock options			40,164				66,423
Net cash provided (used) by financing activities			105,967				(94,085	)
Net increase in cash and cash equivalents			203,930				17,963
Cash and cash equivalents, beginning of the period			664,209				556,119
Cash and cash equivalents, end of period		$	868,139			$	574,082
Supplemental disclosures of cash flow information:
Interest paid during the period		$	6,214			$	6,356
Income taxes paid, net of refunds		$	31,784			$	66,497
Supplemental disclosures of non-cash activities:
Net assets not owned, consolidated per FIN 46R		$	(5,382	)		$	(4,422	)

See notes to condensed consolidated financial statements.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

1. Basis of Presentation

     The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”) and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see note 2 to the accompanying financial statements). Intercompany accounts and transactions have been eliminated in consolidation. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America, they should be read in conjunction with the financial statements and notes thereto included in the Company’s 2007 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the three and six-month period ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

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

     For the three and six-month periods ended June 30, 2008 and 2007, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying financial statements.

2. Consolidation of Variable Interest Entities

     Revised Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (“FIN 46R”), Consolidation of Variable Interest Entities, requires the primary beneficiary of a variable interest entity to consolidate that entity on its financial statements. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the entity. Expected losses are the expected negative variability in the fair value of an entity’s net assets, exclusive of its variable interests, and expected residual returns are the expected positive variability in the fair value of an entity’s net assets, exclusive of its variable interests. As discussed below, NVR evaluates the provisions of FIN 46R as it relates to NVR’s finished lot acquisition strategy.

     NVR does not engage in the land development business. Instead, the Company typically acquires finished building lots at market prices from various development entities under fixed price purchase agreements. The purchase agreements require deposits that may be forfeited if NVR fails to perform under the agreement. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots. As of June 30, 2008, the Company controlled approximately 60,500 lots with deposits in cash and letters of credit totaling approximately $292,000 and $7,700, respectively.

     NVR believes this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. NVR may, at its option, choose for any reason and at any time not to perform under these purchase agreements by delivering notice of its intent not to acquire the finished

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

lots under contract. NVR’s sole legal obligation and economic loss for failure to perform under these purchase agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the purchase agreements. In other words, if NVR does not perform under a purchase agreement, NVR loses only its deposit. NVR does not have any financial or specific performance guarantees, or completion obligations, under these purchase agreements. None of the creditors of any of the development entities with which NVR enters fixed price purchase agreements have recourse to the general credit of NVR. Except as described below, NVR also does not share in an allocation of either the profit earned or loss incurred by any of these entities.

     On a very limited basis, NVR also obtains finished lots using joint venture limited liability corporations (“LLC’s”). All LLC’s are structured such that NVR is a non-controlling member and is at risk only for the amount invested by the Company. NVR is not a borrower, guarantor or obligor of any of the LLCs’ debt. NVR enters into a standard fixed price purchase agreement to purchase lots from the LLC’s.

     At June 30, 2008, NVR had an aggregate investment in nine separate LLC’s totaling approximately $9,900, which controlled approximately 370 lots. NVR recognizes its share of the earnings of the LLC’s as an adjustment of the cost basis of the lots at the time that the lot and related home is settled with an external customer. During the six months ended June 30, 2008 and 2007, NVR adjusted cost of sales by approximately $240 and $270, respectively, which represented NVR’s share of the earnings of the LLC’s. As of June 30, 2008, NVR’s investment in the LLC’s had been partially offset by an approximate $5,800 contract land deposit valuation reserve.

     Forward contracts, such as the fixed price purchase agreements utilized by NVR to acquire finished lot inventory, are deemed to be “variable interests” under FIN 46R. Therefore, the development entities with which NVR enters fixed price purchase agreements, including the LLC’s, are examined under FIN 46R for possible consolidation by NVR. NVR has developed a methodology to determine whether it, or conversely, the owner(s) of the applicable development entity is the primary beneficiary of a development entity. The methodology used to evaluate NVR’s primary beneficiary status requires substantial management judgment and estimation. These judgments and estimates involve assigning probabilities to various estimated cash flow possibilities relative to the development entity’s expected profits and losses and the cash flows associated with changes in the fair value of finished lots under contract. Although management believes that its accounting policy is designed to properly assess NVR’s primary beneficiary status relative to its involvement with the development entities from which NVR acquires finished lots, changes to the probabilities and the cash flow possibilities used in NVR’s evaluation could produce widely different conclusions regarding whether NVR is or is not a development entity’s primary beneficiary.

     The Company has evaluated all of its fixed price purchase agreements and LLC arrangements and has determined that it is the primary beneficiary of twenty-eight of those development entities with which the agreements and arrangements are held. As a result, at June 30, 2008, NVR has consolidated such development entities in the accompanying condensed consolidated balance sheet. Where NVR deemed itself to be the primary beneficiary of a development entity created after December 31, 2003 and the development entity refused to provide financial statements, NVR utilized estimation techniques to perform the consolidation. The effect of the consolidation under FIN 46R at June 30, 2008 was the inclusion on the balance sheet of $145,141 as Assets not owned, consolidated per FIN 46R, with a corresponding inclusion of $134,686 as Liabilities related to assets not owned, consolidated per FIN 46R, after elimination of intercompany items. Inclusive in these totals were assets of approximately $55,000 and liabilities of approximately $51,000 estimated for thirteen development entities created after December 31, 2003 that did not provide financial statements.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

Following is the consolidating schedule at June 30, 2008:

		NVR, Inc.
		and				FIN 46R								Consolidated
		Subsidiaries				Entities				Eliminations				Total
ASSETS
Homebuilding:
Cash and cash equivalents		$	867,329			$	—			$	—			$	867,329
Receivables			16,189				—				—				16,189
Homebuilding inventory			625,637				—				—				625,637
Property, plant and equipment, net			29,077				—				—				29,077
Reorganization value in excess of amount allocable to identifiable assets, net			41,580				—				—				41,580
Goodwill and intangibles, net			11,728				—				—				11,728
Contract land deposits, net			177,455				—				(4,332	)			173,123
Other assets			254,905				—				(6,123	)			248,782
			2,023,900				—				(10,455	)			2,013,445
Mortgage banking assets:			155,269				—				—				155,269
FIN 46R Entities:
Land under development			—				144,286				—				144,286
Other assets			—				855				—				855
			—				145,141				—				145,141
Total assets		$	2,179,169			$	145,141			$	(10,455	)		$	2,313,855
LIABILITIES AND SHAREHOLDERS’ EQUITY
Homebuilding:
Accounts payable, accrued expenses and other liabilities		$	423,783			$	—			$	—			$	423,783
Customer deposits			108,379				—				—				108,379
Other term debt			2,703				—				—				2,703
Senior notes			200,000				—				—				200,000
			734,865				—				—				734,865
Mortgage banking liabilities:			128,351				—				—				128,351
FIN 46R Entities:
Accounts payable, accrued expenses and other liabilities			—				15,337				—				15,337
Debt			—				50,828				—				50,828
Contract land deposits			—				16,791				(16,791	)			—
Advances from NVR, Inc.			—				4,501				(4,501	)			—
Minority interest			—				—				68,521				68,521
			—				87,457				47,229				134,686
Equity			1,315,953				57,684				(57,684	)			1,315,953
Total liabilities and shareholders’ equity		$	2,179,169			$	145,141			$	(10,455	)		$	2,313,855

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     Under FIN 46R, an enterprise with an interest in a variable interest entity or potential variable interest entity created before December 31, 2003, is not required to apply FIN 46R to that entity if the enterprise, after making an “exhaustive effort”, is unable to obtain the information necessary to perform the accounting required to consolidate the variable interest entity for which it is determined to be the primary beneficiary. At June 30, 2008, NVR has been unable to obtain the information necessary to perform the accounting required to consolidate five separate development entities created before December 31, 2003 for which NVR determined it is the primary beneficiary. NVR has made, or has committed to make, aggregate deposits, totaling approximately $7,800 to these five separate development entities, with a total aggregate purchase price for the finished lots of approximately $64,700. The aggregate deposit made or committed to being made is NVR’s maximum exposure to loss. As noted above, because NVR does not have any contractual or ownership interests in the development entities with which it contracts to buy finished lots (other than the limited use of the LLC’s as discussed above), NVR does not have the ability to compel these development entities to provide financial or other data. Because NVR has no ownership rights in any of these five development entities, the consolidation of such entities has no impact on NVR’s net income or earnings per share for the three and six months ended June 30, 2008. Aggregate activity with respect to the five development entities is included in the following table:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Finished lots purchased — dollars		$	4,188			$	2,310			$	4,556			$	5,996
Finished lots purchased — units			10				13				11				32

3. Contract Land Deposits

     During the three and six-month periods ended June 30, 2008, the Company incurred pre-tax impairment charges of approximately $5,800 and $12,400, respectively. During the three and six-month periods ended June 30, 2007, the Company incurred pre-tax impairment charges of approximately $55,000 and $67,200, respectively. These charges are related to the impairment of contract land deposits due to continued deterioration of market conditions in the homebuilding industry. These impairment charges were recorded in cost of sales in the accompanying condensed consolidated statements of income. The contract land deposit asset is shown net of a $114,271 and $133,664 impairment valuation allowance at June 30, 2008 and December 31, 2007, respectively.

4. Earnings per Share

     The following weighted average shares and share equivalents are used to calculate basic and diluted earnings per share for the three and six months ended June 30, 2008 and 2007:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Basic weighted average number of shares outstanding			5,357,000				5,606,000				5,290,000				5,634,000
Shares issuable upon exercise of dilutive options			581,000				814,000				598,000				843,000
Diluted average number of shares outstanding			5,938,000				6,420,000				5,888,000				6,477,000

     The assumed proceeds used in the treasury method for calculating the dilutive impact of employee stock options includes the amount the employee must pay upon exercise, the amount of compensation cost

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

attributed to future services and not yet recognized, and the amount of tax benefits that would be credited to additional paid-in capital assuming exercise of the option. The assumed amount credited to additional paid-in capital equals the tax benefit from assumed exercise after consideration of the intrinsic value upon assumed exercise less the actual stock-based compensation expense to be recognized in the income statement from 2006 and future periods.

     Options to purchase 312,395 and 313,145 shares of common stock during the three and six months ended June 30, 2008, and options to purchase 34,238 shares of common stock during both the three and six months ended June 30, 2007, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. In addition, 377,861 and 408,737 performance-based options were outstanding as of June 30, 2008 and 2007, respectively, and accordingly, have been excluded from the computation of diluted earnings per share because the performance target had not been achieved, pursuant to the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share. NVR does not expect the performance target will be achieved and accordingly does not expect these options to vest. See note 5 for further discussion of the performance-based options.

5. Stock Option Compensation Expense

     During the six months ended June 30, 2008, the Company issued 259,946 non-qualified stock options (“Management Options”) under the 2000 Broadly-Based Stock Option Plan. The exercise price of the Management Options granted was equal to the closing price of the Company’s common stock on the day immediately preceding the date of grant. Each Management Option was granted for a term of ten (10) years from the date of grant. These Management Options will vest 100% on December 31, 2010, subject to the grantee’s continued employment. The Company also issued 12,765 non-qualified stock options (“Director Options”) under the 1998 Directors’ Long Term Stock Option Plan during the six months ended June 30, 2008. The exercise price of the Director Options granted was equal to the closing price of the Company’s common stock on the day immediately preceding the date of grant. Each Director Option was granted for a term of ten (10) years from the date of grant. These Director Options will vest in 33 1/3% annual increments beginning December 31, 2010, subject to the director’s continued Board service.

     To estimate the grant-date fair value of its stock options, the Company uses the Black-Scholes option-pricing model. The Black-Scholes model estimates the per share fair value of an option on its date of grant based on the following factors: the option’s exercise price; the price of the underlying stock on the date of grant; the estimated dividend yield; a “risk-free” interest rate; the estimated option term; and the expected volatility. For the “risk-free” interest rate, the Company uses a U.S. Treasury Strip due in a number of years equal to the option’s expected term. NVR has concluded that its historical exercise experience is the best estimate of future exercise patterns to determine an option’s expected term. To estimate expected volatility, NVR analyzed the historic volatility of its common stock. The fair values of the Director Options and Management Options granted during the six months ended June 30, 2008 were estimated on the grant date using the Black-Scholes option-pricing model based on the following assumptions:

		Management		Director
		Options		Options
Estimated option life		3.89 years		4.87 years
Risk free interest rate (range)		2.64% - 3.23%		2.83% - 3.71%
Expected volatility (range)		31.60% - 36.73%		30.84% - 36.73%
Expected dividend rate		0.00%		0.00%
Grant-date fair value per share of options granted		$155.89		$174.07

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     Compensation cost for options which vest solely based on continued employment over a long-term vesting schedule (“service-only” option) is recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting portion of the grant). As required by SFAS No. 123R, Share-Based Payment, compensation cost is recognized within the income statement in the same expense line as the cash compensation paid to the respective employees. SFAS No. 123R also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation and requires that the compensation costs of stock-based awards be recognized net of estimated forfeitures.

     As of June 30, 2008, the total unrecognized compensation cost for outstanding unvested “service-only” stock option awards equals approximately $90,800, net of estimated forfeitures, and the weighted-average period over which the unrecognized compensation will be recorded is equal to approximately 1.86 years.

     The following table provides additional information relative to NVR’s stock option plans for the six-month period ended June 30, 2008:

						Weighted Average
		Options				Exercise Price
Stock Options
Outstanding at beginning of period			2,050,453			$	325.13
Granted			272,711			$	516.72
Exercised			(318,156	)		$	185.64
Forfeited or expired			(78,299	)		$	437.40
Outstanding at end of period			1,926,709			$	370.71
Exercisable at end of period			417,419			$	193.25

     As noted above, SFAS No. 123R requires the Company to recognize compensation expense related to stock based compensation plans net of estimated forfeitures. In addition, the Company is required to adjust stock based compensation expense if the Company’s actual forfeiture experience differs from estimates made. During the first quarter of 2008, the Company adjusted its expected forfeiture rate and consequently recorded an adjustment reversing approximately $4,800 of stock-based compensation expense as a result.

     The Company determined in the third quarter of 2007 that it was improbable that it would achieve the performance metric related to 377,861 outstanding stock options. Based on the Company’s continued assessment that the performance metric (aggregate diluted earnings per share for the years ended December 31, 2005 through 2008 in excess of $339.00 per fully diluted share) will not be met, the Company expects that none of the contingently issuable options will vest. As a result, the Company currently is not recognizing any stock-based compensation expense related to these options and the Company believes it is improbable that any such expense will be recognized in the future.

     The Company recognized stock based compensation expense of $12,099 and $14,186 during the three months ended June 30, 2008 and 2007, respectively, and $18,432 and $28,509 during the six months ended June 30, 2008 and 2007, respectively.

6. Excess Reorganization Value, Goodwill and Other Intangibles

     SFAS No. 142, Goodwill and Other Intangible Assets, requires goodwill and reorganization value in excess of amounts allocable to identifiable assets (“excess reorganization value”) to be tested for impairment on an annual basis subsequent to the year of adoption. The Company completed the annual assessment of

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

impairment during the first quarter of 2008, and as of June 30, 2008, management believes that there was no impairment of either goodwill or excess reorganization value.

7. Uncertainty in Income Taxes

     As of January 1, 2008, the Company has approximately $36,383 (on a net basis) of unrecognized tax benefits, which would decrease income tax expense if recognized. The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. As of January 1, 2008, the Company had a total of $16,969 of accrued interest for unrecognized tax benefits on its balance sheet. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of these authorities to not seek penalties from the Company for the tax positions it has taken on its returns, related to its unrecognized tax benefits. Therefore, the Company does not accrue penalties for the positions in which it has an unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as a component of income tax expense. With few exceptions, the Company is no longer subject to income tax examinations for years prior to 2004.

8. Shareholders’ Equity

     A summary of changes in shareholders’ equity is presented below:

						Additional												Deferred				Deferred
		Common				Paid-In				Retained				Treasury				Comp.				Comp.
		Stock				Capital				Earnings				Stock				Trust				Liability				Total
Balance, December 31, 2007		$	206			$	663,631			$	3,529,995			$	(3,064,457	)		$	(75,636	)		$	75,636			$	1,129,375
Net income			—				—				94,798				—				—				—				94,798
Deferred compensation activity			—				—				—				—				175				(175	)			—
Stock-based compensation			—				18,432				—				—				—				—				18,432
Stock option activity			—				40,164				—				—				—				—				40,164
Tax benefit from stock-based compensation activity			—				33,184				—				—				—				—				33,184
Treasury shares issued upon option exercise			—				(63,259	)			—				63,259				—				—				—
Balance, June 30, 2008		$	206			$	692,152			$	3,624,793			$	(3,001,198	)		$	(75,461	)		$	75,461			$	1,315,953

     The Company settles option exercises by issuing shares of treasury stock to option holders. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares acquired. Approximately 318,000 options to purchase shares of the Company’s common stock were exercised during the six months ended June 30, 2008.

9. Product Warranties

     The Company establishes warranty and product liability reserves to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to NVR’s homebuilding business. Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with our general counsel and outside counsel retained to handle specific product liability cases. The following table reflects the changes in the Company’s warranty reserve during the three and six months ended June 30, 2008 and 2007:

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Warranty reserve, beginning of period		$	72,272			$	68,328			$	70,284			$	70,175
Provision			7,280				10,300				17,016				18,540
Payments			(9,802	)			(11,854	)			(17,550	)			(21,941	)
Warranty reserve, end of period		$	69,750			$	66,774			$	69,750			$	66,774

10. Segment Disclosures

     Consistent with the principles and objectives of SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, the following disclosure includes four homebuilding reportable segments that aggregate geographically the Company’s homebuilding operating segments, and the mortgage banking operations presented as a single reportable segment. The homebuilding reportable segments are comprised of operating divisions in the following geographic areas:

Homebuilding Mid Atlantic — Virginia, West Virginia, Maryland, and Delaware
Homebuilding North East — New Jersey and eastern Pennsylvania
Homebuilding Mid East — Kentucky, New York, Ohio, and western Pennsylvania
Homebuilding South East — North Carolina, South Carolina and Tennessee

     Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses, and a corporate capital allocation charge. The corporate capital allocation charge which eliminates in consolidation, is based on the segment’s average net assets employed, and is charged using a consistent methodology in the years presented. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are providing the desired rate of return after covering the Company’s cost of capital. The Company records charges on contract land deposits when it is determined that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are charged to the operating segment upon the determination to terminate a finished lot purchase agreement with the developer, or to restructure a lot purchase agreement resulting in the forfeiture of the deposit. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a capital allocation charge.

     In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between segment profit and consolidated profit before tax include unallocated corporate overhead (including all management incentive compensation), stock option compensation expense, consolidation adjustments and external corporate interest expense. NVR’s overhead functions, such as accounting, treasury, human resources, land acquisition, etc., are centrally performed and the costs are not allocated to the Company’s operating segments. Consolidation adjustments consist of such items necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to the Company’s operating segments. Likewise, stock option compensation expense is not charged to the operating segments. External corporate interest expense is primarily comprised of interest charges on the Company’s outstanding Senior Notes and working capital line borrowings, and are not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     Following are tables presenting revenues, segment profit and segment assets for each reportable segment, with reconciliations to the amounts reported for the consolidated Company, where applicable:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Revenues:
Homebuilding Mid Atlantic		$	559,865			$	789,878			$	1,086,257			$	1,478,661
Homebuilding North East			98,811				114,705				184,779				203,328
Homebuilding Mid East			154,769				224,489				304,929				379,617
Homebuilding South East			127,588				168,068				234,937				310,644
Mortgage Banking			14,690				19,528				32,752				37,607
Consolidated revenues		$	955,723			$	1,316,668			$	1,843,654			$	2,409,857

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Profit:
Homebuilding Mid Atlantic		$	45,760			$	115,291			$	89,240			$	218,660
Homebuilding North East			5,559				4,583				12,710				8,008
Homebuilding Mid East			9,839				21,862				20,686				35,874
Homebuilding South East			8,290				25,437				17,350				48,164
Mortgage Banking			7,857				12,604				19,517				23,584
Segment profit			77,305				179,777				159,503				334,290
Contract land deposit impairments (1)			16,076				(39,115	)			15,439				(47,605	)
Stock option expense (2)			(12,099	)			(14,186	)			(18,432	)			(28,509	)
Corporate capital allocation (3)			28,237				38,766				56,204				74,229
Unallocated corporate overhead			(24,894	)			(20,288	)			(51,459	)			(46,271	)
Consolidation adjustments and other			4,907				5,850				4,567				5,837
Corporate interest expense			(3,115	)			(3,127	)			(6,230	)			(6,262	)
Reconciling items sub-total			9,112				(32,100	)			89				(48,581	)
Consolidated income before tax		$	86,417			$	147,677			$	159,592			$	285,709

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

period. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the periods presented:

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Homebuilding Mid Atlantic		$	18,956			$	26,457			$	37,710			$	51,502
Homebuilding North East			2,666				4,064				5,449				7,603
Homebuilding Mid East			3,257				4,683				6,558				8,510
Homebuilding South East			3,358				3,562				6,487				6,614
Total		$	28,237			$	38,766			$	56,204			$	74,229

		June 30,
		2008				2007
Assets:
Homebuilding Mid Atlantic		$	616,016			$	949,937
Homebuilding North East			81,204				131,106
Homebuilding Mid East			122,386				176,728
Homebuilding South East			115,350				129,145
Mortgage Banking			147,922				168,583
Segment assets			1,082,878				1,555,499
Assets not owned, consolidated per FIN 46R			145,141				199,246
Cash			867,329				571,522
Deferred taxes			204,140				192,697
Intangible assets			60,655				60,776
Land reserve			(114,271	)			(104,468	)
Consolidation adjustments and other (4)			67,983				28,009
Reconciling items sub-total			1,230,977				947,782
Consolidated assets		$	2,313,855			$	2,503,281

(4)

The 2008 balance includes bulk purchases of finished building lots of approximately $25,000 which have not yet been allocated to the reportable segments and a reduction in the consolidating adjustment eliminating FIN 46R land deposits of approximately $14,000. See note 2 for further discussion.

11. Fair Value of Derivative Instruments

     In the normal course of business, NVR’s mortgage banking segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by NVR. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVR does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives pursuant to the requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and, accordingly, are marked to fair value through earnings. Fair value is determined pursuant to SFAS No. 157, Fair Value Measurements, and Staff Accounting Bulletin 109, Written Loan Commitments Recorded at Fair Value Through Earnings, both of

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

which the Company adopted on a prospective basis as of the beginning of 2008. Fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying statements of income.

     SFAS No. 157 assigns a fair value hierarchy to the inputs used to measure fair value under the rule. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs. The fair value of the Company’s rate lock commitments to borrowers and the related input levels includes, as applicable:

	i)		the assumed gain/loss of the expected resultant loan sale (level 2);
	ii)		the effects of interest rate movements between the date of the rate lock and the balance sheet date (level 2); and
	iii)		the value of the servicing rights associated with the loan (level 2).

     The assumed gain/loss considers the amount that the Company has discounted the price to the borrower from par for competitive reasons and the excess servicing to be received or buydown fees to be paid upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to contractual terms with investors. To calculate the effects of interest rate movements, the Company utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. The Company sells all of its loans on a servicing released basis, and receives a servicing release premium upon sale. Thus, the value of the servicing rights included in the fair value measurement is based upon contractual terms with investors, and range from approximately 45 basis points to 285 basis points of the loan amount, depending on the loan type. The Company assumes an approximate 18% fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which the Company does not close a mortgage loan and is based on historical experience.

     The fair value of the Company’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

     Mortgage loans held for sale are closed at cost, which includes all fair value measurement in accordance with SFAS No. 133, and thereafter are carried at the lower of cost or fair value until sale.

     The effect of fair value measurements on earnings in the six months ended June 30, 2008 is as follows:

						Assumed				Interest
		Notional or				Gain (Loss)				Rate				Servicing				Security				Total Fair
		Principal				From Loan				Movement				Rights				Price				Value
		Amount				Sale				Effect				Value				Change				Adjustment
Rate lock commitments		$	386,600			$	(244	)		$	(4,418	)		$	6,435			$	—			$	1,773
Forward sales contracts			562,253				—				—				—				6,032				6,032
Mortgages held for sale			132,954				(557	)			(1,643	)			2,401				—				201
Total						$	(801	)		$	(6,061	)		$	8,836			$	6,032			$	8,006

     Prior to the adoption of SAB No. 109 and SFAS No. 157, the fair value measurement for locked loan commitments and closed loans held for sale only considered the effects of interest rate movements between the date of the rate lock and either the loan closing date or the balance sheet date. The Company recognized a net SFAS No. 133 unrealized loss of $111 (pre-tax) in the six-month period ended June 30,

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

2007. The resulting unrealized $8,000 gain in the six-month period ended June 30, 2008 from the fair value measurement was primarily attributable to the inclusion of the value of the servicing rights in the measurement as required by SAB No. 109. The increase in unrealized income from the adoption of SAB No. 109 and SFAS No. 157 was further increased due to the principal volume of the Company’s locked loan pipeline increasing by 68% from June 30, 2007 to June 30, 2008 as a result of a 180 day extended lock program offered to homebuyers that was instituted during 2008. The fair value measurement will be impacted in the future by the change in volume and product mix of the Company’s locked loan commitments.

12. Debt

     NVR Mortgage Finance, Inc., a wholly owned subsidiary of NVR, Inc., increased its borrowing capacity under its existing warehouse credit facility to $149,250 from $125,000 by executing a Lender Addition Agreement dated as of April 22, 2008, with U.S. Bank National Association, as agent, Comerica Bank, National City Bank, Washington Mutual Bank, F.A., Bank of America N.A. and U.S. Bank National Association, each as a Lender. There were no changes made to any other terms of the existing revolving credit agreement.

13. Commitments and Contingencies

     On July 18, 2007, former and current employees filed lawsuits against the Company in the Court of Common Pleas in Allegheny County, Pennsylvania and Hamilton County, Ohio, in Superior Court in Durham County, North Carolina, and in the Circuit Court in Montgomery County, Maryland, and on July 19, 2007 in the Superior Court in New Jersey, alleging that the Company incorrectly classified its sales and marketing representatives as being exempt from overtime wages. These lawsuits are similar in nature to another lawsuit filed on October 29, 2004 by another former employee in the United States District Court for the Western District of New York. The complaints seek injunctive relief, an award of unpaid wages, including fringe benefits, liquidated damages equal to the overtime wages allegedly due and not paid, attorney and other fees and interest, and where available, multiple damages. The suits were filed as purported class actions. However, none of the groups of employees that the lawsuits purport to represent have been certified as a class. The lawsuits filed in Ohio, Pennsylvania, Maryland and New Jersey have been stayed pending further developments in the New York action.

     The Company believes that its compensation practices in regard to sales and marketing representatives are entirely lawful and in compliance with two letter rulings from the United States Department of Labor (“DOL”) issued in January 2007. The two courts to most recently consider similar claims against other homebuilders have acknowledged the DOL’s position that sales and marketing representatives were properly classified as exempt from overtime wages and the only court to have directly addressed the exempt status of such employees concluded that the DOL’s position was valid. Accordingly, the Company has vigorously defended and intends to continue to vigorously defend these lawsuits. Because the Company is unable to determine the likelihood of an unfavorable outcome of this case, or the amount of damages, if any, the Company has not recorded any associated liabilities in the accompanying condensed, consolidated balance sheet.

     In 2006 and 2005, the Company received requests for information pursuant to Section 308(a) of the Clean Water Act (the “Act”) from Regions 3 and 4 of the United States Environmental Protection Agency (the “EPA”). The requests sought information regarding the Company’s storm water management discharge practices in North Carolina, Pennsylvania, Maryland and Virginia during the homebuilding construction process. The Company was informed in the second quarter of 2008 that this matter has been closed with the EPA, and no fines were assessed.

     The Company is involved in various other litigation arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

14. Recent Accounting Pronouncements

     On November 29, 2006, the FASB ratified Emerging Issue Task Force (“EITF”) Issue No. 06-8, Applicability of the Assessment of a Buyer’s Continuing Investment Under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums. EITF No. 06-8 states that the adequacy of the buyer’s continuing investment under SFAS No. 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. This consensus could require that additional deposits be collected by developers of condominium projects that want to recognize profit during the construction period under the percentage-of-completion method. EITF No. 06-8 became effective for the Company beginning on January 1, 2008. The adoption of EITF No. 06-8 did not have a material impact on the Company’s financial statements.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. The statement permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 became effective for the Company on January 1, 2008. The Company did not elect to measure any financial assets or liabilities at fair value except those required to be reported at fair value by SFAS No. 157 as discussed in note 11 above.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non controlling interests. SFAS No. 160 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the impact of the adoption of SFAS No. 160.

     In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) expands on the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which an entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed and interests transferred as a result of business combinations. SFAS No. 141(R) expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations. SFAS No. 141(R) is effective for any acquisitions made on or after January 1, 2009.

     In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP No. 157-2”), Effective Date of FASB Statement No. 157 which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The Company does not expect the adoption of FSP No. 157-2 to have a material impact on its financial statements.

     In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS No. 161 enhances the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, regarding an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for the Company’s fiscal year beginning January 1, 2009. The Company will conform its disclosures to the requirements of SFAS No. 161 upon adoption.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands)

Forward-Looking Statements

     Some of the statements in this Form 10-Q, as well as statements made by us in periodic press releases or other public communications, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other comparable terminology. All statements other than of historical facts are forward looking statements. Forward looking statements contained in this document include those regarding market trends, NVR’s financial position, business strategy, the outcome of pending litigation, projected plans and objectives of management for future operations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of NVR to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to the following: general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by NVR and NVR’s customers; competition; the availability and cost of land and other raw materials used by NVR in its homebuilding operations; shortages of labor; weather related slow-downs; building moratoriums; governmental regulation; the ability of NVR to integrate any acquired business; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which NVR has little or no control. NVR undertakes no obligation to update such forward-looking statements. For additional information regarding risk factors, see Part II, Item 1(a) of this Report.

     Unless the context otherwise requires, references to “NVR”, “we”, “us” or “our” include NVR and its subsidiaries.

Results of Operations for the Three and Six Months Ended June 30, 2008 and 2007

Overview

     Our primary business is the construction and sale of single-family detached homes, townhomes and condominium buildings. To more fully serve our homebuilding customers, we also operate a mortgage banking and title services business. Our homebuilding reportable segments consist of the following markets:

Mid Atlantic:		Maryland, Virginia, West Virginia and Delaware
North East:		New Jersey and eastern Pennsylvania
Mid East:		Kentucky, New York, Ohio and western Pennsylvania
South East:		North Carolina, South Carolina, and Tennessee

     We believe that we operate our business with a conservative operating strategy. We do not engage in land development and primarily construct homes on a pre-sold basis. This strategy allows us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital. In addition, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets which management believes contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets.

     Because we are not active in the land development business, our continued success is contingent upon, among other things, our ability to control an adequate supply of finished lots at current market prices on which to build, and on our developers’ ability to timely deliver finished lots to meet the sales demands of

our customers. We acquire finished lots from various development entities under fixed price lot purchase agreements (“purchase agreements”). These purchase agreements require deposits in the form of cash or letters of credit that may be forfeited if we fail to perform under the purchase agreement. However, we believe this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and development. As of June 30, 2008, we controlled approximately 60,500 lots with deposits in cash and letters of credit totaling approximately $292,000 and $7,700, respectively. Included in the number of controlled lots are approximately 17,600 lots for which we have recorded a contract land deposit impairment reserve of $114,271 as of June 30, 2008. See note 3 to the condensed consolidated financial statements included herein for additional information regarding contract land deposits.

Current Overview of the Business Environment

     The current home sales environment remains challenging, still characterized by relatively higher levels of existing and new homes available for sale, driven by slowed demand and record foreclosure rates. In addition, homebuyer confidence continues to be negatively impacted by concerns regarding a potential economic recession, job stability and declining home prices in many of our markets. The home sales environment also continues to be adversely impacted by a more restrictive mortgage lending environment. The mortgage market changed significantly during 2007 and continues to change in 2008, due to the turmoil in the credit markets. These changes within the mortgage markets continue to make it difficult for our customers to obtain mortgage financing. In response to these challenging market conditions which continue to negatively impact new orders and selling prices in each of our market segments, we continue to offer incentives to homebuyers and to reduce prices in many of our markets. Overall, new orders decreased 29% in the quarter ended June 30, 2008 as compared to the same period in 2007 and selling prices decreased 13% in these same respective periods. Our cancellation rate for the second quarter of 2008 was 19% as compared to 16% during the same period in 2007 and 22% in the first quarter of 2008.

     Reflecting the challenging market conditions discussed above, for the quarter ended June 30, 2008, consolidated revenues decreased approximately 27% from the same period in 2007. Additionally, net income and diluted earnings per share in the current quarter decreased 43% and 39%, respectively, as compared to the second quarter of 2007. Gross profit margins within our homebuilding business declined to 17.9% in the second quarter of 2008 as compared to 18.1% in the second quarter of 2007. Gross profit margins were negatively impacted by contract land deposit impairment charges of approximately $5,800, or 62 basis points, in the second quarter of 2008, and $55,000, or 424 basis points, in the same period in 2007. Gross profit margins excluding these impairments were 18.5% in the second quarter of 2008 compared to 22.4% for the same period in 2007. This decline in gross profit margins excluding contract land deposit impairment charges was due to continued pricing pressure in many of our markets.

     Based on the current uncertainty in both the homebuilding and mortgage markets, we expect to see continued pricing pressures and in turn, continued pressure on gross profit margins in future periods. To offset these declining selling prices and customer affordability issues, we continue to work with our vendors to reduce material and labor costs incurred in the construction process. In addition, we continue to focus on reducing lot costs by working with our developers in certain of our communities to reduce lot prices to current market values and/or to defer scheduled lot purchases to coincide with our slower than expected sales pace. In communities where we are unsuccessful in negotiating necessary adjustments to the contracts to meet current market conditions, we may exit the community and forfeit our deposit. As mentioned above, we recorded a contract land deposit impairment charge of approximately $5,800 during the second quarter of 2008, as compared to approximately $55,000 in the second quarter of 2007. Additionally, in response to continuing pricing pressures and customer affordability issues, we are also providing house types at lower sales price points by reducing the square footage of the products offered and by providing fewer upgraded features as standard options. This provides homebuyers with greater affordability and the option to upgrade only those features important to each particular buyer. We also continue to assess and adjust our staffing levels and organizational structure as market conditions warrant.

Homebuilding Operations

     The following table summarizes the results of operations and other data for the consolidated homebuilding operations:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenues		$	941,033			$	1,297,140			$	1,810,902			$	2,372,250
Cost of Sales		$	772,369			$	1,061,937			$	1,499,300			$	1,915,347
Gross profit margin percentage			17.9	%			18.1	%			17.2	%			19.3	%
Selling, general and administrative		$	89,871			$	101,198			$	174,037			$	198,604
Settlements (units)			2,750				3,463				5,215				6,163
Average settlement price		$	341.7			$	374.2			$	346.9			$	384.4
New orders (units)			2,670				3,745				5,401				7,662
Average new order price		$	316.4			$	363.9			$	318.2			$	368.2
Backlog (units)											5,331				7,887
Average backlog price										$	341.5			$	391.3

Consolidated Homebuilding — Three Months Ended June 30, 2008 and 2007

     Homebuilding revenues decreased 27% for the second quarter of 2008 compared to the same period in 2007 as a result of a 21% decrease in the number of units settled and a 9% decrease in the average settlement price quarter over quarter. The decrease in the number of units settled is primarily attributable to our beginning backlog units being approximately 29% lower at the start of the second quarter of 2008 as compared to the same period of 2007. Average settlement prices were primarily impacted by an 11% lower average price of homes in backlog entering the second quarter of 2008 as compared to the same period in 2007.

     Gross profit margins in the quarter ended June 30, 2008 declined slightly as compared to the second quarter of 2007 despite lower contract land deposit impairment charges of approximately $5,800 in the second quarter of 2008 as compared to approximately $55,000 in the second quarter of 2007. The decline in gross profit margins was primarily driven by continued pressure on selling prices. We expect continued gross profit margin pressure over at least the next several quarters due to the current market conditions discussed above.

     The number of new orders and the average selling price for new orders for the second quarter of 2008 decreased by 29% and 13%, respectively, as compared to the second quarter of 2007. New orders were negatively impacted by a continuing decline in consumer confidence driven by concerns regarding an economic recession and job stability, as well as by concerns regarding the stability in home values. In addition, net new orders have been negatively impacted by higher cancellation rates in the second quarter of 2008, which increased to 19% from 16% in the same period of 2007. Cancellation rates have been impacted by tighter mortgage underwriting standards and financing availability, negatively impacting both our customers’ ability to secure financing for their new home purchase and our customers’ ability to sell their current homes. New orders were also negatively impacted by a 16% reduction in our average number of active communities in the second quarter of 2008 to 435 from 516 in the same period of 2007. The decrease in the average number of active communities is a result of the termination of certain lot purchase agreements and a reduced pace of entering into new lot purchase agreements.

     Selling, general and administrative (“SG&A”) expenses for the second quarter decreased by approximately $11,300, but as a percentage of revenue increased to 9.6% from 7.8% in the second quarter of 2007. The decrease in SG&A expenses is primarily attributable to a $9,100 decrease in selling and marketing costs in the second quarter of 2008 compared to the same period in 2007 due to the previously mentioned 16% decrease in the average number of active communities period over period.

Consolidated Homebuilding — Six Months Ended June 30, 2008 and 2007

     Homebuilding revenues decreased 24% for the six months ended June 30, 2008 compared to the same period in 2007 due to a 15% decrease in the number of units settled and a 10% decrease in the average settlement price. The decrease in the number of units settled is primarily attributable to our beginning backlog units being approximately 19% lower entering 2008 as compared to the backlog unit balance entering 2007. Average settlement prices were impacted primarily by a 10% lower average price of homes in the beginning backlog entering the second quarter of 2008 compared to the same period in 2007.

     Gross profit margins in the first six months of 2008 declined compared to the first six months of 2007 despite lower contract land deposit impairment charges of approximately $12,400, or 69 basis points, in the 2008 period as compared to approximately $67,200, or 283 basis points, in the same period in 2007. The decline in gross profit margins was primarily driven by continued pressure on selling prices as a result of the aforementioned challenging market conditions.

     New orders for the six months ended June 30, 2008 decreased by 30% compared to the same period in 2007 and the average sales price of new orders decreased 14% over the same respective periods. New order units and prices have been negatively impacted by the aforementioned challenging market conditions. In addition, new order units have been negatively impacted by a 16% reduction in the average number of active communities period over period to 438 in 2008 from 522 in 2007. We expect to continue to experience downward pressure on sales and selling prices over at least the next several quarters in all of our market segments as the market remains challenging.

     SG&A expenses for the six-month period ended June 30, 2008 decreased approximately $24,600 compared to the same period in 2007, and as a percentage of revenue increased to 9.6% in 2008 compared to 8.4% for the 2007 period. The decrease in SG&A expenses is primarily attributable to a $12,400 decrease in selling and marketing costs in 2008 as compared to the same period in 2007 due to previously mentioned 16% decrease in the average number of active communities year over year. In addition, stock based compensation expense decreased approximately $9,400 in 2008 as compared to 2007. This decrease is attributable to the recognition of approximately $10,300 of performance based stock compensation in 2007, with no corresponding charge in 2008 due to our determination that it is improbable the performance metric associated with our contingently issuable stock options will be met. Further, in the first quarter of 2008, we reversed approximately $4,500 of previously expensed stock based compensation due to a change in our estimated stock option forfeiture rate. These decreases were partially offset by additional expense in 2008 related to 2008 stock option grants. See note 5 to the accompanying condensed consolidated financial statements for additional discussion of stock option compensation expense.

     Backlog units and dollars were 5,331 and $1,820,482, respectively, as of June 30, 2008 compared to 7,887 and $3,085,939 as of June 30, 2007. The decrease in backlog units is primarily attributable to our beginning backlog units being approximately 19% lower at the beginning of 2008 as compared to the beginning of 2007, coupled with net new order and settlement activity, for the first six months of 2008 as compared to the same period in 2007. Backlog dollars were negatively impacted by the decrease in backlog units coupled with a 13% decrease in the average price of homes in ending backlog, resulting primarily from a 14% decrease in the average selling price for new orders over the six-month period ended June 30, 2008 compared to the same period in 2007.

Reportable Segments

     Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses, and a corporate capital allocation charge determined at the corporate headquarters. The corporate capital allocation charge eliminates in consolidation, is based on the segment’s average net assets employed, and is charged using a consistent methodology in the periods presented. The corporate capital allocation charged to the

operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are providing the desired rate of return after covering our cost of capital. We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are charged to the operating segment upon the determination to terminate a finished lot purchase agreement with the developer, or to restructure a lot purchase agreement resulting in the forfeiture of the deposit. The following table summarizes certain homebuilding operating activity by segment for the three and six months ended June 30, 2008 and 2007:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Mid Atlantic:
Revenues		$	559,865			$	789,878			$	1,086,257			$	1,478,661
Settlements (units)			1,344				1,720				2,585				3,072
Average settlement price		$	416.4			$	459.1			$	420.1			$	481.1
New orders (units)			1,341				1,803				2,633				3,724
Average new order price		$	378.2			$	456.3			$	380.7			$	460.5
Backlog (units)											2,774				4,317
Average backlog price										$	409.4			$	479.2
Gross profit margin		$	93,117			$	179,537			$	183,253			$	341,570
Gross profit margin percentage			16.6	%			22.7	%			16.9	%			23.1	%
Segment profit		$	45,760			$	115,291			$	89,240			$	218,660
North East:
Revenues		$	98,811			$	114,705			$	184,779			$	203,328
Settlements (units)			304				324				549				573
Average settlement price		$	325.0			$	353.9			$	336.6			$	354.8
New orders (units)			240				345				520				762
Average new order price		$	298.1			$	344.7			$	303.1			$	342.3
Backlog (units)											476				729
Average backlog price										$	302.3			$	345.1
Gross profit margin		$	13,727			$	16,794			$	28,959			$	31,047
Gross profit margin percentage			13.9	%			14.6	%			15.7	%			15.3	%
Segment profit		$	5,559			$	4,583			$	12,710			$	8,008
Mid East:
Revenues		$	154,769			$	224,489			$	304,929			$	379,617
Settlements (units)			639				839				1,256				1,411
Average settlement price		$	240.3			$	266.4			$	241.5			$	267.5
New orders (units)			726				923				1,443				1,953
Average new order price		$	231.1			$	245.2			$	235.5			$	251.4
Backlog (units)											1,300				1,816
Average backlog price										$	238.3			$	252.4
Gross profit margin		$	25,760			$	41,571			$	51,527			$	72,172
Gross profit margin percentage			16.6	%			18.5	%			16.9	%			19.0	%
Segment profit		$	9,839			$	21,862			$	20,686			$	35,874
South East:
Revenues		$	127,588			$	168,068			$	234,937			$	310,644
Settlements (units)			463				580				825				1,107
Average settlement price		$	275.6			$	289.8			$	284.8			$	280.6
New orders (units)			363				674				805				1,223
Average new order price		$	270.5			$	288.8			$	271.9			$	289.7
Backlog (units)											781				1,025
Average backlog price										$	296.2			$	299.9
Gross profit margin		$	21,388			$	39,100			$	42,447			$	73,223
Gross profit margin percentage			16.8	%			23.3	%			18.1	%			23.6	%
Segment profit		$	8,290			$	25,437			$	17,350			$	48,164

Mid Atlantic

Three Months Ended June 30, 2008 and 2007

     The Mid Atlantic segment had an approximate $69,500 reduction in segment profit in the three months ended June 30, 2008 compared to the same period in 2007. Revenues decreased approximately $230,000, or 29%, for the three months ended June 30, 2008 from the prior year quarter due primarily to a 22% decrease in the number of units settled and a 9% decrease in the average settlement price. The decrease in units settled is attributable to a 34% lower backlog unit balance entering the second quarter of 2008 compared to the same period in 2007, offset partially by a higher backlog turnover rate period over period. The Mid Atlantic segment’s gross profit margin percentage for the second quarter of 2008 decreased to 16.6% from 22.7% in the same period in 2007. Gross profit margins were negatively impacted by the increased pressure on selling prices resulting in a 9% decrease in the average settlement price in the second quarter of 2008 as compared to the second quarter of 2007. In addition, gross margins were also negatively impacted by higher contract land deposit impairment charges of approximately $12,400 in the second quarter of 2008 compared to approximately $10,800 in the second quarter of 2007.

     Segment new orders for the second quarter of 2008 decreased 26% from the same period in 2007. The segment’s average sales price of new orders decreased 17% in the quarter compared to the second quarter of 2007. New orders and new order sale prices have been negatively impacted by deteriorating market conditions within this segment resulting from high levels of new and existing home inventory for sale, low consumer confidence, and a tougher lending environment. In addition, new orders are down in the current quarter from the same period in 2007 as a result of a 16% decrease in the average number of active communities in the second quarter of 2008 as compared to the same period in 2007.

Six Months Ended June 30, 2008 and 2007

     The Mid Atlantic segment had an approximate $129,400 decrease in segment profit in the six months ended June 30, 2008 compared to the same period in 2007. Revenues decreased approximately $392,400, or 27%, for the six months ended June 30, 2008 from the prior year period on a 16% decrease in the number of units settled and a 13% decrease in the average settlement price. The decrease in units settled is attributable to a 26% lower backlog unit balance at the beginning of 2008 as compared to the same period in 2007. The decrease in the average settlement price is primarily attributable to an 11% lower average price of homes in the beginning backlog period over period. The segment’s gross profit margin percentage fell to 16.9% in 2008 from 23.1% in 2007. Gross profit margins were adversely affected by the downward pressure on selling prices which resulted in the aforementioned 13% decrease in the average settlement price and higher contract land deposit impairment charges of approximately $18,400 in 2008 compared to approximately $14,700 in 2007.

     Segment new orders for the six-month period ended June 30, 2008 decreased 29% from the same period in 2007 and the segment’s average sales price of new orders decreased 17% period over period. As discussed above, we continue to experience downward pressure on new order units and selling prices as a result of the challenging market conditions. Backlog units and dollars decreased approximately 36% and 45%, respectively. The decrease in backlog units is attributable to the beginning backlog units being approximately 26% lower at the beginning of 2008 as compared to the beginning of 2007, coupled with the net new order and settlement activity for the six-month period ended June 30, 2008. Backlog dollars were negatively impacted by the decrease in backlog units and a 15% decrease in the average price of homes in ending backlog, due primarily to the aforementioned 17% decrease in the average selling price for new orders over the six-month period ended June 30, 2008 compared to the same period in 2007.

North East

Three Months Ended June 30, 2008 and 2007

     The North East segment had an approximate $1,000 increase in segment profit in the three months ended June 30, 2008 compared to the same period in 2007, despite a decrease in revenues of approximately $15,900, or 14%. Revenues declined as a result of a 6% decrease in the number of units settled and an 8% decrease in the average settlement price. The decrease in units settled is attributable to a 24% lower backlog unit balance entering the second quarter of 2008 compared to the same period in 2007, offset partially by a higher backlog turnover rate quarter over quarter. Average settlement prices were down primarily as a result of selling price pressures in prior quarters, which were reflected in the average price of homes in our backlog balance at the beginning of the second quarter of 2008 being 9% lower than the same period in 2007. Gross profit margins decreased to 13.9% in 2008 from 14.6% in 2007 primarily as a result of the lower average settlement prices in 2008.

     Segment new orders and the average new order sales price for the second quarter of 2008 decreased 30% and 14%, respectively, from the same period in 2007, as a result of challenging market conditions and continued pricing pressures in each market within this segment. New orders have also been negatively impacted by an increase in the cancellation rate in the segment to 18% in the second quarter of 2008 from 15% in the second quarter of 2007. In addition, new orders were negatively impacted by a 20% reduction in the average number of active communities within the North East segment in the second quarter of 2008 as compared to the same period in 2007.

Six Months Ended June 30, 2008 and 2007

     The North East segment had an approximate $4,700 increase in segment profit in the six-month period ended June 30, 2008 compared to the same period in 2007, despite a decrease in revenues of approximately $18,500, or 9%, for the six-month period ended June 30, 2008 from the prior year period. Revenues declined due to a 4% decrease in the number of units settled and a 5% decrease in the average settlement price period over period. The decrease in the number of units settled and the average settlement price is primarily attributable to a 7% lower beginning backlog balance and 6% lower average price of homes in beginning backlog period over period. Gross profit margins increased slightly to 15.7% in the first six months of 2008 from 15.3% in the same period 2007. The increase in segment profit is attributable primarily to cost control measures as well as to reduced sales and marketing costs due to a 20% reduction in the average number of active communities during 2008 as compared to the same period in 2007.

     Segment new orders and the average new order sales price for the six-month period ended June 30, 2008, decreased 32% and 11%, respectively, from the same period in 2007, as a result of deteriorating market conditions in each of the markets in this segment. New orders have also been negatively impacted by an increase in the cancellation rate in the segment to 18% in 2008 from 15% in 2007. In addition, new orders were negatively impacted by a 20% reduction in the average number of active communities within the North East segment. The net new order and settlement activity for the first six months of 2008 resulted in a 35% decrease in backlog units at June 30, 2008 as compared to June 30, 2007. Backlog dollars decreased 43% year over year due to the decrease in backlog units and to a 11% decrease in the average selling price for new orders for the six-month period ended June 30, 2008 as compared to the same period in 2007.

Mid East

Three Months Ended June 30, 2008 and 2007

     The Mid East segment had an approximate $12,000 decrease in segment profit quarter over quarter. Revenues decreased approximately $69,700, or 31%, due to a 24% decrease in the number of units settled and

a 10% decrease in the average settlement price. The decrease in units settled is attributable to a 30% lower backlog unit balance entering the second quarter of 2008 compared to the same period in 2007, offset partially by a higher backlog turnover rate period over period. The decrease in the average settlement price is primarily attributable to a 7% lower average price of homes in beginning backlog quarter over quarter. Gross profit margins decreased to 16.6% in the second quarter of 2008 from 18.5% in the same period of 2007, primarily as a result of the 10% decrease in the average settlement price quarter over quarter.

     Segment new orders and the average selling price during the second quarter of 2008 decreased 21% and 6%, respectively, from the same period in 2007. The decrease in new orders was attributable to a continuing deterioration in each of the markets within the Mid East segment quarter over quarter. In addition, new orders were negatively impacted by a 19% decrease in the average number of active communities in the second quarter of 2008 as compared to the same period in 2007.

Six Months Ended June 30, 2008 and 2007

     The Mid East segment had an approximate $15,200 decrease in segment profit in the six-month period ended June 30, 2008 compared to the same period in 2007. Revenues decreased approximately $74,700, or 20%, for the six months ended June 30, 2008 from the prior year period due to an 11% decrease in the number of units settled and a 10% decrease in the average settlement price period over period. The decrease in the number of units settled and the average settlement price is primarily attributable to a 13% lower beginning backlog balance and 9% lower average price of homes in beginning backlog period over period. Gross profit margins decreased to 16.9% in the first six months of 2008 from 19.0% in the same period in 2007, primarily as a result of the 10% decrease in the average settlement price period over period.

     Segment new orders and the average new order sales price for the six-month period ended June 30, 2008, decreased 26% and 6%, respectively, from the same period in 2007. New orders have been negatively impacted by an increase in the cancellation rate in the segment to 14% in 2008 from 12% in 2007. In addition, new orders were negatively impacted by a 22% reduction in the average number of active communities within the Mid East segment. The net new order and settlement activity for the first six months of 2008 resulted in a 28% decrease in backlog units at June 30, 2008 as compared to June 30, 2007. Backlog dollars decreased 32% year over year due to the decrease in backlog units and to a 6% decrease in the average selling price for new orders for the six-month period ended June 30, 2008 as compared to the same period in 2007.

South East

Three Months Ended June 30, 2008 and 2007

     The South East segment had an approximate $17,100 decrease in segment profit quarter over quarter. Revenues decreased approximately $40,500, or 24%, due to a 20% decrease in the number of homes settled and a 5% decrease in the average settlement price. The decrease in units settled is attributable to a 5% lower unit backlog entering the second quarter of 2008 compared to the same period in 2007, coupled with a slower backlog turnover rate quarter over quarter. The decrease in the average settlement price is primarily attributable to a 2% lower average price of units in backlog entering the second quarter of 2008 compared to the same period in 2007. Gross profit margins decreased to 16.8% in the second quarter of 2008 from 23.3% in the same period in 2007. Gross profit margins were negatively impacted by higher contract land deposit write-offs of approximately $4,100 in the second quarter of 2008 as compared to $72 in the second quarter of 2007. In addition, gross profit margins were negatively impacted by higher average lot and operating costs per settled unit.

     Segment new orders and the average selling price during the second quarter of 2008 decreased 46% and 6%, respectively, from the same period in 2007. The decrease in new orders is attributable to lower sales absorption on 5% lower average number of active communities quarter over quarter. In addition, sales were negatively impacted by an increase in the cancellation rate to 28% in the second quarter of 2008 from 14% in the same period of 2007, as market conditions have become more challenging in the markets within the South East segment.

Six Months Ended June 30, 2008 and 2007

     The South East segment had an approximate $30,800 decrease in segment profit in the six-month period ended June 30, 2008 compared to the same period in 2007. Revenues decreased approximately $75,700, or 24%, for the six months ended June 30, 2008 from the prior year period due primarily to a 25% decrease in the number of units settled period over period. The decrease in units settled is attributable to a 12% lower beginning backlog unit balance entering 2008 compared to the same period in 2007, coupled with a lower backlog turnover rate period over period. Gross profit margins decreased to 18.1% in the first six months of 2008 from 23.6% in the same period of 2007 as a result of higher contract land deposit write-offs of approximately $3,900 in 2008 as compared to $73 in 2007. In addition, gross profit margins were negatively impacted by higher average lot and operating costs per settled unit.

     Segment new orders and the average new order price decreased 34% and 6%, respectively, during the six-month period ended June 30, 2008 as compared to the same period in 2007. Market conditions within the South East segment have continued to deteriorate throughout 2008. These worsening market conditions have negatively impacted net new orders as seen by lower sales absorption rates within our active communities and higher cancellation rates. Cancellation rates in the overall segment increased to 26% in 2008 from 16% in 2007. The net new order and settlement activity for the first six months of 2008, coupled with a 12% lower beginning backlog balance entering 2008 as compared to 2007, resulted in a 24% decrease in backlog units at June 30, 2008 as compared to June 30, 2007. The decrease in backlog units has resulted in a 25% decline in backlog dollars year over year.

Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations

     In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated profit before tax include unallocated corporate overhead, consolidation adjustments, stock option compensation expense and external corporate interest. NVR’s overhead functions, such as accounting, treasury, human resources, land acquisition, etc., are centrally performed and the costs are not allocated to the Company’s operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to the Company’s operating segments. Likewise, stock option compensation expenses are not charged to the operating segments. External corporate interest expense is primarily comprised of interest charges on the Company’s outstanding Senior Notes and working capital line borrowings, and are not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Homebuilding Consolidated Gross Profit:
Homebuilding Mid Atlantic		$	93,117			$	179,537			$	183,253			$	341,570
Homebuilding North East			13,727				16,794				28,959				31,047
Homebuilding Mid East			25,760				41,571				51,527				72,172
Homebuilding South East			21,388				39,100				42,447				73,223
Consolidation adjustments and other (1)			14,672				(41,799	)			5,416				(61,109	)
Segment gross profit		$	168,664			$	235,203			$	311,602			$	456,903

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
Homebuilding Consolidated Profit Before Tax:
Homebuilding Mid Atlantic		$	45,760			$	115,291			$	89,240			$	218,660
Homebuilding North East			5,559				4,583				12,710				8,008
Homebuilding Mid East			9,839				21,862				20,686				35,874
Homebuilding South East			8,290				25,437				17,350				48,164
Reconciling items:
Contract land deposit impairments (1)			16,076				(39,115	)			15,439				(47,605	)
Stock option expense (2)			(11,397	)			(13,301	)			(17,313	)			(26,739	)
Corporate capital allocation (3)			28,237				38,766				56,204				74,229
Unallocated corporate overhead			(24,894	)			(20,288	)			(51,459	)			(46,271	)
Consolidation adjustments and other			4,907				5,850				4,567				5,837
Corporate interest expense			(3,115	)			(3,127	)			(6,230	)			(6,262	)
Reconciling items sub-total			9,814				(31,215	)			1,208				(46,811	)
Homebuilding consolidated profit before taxes		$	79,262			$	135,958			$	141,194			$	263,895