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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended November 30, 2002

Commission file number 1-11749

LENNAR CORPORATION

(Exact name of registrant as specified in its charter)

700 Northwest 107th Avenue, Miami, Florida 33172

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (305) 559-4000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

NONE

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  ¨             

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

As of January 31, 2003, registrant had outstanding 55,234,318 shares of common stock and 9,700,462 shares of Class B common stock (which can be converted into common stock). Of the total shares outstanding, 54,020,863 shares of common stock and 10,501 shares of Class B common stock, having a combined aggregate market value (assuming the Class B shares were converted) on that date of $2,910,129,265, were held by non-affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE:

PART I

Item 1.    Business.

General Development of Business

We are one of the nation’s largest homebuilders and a provider of financial services. Our homebuilding operations include the sale and construction of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through our unconsolidated partnerships. Our financial services subsidiaries provide mortgage financing, title insurance, closing services and insurance agency services for both buyers of our homes and others, and sell the loans they originate in the secondary mortgage market. These subsidiaries also provide high-speed Internet access, cable television and alarm installation and monitoring services to residents of communities we develop and others.

The following is a summary of our growth history:

Financial Information about Operating Segments

We have two operating segments—homebuilding and financial services. The financial information related to these operating segments is contained in Item 8.

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Narrative Description of Business

HOMEBUILDING

Under the Lennar Family of Builders banner, we operate using the following brand names: Lennar Homes, U.S. Home, Greystone Homes, Village Builders, Renaissance Homes, Orrin Thompson Homes, Lundgren Bros., Winncrest Homes, Sunstar Communities, Don Galloway Homes, Patriot Homes, NuHome, Barry Andrews Homes, Concord Homes, Summit Homes, Cambridge Homes, Seppala Homes, Genesee and Rutenberg Homes. Our active adult communities are primarily marketed under the Heritage and Greenbriar brand names.

Through our own efforts and unconsolidated partnerships in which we have interests, we are involved in all phases of planning and building in our residential communities, including land acquisition, site planning, preparation and improvement of land, and design, construction and marketing of homes. We subcontract virtually all aspects of development and construction.

We primarily sell single-family attached and detached homes. The homes are targeted primarily to first-time, move-up and active adult homebuyers. The average sales price of a Lennar home was $245,000 in fiscal 2002.

Current Homebuilding Activities

At November 30, 2002, our market regions consisted of the following states: East: Florida, Maryland, Virginia, New Jersey, North Carolina and South Carolina. Central: Texas, Illinois and Minnesota. West: California, Colorado, Arizona and Nevada. In addition, we have interests in unconsolidated partnerships that sell homes in other states.

Management and Operating Structure

We balance a local operating structure with centralized corporate level management. Our local managers, who have significant experience both in the homebuilding industry generally and in their particular markets, are responsible for operating decisions regarding land identification, home design, construction and marketing. Decisions related to our overall strategy, acquisitions of land and businesses, financing, cash management and information systems are centralized at the corporate level.

We view unconsolidated partnerships and similar entities as a means to both expand our market opportunities and manage our risk. For additional information about our unconsolidated partnerships, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

Property Acquisition

In our homebuilding operations, we generally acquire land for the development and construction of homes which we sell to homebuyers. We also sell land to third parties. Land acquisitions are subject to strict underwriting criteria and may be made directly or through partnerships with other entities. Through unconsolidated partnerships, we reduce our risk and also the amount invested in owned land and increase our access to other land. Partnerships also, in some instances, help us acquire land to which we could not obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner.

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In some instances, we acquire land through option contracts, which enables us to defer acquiring portions of properties owned by third parties and unconsolidated partnerships. This reduces our financial risk associated with land holdings. Most of our land is not subject to mortgages; however, the majority of land acquired by partnerships is subject to purchase money mortgages. We generally do not acquire land for speculation. At November 30, 2002, we owned approximately 70,000 homesites and had access to an additional 88,000 homesites through options or unconsolidated partnerships.

Construction and Development

We supervise and control the development and building of our residential communities. We hire subcontractors for site improvements and virtually all of the work involved in the construction of homes. In almost all instances, the arrangements with our subcontractors commit the subcontractors to complete specified work in accordance with written price schedules. These price schedules normally change to meet changes in labor and material costs. We generally do not own heavy construction equipment and only have a relatively small labor force used to supervise development and construction and perform routine maintenance and minor amounts of other work. We generally finance construction and land development activities with cash generated from operations as well as from borrowings under our working capital lines and issuances of public debt.

Marketing

We offer a diversified line of homes for first-time, move-up and active adult homebuyers. With homes priced from under $100,000 to above one million dollars and available in a variety of environments ranging from urban infill communities to golf course communities, we are focused on providing homes for a wide spectrum of buyers. Our unique dual marketing strategies of Everything’s Included^® and Design Studio^SM provide customers with flexibility to choose how they would like to purchase their new home. In our Everything’s Included^® homes, we make the homebuying experience simple by including desirable, top-of-the-line features as standard items. In our Design Studio^SM homes, we provide an individualized homebuying experience and personalized design consultation in our design studios, offering a diverse selection of upgrades and options for a new home. We sell our homes primarily from models that we have designed and constructed.

We employ sales associates who are paid salaries, commissions or both to make on-site sales of homes. We also sell through independent brokers. We advertise our communities in newspapers and other local and regional publications, on billboards and through our web site, www.lennar.com. The website allows homebuyers to search for homes with specific design criteria in their price range and desired location. In addition, we advertise our active adult communities in areas where prospective active adult homebuyers live.

Our business is somewhat seasonal, with signings of new home sales contracts being strongest in the late winter and spring, resulting in the strongest home deliveries (and therefore, strongest home sales revenues) in the late summer and fall (our third and fourth fiscal quarters).

For a small percentage of our homebuyers (generally less than 5% of our deliveries), we have participated in charitable down-payment assistance programs. Through these programs, we make a donation to a non-profit organization that provides assistance to a homebuyer, who would not otherwise have sufficient funds for a down payment.

Quality Service

We strive to continually improve customer satisfaction by employing a process which is intended to provide a positive experience for each homeowner throughout the pre-sale, sale, building, closing and post-closing periods. The participation of sales associates, on-site construction supervisors and post-closing customer care associates, working in a team effort, is intended to foster our reputation for quality service and ultimately lead to enhanced customer retention and referrals.

The quality of our homes is affected substantially more by the efforts of on-site management and others engaged in the construction process than it is by the materials we use in particular homes or similar factors. Currently, all of our management team members’ bonus plans are aligned with achieving customer satisfaction.

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Our “Heightened Awareness” program is a full-time focused initiative designed to objectively evaluate and measure the quality of construction in our communities. The purpose of this program is to ensure that the homes delivered to our customers meet our high standards. Our communities are inspected and reviewed on a periodic basis by one of our trained associates. This program is an example of our commitment to provide the finest homes to our customers. In addition to our “Heightened Awareness” program, we obtain independent surveys of selected customers through a third party consultant and use the survey results to further improve our standard of quality and customer satisfaction.

Competition

The housing industry is highly competitive. In our activities, we compete with numerous developers and builders of various sizes, both national and local, who are building homes in and near the areas where our communities are located. Competition is on the basis of location, design, quality, amenities, price, service and reputation. Sales of existing homes also provide competition. Some of our principal national competitors include Beazer Homes USA, Inc., Centex Corporation, D.R. Horton, Inc., Hovnanian Enterprises, Inc., KB Home, M.D.C. Holdings, Inc., NVR, Inc., Pulte Homes, Inc., Standard Pacific Corp., The Ryland Group, Inc. and Toll Brothers, Inc.

FINANCIAL SERVICES

Mortgage Financing

We provide conventional, FHA-insured and VA-guaranteed mortgage loans to our homebuyers and others through our financial services subsidiaries in Arizona, California, Colorado, Florida, Illinois, Maryland, Minnesota, Nevada, New Jersey, North Carolina, Ohio, Oregon, South Carolina, Texas, Utah, Virginia, and Washington. In 2002, our financial services subsidiaries provided loans to approximately 80% of our homebuyers who sought mortgage financing in areas where we offered services for the entire year. Because of the availability of mortgage loans from our financial services subsidiaries, as well as independent mortgage lenders, we believe access to financing has not been, and is not, a significant obstacle for most purchasers of our homes.

During 2002, we originated approximately 34,000 mortgage loans totaling $6.1 billion. We sell the loans we originate in the secondary mortgage market on a servicing released, non-recourse basis. We have a corporate risk management policy under which we hedge our interest rate risk on rate locked loan commitments and loans held for sale against exposure to interest rate fluctuations. We finance our mortgage loan activities with borrowings under our financial services subsidiaries’ warehouse lines of credit or from our general corporate funds.

Title Insurance, Closing Services and Insurance Agency Services

We provide title insurance and closing services to our homebuyers and others. We provided these services for approximately 205,000 real estate transactions during 2002 through our subsidiaries of North American Title Group. Closing services are provided by agency subsidiaries in Arizona, California, Colorado, District of Columbia, Florida, Maryland, and Texas. North American Title Insurance Corporation in Florida and Texas, and North American Title Insurance Company in Arizona, California and Colorado provide title insurance underwriting.

We provide insurance products through our insurance agency subsidiary, Universal American Insurance Agency, Inc., for our homebuyers and others in Arizona, California, Colorado, Florida and Texas. During 2002, we provided approximately 5,000 homeowner policies.

Strategic Technologies

Our subsidiary, Strategic Technologies, Inc., provides broadband services including high-speed Internet access, as well as alarm installation and monitoring services to residents of our communities and others. At November 30, 2002, we had approximately 4,000 broadband subscribers in California and approximately 13,000 alarm monitoring customers in Florida and California.

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RELATIONSHIP WITH LNR PROPERTY CORPORATION

In connection with the 1997 transfer of our commercial real estate investment and management business to LNR Property Corporation (“LNR”), and the spin-off of LNR to our stockholders, we entered into an agreement which, among other things, prevented us from engaging until December 2002 in any of the businesses in which LNR was engaged, or anticipated becoming engaged, at the time of the spin-off, and prohibited LNR from engaging, at least until December 2002, in any of the businesses in which we were engaged, or anticipated becoming engaged, at the time of the spin-off (except in limited instances in which our then activities or anticipated activities overlap with LNR). We have no current intention to become involved in the types of activities in which LNR primarily engages (primarily related to commercial or multi-family residential real estate, commercial mortgage loans and investments in commercial mortgage backed securities). Further, the agreement delineating activities in which we could engage from those in which LNR could engage helped our two companies work cooperatively in partnerships (including Lennar Land Partners) and other joint endeavors. Because of this, our Board and LNR’s Board are considering our two companies entering into a new similar agreement.

We and LNR are separate publicly-traded companies and neither of us has any financial interest in the other except for partnerships in which we both have investments. Stuart Miller, our President and Chief Executive Officer, is the Chairman of the Board of Directors of LNR and is the sole director and officer of a family-owned corporation which owns stock that gives it voting control of both companies. An Independent Directors Committee approves any significant transactions between us and LNR or any of its subsidiaries.

For information about our partnerships with LNR, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

REGULATION

Homes and residential communities that we build must comply with state and local laws and regulations relating to, among other things, zoning, treatment of waste, construction materials which must be used, density requirements, building design and minimum elevation of properties. These include laws requiring use of construction materials which reduce the need for energy-consuming heating and cooling systems. These laws and regulations are subject to frequent change and often increase construction costs. In some cases, there are laws which require that commitments to provide roads and other offsite infrastructure be in place prior to the commencement of new construction. These laws and regulations are usually administered by individual counties and municipalities and may result in fees and assessments or building moratoriums. In addition, certain new development projects are subject to assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial.

The residential homebuilding industry also is subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas.

In recent years, several cities and counties in which we have developments have submitted to voters “slow growth” initiatives and other ballot measures which could impact the affordability and availability of homes and land within those localities. Although many of these initiatives have been defeated, we believe that if similar initiatives were approved, residential construction by us and others within certain cities or counties could be seriously impacted.

In order to make it possible for purchasers of some of our homes to obtain FHA-insured or VA-guaranteed mortgages, we must construct those homes in compliance with regulations promulgated by those agencies.

We have registered condominium communities with the appropriate authorities in Florida and California. Sales in other states would require compliance with laws in those states regarding sales of condominium homes.

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Our insurance subsidiaries must comply with applicable insurance laws and regulations. Our mortgage financing subsidiaries must comply with applicable real estate lending laws and regulations.

Our mortgage banking and insurance subsidiaries are licensed in the states in which they do business and must comply with laws and regulations in those states regarding mortgage banking and title insurance companies. These laws and regulations include provisions regarding capitalization, operating procedures, investments, lending and privacy disclosures, forms of policies and premiums.

We can be affected by government regulation that does not directly apply to us such as the possible curtailment of some activities of the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Because these organizations provide significant liquidity to the secondary mortgage market, a serious curtailment of their activities could increase mortgage interest rates and therefore increase the effective cost of purchasing our homes.

CAUTIONARY STATEMENTS

Some of the statements in this Report are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those which the statements anticipate.

PARTICULAR FACTORS WHICH COULD AFFECT US

The following factors in particular could significantly affect our operations and financial results.

We are subject to the cyclical nature of the home sales market.

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing, interest rate levels and demand for housing. The resale market for used homes, including foreclosed homes, also affects the sale of new homes or cancellation of contracts in backlog.

Although the homebuilding business historically has been cyclical, it has not undergone a down cycle in a number of years. This has led some people to assert that the prices of homes and the stocks of homebuilding companies are overvalued and will decline when or if the market for new homes begins to weaken. A decline in prices of stocks of homebuilding companies could make it more difficult and more expensive for us to raise funds through stock issuances if we needed funds to meet our obligations or otherwise wanted to do so.

We could be affected by prices or shortages of materials or by weather conditions.

The residential homebuilding industry has, from time-to-time, experienced fluctuating lumber prices and supply, as well as shortages of other materials and labor, including insulation, drywall, concrete, carpenters, electricians and plumbers. Delays in construction of homes due to these factors or due to weather conditions could have an adverse effect upon our operations.

We are dependent on the availability of suitable land.

Our ability to build homes depends upon our being able to acquire at acceptable prices land that is suitable for residential development in the areas in which we want to build homes. Because of this, we maintain, directly or through partnerships or similar arrangements, a significant inventory of land, much of which is undeveloped or only partially developed.

We could be affected by government regulations.

All our businesses are subject to substantial government regulation. In particular, the homebuilding business is subject to government regulations relating to land use, water rights, construction materials, building design and minimum elevation of properties, as well as a variety of environmental matters. Changes in government regulations often increase the cost of building homes in areas in which we have communities and could prevent entirely the building of new homes in some areas.

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We could be affected by inflation or deflation.

Inflation can increase the cost of building materials, land, labor and other construction related costs. Conversely, deflation can reduce the value of our land inventory and make it more difficult to recover the full cost of previously purchased land in home sale prices.

Customers may be unwilling or unable to purchase our homes at times when mortgage financing costs are high.

Virtually all of our homebuyers finance their acquisitions through our financial services subsidiaries or third-party lenders. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing. If effective mortgage interest rates increase and the ability or willingness of prospective buyers to finance home purchases is adversely affected, our operating results may be negatively affected. Our homebuilding activities also are dependent upon the availability and cost of mortgage financing for buyers of homes currently owned by potential purchasers of our homes who cannot purchase our homes until they sell their current homes.

Our operating results vary from quarter to quarter.

We have historically experienced, and expect to continue to experience, variability in operating results on a quarterly basis. Factors which may contribute to this variability include, but are not limited to:

Our historical financial performance is not necessarily a meaningful indicator of future results. We expect our financial results to continue to vary from quarter to quarter.

We could be hurt by loss of key personnel.

Our success depends to a significant degree on the efforts of our senior management. Our operations may be adversely affected if key members of senior management cease to be active in our Company. We have designed our compensation structure and employee benefit programs to encourage long-term employment by senior management.

We have a controlling stockholder.

We have two classes of stock: common stock, which is entitled to one vote per share; and Class B common stock, which is entitled to ten votes per share. Stuart Miller, our President and Chief Executive Officer, has voting control, through family owned entities, of Class B common stock that entitles the holders to approximately 64% of the combined votes that can be cast by the holders of our outstanding common stock and Class B common stock combined. That gives Mr. Miller the power to elect all our directors and to approve most matters that are presented to our stockholders, even if no other stockholders vote in favor of them. Mr. Miller’s voting control might discourage someone from making a significant equity investment in us, even if we needed the investment to meet our obligations and to operate our business.

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EMPLOYEES

At November 30, 2002, we employed 9,419 individuals of whom 6,053 were involved in homebuilding operations and 3,366 were involved in financial services operations. We do not have collective bargaining agreements relating to any of our employees. However, some of the subcontractors we use have employees who are represented by labor unions.

Item 2.    Properties.

For information about properties we own for use in our homebuilding activities, see Item 1.

We lease and maintain our executive offices, financial services subsidiary headquarters, certain mortgage and title branches and Miami-Dade County, Florida homebuilding office in an office complex we built which is now owned by an independent third party. The leases for these offices expire through 2009. Our other homebuilding and financial services offices are located in the markets where we conduct business, generally in our communities or in leased space.

Item 3.    Legal Proceedings.

We are parties to various claims and lawsuits which arise in the ordinary course of business. Although the specific allegations in the lawsuits differ, most of them involve claims that we failed to construct buildings in particular communities in accordance with plans and specifications or applicable construction codes, and seek reimbursement for sums allegedly needed to remedy the alleged deficiencies, or assert contract issues or relate to personal injuries. Lawsuits of these types are common within the homebuilding industry. We do not believe that these claims or lawsuits will have a material effect on our business, financial position or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders.

Not applicable.

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PART II

Item 5.    Market for the Registrant’s Common Stock and Related Security Holder Matters.

As of November 30, 2002, there were approximately 1,600 holders of record of our common stock.

The following table summarizes our equity compensation plans as of November 30, 2002:

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Item 6.    Selected Financial Data.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Some of the statements contained in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those which the statements anticipate. Factors which may affect our results include, but are not limited to, changes in general economic conditions, the market for homes and prices for homes generally and in areas where we have developments, the availability and cost of land suitable for residential development, materials prices, labor costs, interest rates, consumer confidence, competition, terrorist acts or other acts of war, environmental factors and government regulations affecting our operations.

RESULTS OF OPERATIONS

Overview

We achieved record revenues, profits and earnings per share in 2002. Our net earnings in 2002 were $545.1 million, or $7.72 per share diluted, compared to $417.8 million, or $6.01 per share diluted, in 2001. In 2002, we acquired nine homebuilders which strengthened our positions in several of our existing markets and provided us with attractive growth opportunities in new markets. The increase in net earnings was also attributable to strong homebuilding gross margins and increased operating earnings from our Financial Services Division. With $731 million of cash at year end, our net homebuilding debt (i.e., homebuilding debt less homebuilding cash) to total net capital (i.e., net capital is average net homebuilding debt and stockholders’ equity) ratio was 27.7% at November 30, 2002, compared to 29.1% last year. Additionally, we had zero outstanding under our $926 million revolving credit facilities at year end. Our record earnings combined with a strong balance sheet contributed to a return on net capital of approximately 22% in 2002, compared to approximately 20% in 2001.

Homebuilding

Our Homebuilding Division sells and constructs homes primarily for first-time, move-up and active adult homebuyers. We use a dual marketing strategy in which we sell homes under both our Everything’s Included^® and Design Studio^SM programs. Our land operations include the purchase, development and sale of land for our homebuilding activities, as well as the sale of land to third parties. In certain circumstances, we diversify our operations through strategic alliances and minimize our risk by forming partnerships with other entities. The following tables set forth selected financial and operational information for the years indicated. The results of operations of our acquisitions are included in the information since the respective dates of the acquisitions.

Selected Homebuilding Division Financial Data

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Summary of Home and Backlog Data By Region

At November 30, 2002, our market regions consisted of the following states: East: Florida, Maryland, Virginia, New Jersey, North Carolina and South Carolina. Central: Texas, Illinois and Minnesota. West: California, Colorado, Arizona and Nevada. In addition, we have interests in unconsolidated partnerships that sell homes in other states.

During 2002, we acquired nine homebuilders, which expanded our operations into the Carolinas and the Chicago, Baltimore and Central Valley, California homebuilding markets and strengthened our positions in several of our existing markets. The results of operations of the acquired homebuilders are included in our results of operations since their respective acquisition dates. During the seven months of fiscal 2000, in which we owned U.S. Home and its subsidiaries, U.S. Home and its subsidiaries contributed 31% of our homebuilding revenues and 32% of our homebuilding expenses.

Revenues from sales of homes increased 20% in 2002 and 33% in 2001, compared to the previous years as a result of a 16% increase and a 27% increase in the number of home deliveries, and a 4% increase and a 5% increase in the average sales price in 2002 and 2001, respectively. 2002 new home deliveries were higher primarily due to a strong homebuilding market, combined with our acquisitions this year. 2001 new home deliveries were higher primarily due to the inclusion of a full year of U.S. Home’s homebuilding activity in 2001, compared to seven months inclusion in 2000. The average sales price of homes delivered increased in 2002 and 2001 primarily due to an increase in the average sales price in most of our existing markets, combined with changes in our product mix.

Gross margin percentages on home sales were 24.3%, 23.9% and 20.4% in 2002, 2001 and 2000, respectively. The increases in 2002 and 2001 were due to improved operational efficiencies and strength in the homebuilding markets in which we operate. The increase in 2002 was partially offset by softness in the Texas market.

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Selling, general and administrative expenses as a percentage of revenues from home sales increased to 10.7% in 2002 compared to 10.5% and 10.0% in 2001 and 2000, respectively. The increase in 2002 was primarily due to an increase in insurance costs, compared to 2001. The increase in 2001 was primarily due to higher incentive-based personnel-related expenses, compared to 2000.

Sales of land and other revenues, net totaled $43.9 million in 2002, compared to $23.3 million in 2001 and $37.2 million in 2000. Equity in earnings from unconsolidated partnerships increased to $42.7 million in 2002, compared to $27.1 million in 2001 and $13.3 million in 2000. Margins achieved on sales of land and equity in earnings from unconsolidated partnerships may vary significantly from period to period depending on the timing of land sales by us and our unconsolidated partnerships.

New home orders increased 19% in 2002 and 34% in 2001, compared to previous years. The increase in 2002 was primarily due to our recent acquisitions and growth in the number of active communities. The increase in 2001 was due to the inclusion of a full year of U.S. Home’s homebuilding activity in 2001 whereas 2000 included only seven months of U.S. Home’s homebuilding activity. Due to the increase in new home orders and the acquired backlog from acquisitions, the backlog dollar value increased to $3.2 billion at November 30, 2002, compared to $2.0 billion at November 30, 2001.

Financial Services

Our Financial Services Division provides mortgage financing, title insurance, closing services and insurance agency services for both buyers of our homes and others and sells the loans it originates in the secondary mortgage market. The Division also provides high-speed Internet access, cable television and alarm installation and monitoring services to residents of our communities and others. The following table sets forth selected financial and operational information relating to our Financial Services Division. The results of operations of our acquisitions are included in the information since the respective dates of the acquisitions.

Operating earnings from our Financial Services Division increased to $127.6 million in 2002, compared to $89.1 million and $43.6 million in 2001 and 2000, respectively. The increase in 2002 was primarily due to improved results from our mortgage and title operations, which benefited from a low interest rate and strong housing environment in 2002. Mortgage and title results increased due to both an increase in the number of transactions and profit per transaction in 2002, compared to 2001. Additionally, Strategic Technologies, Inc. generated a $5.0 million gain on the sale of a cable system. The increase in 2001 compared to 2000 was partially attributable to pretax earnings of approximately $16 million primarily related to the sale of our retained mortgage servicing rights. Additionally, the increase reflects the successful operational efficiencies which resulted from the combination of our and U.S. Home’s mortgage operations under the Universal American Mortgage banner and the consolidation of our title operations under the North American Title banner. The increase also reflects a greater level of refinance activity and a higher capture rate of our homebuyers, as well as a full year of earnings contribution from U.S. Home in 2001. The earnings contribution from U.S. Home represented 28% of the Division’s operating earnings in 2000.

Corporate General and Administrative

Corporate general and administrative expenses as a percentage of total revenues were 1.2% in 2002 compared to 1.3% and 1.1% in 2001 and 2000, respectively.

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Interest

Interest expense was $145.6 million, or 2.0% of total revenues, in 2002, $119.5 million, or 2.0% of total revenues, in 2001 and $98.6 million, or 2.1% of total revenues, in 2000. Interest incurred was $130.6 million, $127.9 million and $117.4 million in 2002, 2001 and 2000, respectively. Interest incurred is capitalized as inventories and relieved as interest expense when homes are delivered. The average rates for interest incurred were 7.6%, 7.6% and 6.2% in 2002, 2001 and 2000, respectively. The average debt outstanding was $1.6 billion, $1.5 billion and $1.4 billion in 2002, 2001 and 2000, respectively.

FINANCIAL CONDITION AND CAPITAL RESOURCES

At November 30, 2002, we had cash of $731.2 million, compared to $824.0 million at the end of fiscal 2001. The decrease in cash was primarily due to the funding of our acquisition of nine homebuilders during 2002 offset by cash flows provided by operating activities. During 2002, cash flows provided by operating activities amounted to $204.6 million, consisting primarily of net earnings offset in part by increased levels of operating assets to support a significantly higher backlog and a higher number of active communities as we continue to grow. Cash flows provided by operating activities in 2001 were reduced by financial services loans held for sale of $211.1 million and $57.1 million in receivables. We sell the loans we originate in the secondary mortgage market, generally within thirty days of the closing of the loans. The cash related to these loans and receivables was primarily received in December 2001 and was used to pay down our warehouse lines of credit. Inventories increased $130.7 million in 2001 as we positioned ourselves for future growth.

Cash used in investing activities totaled $365.7 million in the year ended November 30, 2002, compared to cash provided by investing activities of $1.9 million in 2001. In 2002, we used $424.3 million of cash for acquisitions. In 2001, $10.8 million was provided by the sale of substantially all of our mortgage servicing rights and $5.6 million related to net distributions by unconsolidated partnerships in which we invest. This generation of cash was offset by $13.1 million of net additions to operating properties and equipment.

We are always looking at the possibility of acquiring homebuilding or similar companies or their assets. We frequently enter into confidentiality agreements before we begin our exploratory evaluations of possible acquisition opportunities. At November 30, 2002, we were a party to confidentiality agreements relating to a number of homebuilding and other companies, including several publicly-held companies. Our exploratory evaluations under these or future confidentiality agreements may result in acquisition transactions.

During 2002, we acquired nine homebuilders, which expanded our operations into the Carolinas and the Chicago, Baltimore and Central Valley, California homebuilding markets and strengthened our positions in several of our existing markets. In connection with these acquisitions, total consideration, including debt of acquired companies, totaled approximately $600 million. The results of operations of the acquired homebuilders are included in our results of operations since their respective acquisition dates.

We finance our land acquisition and development activities, construction activities, financial services activities and general operating needs primarily with cash generated from operations and public debt issuances, as well as cash borrowed under revolving credit facilities. We also buy land under option agreements, which enable us to acquire homesites when we are ready to build homes on them. The financial risks of adverse market conditions associated with land holdings is managed by prudent underwriting of land purchases in areas we view as desirable growth markets, careful management of the land development process, and limitation of risk by using partners to share the costs of purchasing and developing land, as well as obtaining access to land through option arrangements.

On February 5, 2003, we issued $350 million of 5.95% senior notes due 2013 at a price of 98.287%. The senior notes are guaranteed on a joint and several basis by substantially all of our subsidiaries, other than subsidiaries engaged in mortgage and reinsurance activities. Proceeds from the offering, after underwriting discount and expenses, were approximately $342 million. We added the proceeds to our general working capital so that the proceeds will be available for use in our operations, for acquisitions and to purchase or repay outstanding indebtedness. The senior notes were issued under our $970 million shelf registration statement.

The majority of our short-term financing needs are met with cash generated from operations and funds available under our senior secured credit facilities. In May 2002, we amended and restated our senior secured

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credit facilities (the “Credit Facilities”), to provide us with up to $1.3 billion of financing. The Credit Facilities consist of a $653 million revolving credit facility maturing in April 2006, a $273 million 364-day revolving credit facility maturing in April 2003 and a $393 million term loan B maturing in May 2007. We may elect to convert borrowings under the 364-day revolving credit facility to a term loan, which would mature in April 2006. At November 30, 2002, $391.0 million was outstanding under the term loan B and we had paid down our revolving credit facilities to zero. Interest rates are LIBOR-based and the margins are set by a pricing grid with thresholds that adjust based on changes in our leverage ratio and the Credit Facilities’ credit rating. At November 30, 2002, we had letters of credit outstanding in the amount of $463.9 million, of which $310.6 million were collateralized against certain borrowings available under the Credit Facilities.

The following summarizes our senior notes and other debts payable:

Our ratio of net homebuilding debt to total net capital was 27.7% at November 30, 2002, compared to 29.1% at November 30, 2001. The decrease primarily resulted from cash generated by our operations during 2002. In addition to the use of capital in our ordinary homebuilding and financial services activities, we will continue to actively evaluate various other uses of capital which fit into our homebuilding and financial services strategies and appear to meet our profitability and return on capital requirements. This may include acquisitions of or investments in other entities. These activities may be funded through any combination of our credit facilities, cash generated from operations, sales of assets or the issuance of public debt, common stock or preferred stock.

At November 30, 2002, our Financial Services Division had a $500 million warehouse line of credit which included a $145 million 30-day increase which expired in December 2002 to fund the Division’s mortgage loan activities. Borrowings under this facility were $489.7 million at November 30, 2002, and were collateralized by mortgage loans and receivables on loans sold not yet funded with outstanding principal balances of $523.8 million. The warehouse line of credit matures in October 2004, at which time we expect the facility to be renewed. At November 30, 2002, we had advances under a conduit funding agreement with a major financial institution amounting to $343.7 million. Borrowings under this agreement are collateralized by mortgage loans. We also had a $20 million revolving line of credit with a bank, collateralized by certain assets of the Division and stock of certain title subsidiaries. Borrowings under the line of credit were $20.0 million at November 30, 2002.

The limited-purpose finance subsidiaries of our Financial Services Division have placed mortgages and other receivables as collateral for various long-term financings. These limited-purpose finance subsidiaries pay the principal of, and interest on, these financings almost entirely from the cash flows generated by the related pledged collateral, which includes a combination of mortgage notes, mortgage-backed securities and funds held by a trustee. At November 30, 2002, the balance outstanding for the bonds and notes payable was $9.2 million. The borrowings mature in years 2013 through 2018 and the annual principal repayments are dependent upon collections on the underlying mortgages, including prepayments, and cannot be reasonably determined.

We have various interest rate swap agreements which effectively convert variable interest rates to fixed interest rates on approximately $300 million of outstanding debt related to our homebuilding operations. The

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interest rate swaps mature at various dates through 2007 and fix the LIBOR index (to which certain of our debt interest rates are tied) at an average interest rate of 6.8% at November 30, 2002. The net effect on our operating results is that interest on the variable-rate debt being hedged is recorded based on fixed interest rates. Counterparties to each of the above agreements are major financial institutions. At November 30, 2002, the fair value of the interest rate swaps, net of tax, was a $24.4 million liability. Our Financial Services Division, in the normal course of business, uses derivative financial instruments to reduce our exposure to fluctuations in interest rates. The Division enters into forward commitments and option contracts to protect the value of loans held for sale or disposition from increases in market interest rates. We do not anticipate that we will suffer credit losses from counterparty non-performance.

Our 2000 Stock Option and Restricted Stock Plan (the “Plan”) provides for the granting of stock options and stock appreciation rights and awards of restricted common stock to key officers, employees and directors. The exercise prices of stock options and stock appreciation rights are not less than the market value of the common stock on the date of the grant. No options granted under the 2000 Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in installments determined when the options are granted. Each stock option and stock appreciation right will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. At November 30, 2002, 740,500 shares of restricted stock were outstanding under the Plan. The restricted stock is valued based on its market price on the date of grant. The grants vest over 5 years from the issuance date. Unearned compensation arising from the restricted stock grants is amortized to expense over the period of restrictions and is shown as a reduction of stockholders’ equity in the consolidated balance sheets.

In June 2001, our Board of Directors increased our previously authorized stock repurchase program to permit future purchases of up to 10 million shares of our common stock. We may repurchase these shares in the open market from time-to-time. During 2002 and 2001, we did not repurchase any of our outstanding common stock in the open market under these authorizations. As of November 30, 2002, in prior years under prior approvals, we had repurchased approximately 9.8 million shares of our outstanding common stock for an aggregate purchase price of approximately $158.9 million, or $16 per share. During 2002, our treasury stock increased by approximately 1,000 shares related to employee stock plans and share reacquisitions at the time of vesting of restricted stock.

In recent years, we have sold convertible and non-convertible debt into public markets, and at year end, we had effective Securities Act registration statements under which we could sell to the public up to $970 million of debt securities, common stock, preferred stock or other securities and up to $400 million of equity or debt securities which it may issue in connection with acquisitions of companies or interests in them, businesses, or assets. Our $970 million shelf registration statement was reduced by $350 million from the issuance of 5.95% senior notes in February 2003.

Our willingness to use common stock in acquisitions, or to sell common stock, could be adversely affected by the fact that if at any time our Class B common stock (which entitles holders to ten votes per share, is essentially non-transferable other than through conversion into common stock and is almost entirely owned by entities controlled by Stuart Miller, our President and Chief Executive Officer, and his family) is less than 10% of the outstanding common stock and Class B common stock taken together, all the Class B common stock will automatically be converted into common stock. We are proposing to increase the outstanding Class B common stock (and therefore, the number of shares of common stock we can issue without endangering the Class B common stock) by distributing to our stockholders one share of Class B common stock for each ten shares of common stock or Class B common stock already held, if our stockholders approve changes to the Class B common stock that would enable it to be publicly traded. We are also asking our stockholders to increase the number of shares of common stock and Class B common stock we are authorized to issue.

Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of growth.

Investments in Unconsolidated Partnerships

We frequently enter into partnerships that acquire and develop land for our homebuilding operations or for sale to third parties. Through partnerships, we reduce and share our risk and also the amount invested in land while increasing access to potential future homesites. The use of partnerships also, in some instances, enables us

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to acquire land to which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Our partners generally are unrelated homebuilders, land sellers or other real estate professionals. While we view the use of unconsolidated partnerships as beneficial to our homebuilding activities, we do not view them as essential to those activities.

Most of the partnerships in which we invest are accounted for by the equity method of accounting. At November 30, 2002, we had ownership interests of between 10% to 50% in these unconsolidated partnerships. In many instances, we are appointed as the day-to-day manager of the partnerships and receive fees for performing this function. During 2002, 2001 and 2000, we received management fees and reimbursement of expenses totaling $29.2 million, $26.1 million and $9.7 million, respectively, from unconsolidated partnerships in which we had interests. We and/or our partners sometimes obtain options or enter into other arrangements under which we can purchase portions of the land held by the unconsolidated partnerships. Option prices are generally negotiated prices that approximate fair value when we receive the options. During 2002, 2001 and 2000, $419.3 million, $232.6 million and $134.6 million, respectively, of the unconsolidated partnerships’ revenues were from land sales to our homebuilding divisions.

At November 30, 2002, the unconsolidated partnerships in which we had interests had total assets of $1.4 billion and total liabilities of $741.2 million, which included $563.6 million of notes and mortgages payable. In some instances, we and/or our partners have provided varying levels of guarantees on certain partnership debt. At November 30, 2002, we had recourse guarantees of $50.3 million and limited maintenance guarantees of $162.2 million of the partnerships’ debts. When we provide guarantees, the partnership generally receives more favorable terms from its lenders. The limited maintenance guarantees only apply if a partnership defaults on its loan arrangements and the carrying value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If we are required to make a payment under a limited maintenance guarantee to bring the carrying value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the unconsolidated partnership and increase our share of any funds it distributes.

During 2002, the unconsolidated partnerships in which we were a partner generated $939.8 million of revenues and incurred $780.1 million of expenses, resulting in net earnings of $159.8 million. Our share of those net earnings was $42.7 million. We do not include in our income our pro rata share of partnership earnings resulting from land sales to our homebuilding divisions. Instead, we account for those earnings as a reduction of our cost of purchasing the land from the partnerships. This in effect defers recognition of our share of the partnership earnings until a home is delivered and title passes to a homebuyer.

At the time of the 1997 transfer of our commercial real estate investment business to LNR Property Corporation (“LNR”), and the spin-off of LNR to our stockholders, we formed Lennar Land Partners, a 50%-50% owned unconsolidated partnership with LNR, which is included in the unconsolidated partnerships discussed above. We also have several other unconsolidated partnerships with LNR. In these partnerships, we provide the residential development experience and LNR contributes the commercial property expertise. In 2002, 2001 and 2000, we purchased land from Lennar Land Partners for a total of $83.0 million, $104.2 million and $112.3 million, respectively, which approximated fair value.

Contractual Obligations and Commercial Commitments

The following summarizes our contractual obligations at November 30, 2002:

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We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated partnerships. This reduces our financial risk associated with land holdings. At November 30, 2002, we had $218.3 million of primarily non-refundable option deposits with entities, which allows us to acquire approximately 45,000 homesites.

We are committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $463.9 million at November 30, 2002. Additionally, we had outstanding performance and surety bonds related to site improvements at various projects with estimated costs to complete of $839.4 million. We do not believe that draws upon these bonds, if any, will have a material effect on our financial position, results of operations or cash flows.

Our Financial Services Division’s pipeline of loans in process totaled approximately $2.3 billion at November 30, 2002. To minimize credit risk, we use the same credit policies in the approval of the commitments as are applied to our lending activities. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements. Loans in the pipeline of loans in process for which interest rates were committed to the borrower totaled approximately $316.3 million as of November 30, 2002. Substantially all of these commitments were for periods of 60 days or less.

Our Financial Services Division uses mandatory mortgage-backed securities forward commitments (“MBS”) to hedge our interest rate exposure during the period from when we make an interest rate commitment to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into MBS only with investment bankers with primary dealer status and with permanent investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 2002, we had open commitments amounting to $314.2 million to sell MBS with varying settlement dates through January 2003.

ECONOMIC CONDITIONS

Despite difficult economic conditions in large portions of the United States during much of 2002, the homebuilding environment remained strong due to a positive supply/demand relationship as well as low interest rates. As a result of this favorable environment, as well as recent homebuilding acquisitions and growth in the number of our active communities, our new orders increased by 19% in 2002. Although the homebuilding business historically has been cyclical, it has not undergone a down cycle in a number of years. This has led some people to assert that the prices of homes and the stocks of homebuilding companies are overvalued and will decline rapidly when the market for new homes begins to weaken. A decline in prices of stocks of homebuilding companies would make it more expensive, and could make it more difficult, for us to raise funds through stock issuances.

BACKLOG

Backlog represents the number of homes subject to pending sales contracts. Homes are sold using sales contracts which are generally accompanied by sales deposits. Before entering into sales contracts, we generally prequalify our customers. In some instances, purchasers are permitted to cancel sales contracts if they are unable to close on the sale of their existing home or fail to qualify for financing and under certain other circumstances. We experienced an average cancellation rate of 21% in 2002, compared to 22% and 21% in 2001 and 2000, respectively. Although cancellations can delay the sales of our homes, they have not had a material impact on sales, operations or liquidity, because we closely monitor the progress of prospective buyers in obtaining financing and use the information to adjust construction start plans to match anticipated deliveries of homes. We do not recognize revenue on homes covered by pending sales contracts until the sales are closed and title passes to the new homeowners.

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SEASONALITY

We have historically experienced variability in results of operations from quarter to quarter due to the seasonal nature of the homebuilding business. We typically experience the highest rate of orders for new homes in the first half of the calendar year, although the rate of orders for new homes is highly dependent on the number of active communities and the timing of new community openings. Because new home deliveries trail orders for new homes by several months, we typically have a greater percentage of new home deliveries in the second half of our fiscal year compared to the first half. As a result, our earnings from sales of homes are generally higher in the second half of the fiscal year.

INTEREST RATES AND CHANGING PRICES

Inflation can have a long-term impact on us because increasing costs of land, materials and labor result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. In recent years, the increases in these costs have followed the general rate of inflation and hence have not had a significant adverse impact on us. In addition, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 142 no longer permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. We adopted SFAS No. 142 on December 1, 2001. No impairment charges were recognized from the adoption of this statement. As of November 30, 2002 and 2001, there are no material identifiable intangible assets, other than goodwill. Pro forma net earnings and earnings per share for both fiscal 2001 and 2000 are discussed in Note 1 of Notes to Consolidated Financial Statements.

In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for our 2003 fiscal year. We do not believe that the implementation of SFAS No. 144 will have a material impact on our financial condition, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. We do not believe that the implementation of SFAS No. 145 will have a material impact on our financial condition, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure. SFAS No. 148 amends SFAS No. 123 Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We do not believe that the implementation of SFAS No. 148 will have a material impact on our financial condition, results of operations or cash flows.

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In November 2002, the FASB issued Financial Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies and expands on existing disclosure requirements for guarantees, including product warranties. FIN No. 45 also requires recognition of a liability at fair value of a company’s obligations under certain guarantee contracts. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The initial recognition and measurement provisions of FIN No. 45 are applied only on a prospective basis to guarantees issued after December 31, 2002, irrespective of the guarantor’s fiscal year-end. We do not believe that the implementation of FIN No. 45 will have a material impact on our financial condition, results of operations or cash flows.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 provides accounting guidance for consolidation of off-balance sheet entities with certain characteristics (variable interest entities). The consolidation requirements apply to variable interest entities created after January 31, 2003 and to variable interest entities in which we maintain an interest after August 31, 2003. We are in the process of evaluating all of our investments and other interests in entities that may be deemed variable interest entities under the provisions of FIN No. 46. These include interests in unconsolidated partnerships with assets totaling approximately $1.4 billion at November 30, 2002. Our maximum exposure to loss represents our recorded investment in these partnerships totaling $285.6 million. We believe that many of these interests and entities will not be consolidated, and may not ultimately fall under the provisions of FIN No. 46. We cannot make any definitive conclusion until we complete our evaluation.

CRITICAL ACCOUNTING POLICIES

Our accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements. As discussed in Note 1, 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 about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to the financial statements. Listed below are those policies that we believe are critical and require the use of significant judgment in their application.

Homebuilding Division

Revenue Recognition

Sales of homes are recognized when sales are closed and title passes to the new homeowners. Additionally, sales of other real estate (including sales of land and operating properties) are recognized when a significant down payment is received, the earnings process is complete and collectibility of the receivable is assured. We do not include in our income our pro rata share of partnership earnings resulting from land sales to our homebuilding divisions. Instead, we account for those earnings as a reduction of our cost of purchasing the land from the partnerships. This in effect defers recognition of our share of the partnership earnings until a home is delivered and title passes to a homebuyer. We believe that the accounting policy related to revenue recognition is a “critical accounting policy” because of the significance of revenue recognition.

Inventories

Inventories are stated at cost, unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. Inventory costs include land, land development and home construction costs, real estate taxes and interest related to development and construction. Land, land development, amenities and other costs are accumulated by specific area and allocated to homes within the respective areas.

We evaluate our inventory for impairment whenever indicators of impairment exist. Accounting standards require that if the sum of the undiscounted future cash flows expected to result from an asset is less than the reported value of the asset, an asset impairment must be recognized in the consolidated financial statements. The amount of impairment to recognize is calculated by subtracting the fair value of the asset from the carrying value of the asset.

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We believe that the accounting estimate related to inventory valuation and impairment is a “critical accounting estimate” because: (1) it is highly susceptible to change because of the assumptions about future sales and cost of sales and (2) the impact that recognizing an impairment would have on the assets reported in our consolidated balance sheets as well as our net earnings could be material. Our assumptions about future home sales prices and volumes require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. Although the homebuilding business historically has been cyclical, it has not undergone a down cycle in a number of years.

While no impairment existed as of November 30, 2002, there can be no assurances that future economic or financial developments, including general interest rate increases or a continued slowdown in the economy, might not lead to impairment of inventory.

Warranty Costs

We subcontract virtually all segments of construction to others and while our contracts call for the subcontractors to repair or replace any deficient items related to their trade, we are primarily responsible to correct any deficiencies. Additionally, in some instances, we may be held responsible for the actions of or losses incurred by subcontractors. Warranty reserves are established in an amount estimated to be adequate to cover expected warranty-related costs for materials and outside labor to be incurred during the warranty period. Reserves are determined based upon historical data and trends with respect to similar product types and geographical areas. We believe the accounting estimate related to the reserve for warranty costs is a “critical accounting estimate” because the estimate requires a large degree of judgment.

At November 30, 2002, the reserve for warranty costs was $93.6 million. While we believe that the reserve for warranty costs is adequate, there can be no assurances that the use of historical data and trends will resemble the actual warranty costs. Additionally, there can be no assurances that future economic or financial developments might not lead to a significant change in the reserve.

Investments in Unconsolidated Partnerships

We frequently enter into partnerships that acquire and develop land for our homebuilding operations or for sale to third parties. Our partners generally are unrelated homebuilders, land sellers or other real estate professionals.

Most of the partnerships through which we acquire and develop land are accounted for by the equity method of accounting, because we have a significant, but less than controlling, interest in the partnerships. We record the investment in these partnerships in the consolidated balance sheets as “Investments in Unconsolidated Partnerships” and our share of the partnerships’ earnings or losses as “Equity in Earnings from Unconsolidated Partnerships” as described in Notes 3 and 5 of Notes to Consolidated Financial Statements. Additionally, advances to these partnerships are included in the investment amount.

Judgment is required in determining controlling interest. Factors considered in determining whether we have significant influence or we have control include risk and reward sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating decisions and continuing involvement. Due to the judgment required in determining whether we have control or only significant influence, the accounting policy relating to the use of the equity method of accounting is a “critical accounting policy.”

As of November 30, 2002, we believe that the equity method of accounting is appropriate for our investments in unconsolidated partnerships where we do not have a controlling interest but rather share control with our partners. At November 30, 2002, the unconsolidated partnerships in which we had interests had total assets of $1.4 billion and total liabilities of $741.2 million.

Financial Services Division

Revenue Recognition

Loan origination revenues, net of direct origination costs, are recognized when the related loans are sold. Gains and losses from the sale of loans and loan servicing rights are recognized when the loans are sold and delivered to an investor. Premiums from title insurance policies are recognized as revenue on the effective date of

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the policy. Escrow fees are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. In all circumstances, we do not recognize revenue until the earnings process is complete and collectibility of the receivable is reasonably assured. We believe that the accounting policy related to revenue recognition is a “critical accounting policy” because of the significance of revenue recognition.

Allowance for Loss Reserves

We provide an allowance for loan losses when and if we determine that loans or portions of them are not likely to be collected. In evaluating the adequacy of the allowance for loan losses, we consider various factors such as past loan loss experience, regulatory examinations, present economic conditions and other factors considered relevant by management. Anticipated changes in economic conditions, which may influence the level of the allowance, are considered in the evaluation by management when the likelihood of the changes can be reasonably determined. This analysis is based on judgments and estimates and may change in response to economic developments or other conditions that may influence borrowers’ financial conditions or prospects. At November 30, 2002, we also had an allowance for title and escrow losses of $0.6 million for both known and incurred but not reported claims which requires management’s judgments and estimates. For these reasons, we believe that the accounting estimate related to the allowance for loss reserves is a “critical accounting estimate.”

At November 30, 2002, the allowance for loan losses was $3.0 million. While we believe that the 2002 year-end allowance was adequate, particularly in view of the fact that we usually sell the loans within 30 days after we originate them, there can be no assurances that future economic or financial developments, including general interest rate increases or a continued slowdown in the economy, might not lead to increased provisions to the allowance or a higher incidence of loan charge-offs.

Homebuilding and Financial Services Divisions

Goodwill Valuation

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. The process of determining goodwill requires judgment. Evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations. To the extent additional information arises or our strategies change, it is possible that the conclusion regarding goodwill impairment could change, which could result in a material effect on our financial position and results of operations. For those reasons, we believe that the accounting estimate related to goodwill impairment is a “critical accounting estimate.”

During fiscal 2002, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. In connection with the adoption of SFAS No. 142, we performed a test for impairment of goodwill as of December 1, 2001, which resulted in no impairment being identified. Goodwill is no longer subject to amortization. Instead, we review goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Historically through fiscal 2001, we amortized goodwill on a straight-line basis over periods ranging from 15 to 20 years.

At November 30, 2002, goodwill was $189.4 million (net of accumulated amortization of $18.0 million). While we believe that no impairment existed as of November 30, 2002, there can be no assurances that future economic or financial developments, including general interest rate increases or a continued slowdown in the economy, might not lead to impairment of goodwill.

Valuation of Deferred Tax Assets

We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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We believe that the accounting policy for the valuation of deferred tax assets is a “critical accounting policy” because judgment is required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. Changes in existing tax laws or rates could affect our ability to realize anticipated tax results and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents our best estimate of future events. Although it is possible there will be changes that are not anticipated in our current estimates, we believe it is unlikely such changes would have a material period-to-period impact on our financial position or results of operations.

At November 30, 2002, we had a valuation allowance of $7.0 million for net operating loss and capital loss carryforwards and certain acquisition adjustments. Based on our assessment, it appears more likely than not that the net deferred tax asset will be realized through future taxable earnings.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks related to fluctuations in interest rates on our debt obligations, mortgage loans and mortgage loans held for sale. We utilize derivative instruments, including interest rate swaps, in conjunction with our overall strategy to manage our exposure to changes in interest rates. We also utilize forward commitments and option contracts to mitigate the risk associated with our mortgage loan portfolio.

The tables on the following pages provide information at November 30, 2002 and 2001 about our significant derivative financial instruments and other financial instruments used for purposes that are sensitive to changes in interest rates. For mortgage loans held for sale, mortgage loans and investments, senior notes and notes and other debts payable, the tables present principal cash flows and related weighted average effective interest rates by expected maturity dates and estimated fair market values at November 30, 2002 and 2001. Weighted average variable interest rates are based on the variable interest rates at November 30, 2002 and 2001. Our term loan B is presented as fixed rate debt because the interest rate swaps changed the majority of the debt from variable interest rates to fixed interest rates. For interest rate swaps, the tables present notional amounts and weighted average interest rates by contractual maturity dates and estimated fair market values at November 30, 2002 and 2001. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contracts. Our limited-purpose finance subsidiaries have placed mortgages and other receivables as collateral for various long-term financings. These limited-purpose finance subsidiaries pay the principal of, and interest on, these financings almost entirely from the cash flows generated by the related pledged collateral and therefore, they received little more than is required to pay that debt service and are excluded from the following tables.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Notes 1 and 14 of Notes to Consolidated Financial Statements in Item 8 for a further discussion of these items and our strategy of mitigating our interest rate risk.

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Information Regarding Interest Rate Sensitivity

Principal (Notional) Amount by

Expected Maturity and Average Interest Rate

November 30, 2002

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Information Regarding Interest Rate Sensitivity

Principal (Notional) Amount by

Expected Maturity and Average Interest Rate

November 30, 2001