Overview

Since early 2006, the U.S. housing market has been unfavorably impacted by a lack of consumer confidence, decreased housing affordability, tightened mortgage standards, and large supplies of resale and new home inventories and related pricing pressures. These factors have contributed to weakened demand for new homes, slower sales, higher cancellation rates, and increased price discounts and sales incentives to attract homebuyers. During 2008, these conditions continued to deteriorate and were accompanied by increased foreclosure activity, constraints on the availability of certain mortgage financing products, increasing unemployment, and significant uncertainty in the U.S. economy. As a result of the combination of these homebuilding industry, mortgage financing, and broader economic factors, we have experienced a net loss in each quarter since the fourth quarter of 2006. Such losses resulted from a combination of reduced operational profitability and significant asset impairments. Since the beginning of 2006, we have incurred total land-related charges of $4.3 billion and goodwill impairments of $375.7 million.

We continue to operate our business with the expectation that difficult market conditions will continue to impact us for at least the near term. We expect these trends in our unit settlements and pricing to continue and the majority of the markets we serve to remain challenging throughout 2009. We have adjusted our approach to land acquisition and development and construction practices and continue to shorten our land pipeline, limit land development expenditures, reduce production volumes, and balance home price and profitability with sales pace and cash flow at each of our communities. We are delaying planned land purchases and development spending and have significantly reduced our total number of controlled lots owned and under option. Additionally, we are closely managing the number of speculative homes put into production. While we will continue to purchase select land positions where it makes strategic and economic sense to do so, we anticipate minimal investment in new land parcels in the near term. We have also closely evaluated and made significant reductions in employee headcount and overhead expenses. As a result of these actions, we incurred restructuring charges of $45.5 million during 2008. In May 2007, we announced a restructuring plan designed to reduce costs and improve ongoing operating efficiencies, which resulted in related charges of $45.7 million in 2007. Due to the persistence of these difficult market conditions, improving the efficiency of our overhead costs will continue to be a significant area of focus. We believe that these measures will help to strengthen our market position and allow us to take advantage of opportunities that may develop in the future.

The U.S. economy is currently undergoing a period of economic uncertainty, and the related financial markets are experiencing significant volatility. In response, the U.S. government has made significant efforts in recent months to stabilize these conditions and increase the regulatory oversight of the financial markets. These actions have included:

• The Housing and Economic Recovery Act of 2008, which was enacted into law in July 2008. Overall, the act is intended to help stabilize and add consumer confidence to the housing industry. However, the act also mandates certain changes to which the industry will have to adjust, such as the elimination of down payment assistance programs for FHA loans. Such programs were utilized for approximately 8% of our home closings in 2008.

• The Emergency Economic Stabilization Act of 2008, which was enacted into law in October 2008. In addition to providing additional liquidity into the financial markets, the act also provides for additional measures to be used to prevent future home foreclosures.

• Modifications to the Real Estate Settlement and Procedures Act ("RESPA") regarding the use by homebuilders of affiliated businesses, such as captive mortgage and title insurance providers. As specific interpretations of the application of certain of these modifications are not yet final, it is unclear as to the magnitude of the impact, if any, that these modifications will have on our business.

• The American Recovery and Reinvestment Act of 2009, which was enacted into law in February 2009. The act is intended to provide additional economic stimulus to the U.S. economy and, among other things, provides for expansion of an existing housing tax credit, an increase to FHA loan limits, various individual tax reductions, and significant increases in government spending for certain programs.

While the ultimate impact of laws already enacted are not yet known, thus far, these actions have not proven stimulative for the homebuilding industry. Due to the uncertainties as to the provisions that may be included in any future legislation, we can not estimate the impact that such new laws, if enacted, would have on our business or future results of operations.

Overview (continued)

If the current trends in economic conditions or financial market volatility continue, it could adversely affect our business and results of operations in future periods, including a further reduction in the demand for housing as well as difficulties in accessing financing on acceptable terms. Given these conditions and the continued weakness in new home sales and closings, visibility as to future earnings performance is limited. Our evaluation for land-related charges recorded to date assumed our best estimates of cash flows for the communities tested. If conditions in the homebuilding industry or our local markets worsen in the future, or if our strategy related to certain communities changes, we may be required to evaluate our assets, including additional projects, for further impairments or write-downs, which could result in future charges that might be significant.

The following is a summary of our operating results for 2008, 2007, and 2006 ($000's omitted, except per share data):

                                                             Years Ended December 31,
                                                       2008             2007            2006
Income (loss) before income taxes:
Homebuilding                                       $ (1,694,711 )   $ (2,509,492 )   $ 1,010,368
Financial Services                                       28,045           42,980         115,460
Other non-operating                                     (15,933 )        (30,391 )       (43,100 )

Income (loss) from continuing operations before
income taxes                                         (1,682,599 )     (2,496,903 )     1,082,728
Income taxes (benefit)                                 (209,486 )       (222,486 )       393,082

Income (loss) from continuing operations             (1,473,113 )     (2,274,417 )       689,646
Income (loss) from discontinued operations                   -            18,662          (2,175 )

Net income (loss)                                  $ (1,473,113 )   $ (2,255,755 )   $   687,471

Per share data - assuming dilution:
Income (loss) from continuing operations           $      (5.81 )   $      (9.02 )   $      2.67
Income (loss) from discontinued operations                   -              0.07           (0.01 )

Net income (loss)                                  $      (5.81 )   $      (8.94 )   $      2.66

The following is a comparison of income (loss) before income taxes for 2008, 2007, and 2006:

• Our Homebuilding loss before income taxes for 2008 was $1.7 billion compared with a loss before income taxes of $2.5 billion in 2007 and income before income taxes of $1.0 billion for 2006. The losses experienced in 2008 and 2007 resulted from lower settlement revenues combined with lower gross margins and significant land-related charges and impairments of investments in unconsolidated joint ventures. Gross margins in 2008 and 2007 were unfavorably impacted by lower selling prices and increased sales incentives. Land-related charges totaled $1.5 billion, $2.2 billion, and $0.5 billion for 2008, 2007, and 2006, respectively. In addition, we incurred goodwill impairment charges of $5.0 million in 2008 and $370.0 million in 2007. There were no goodwill impairment charges in 2006.

• Income before income taxes from our Financial Services business segment decreased 35% in 2008 compared with 2007 after decreasing 63% in 2007 compared with 2006. Income before income taxes for 2006 includes a one-time gain of $31.6 million related to the sale of our investment in Su Casita, a Mexican mortgage banking company, which occurred in the first quarter of 2006. The significant decreases in 2008 and 2007 are primarily the result of lower loan originations due to significant decreases in the number of homes closed and average selling prices combined with higher loan loss reserves. In addition, Financial Services incurred goodwill impairment charges of $0.7 million in 2008. There were no goodwill impairment charges in 2007 or 2006. Capture rates were 92%, 92%, and 91% in 2008, 2007, and 2006, respectively.

• Our Other non-operating loss decreased 48% in 2008 compared with 2007 after decreasing 29% in 2007 compared with 2006, due primarily to reductions in compensation-related costs.

Homebuilding Operations

The following is a summary of income (loss) before income taxes for our
Homebuilding operations ($000's omitted):



                                                             Years Ended December 31,
                                                      2008             2007             2006
Home sale revenue (settlements)                   $  5,980,289     $  8,881,509     $  13,975,387
Land sale revenue                                      131,749          240,221            99,861

Total Homebuilding revenues                          6,112,038        9,121,730        14,075,248

Home cost of sales (a)                              (6,585,177 )     (9,329,354 )     (11,544,905 )
Land cost of sales (b)                                (393,998 )       (418,177 )        (138,528 )
Selling, general and administrative expense           (776,673 )     (1,060,818 )      (1,136,027 )
Equity income (loss) (c)                               (12,924 )       (190,383 )         (95,244 )
Other income (expense), net (d)                        (37,977 )       (632,490 )        (150,176 )

Income (loss) before income taxes                 $ (1,694,711 )   $ (2,509,492 )   $   1,010,368

Total active communities at December 31                    459              636               690
Unit settlements                                        21,022           27,540            41,487
Average selling price                             $        284     $        322     $         337
Net new orders:
Units                                                   15,306           25,175            33,925
Dollars (e)                                       $  4,101,000     $  7,812,000     $  11,253,000
Backlog at December 31:
Units                                                    2,174            7,890            10,255
Dollars                                           $    631,000     $  2,510,000     $   3,580,000

(a) Includes homebuilding interest expense, which represents the amortization of capitalized interest. Home cost of sales also includes land and community valuation adjustments of $1.2 billion, $1.6 billion, and $203.8 million for 2008, 2007, and 2006, respectively.

(b) Includes net realizable value adjustments for land held for sale of $271.1 million, $199.2 million, and $54.6 million for 2008, 2007, and 2006, respectively.

(c) Includes impairments of our investments in unconsolidated joint ventures, which totaled $18.5 million, $189.9 million, and $95.4 million for 2008, 2007, and 2006, respectively.

(d) Includes the write-off of deposits and pre-acquisition costs for land option contracts we no longer plan to pursue of $33.3 million, $239.7 million, and $151.2 million for 2008, 2007, and 2006, respectively. For 2008 and 2007, other income (expense) includes goodwill impairment charges of $5.0 million and $370.0 million, respectively.

(e) Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.

Home sale revenues for 2008 were lower than those for 2007 by $2.9 billion, or 33%, and in 2007 were lower than those for 2006 by $5.1 billion, or 36%. The lower home sale revenues in 2008 and 2007 were attributable to decreases in unit settlements of 24% and 34%, respectively, combined with decreases in the average selling price of 12% and 4%, respectively. The declines in unit settlements resulted from both reductions in the number of our active communities (down 28% and 8% at December 31, 2008 and 2007, respectively, compared with the respective prior year) and the challenging sales conditions in our local markets. The decreases in average selling price in 2008 and 2007 reflect a combination of factors, including changes in the product and geographic mix of homes closed during the periods as well as lower market selling prices and higher sales incentives. Home sale revenues, unit settlements, and average selling prices decreased in all of our Homebuilding segments during 2008 and 2007.

Homebuilding gross profit margins from home sales in 2008 were negative 10.1%, compared with negative 5.0% in 2007 and positive 17.4% in 2006. The significant decreases in gross profit margins that commenced in 2006 and continued through 2008 were attributable to the difficult market conditions and challenging sales environment, which have resulted in lower average selling prices and increased sales incentives. In addition, we recorded land and community valuation adjustments of $1.2 billion, $1.6 billion, and $203.8 million in 2008, 2007, and 2006, respectively.

Homebuilding Operations (continued)

We continue to evaluate our existing land positions to ensure the most effective use of capital. Land sale revenues and their related gains or losses may vary significantly between periods, depending on the timing of land sales. Gross profit from land sales had negative margin contributions of $262.2 million, $178.0 million, and $38.7 million for 2008, 2007, and 2006, respectively. These negative margin contributions in 2008, 2007, and 2006 included net realizable value adjustments totaling $271.1 million, $199.2 million, and $54.6 million, respectively, related to land held for sale.

Selling, general, and administrative expenses, as a percentage of home sale revenues, increased to 13.0% compared with 11.9% in 2007 and 8.1% in 2006. While our internal initiatives focused on controlling costs and matching our overall cost structure with the current business environment have resulted in significant reductions in our selling, general, and administrative expenses since 2006, these reductions have been offset by reduced operating leverage resulting from the significant decrease in home sale revenues and lower absorption into inventory of overhead costs due to lower construction volumes. We incurred employee severance costs related to overhead reductions totaling $28.1 million in 2008. We also initiated a restructuring plan in May 2007 that resulted in employee severance costs totaling $31.9 million in 2007. Additionally, we incurred incremental insurance-related expenses in 2008 and 2007 related to the adverse development of general liability product claims.

Equity loss was $12.9 million, $190.4 million, and $95.2 million for 2008, 2007, and 2006, respectively. The equity losses experienced for 2008, 2007 and 2006 included impairments related to investments in unconsolidated joint ventures totaling $18.5 million, $189.9 million, and $95.4 million, respectively.

Other income (expense), net includes the write-off of deposits and pre-acquisition costs resulting from decisions not to pursue certain land acquisitions which totaled $33.3 million, $239.7 million, and $151.2 million, in 2008, 2007, and 2006, respectively. These write-offs vary in amount from year to year as we continue to evaluate potential land acquisitions for the most effective use of capital. Other income (expense), net also includes goodwill impairment charges of $5.0 million and $370.0 million in 2008 and 2007, respectively. Additionally, other income (expense), net includes restructuring charges (primarily asset impairments and lease termination costs) of $13.3 million in 2008 related to overhead reduction efforts, $13.7 million in 2007 related to the reorganization initiated in May 2007, and $18.5 million in 2006 related to the closure of a production facility located in Virginia.

For 2008, net new order units decreased 39% to 15,306 units compared with 2007. For 2007, net new order units decreased 26% to 25,175 units compared with 2006. Cancellation rates were 33%, 33%, and 29%, in 2008, 2007, and 2006, respectively. Most markets experienced a substantial increase in resale and new home inventory, and this, combined with declining consumer confidence, decreased housing affordability, difficulties experienced by customers in selling their existing homes, and the more restrictive mortgage financing market, has resulted in higher than historical cancellation rates and reduced net new orders during 2008, 2007, and 2006.

The dollar value of net new orders decreased 48% in 2008 compared to 2007 and decreased 31% in 2007 compared with 2006. At December 31, 2008, we had 459 active selling communities, a decrease of 28% from December 31, 2007. At December 31, 2007, we had 636 active selling communities, a decrease of 8% from December 31, 2006. Ending backlog, which represents orders for homes that have not yet closed, was 2,174 units at December 31, 2008 with a dollar value of $631 million. Ending backlog was 7,890 units at December 31, 2007 with a dollar value of $2.5 billion.

We had 5,058 and 9,031 homes in production at December 31, 2008 and 2007, respectively, excluding 1,372 and 1,628 model homes, respectively. Included in our total homes in production were 3,509 and 3,744 homes that were unsold to customers at December 31, 2008 and 2007, respectively, of which 1,857 and 1,273 homes, respectively, were completed.

At December 31, 2008 and 2007, our Homebuilding operations controlled 120,796 and 157,858 lots, respectively. Of these controlled lots, 97,473 and 131,385 lots were owned and 23,250 and 24,813 lots were under option agreements approved for purchase at December 31, 2008 and 2007, respectively. In addition, there were 73 and 1,660 lots under option agreements, pending approval, at December 31, 2008 and 2007, respectively. During 2008, we withdrew from land option contracts representing 6,203 lots with purchase prices totaling $179.4 million.

The total purchase price related to approved land under option for use by our Homebuilding operations at future dates approximated $1.3 billion at December 31, 2008. In addition, total purchase price related to land under option pending approval was valued at approximately $1.7 million at December 31, 2008. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits and pre-acquisition costs totaling $225.3 million, of which $1.2 million is refundable. This balance excludes $19.8 million of contingent payment obligations which may or may not become actual obligations to us.

Homebuilding Segment Operations

Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of first-time, first and second move-up, and active adult homebuyers. We have determined that our operating segments are our Areas. We conduct our operations in 49 markets, located throughout 25 states, and have presented our reportable Homebuilding segments as follows:

Atlantic Coast: Atlantic Coast Area includes the following states:

                  Connecticut, Delaware, Georgia, Maryland, Massachusetts, New Jersey,
                  New York, North Carolina, Pennsylvania, Rhode Island, South Carolina,
                  Tennessee, Virginia

Gulf Coast:       Gulf Coast Area includes the following states:
                  Florida, Texas

Midwest:          Great Lakes Area includes the following states:
                  Colorado, Illinois, Indiana, Michigan, Minnesota, Ohio

Southwest:        Southwest Area includes the following states:
                  Arizona, Nevada, New Mexico

*California: California Area includes the following state:
California

* Our homebuilding operations located in Reno, Nevada are reported in the California segment, while our remaining Nevada homebuilding operations are reported in the Southwest segment.

We also have one reportable segment for our financial services operations which consists principally of mortgage banking and title operations conducted through Pulte Mortgage and our other subsidiaries. Our Financial Services segment operates generally in the same markets as our Homebuilding segments.

Homebuilding Segment Operations (continued)



The following table presents selected financial information for our homebuilding
reporting segments:



                                                           Years Ended December 31,
                                                  2008               2007               2006
Home sale revenue (settlements) ($000's
omitted):
Atlantic Coast                                $  1,794,383       $  2,287,290       $  2,904,466
Gulf Coast                                       1,194,828          1,663,459          3,104,314
Midwest                                            720,565          1,146,991          1,639,940
Southwest                                        1,459,385          2,316,147          3,694,571
California                                         811,128          1,467,622          2,632,096

                                              $  5,980,289       $  8,881,509       $ 13,975,387

Income (loss) before income taxes ($000's
omitted):
Atlantic Coast                                $   (144,520 )     $    (76,994 )     $    215,538
Gulf Coast                                        (244,900 )         (468,938 )          397,962
Midwest                                           (103,202 )         (339,193 )          (90,695 )
Southwest                                         (555,756 )         (249,173 )          714,185
California                                        (284,048 )         (545,369 )          107,368
Unallocated (a)                                   (362,285 )         (829,825 )         (333,990 )

                                              $ (1,694,711 )     $ (2,509,492 )     $  1,010,368

Unit settlements:
Atlantic Coast                                       5,416              6,563              7,993
Gulf Coast                                           5,391              6,630             12,189
Midwest                                              2,651              3,888              5,548
Southwest                                            5,494              7,318             10,548
California                                           2,070              3,141              5,209

                                                    21,022             27,540             41,487

Net new orders - units:
Atlantic Coast                                       3,920              6,010              7,445
Gulf Coast                                           3,958              6,418              8,824
Midwest                                              2,094              3,319              5,201
Southwest                                            3,878              6,609              8,365
California                                           1,456              2,819              4,090

                                                    15,306             25,175             33,925

Unit backlog:
Atlantic Coast                                         576              2,072              2,625
Gulf Coast                                             689              2,122              2,334
Midwest                                                271                828              1,397
Southwest                                              394              2,010              2,719
California                                             244                858              1,180

                                                     2,174              7,890             10,255

(a) Unallocated includes amortization of capitalized interest of $210.7 million, $315.0 million, and $255.7 million for 2008, 2007, and 2006, respectively; goodwill impairments of $5.0 million and $370.0 million for 2008 and 2007; and shared services that benefit all operating segments, the costs of which are not allocated to the operating segments reported above.

Homebuilding Segment Operations (continued)



                                                            Years Ended December 31,
                                                      2008              2007           2006
Controlled lots:

Atlantic Coast                                          21,327            30,322        50,856
Gulf Coast                                              41,840            48,371        66,960
Midwest                                                  9,187            14,098        23,082
Southwest                                               36,920            49,746        66,034
California                                              11,522            15,321        25,291

                                                       120,796           157,858       232,223

Land and community valuation adjustments
($000's omitted):
Atlantic Coast                                     $   112,292       $   133,507     $  23,289
Gulf Coast                                             172,384           381,534        25,984
Midwest                                                 79,029           240,380        73,152
Southwest                                              519,405           335,044         9,774
California                                             238,984           398,717        55,569
Corporate and unallocated (a)                           85,237           114,473        16,000

Total valuation adjustments                        $ 1,207,331       $ 1,603,655     $ 203,768

Net realizable value adjustments (NRV) - land
held for sale ($000's omitted):
Atlantic Coast                                     $    91,697       $    22,703     $   3,204
Gulf Coast                                              74,809            46,773        14,275
Midwest                                                 20,295           103,374        29,784
Southwest                                               53,269            14,859         7,014
California                                              31,041            11,538           293

Total NRV adjustments - land held for sale         $   271,111       $   199,247     $  54,570

Write-off of deposits and pre-acquisition
costs ($000's omitted) (b):
. . .