UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

Commission File Number 001-31255

WCI COMMUNITIES, INC.

24301 Walden Center Drive
Bonita Springs, Florida 34134
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (239) 947-2600
Securities registered pursuant to Section 12 (b) of the Act:

Securities registered pursuant to Section 12 (g) of the Act:
NONE
(Title of class)

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

Indicate by check mark 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. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES þ NO o

As of June 30, 2004, the aggregate market value of the Common Stock held by non-affiliates (all persons other than officers and directors of Registrant) of the Registrant was approximately $901,247,000.

As of February 24, 2005, there were 45,041,479 shares of Common Stock outstanding.

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement for its 2005 annual meeting of stockholders scheduled to be held on May 18, 2005 are incorporated herein by reference in Part III, Items 10, 11, 12, 13 and 14. Such Proxy Statement will be filed with the SEC no later than 120 days after the registrant’s fiscal year end December 31, 2004.

WCI COMMUNITIES, INC.
TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

GENERAL

WCI Communities, Inc. (the Company or WCI), a Delaware corporation, is a fully integrated homebuilding and real estate services company with over 50 years of experience in the design, construction and operation of leisure-oriented, amenity-rich master-planned communities. We began our operations in Florida through companies that principally focused on developing amenitized communities in the state. In the late 1990’s, we changed our business model to capture greater revenues and gross margins by becoming the principal homebuilder in most of our communities. In May 2004, we initiated homebuilding operations outside of Florida with the acquisition of Spectrum Communities, a developer and homebuilder that currently operates in New York, New Jersey and Connecticut. This acquisition established our position in the Northeast U.S. luxury residential market and broadens our capabilities to take advantage of future opportunities in the mid- and high-rise urban residential market. When this report uses the words “we,” “us,” and “our,” these words refer to WCI Communities, Inc. and its subsidiaries, unless the context otherwise requires.

We offer a full complement of products and services to enhance our customers’ lifestyles and meet their expectations. We design, sell and build single- and multi-family homes serving move-up, pre-retirement and retirement home buyers. We design, sell and build luxury residential towers targeting affluent, leisure-oriented home purchasers. We acquire and develop the land in our communities, construct the residences, design, build and operate the amenities in many of our communities and otherwise control most aspects of the planning, design, development, construction and operation of our communities. In certain situations, we elect to sell parcels and lots to others, including other builders and developers or end users.

We conduct development and homebuilding operations in the following markets:

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Florida:

	•	East Coast — Miami, Fort Lauderdale, West Palm Beach/Boca Raton, Daytona Beach and Jacksonville; and
	•	West Coast — Marco Island, Naples, Fort Myers/Cape Coral, Punta Gorda, Sarasota/Bradenton, Tampa/St. Petersburg/Clearwater and Pensacola; and

	•	New York — Dix Hills, Croton-on-Hudson, Sleepy Hollow, West Nyack, Eastport, East Fishkill, Lake Grove, Tarrytown and Hopewell Crossing; and
	•	New Jersey — Monroe and North Bergen; and
	•	Connecticut — Southbury and Danbury.

As of December 31, 2004, we have 50 locations where we are building single- and multi-family homes or mid- and high-rise residential units or operating amenity facilities. In total, we control over 17,000 acres of land, where we plan to develop approximately 17,000-20,000 future residences.

Since we market our products to move-up, pre-retirement and retirement leisure-oriented home purchasers, we expect to benefit from favorable demographic and economic trends, including the aging of the “baby-boom” generation, the growing inter-generational wealth transfer to our target demographic segment, and the increasing affluence of the pre-retirement and retirement-aged population.

Our principal business lines include single- and multi-family (traditional) homebuilding, mid- and high-rise (tower) homebuilding, and real estate services. We also develop and operate amenity facilities, sell selected land parcels, and enter into real estate joint ventures, in each case within our communities. See Note 2 to the consolidated financial statements for further information regarding our business segments for each of the three years ended December 31, 2004, 2003 and 2002.

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HOMEBUILDING ACTIVITIES

Traditional homes

We design, sell and build traditional homes serving primary, second and retirement home buyers. Our homes range from approximately 1,080 square feet to 8,000 square feet in living space and are priced from over $100,000 to over $5.0 million, with an average selling price per new order for the year ended December 31, 2004 of $432,000. We build most of these homes within our master-planned communities, which often feature attractive amenities, including hotels, such as Ritz-Carlton, Hyatt, Regent International, and Starwood’s luxury collection. Many of our communities also include golf courses designed by Raymond Floyd, Peter Jacobson and Greg Norman. We believe that this approach increases the value of our homes and communities and helps us attract affluent purchasers. Additionally, we sometimes sell selected lots directly to buyers for the design and construction of large custom homes.

Sales. We maintain sales centers with community scale models and lifestyle and home demonstration displays. We also maintain professionally decorated model homes, which demonstrate the benefits and features of our products and the community lifestyles. We offer customers a wide selection of standard options and upgrades to finish their homes. In addition, some of our larger communities offer design studios staffed with professional designers where the many options and upgrades available to purchasers of our products are displayed and demonstrated prior to incorporation into a home. We maintain and manage an inventory of homes that are available immediately or within a few months.

We employ a wide range of sales incentives to market our homes to prospective buyers. These incentives generally fall into one of three categories: (1) cash discounts against the purchase price or credits towards options and upgrades from the standard home features; (2) golf or sports club memberships, automobiles and/or other tangible merchandise; and (3) payment of the buyer’s loan closing costs, travel related expenses, and/or certain future expenses for a limited time period such as ad valorem taxes or property owner’s association assessments.

Backlog. At December 31, 2004 and 2003, we had a backlog of signed contracts for 2,109 and 882 traditional home units, respectively, with sales values aggregating $1.0 billion and $435.4 million, respectively. We expect to deliver approximately $873.0 million of our backlog at December 31, 2004 within the next twelve months.

Construction. We typically act as the general contractor in the construction of our residences. Our employees provide purchasing and quality assurance for, and construction management of, the homes we build, while the material and labor components of our houses are provided by subcontractors. Depending upon the size and complexity of a home’s design, the availability of labor, materials and supplies, our construction time ranges from about 100 to 365 calendar days for our single and multi-family homes.

Tower residences

We design, sell and build luxury residential towers and condominium hotels targeted to affluent, leisure-oriented home purchasers. Residences available for sale in our towers range in size from approximately 1,100 square feet to 11,700 square feet in living space and are priced from over $360,000 to over $12.0 million. The average selling price per new order for a tower unit in 2004 was approximately $1.0 million. Our towers range in size from 5 to 30 stories and include 15 to 309 residences.

In 2004, we entered into the design, marketing and development of two condominium hotels located in the Miami and Singer Island, Florida markets, respectively. The Miami development will consist of up to a 124-unit resort-hotel managed by Regent International Hotels and a 185-unit residential tower. The Singer Island development will consist of up to a 239-unit resort-hotel managed by Starwood Hotels & Resorts Worldwide, Inc. and a 66-unit residential tower. Each condominium hotel plans to offer an array of amenities such as, but not limited to: a gourmet signature restaurant; elite in-residence spa, swimming pool and cabanas; 24-hour concierge, butler, room and valet services.

Design. We commence the design and planning of towers by conducting extensive research relating to the market, customer base, product requirements, pricing and absorption. Our research effort is directed by dedicated

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project managers specializing in the development of towers. Based on the results of this research, we organize an experienced team of architects, engineers and specialty consultants under the leadership of the project manager to create the design of the tower. We also contract for the services of an experienced third party general contractor during the early stages to assist in design, engineering and the estimation of construction costs.

Sales. Once the design for a tower has been completed and its construction costs have been estimated, marketing of the residences commences. Our sales associates assist prospective homebuyers with floor plans, price information and tours of model homes and in connection with the selection of options and upgrades. We sometimes use various sales incentives in order to attract homebuyers. The use of incentives such as cash discounts against the purchase price or credits toward options and upgrades, depends largely on local economic and competitive market conditions. Brochures, scaled architectural models, walk-in kitchen and bathroom models and other marketing materials are used to assist sales associates in explaining and demonstrating the residences to be built.

Backlog. At December 31, 2004 and 2003, we had a backlog of signed contracts with sales values aggregating $852.6 million and $512.2 million, respectively. Substantially our entire backlog at December 31, 2004 is expected to be completed and delivered to our buyers within the next twelve to twenty-four months.

Construction. We hire experienced and bonded third party general contractors specializing in the construction of towers to construct these buildings. By hiring experienced general contractors to construct our towers, we mitigate many of the risks associated with construction. As the developer of the towers that we build, we manage the entire process from planning to closing of completed residences and turnover of the condominium association to residents.

Generally, construction is not commenced until a substantial number of units are under non-cancelable contracts. We will generally collect from each purchaser a deposit ranging from 10% to 30% of a residence purchase price to cover a portion of estimated construction costs. Once construction is completed, closings of sold residences usually occur within one month, at which time we are paid the balance of the purchase price for the residences sold. Over our 16 year history of building towers, approximately 1% to 2% of the contracts for which nonrefundable contract deposits were collected by us defaulted on the obligation to close the purchase of the tower unit; however, there can be no assurance that our cancellations or defaults will not increase in the future.

REAL ESTATE SERVICES

Realty brokerage

In 2004, we extended our franchise agreement with Prudential Real Estates Affiliates, Inc. This agreement, allows us to provide exclusive residential brokerage services as Prudential Florida WCI Realty in seven geographic areas across nine counties in Florida and commercial brokerage services in Naples. The exclusive franchise areas are in Lee, Collier, Martin, Palm Beach, Broward, Charlotte, and Dade Counties and in portions of Hillsborough and Manatee Counties. As consideration under the agreement, we pay Prudential a royalty based on gross commission revenue on a monthly basis. Additionally, through a separate subsidiary, we provide new home and certain resale brokerage services. At December 31, 2004, our realty brokerage operations had 34 offices and approximately 1,500 sales agents.

Title insurance

We provide title insurance and closing services through a subsidiary which underwrites its policies on behalf of large national title insurers and derives its revenues from commissions on title insurance premiums and closing services provided to our customers, third party residential closings and commercial closings.

Mortgage banking

We provide residential mortgage banking services to our buyers, as well as third party purchasers through our subsidiary, Financial Resources Group, Inc. (FRG) which also does business as WCI Mortgage. FRG originates home mortgages which are subsequently sold to mortgage investors. Generally these mortgages are sold at prices

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established in commitments obtained from mortgage investors prior to the time the mortgages are originated. The mortgages are primarily funded through a bank warehouse facility.

Property management

We provide management services to our master-planned community developments and oversee the business affairs of condominium, homeowners’ and community master associations encompassing over 13,000 residences throughout Florida. The services provided by our management companies include accounting, security, common area maintenance and insurance policy administration.

AMENITY MEMBERSHIP AND OPERATIONS

Our recreational amenities, including championship golf courses with clubhouses, fitness, tennis and recreational facilities, guest lodging, marinas and a variety of restaurants, are central to our mission to deliver high quality residential lifestyles. Amenities at our communities are owned by either community residents or non-residents in equity membership programs, unaffiliated third parties, or retained by us. As we plan the development of new communities, the ownership of the amenities is structured to cater to the preferences and expectations of community residents.

LAND SALES

We leverage our expertise and experience in master planning by strategically selling land at premium prices within our communities for construction of products we do not choose to build. This enables us to create a more well-rounded community by selling land to developers who will construct residential, commercial, industrial and rental properties, which we may prefer not to develop at the time or in general. We sometimes sell selected lots to other builders and to end users for the design and construction of homes.

OTHER INVESTMENTS

We selectively enter into business relationships through partnerships and joint ventures with unrelated parties. These partnerships and joint ventures are utilized to acquire, develop, market and operate homebuilding, timeshare, amenities, and/or real estate services projects. As of December 31, 2004, we participated in fifteen real estate joint ventures, including nine that are consolidated in our financial statements. We may be required to make additional cash contributions to the partnerships pursuant to agreements. As of December 31, 2004, none of our unconsolidated partnerships had debt balances.

MARKETING

Targeting move-up, pre-retirement, retirement and affluent second home buyers, we develop and execute award-winning, multi-media marketing plans for our homes and communities. We believe our proprietary marketing systems and the depth of experience of our marketing group create an increased number of selling opportunities for us and has generally enhanced our marketing presence and brand recognition. Our marketing programs reach prospective purchasers, locally, nationally and internationally through advertisements placed in demographic specific periodicals and other media. When a prospective purchaser responds to one of our advertisements or our website, specific property information is provided to them and purchaser-specific information is entered into our database creating a personalized customer record, which is used to record every interaction we have with this prospective purchaser. We believe that our relationship and database marketing results in the efficient use of expenditures and results in a greater conversion rate of interested parties to buyers.

LAND ACQUISITION POLICY

We complete market studies and other analyses before entering into a contract to acquire land. We generally purchase land or obtain an option to purchase land, which may require certain site improvements prior to construction including site planning and engineering, as well as constructing road, sewer, water, utilities, drainage and recreational facilities and other amenities.

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The majority of the land we acquire typically includes all necessary entitlements so that we have the right to begin development or construction. In certain circumstances, we will purchase land without all necessary entitlements where we identify an opportunity to build on the property in a manner consistent with our strategy. Although entitlements are typically obtained prior to the acquisition of land, we are typically required to obtain other governmental approvals and permits during the course of land development and construction of residences.

Our land purchase agreements are typically subject to a number of conditions including, but not limited to, our ability to obtain necessary governmental approvals. If all governmental approvals are not obtained prior to a pre-determined contractual deadline, we may extend the deadline or cancel the contract and our initial deposit will be returned to us. In addition, we typically have the right to cancel any of our agreements by forfeiture of our deposit. In such instances, we generally are not able to recover any pre-development costs.

We have extensive land currently under our control for which we have obtained approvals or are seeking approvals. There can be no assurance that we will be successful in securing the necessary development approvals for the land currently under our control. The inability to locate an adequate land supply or to obtain necessary governmental approvals may limit our ability over the long-term to maintain current levels of development activities.

OUR COMMUNITIES

Our expertise in development and in-depth market knowledge enable us to successfully identify attractive land acquisition opportunities in highly sought-after Florida coastal and the Northeast U.S. major commuter markets, efficiently manage the development, and maximize the land value.

The following table sets forth summary information about our communities, including remaining acres, remaining entitled units and remaining number of tower sites.

Our communities
As of December 31, 2004

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EMPLOYEES

At December 31, 2004, we had approximately 3,500 employees. We have no unionized employees and believe that our relationship with our employees is good. We believe that we offer a desirable and attractive selection of employee benefits to assist in recruiting and retaining employees.

SEASONALITY

We have historically experienced, and in the future expect to continue to experience, seasonal variability in revenue, profit and cash flow. Factors expected to contribute to this variability include: the timing of the introduction and start of construction of new towers; the timing of tower residence sales; the timing of closings of homes, lots and parcels; our ability to continue to acquire land and options on land on acceptable terms; the timing of receipt of regulatory approvals for development and construction; the condition of the real estate market and general economic conditions in Florida and the Northeast US; prevailing interest rates and the availability of financing, both for us and for the purchasers of our homes; weather conditions; and the cost and availability of materials and labor.

Our historical financial performance is not necessarily a meaningful indicator of future results and, in particular, we expect financial results to vary from project to project and from quarter to quarter. Our revenue may therefore fluctuate significantly on a quarterly basis, and we believe that quarter-to-quarter comparisons of our results should not be relied upon as an indication of future performance.

COMPETITION

The homebuilding industry and real estate development is highly competitive. In each of our business components, we compete against numerous developers and others in the real estate business in and near the areas where our communities are located. We, therefore, may be competing for investment opportunities, financing, available land, raw materials and skilled labor with entities that possess greater financial, marketing and other resources. Competition generally may increase the bargaining power of property owners seeking to sell, and industry competition may be increased by future consolidation in the real estate development industry.

REGULATORY AND ENVIRONMENTAL MATTERS

Our operations are subject to Federal, State and local laws and regulations. In particular, development of property is subject to comprehensive Federal and State environmental legislation. This regulatory framework, in general, encompasses areas like traffic considerations, availability of municipal services, use of natural resources, impact of growth, utility services, conformity with local and regional plans, together with a number of other safety and health regulations. Permits and approvals mandated by regulation for development of any magnitude are often numerous, significantly time-consuming and onerous to obtain, and not guaranteed. Such permits, once expired, may or may not be renewed and development for which the permit is required may not be completed if such

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renewal is not granted. These requirements have a direct bearing on our ability to further develop communities. Our mortgage activities and title insurance agencies must also comply with various Federal and State laws, consumer credit rules and regulations and other rules and regulations unique to such activities. Although we believe that our operations are in full compliance in all material respects with applicable Federal, State and local requirements, our growth and development opportunities may be limited and more costly as a result of legislative, regulatory or municipal requirements.

Our operating costs may also be affected by the cost of complying with existing or future environmental laws, ordinances and regulations, which require a current or previous owner or operator of real property to bear the costs of removal or remediation of hazardous or toxic substances on, under or in the property. Environmental site assessments conducted at our properties have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any material environmental liability or concerns. Although we conduct environmental site assessments with respect to our own properties, there can be no assurance that the environmental assessments that we have undertaken have revealed all potential environmental liabilities, or that an environmental condition does not otherwise exist as to any one or more of our properties that could have a material adverse effect on our business, results of operations and financial condition.

AVAILABLE INFORMATION

The Company makes available free of charge on or through its Internet website (http://www.wcicommunities.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). These filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

The Company also has a Corporate Governance webpage. You can access the Company’s Corporate Governance webpage through our Internet site, www.wcicommunities.com by clicking on the “Governance” link to the heading “Investors.”

ITEM 2. PROPERTIES

As of December 31, 2004, we owned and used approximately 327,000 square feet of office and amenity space throughout Florida. In addition, we lease approximately 105,000 square feet of office space in Bonita Springs, which serves as our corporate headquarters, and approximately 408,000 square feet of office space in other locations throughout Florida, New York, New Jersey and Connecticut which serve our divisional homebuilding operations and as branch office space for our related real estate services businesses.

ITEM 3. LEGAL PROCEEDINGS

The Company and certain of its subsidiaries have been named as defendants in various claims, complaints and other legal actions arising in the normal course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s estimates and assumptions related to these proceedings, or due to the ultimate resolution of the litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the New York Stock Exchange (Symbol: WCI).

The following table sets forth the high and low price of the shares of WCI common stock for the periods indicated as reported on the New York Stock Exchange.

The Company has not paid any cash dividends on its common stock to date and expects that, for the foreseeable future, it will not do so; rather it expects to follow a policy of retaining earnings in order to finance the continued development of its business.

The payment of dividends is within the discretion of the Company’s Board of Directors and any decision to pay dividends in the future will depend upon an evaluation of a number of factors, including the earnings, capital requirements, operating and financial condition of the Company, and any contractual limitations then in effect. In this regard, the indentures governing the Company’s outstanding senior subordinated notes contain restrictions on the amount of dividends the Company may pay on its common stock. In addition, the Company’s senior credit facility and senior subordinated notes require the maintenance of minimum consolidated stockholders’ equity, which restricts the amount of dividends the Company may pay.

As of February 24, 2005, there were approximately 228 record holders of the Company’s common stock.

Please refer to Item 12 of this report and Note 17 to the Company’s consolidated financial statements for a discussion of the shares of WCI common stock that may be issued under existing equity compensation plans, all of which have been approved by shareholders, and a description of the Company’s equity incentive plans and the types of grants, in addition to options, that may be made under the plans.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data for each of the five years in the period ended December 31, 2004. Balance sheet data as of December 31, 2004 and 2003 and statements of operations data for the years ended December 31, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements which are included in Item 8 of this report. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited historical consolidated financial statements, including the introductory paragraphs and related notes thereto, appearing in Items 7 and 8 of this report.

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	(1)	Debt excludes accounts payable and other liabilities, customer deposits, income taxes payable and community development district obligations.
	(2)	Net income includes $18.2 million in cash proceeds received from the sale of our class B limited partnership interest in Bighorn Development Limited Partnership. The statement of operations and balance sheet also includes the effects of the acquisition of Spectrum Communities in May 2004. See the footnotes to the consolidated financial statements for further details.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue recognition — Traditional Homebuilding. We recognize homebuilding revenues when homes close and title to and possession of the property is formally transferred to the buyer. The majority of our homebuilding revenues are received in cash within one or two days subsequent to closing. We include amounts in transit from title companies at the end of each reporting period in cash and cash equivalents.

Revenue recognition — Tower Homebuilding. Revenue for tower residences under construction is recognized on the percentage-of-completion method. Revenue is recorded as a portion of the value of non-cancelable tower unit contracts when (1) construction is beyond a preliminary stage, (2) the buyer is committed to the extent of being

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unable to require a full refund except for non-delivery of the residence, (3) a substantial percentage of residences are under non-cancelable contracts, (4) collectibility of sales prices are reasonably assured and (5) costs can be reasonably estimated. Revenue recognized is calculated based upon the percentage of total costs incurred in relation to estimated total costs. The percentage-of-completion method is applied since we meet applicable requirements under SFAS 66, Accounting for Sales of Real Estate. Actual revenues and costs to complete building construction in the future could differ from our current estimates. If our estimates of tower revenues and development costs are significantly different from actual amounts, then our revenues, related cumulative profits and costs of sales may be revised in the period that estimates change.

Contracts receivable. Amounts due under tower sales contracts, to the extent recognized as revenue under the percentage-of-completion method, are recorded as contracts receivable. We review the collectibility of contracts receivable on a quarterly basis and provide for estimated losses due to potential customer defaults. Historically, approximately 1% to 2% of customers who had noncancelable contracts defaulted on the obligation to close the purchase of the tower unit. Actual contract defaults may differ from our current estimates.

Real estate inventories and cost of sales. In accordance with SFAS 67, Accounting for Costs and Initial Rental Operations for Real Estate Projects, real estate inventories including land, common development costs and estimates for costs to complete, are allocated to each parcel or lot based on the estimated relative sales value of each parcel or lot, as compared to the sales value of the total project, while site specific development costs are allocated directly to the benefited land. We use the specific identification method for the purpose of accumulating costs associated with home and tower construction. We amortize all applicable land acquisition, land development and related costs (both incurred and estimated to be incurred) to cost of sales for homes closed based upon the relative sales values of homes expected to be closed in each project.

When a home is closed, we usually have not yet paid all incurred costs necessary to complete the home. Each month we record as a liability and as a charge to cost of sales the amount we have incurred, estimate to be incurred and expect to be paid related to completed homes that have been closed as of the end of that month. Actual costs to complete in the future could differ from our current estimated amounts.

Warranty costs. We establish warranty reserves for traditional and tower residences by charging cost of sales and crediting a warranty liability. The amounts charged are estimated by management to be adequate to cover expected warranty-related costs for materials and labor required under our warranty obligation periods. We provide our single- and multi-family home buyers with a one to three year limited warranty, respectively for all material and labor and a ten year warranty for certain structural defects. We provide our tower home buyers a three year warranty for the unit and common elements of the tower. Our warranty cost accruals are based upon our historical warranty cost experience in each market in which we operate and are adjusted as appropriate to reflect qualitative risks associated with the type of homes we build and the geographic areas in which we build them. Actual future warranty costs could differ from our currently estimated amounts.

Capitalized interest and real estate taxes. We capitalize interest, up to an amount not to exceed total interest incurred, and real estate taxes on parcels, lots, towers and amenity facilities (the “Projects”) while under active development. The capitalization period ends when the asset is substantially complete and ready for its intended use or sale. The amount of interest capitalized in an accounting period is determined by applying the Company’s weighted average annualized interest rate to the amount of accumulated expenditures related to the Projects under development during the period. For homebuilding projects, land sales and amenities conveyed through equity membership sales, capitalized interest and real estate taxes are apportioned on relative sales value and amortized to cost of sales, respectively, with each home closing, land sale or membership sold. For tower buildings, capitalized interest and real estate taxes are amortized to cost of sales under the percentage-of-completion method. For owned and operated assets, capitalized interest and real estate taxes are included in the base cost of the assets and depreciated. If the various underlying estimates related to interest capitalization and amortization are revised, then more or less interest and real estate taxes would be capitalized and/or amortized to cost of sales.

Community development district obligations. In connection with certain development activities, bond financing is utilized in many of our communities to construct on-site and off-site infrastructure improvements. Some bonds

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are repaid directly by us while other bonds only require us to pay non-ad valorem assessments related to lots not yet delivered to residents. We also guarantee district shortfalls under certain bond debt service agreements. In accordance with EITF 91-10, Accounting for Special Assessments and Tax Increment Financing Entities, we annually estimate the amount of bond obligations that we may be required to fund in the future. If our estimates of the amount of bond obligations that we may be required to fund are significantly different from actual amounts funded, our real estate inventories and costs of sales may be revised on a prospective basis.

Impairment of long-lived assets and long-lived assets to be disposed of. Real estate inventories considered held for sale including land intended for sale and completed tower residences and homes are carried at the lower of cost or fair value less costs to sell. Property and equipment are recorded at cost less accumulated depreciation and depreciated on the straight-line method over their estimated useful lives. Whenever events or circumstances indicate that the carrying value of property and equipment and real estate inventories considered held and used, including land and land improvements, investments in amenities and tower residences and homes under development may not be recoverable, we compare the carrying amount of the asset to the undiscounted expected future cash flows. If this comparison indicates that the asset is impaired, the amount of the impairment is calculated using discounted expected future cash flows. If our estimate of the future cash flows is significantly different from actual cash flows, we may prematurely impair the value of the asset, we may underestimate the value of the calculated impairment or we may fail to record impairment.

Goodwill. Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the goodwill to its carrying amount. If the carrying amount of the goodwill exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Several factors are used to evaluate goodwill, including management’s plans for future operations, recent operating results and estimated future revenues and costs. Due to the uncertainties associated with such estimates, our conclusion regarding goodwill impairment could change and result in future goodwill impairment.

Litigation. The Company is involved in litigation incidental to its business, the disposition of which is expected to have no material effect on the Company’s financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s estimates and assumptions related to these proceedings, or due to the ultimate resolution of the litigation.

RESULTS OF OPERATIONS

Overview

Our principal business lines include single- and multi-family (traditional) homebuilding, mid- and high-rise (tower) homebuilding and real estate services each of which contributes to our profitability. In 2004, 88.2% and 93.3% of revenues and gross margin, respectively, were derived from our combined homebuilding operations.

During August and September 2004, we experienced flood and wind damage to several of our properties in Florida as a result of hurricanes Charley, Francis, Ivan and Jeanne. As of December 31, 2004, we recorded a $10.2 million expense relating to the damaged properties before considering insurance recoveries. As further described below, we offset the reported expense for the receipt of $5.0 million in insurance recoveries and the accrual of an additional $4.0 million in estimated future insurance recoveries, resulting in net hurricane costs of $1.2 million.

We have insurance in place that covers damage to our properties and related losses, including certain losses caused by interruption of business. As of December 31, 2004, we have recorded in accounts receivable $4.0 million as estimated insurance recoveries related to damages caused by hurricanes Charley, Francis and Jeanne, which is our best estimate of the amount of reimbursement that will be received after considering deductibles and other factors. In the fourth quarter of 2004, we received $5.0 million in insurance recoveries related to damages caused by hurricane Ivan to our Northwest Florida properties. We are in the process of documenting all estimated losses and preparing claims for submission to our insurance carriers. Although we do not believe that we will incur any additional material losses, the final insurance recoveries cannot be determined until additional information is known.

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Although our operations for the last half of 2004 were significantly impacted by the hurricanes, we achieved an increase in total revenues of 24.3% due primarily to growth in our traditional and tower homebuilding and real estate services divisions. Net income for the year increased 13.9%. The increase in net income was primarily attributable to the 42.7% increase in gross margin from our tower homebuilding division, $18.2 million received from the sale of our investment in a partnership and $4.0 million received from the sale of development rights in a previously closed out community. Net income was unfavorably impacted by a decline in gross margins from our traditional homebuilding and amenity membership and operations and an increase in selling, general and administrative (SG&A) expenses and interest expense.

For 2003, total revenues and net income increased 19.8% and 0.7%, respectively, over 2002. The increases were driven primarily by our traditional and tower homebuilding and real estate services divisions. Although net income increased only slightly over 2002, gross margins increased 8.1% due primarily to increased contributions from the traditional homebuilding and real estate services divisions. Gross margins from tower homebuilding, amenities and land sales declined as compared to 2002. Overall, net income increased slightly due to the increase in gross margin offset by a 19.2% increase in selling, general and administrative costs. During the fourth quarter of 2003, we settled an Internal Revenue Service examination of our tax returns for the years 1999-2001. As a result, we reduced our income tax expense by approximately $1.9 million.

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Homebuilding

Traditional homebuilding

Year ended December 31, 2004 compared to year ended December 31, 2003

The increase in revenues was primarily due to the $156.7 million of revenue contributed by our Northeast U.S. operations, which were acquired in May 2004, offset by a decrease in revenues of $27.6 million in our Florida markets. We closed 230 units during the year in our Northeast U.S. markets while 1,433 units were closed in our Florida markets, compared to 1,666 closed last year in Florida. The decline in home deliveries in the Florida markets was due primarily to construction delays caused by the hurricanes and permitting delays. We anticipate approximately 270 units, with a sales value of $123.9 million related to the hurricane-delay, will close in 2005. The number of homes closed in our affordable retirement market increased 70.8% from 2003 while the number of homes closed in our primary/move-up and luxury/second home markets decreased 16.4% and 71.7%, respectively. The decline in the primary/move-up and luxury/second home markets is primarily related to hurricane delays in the Southeast Florida region and the close-out of four communities in the Florida markets in 2003, respectively. Revenues were favorably impacted by the 20.8% increase in the average selling price per home closed. The increase in the average selling price per home closed was positively impacted by the $681,000 average price achieved by our Northeast U.S. markets and the $416,000 contributed by the Florida markets.

Lot revenues decreased $4.7 million due primarily to the near sell-out in 2003 of lots in one of our communities located in the Southeast Florida region. From time to time, we sell certain large lots for custom homes directly to prospective residents or custom homebuilders as part of our strategy to serve a broad range of customers.

The decrease in the gross margin percentage was due to the write-up of real estate inventories associated with the acquisition of Spectrum Communities to reflect fair value at the time of purchase and a decline in gross margins from the Florida markets. Gross margin percentages for the Florida markets decreased to 19.6% from 22.8% primarily due to higher raw material and labor costs at one Southeast Florida community where home deliveries were delayed, the close-out of a subdivision in one community located in the Southwest Florida region and above-average incentives and discounts related to the sale and delivery of two luxury model homes. Due to permitting delays, the timeframe from initial customer contract to construction start to home delivery increased by up to as much as 12 to 18 months, thus sales prices were locked in over a year or longer before delivery and our actual costs were higher than previously estimated. The hurricanes of the third quarter exacerbated the delays and cost

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increases, making the impact even greater. Other factors impacting gross margin were the $20.6 million increase in warranty and construction overhead costs. Construction overhead costs increased primarily due to increased salaries and benefits. The lingering effects of the hurricanes and permitting delays on Florida’s East Coast, as well as the purchase price accounting treatment of our Northeast U.S. homebuilding acquisition, is expected to suppress gross margins in the first half of 2005. Gross margins are expected to begin the year at 15.0% to 16.0%, rising to 21.0% to 22.0% in the latter half of the year, bringing the average for the year to approximately 19.0%.

Contract values of new orders increased 59.8% due in part to 271 units and $134.5 million of new contract values contributed by our Northeast U.S. markets and the increase from our Florida markets. Contract values for the Florida markets increased 41.1% due to contributions from all regions with the exception of the Southeast region which was significantly impacted by the reduced sales at one community as a result of planned sales reductions designed to reduce the gross margin impact of the hurricanes and permitting delays. Although absorption of homes priced in excess of $1 million in certain second home luxury communities located in our Florida markets continues to be slow, the overall increase in sales is believed to be attributable to increasing consumer confidence throughout our regions and the completion of the new amenity facilities in existing communities.

The 130.0% increase in backlog contract values primarily reflects a 139.1% increase in the backlog units and 3.8% decrease in the average sales price of homes under contract to $475,000 in 2004 compared to $494,000 in 2003. The increase in backlog contract values and units is attributed to a rise in homebuilding sales combined with closing delays in the Florida markets due to the hurricanes and, to a lesser extent, the acquisition of Spectrum Communities, which had 273 units and $147.7 million in backlog at December 31. We expect to deliver approximately $873.0 million of our backlog within the next twelve months.

Our ability to obtain labor, materials and permits in the Southeast regions of Florida in the aftermath of the hurricanes will impact the timing of delivery of homes in the near future. As it relates to our homes in backlog, we anticipate an increase in labor and material prices in the Southeast and East Central regions of Florida may negatively impact our gross margin in the near future.

We employ a wide range of sales incentives to market our homes to prospective buyers. These incentives are an important aspect of our sales and marketing of homes, and we may rely on them more heavily in promoting communities experiencing weaker demand or to promote the sale of completed unsold homes. Without the use of these marketing incentives, our ability to sell homes could be adversely impacted.

Year ended December 31, 2003 compared to year ended December 31, 2002

Revenues increased 35.3% due to a 17.9% increase in the number of homes delivered and a 15.0% increase in average selling price. We recorded initial deliveries of 250 homes in three of our communities located in the East Central and Southwest regions of Florida, offset by a decrease in deliveries from two communities closed-out in 2002 and four communities that were approaching close-out in 2003. The average selling price per home closed increased as a result of closing a larger proportion of homes in our higher-priced communities. Lot revenues increased 50.8% primarily due to the introduction of a new community and subdivision located in the East Central and Southeast regions of Florida, respectively.

The number of homes closed in our primary/move up market increased 63.4% from 2002, while the number of homes closed in our affordable retirement and luxury/second home markets declined 8.9% and 36.5%, respectively, from 2002. The increase in the primary move-up market is attributed to the low interest rate environment and the increase in available product offerings. The decline in the more affordable retirement and luxury/second home markets is primarily related to an unpredictable stock market, geopolitical risks and an uncertain economic outlook.

Gross margin percentage increased 120 basis points due primarily to an increase in the average selling price per home closed, which reflects the sale of larger homes with more features and, consequently, higher margins. We also began the initial delivery of high-margin units in a community located in the East Central region of Florida.

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Contract values of new orders increased 34.8% due primarily to an increase in the average sales price. The 33.8% increase in the average sales price per new order was primarily due to sales in three recently introduced higher-priced communities and demand for higher-priced homes at certain existing communities. The 28.3% increase in backlog contract values primarily reflects a 26.7% increase in the average sales price of homes under contract to $494,000 in 2003 compared to $390,000 in 2002.

Tower homebuilding

Year ended December 31, 2004 compared to year ended December 31, 2003

The increase in revenues was primarily due to the increase from towers recognizing percentage-of-completion revenues and a $51.3 million increase in the delivery of completed tower units. In 2004, 12 new towers began recognizing revenue and contributed $321.5 million to revenues compared to four contributing $91.9 million in 2003.

Gross margin percentage increased 110 basis points primarily due to the realization of $6.8 million in construction and sales incentive cost savings on certain recently completed buildings, and the favorable margins realized on delivery of completed tower units. The gross margin for the year was negatively impacted by a $4.0 million increase in overhead costs which is due to higher wages and benefits associated with an increase in tower activities in new and existing markets.

Contract values of new orders increased 59.1% due to the conversion to non-cancelable contracts of 906 units in 14 towers introduced in 2004 with a sales value of $877.2 million.

The 66.4% increase in backlog contract values was due to the 52.1% increase in cumulative contract values partially offset by a 38.8% increase in cumulative revenues recognized. The increase in cumulative contract values was due to a $982.7 million increase in contract values in new and existing towers offset by the $428.8 million reduction in cumulative contracts associated with the six towers that were completed and delivered to buyers during 2004.

In 2005, revenue growth of 10%-15% is expected to be provided by the greater number and value of tower units that are sold and under construction. Gross margin percentage may decline since a broader range of moderate-priced towers are under construction and planned for initial sales release. On a long-term basis, we expect gross margins in the mid to high 20% range.

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Year ended December 31, 2003 compared to year ended December 31, 2002

Revenues increased 10.8% due primarily to a $76.3 million increase in the delivery of previously completed unsold tower units offset by an $18.4 million decrease in revenues from towers recognizing percentage-of-completion revenues in the periods. Gross margin percentage declined to 28.9% from 33.4% in 2002. In addition to the net $3.0 million increase to our allowance for uncollectability of contracts receivable, the decline in the gross margin percentage was primarily due to a change in the mix of units built and sold toward lower-priced, lower-margin units, and a $4.2 million increase in warranty and completion costs recorded in 2003 related to three recently completed towers. Gross margins in 2003 were positively impacted by the initial percentage-of-completion recognition of one higher-priced, higher-margin tower located on the west coast of Florida.

Contract values of new orders increased 65.6% in 2003 due primarily to the conversion to firm contracts of 315 units in five newly introduced towers with a sales value of $500,811 or $1.6 million average selling price compared to 305 units in seven towers with a sales value of $235,856 or $773,000 average selling price in 2002.

In addition to the items noted above, favorable period over period comparisons of revenues and contract values of new orders were impacted by the Company’s business decision to grant rescission on 48 tower units and the default by customers on closing of five tower units in the quarter ended September 30, 2002 as previously reported. The resulting impact reduced 2002 revenue and gross margin by $35.4 million and $12.9 million, respectively.

The increase in backlog contract values was due primarily to the increase in cumulative contract values as a result of the One Bal Harbour and Veracruz tower contract conversions in 2003 offset by the increase in cumulative revenues recognized as a result of the increase in the extent of completion of towers under construction in both periods and the completion and delivery of units in nine completed towers during 2003. The increase in cumulative contract values reflects an 11.2% increase in the average sales price of units in backlog.

Real estate services

Year ended December 31, 2004 compared to year ended December 31, 2003

Real estate services revenues, including real estate brokerage, mortgage banking, title and property management operations, increased 24.3% primarily due to an increase in the volume of transactions and an increase in the average sales price per transaction associated with our Prudential Florida WCI Realty brokerage operations. Prudential Florida WCI Realty brokerage transaction volume increased 12.8% to 10,949 closings from 9,710 in 2003 and the average brokerage transaction price increased 21.0%.

Gross margin percentages declined to 15.3% from 16.3% due primarily to margin declines in our title and mortgage banking operations. The decline in title gross margins was due to lower transaction volume as a result of delayed closing transactions related to hurricanes that occurred during the third quarter and increased overhead associated with staff training and operational expansion. The decline in mortgage banking gross margins was due primarily to the decline in transaction volume and an increase in adjustable rate mortgage business which carries a lower margin. The decline in overall volume was primarily due to a slowdown in the refinance business.

In 2005, we anticipate revenue growth in real estate services primarily due to increased transaction volume and higher average sales prices within the Prudential Florida WCI Realty brokerage business and increased capture

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rates in the mortgage banking and title operations achieved through synergies with our homebuilding and realty brokerage division.

Year ended December 31, 2003 compared to year ended December 31, 2002

Real estate services revenues increased 26.2% primarily due to an increase in the volume of transactions and an increase in the average sales price per transaction associated with our Prudential Florida WCI Realty brokerage operations. Prudential Florida WCI Realty brokerage transaction volume increased 16.7% to 9,710 closings from 8,321 and the average brokerage transaction price increased 15.5% compared to the same period in 2002. The increase in gross margin was primarily due to increased efficiency in the real estate brokerage and mortgage banking businesses and prudent cost management in general.

Amenity membership and operations

Year ended December 31, 2004 compared to year ended December 31, 2003

Total amenity membership and operations revenues decreased 8.8% due primarily to the $13.7 million decline in equity membership and marina slip revenues offset by the $8.7 million increase in membership dues and amenity service revenues.

Marina slip revenues declined due to the sell-out of slips at our Jupiter Yacht Club and Deering Bay communities in 2003 and early 2004, respectively. Equity membership revenues declined $5.1 million due primarily to the bulk sale of all remaining equity memberships at the Deering Bay club in the second quarter of 2003 and the decline in demand for luxury equity memberships. In general, the sale of luxury equity memberships continues to be affected by reduced demand in the Southwest Florida region.

Membership dues and amenity service revenues increased 24.6% due to the initial operations of new amenity facilities located throughout the Florida markets and increasing annual membership fees, offset by decreased revenues as a result of the four hurricanes in the third quarter of 2004.

The decline in the gross margin percentage was primarily due to sell-out of higher margin marina slips in 2003, the decline in the demand for high margin luxury equity memberships, the increased costs associated with the new amenity facilities that began operations during the year and decreased revenues as a result of the four hurricanes.

Amenity gross margin in 2005 will continue to be adversely impacted by the reduced availability of marina slips, slow demand for luxury equity memberships due to general market conditions and increased start-up deficits associated with new amenity operations.

Year ended December 31, 2003 compared to year ended December 31, 2002

Equity membership and marina slip revenues decreased 32.8% due to a $7.5 million decline in marina slip revenues primarily due to the sell-out of marina slips at our Gulf Harbour community that occurred in 2002 and a $2.6 million decline in luxury equity membership sales at our existing amenity clubs. The decline in equity membership sales was partially mitigated by revenues of $5.2 million recognized on the sale of all remaining memberships at the Deering Bay Club that occurred in the second quarter of 2003.

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Membership dues and amenity operations revenues decreased 11.4% primarily due to an $8.6 million decrease related to the turnover of two clubs located in the Southwest region to its members, offset by a $4.0 million increase in revenues from several new and existing club facilities. The decline in total amenity gross margins was primarily due to the decline in sales of luxury equity memberships and marina slips and increased start-up deficits associated with new amenity operations.

Land Sales

Year ended December 31, 2004 compared to year ended December 31, 2003

Land sales are incidental to our overall operations and are expected to continue in the future, but may significantly fluctuate. The decrease in land sales revenue was primarily attributable to the timing of sales of non-strategic parcels located in our various regions. Land sales gross margin percentages are impacted by the change in mix and location of property sold. We are currently marketing a significant land parcel that may be sold in part or entirely. We are negotiating with more than one party and the sale is currently expected to close in 2005.

Year ended December 31, 2003 compared to year ended December 31, 2002

The slight increase in revenues was primarily attributable to the sale of non-strategic parcels located in our various regions. Land sales gross margins were $15.1 million before adjustments of $5.3 million for community development district obligations and estimated costs to complete development activities in two closed-out non-homebuilding communities.

Other income and expense

Year ended December 31, 2004 compared to year ended December 31, 2003

Other income increased to $26.3 million from $5.1 million in 2003 due to the cash proceeds received from the sale of our Class B limited partnership interest in Bighorn Development Limited Partnership (Bighorn) and $4.0 million from the sale of our development rights in a previously closed out community. In February 2004, the Company sold its interest in Bighorn to Bighorn and affiliates for $20.0 million. During 2004, the Company received and recognized approximately $18.2 million in other income related to Bighorn. The remaining unpaid commitment of $1.8 million was collected and will be reported in January 2005.

As of December 31, 2004, we recognized costs of approximately $10.2 million related to repairs, storm preparation and cleanup and impairments to the net historical book value of assets believed damaged or destroyed by the hurricanes. We have recorded $4.0 million as estimated insurance recoveries related to damages caused by Hurricanes Charley, Francis and Jeanne, which represents our best estimate of the amount of reimbursement that will be received after considering deductibles and other factors. In the fourth quarter of 2004, we received $5.0 million in insurance recoveries related to damages caused by Hurricane Ivan to our properties near Pensacola, Florida which was recorded against hurricane costs. We are in the process of documenting all estimated losses and preparing claims for submission to our insurance carrier, including business interruption claims. Although we do not believe that we will incur any additional material losses, the final insurance recoveries cannot be determined until additional information is known.

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Selling, general and administrative expenses, including real estate taxes, (SG&A) increased 20.4% to $182.8 million from $151.8 million in 2003. General and administrative (G&A) costs increased 25.8% primarily due to the increase in salaries and benefits associated with the planned growth of our business and the addition of our Northeast U.S. operations. Marketing expenditures increased 24.3% due to the increase in costs associated with opening sales offices and incremental costs from operating existing sales offices. As a percentage of total revenues, SG&A decreased to 10.1% from 10.5% in 2003.

Interest expense, net of capitalization, increased 24.7%, due to a 15.4% increase in interest incurred offset by a 6.8% increase in interest capitalized. Interest incurred increased primarily as a result of the increase in the weighted average outstanding debt balance for 2004 as compared to 2003. The increase in overall debt was primarily related to increased development activities associated with traditional and tower homebuilding products under contract for delivery in the next three to 24 months, land acquisitions, land improvements, amenity development activities and the acquisition of Spectrum Communities in 2004. The increase in interest capitalized was primarily due to a greater book value of new and existing properties undergoing active development.

Year ended December 31, 2003 compared to year ended December 31, 2002

Equity in earnings from joint ventures and other income increased slightly from 2002. SG&A increased 21.2% to $151.8 million primarily due to a 20.6% and 16.6% increase in G&A costs and marketing expenditures, respectively. G&A increased due to an increase in salary, wages and benefits, professional and legal fees and insurance, respectively. The increase in G&A was expected with the planned growth in our business. Marketing expenditures increased primarily due to increased advertising in new and existing communities. As a percentage of total revenues, SG&A was 10.5% compared to 10.3% in 2002.

Interest expense, net of capitalization, increased 11.8% primarily due to a 7.0% increase in interest incurred. Interest incurred increased primarily as a result of the increase in the weighted average outstanding debt balance for 2003 as compared to 2002.

LIQUIDITY AND CAPITAL RESOURCES

We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We finance our land acquisitions, land improvements, homebuilding, development and construction activities from internally generated funds, credit agreements with financial institutions and other debt. As of December 31, 2004, we had $102.0 million of cash and cash equivalents and approximately $495.5 million available to draw under our senior unsecured credit facility.

Our cash flows from operations are impacted by the net cash proceeds from the sale of homes, tower units, amenity memberships and marina slips and land and other factors. In addition, we receive cash proceeds from mortgage loans originated by our mortgage banking operations, and by providing realty brokerage, title, property management and construction management services to our customers.

We use cash flows from operations to build inventory additions related to single- and multi-family homes that are under contract for delivery during the next six to twelve months, land acquisitions, land improvements, amenity development activities, and additions to tower inventories. Including land acquisitions, net additions to real estate inventories were approximately $212.6 million for the year ended 2004. During the year, we acquired approximately $265.8 million in additional land. We expect real estate inventories to increase as we are currently searching for and negotiating additional opportunities to obtain control of land for future communities.

For 2004, our cash flows from operations were impacted by a $211.7 million increase in contracts receivable reflecting the increase in percentage-of-completion revenue recognition in tower units under contract that are now being constructed offset by cash received from closing of six towers during the year. In addition, we expect to collect a portion of the remaining contracts receivable during the next twelve months as seven tower closings are planned to occur, allowing delivery of units to residents. If we do not collect these contract receivables due to various contingencies, including buyer defaults, we may receive less cash than we expect. Historically,

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approximately 1% to 2% of non-cancelable contacts have resulted in cancellation or default. Future defaults may limit our ability to deliver units from backlog and collect contract receivables upon the completion of towers under construction.

For 2004, approximately $53.5 million of cash was used in investing activities for the purchase of Spectrum Communities and $42.3 million to develop golf courses and club facilities offset by net distributions from four of our joint ventures. We anticipate cash used in investing activities will continue to increase with future company acquisitions and development of current and future amenity operations which are owned and operated by the Company.

For 2004, financing activities provided net cash from borrowings on the senior unsecured credit facility, tower construction facilities and other project loans. These cash proceeds are typically utilized to fund land acquisitions, construction activities and general and administrative costs.

Our wholly owned finance subsidiary, Financial Resources Group, Inc., utilizes a $23.0 million bank warehouse facility to fund mortgage loan originations. The warehouse facility requires the maintenance of an adequate collateral borrowing base and the maintenance of certain financial covenants including a maximum leverage ratio, as defined, of 15.0 to 1. As of December 31, 2004, $2.5 million was available for borrowing under the warehouse facility.

In March 2004, the Company entered into a new revolving credit construction loan agreement (the Tower Facility) which replaced the three existing tower construction loans. The Tower Facility provides for a $290.0 million revolving loan, which may increase to $340.0 million if certain conditions are met. At December 31, 2004, the Tower facility was amended to add new towers, reduce the interest rate and extend the maturity date. The loan matures December 2008. Under the Tower Facility we are required to maintain an adequate borrowing base. The principal financial covenants include the following, as defined in the Tower Facility: (1) net sales proceeds from the projects cannot be less than 90% of the aggregate loan amount project allocations and (2) Minimum Adjusted Tangible Net Worth must be at least $600.0 million. At December 31, 2004 approximately $62.4 million was outstanding. In addition, the company has a construction loan for another tower for up to $90 million. This loan matures October 2005. At December 31, 2004 approximately $58.4 million was outstanding.

In August 2004, the Company entered into a new senior unsecured revolving credit agreement (the Credit Facility) which replaced the previous $405.0 million revolving credit agreement. At December 31, 2004, the revolving loan commitment was increased to $686.3 million, which increased to $750.0 million on January 5, 2005. The loan matures August 2008. Under the Credit Facility we are required to maintain an adequate borrowing base. At December 31, 2004, the borrowing base calculation was in excess of the commitment amount of $686.3 million. The principal financial covenants include the following, as defined in the Credit Facility: (1) Minimum Adjusted Tangible Net Worth may not be less than $715.8 million plus 50% of positive net income earned after March 31, 2004 plus 50% of the aggregate proceeds of equity offerings after the closing date, (2) Total Debt to Adjusted Tangible Net Worth cannot exceed 2.25 to 1.0, and (3) EBITDA to Fixed Charges cannot be less than 2.0 to 1. At December 31, 2004, approximately $495.5 million was available for borrowing.

In connection with the acquisition of Spectrum Communities, the Company assumed approximately $68.0 million of project debt with maximum interest rates of prime plus 1% and maturity dates from 2004 to 2007. As of December 31, 2004, approximately $3.8 million was outstanding related to this assumed debt.

Excluding any premiums, at December 31, 2004, $800.0 million of senior subordinated debt was outstanding. Under our senior subordinated indenture agreements, we are required to maintain certain financial and operational covenants that may limit the Company’s and its subsidiaries ability to incur additional debt, pay dividends, repurchase capital stock and make investment acquisitions. As defined in our senior subordinated bond indentures, in order to incur additional debt, we are required to maintain a minimum coverage ratio of 2.0 to 1.0 and maximum debt to tangible net worth ratio of 3.0 to 1.0. Additionally, under the indentures, if our consolidated tangible net worth declines below $125.0 million for two consecutive quarters we would be required to offer to purchase 10% of the aggregate principal of the notes originally issued.

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At December 31, 2004, we were in compliance with all of the covenants, limitations and restrictions in regards to our senior subordinated notes, senior unsecured credit facility, tower construction loans and warehouse credit facility.

During the course of future operations, we plan to acquire developed and undeveloped land, which will be used in the homebuilding, tower and amenities lines of business. As of December 31, 2004, we had option contracts aggregating $226.0 million, net of deposits, to acquire approximately 3,300 acres of land. Our contractual obligation with respect to the option contracts is limited to the forfeiture of the related non-refundable deposits and/or letters of credit which are approximately $10.2 million at December 31, 2004.

On July 28, 2004, our Board of Directors authorized the Company to repurchase up to 500,000 shares of its common stock and to repurchase up to $50 million of its 10 5/8% senior subordinated notes from time to time, subject to certain parameters.

The following table summarizes our payments under debt, operating lease and purchase obligations as of
December 31, 2004:

Our cash requirements for 2005 are projected to increase as we continue to develop new communities and fund our growth. We anticipate using our existing senior unsecured credit facility to fund land acquisitions, land development, homebuilding and amenity development. Our real estate development is dependent upon the availability of funds to finance current and future development. We plan to continue growing and expect to fund this growth through the generation of cash flow from operations, from the availability of funds under our credit facilities, from new construction loans and from future debt and equity offerings. We believe we have adequate resources and sufficient credit facilities to satisfy our current and reasonably anticipated future requirements to acquire capital assets and land, to develop land improvements and construction activities and to meet any other needs of our business, both on a short- and long-term basis. If we do not have sufficient capital resources to fund our development and expansion, projects may be delayed, resulting in possible adverse effects on our results of operations. No assurance can be given as to the terms, availability or cost of any future financing we may need. If we are at any time unable to service our debt, refinancing or obtaining additional financing may be required and may not be available or available on terms acceptable to us. Furthermore, considerable economic and political uncertainties could have adverse effects on consumer buying behavior, construction costs, availability of labor and materials and other factors affecting us and the homebuilding industry generally.

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OFF-BALANCE SHEET ARRANGEMENTS

We selectively enter into business relationships through the form of partnerships and joint ventures with unrelated parties. These partnerships and joint ventures are utilized to acquire, develop, market and operate homebuilding, amenities and real estate projects. In connection with the operation of these partnerships and joint ventures, the partners may agree to make additional cash contributions to the partnerships pursuant to the partnership agreements. We believe that future contributions, if required, will not have a significant impact on our liquidity or financial position. If we fail to make required contributions, we may lose some or all of our interest in such partnerships or joint ventures. At December 31, 2004, none of our unconsolidated partnerships or joint ventures had outstanding debt. However, the partners may agree to incur debt to fund partnership and joint venture operations in the future.

Standby letters of credit and performance bonds, issued by third party entities, are used to guarantee our performance under various contracts, principally in connection with the development of our projects and land purchase obligations. At December 31, 2004, we had approximately $48.0 million in letters of credit outstanding. Performance bonds do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $112.7 million at December 31, 2004, are typically outstanding over a period of approximately one to five years.

INFLATION

Our costs of operations may be impacted by inflation to the extent that a strengthening economic environment places upward pressure on the cost of labor and materials. In addition, certain raw materials used by us in our homebuilding operations are susceptible to commodity price increases. Unless these cost increases are passed on to customers through increased home and service prices, our operating margins may be reduced. In addition, in times of inflation, the reduced availability of attractive mortgage financing for purchasers of our homes may have an adverse effect on sales. If interest rates increase, construction and financing costs, as well as the cost of borrowings, also would increase, which can result in lower operating margins.

The volatility of interest rates could have an adverse effect on our future operations and liquidity. Among other things, these conditions may affect adversely the demand for housing and the availability of mortgage financing and may reduce the credit facilities offered to us by banks, investment bankers and mortgage bankers.

FORWARD-LOOKING STATEMENTS

As we enter 2005, we expect increased revenues from all lines of business as demand for our products is expected to grow. Assuming the current economic environment continues, including increased consumer confidence, a stronger stock market and moderately increasing interest rates, we expect 2005 to produce a 20% or greater increase in earnings. If economic conditions deteriorate, interest rates increase significantly, the ability to obtain permits and approvals for land development is delayed or adverse legislation or regulations occurs, then it may be difficult to achieve earnings growth.

Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings, cash flows or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management, are also forward-looking statements. Forward-looking statements are based on current expectations and beliefs concerning future events and are subject to risks and uncertainties about the Company, economic and market factors and the homebuilding industry, among other things. These statements are not guaranties of future performance.

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These risks and uncertainties include the Company’s ability to compete in real estate markets where we conduct business; the availability and cost of land in desirable areas in Florida and elsewhere and our ability to expand successfully into those areas; the Company’s ability to obtain necessary permits and approvals for the development of its lands; the availability of capital to the Company and our ability to effect growth strategies successfully; the Company’s ability to pay principal and interest on its current and future debts; the Company’s ability to maintain or increase historical revenues and profit margins; our ability to offer sales incentives at levels consistent with our past practices; the Company’s ability to collect contracts receivable and close homes in backlog, particularly related to buyers purchasing homes as investments; availability of labor and materials and material increases in labor and material costs; increases in interest rates and availability of mortgage financing; the level of consumer confidence; adverse legislation or regulations; unanticipated litigation or legal proceedings; natural disasters; and changes in general economic, real estate and business conditions. If one or more of the assumptions underlying our forward-looking statements proves incorrect, then the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by the forward-looking statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking statements.

All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to update any forward-looking statements in this Report or elsewhere as a result of new information, future events or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We utilize fixed and variable rate debt. Changes in interest rates on fixed–rate debt generally affects the fair market value of the instrument, but not our earnings or cash flow. Changes in interest rates on variable rate debt generally does not impact the fair market value of the instrument but does affect our earnings and cash flow.

The following table sets forth, as of December 31, 2004, the Company’s debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors and Shareholders of WCI Communities, Inc:

We have completed an integrated audit of WCI Communities, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

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Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of WCI Communities, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Miami, Florida
February 28, 2005

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WCI Communities, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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WCI Communities, Inc.
Consolidated Statements of Income
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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WCI Communities, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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WCI Communities, Inc.
Consolidated Statements of Cash Flows
(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Statements of Cash Flows (Continued)
(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

1.	Significant Accounting Policies
	A summary of the significant accounting principles and practices used in the preparation of the consolidated financial statements follows.
	Basis of Financial Statement Presentation
	The consolidated financial statements include the accounts of WCI Communities, Inc. (the Company), its wholly owned subsidiaries and certain joint ventures in which the Company has the ability to exercise control. The equity method of accounting is applied in the accompanying consolidated financial statements with respect to those investments in joint ventures in which the Company has less than a controlling interest, has substantive participating rights, or is not the primary beneficiary as defined in FIN 46-R, Consolidation of Variable Interest Entities. All material intercompany balances and transactions are eliminated in consolidation.
	The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
	Revenue and Profit Recognition
	Single- and multi-family (traditional) homebuilding revenue is recognized at the time of closing under the completed contract method. The related profit is recognized when collectibility of the sales price is reasonably assured and the earnings process is substantially complete. When a sale does not meet the requirements for income recognition, profit is deferred until such requirements are met and the related sold inventory is classified as completed inventory.
	Revenue for tower residences under construction is recognized on the percentage-of-completion method. Revenue is recorded as a portion of the value of non-cancelable tower unit contracts when construction of each building is beyond a preliminary stage, the buyer is committed to the extent of being unable to require a full refund except for non-delivery of the residence, a substantial percentage of residences are under non-cancellable contracts, collectibility of the sales prices are reasonably assured and costs can be reasonably estimated. Revenue recognized is calculated based upon the percentage of total costs incurred in relation to estimated total costs. The percentage-of-completion method is applied since we meet the applicable requirements under SFAS 66, Accounting for Sales of Real Estate. Any amounts due under sales contracts, to the extent recognized as revenue, are recorded as contracts receivable. The Company expects to collect contracts receivable of $453,298 and $311,133 in 2005 and 2006, respectively. We review the collectibility of contracts receivable on a quarterly basis and provide for estimated losses due to potential customer defaults. Contracts receivable includes an allowance of $6,025 and $4,180 for estimated losses due to potential customer defaults at December 31, 2004 and 2003, respectively. Any sales after the completion of tower residence construction are recorded as revenue on the completed contract method.
	Real estate services revenue primarily includes realty brokerage, mortgage banking and title operations. Realty brokerage and title revenues are recognized upon closing of a sales contract. Mortgage banking revenues include premiums and fees associated with the qualification, processing and placement of mortgage loans with third-party investors and are recognized as revenues when the earnings process is complete. Interest income, net of related interest expense, is accrued on mortgage loans from the date of the note until the loan is sold. The Company records sales of mortgage loans at the time the purchaser acquires the risks and rewards of ownership and the Company has surrendered control over the loans and received all cash payments. The sales of these mortgages are at prices established in commitments obtained from mortgage investors prior

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

	to the time the mortgages are originated. Gains and losses are recognized based upon the difference between the sales proceeds and the basis of the loan sold, adjusted for net deferred loan fees and certain direct costs. Loan origination fees and costs are deferred and recognized upon sale of the related loans.
	Revenues from amenity operations include the sale of equity memberships and marina slips, non-equity memberships, billed membership dues and fees for services provided. Equity membership and marina slip sales are recognized at the time of closing. Equity membership sales and the related cost of sales are initially recorded under the cost recovery method. Revenue recognition for each equity club program is reevaluated on a periodic basis based upon changes in circumstances. If the Company can demonstrate that it is likely to recover proceeds in excess of remaining carrying value, the full accrual method is then applied. Dues are billed on an annual basis in advance and are recorded as deferred revenue and then recognized as revenue ratably over the term of the membership year. Revenues for services are recorded when the service is provided.
	Revenue from land sales is recognized at the time of closing. The related profit is recognized in full when collectibility of the sales price is reasonably assured and the earnings process is substantially complete. When a sale does not meet the requirements for income recognition, profit is deferred under the deposit method and the related inventory is classified as completed inventory. The deferred income is recognized as the Company’s involvement is completed.
	Sales incentives such as reductions in listed sales prices of homes, tower units, golf club memberships and marina slips are classified as a reduction of revenue. Sales incentives such as free products or services are classified as cost of sales.
	Real Estate Inventories and Cost of Sales
	Real estate inventories consist of land and land improvements, investments in amenities and tower residences and homes that are under construction or completed. Total land and common development costs are apportioned to each home, lot, amenity or parcel on the relative sales value method, while site specific development costs are allocated directly to the benefited land. Investments in amenities include clubhouses, golf courses, marinas, tennis courts and various other recreation facilities that the Company intends to recover through equity membership and marina slip sales.
	The Company constructs amenities in conjunction with the development of certain planned communities and accounts for related costs in accordance with SFAS 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects. Amenities are either transferred to common interest realty associations (CIRAs), equity membership clubs, or retained and operated. The cost of amenities conveyed to a CIRA are classified as a common cost of the community and included in real estate inventories. These costs are allocated to cost of sales on the basis of the relative sales value of the homes sold. Cost of amenities retained and operated by the Company are accounted for as property and equipment.
	Real estate inventories considered held for sale, including completed tower residences and homes, are carried at the lower of cost or fair value less cost to sell. Whenever events or circumstances indicate that the carrying value of real estate inventories considered held and used, including land and land improvements, investments in amenities and tower residences and homes under development, may not be recoverable, impairment losses are recorded and the related assets are adjusted to their estimated fair value.

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

	Capitalized Interest and Real Estate Taxes
	Interest and real estate taxes incurred relating to land under development and construction of tower residences are capitalized to real estate inventories during the active development period. Interest incurred relating to the construction of amenities is capitalized to real estate inventories for equity membership clubs or property and equipment for clubs to be retained and operated by the Company. Interest and real estate taxes capitalized to real estate inventories are amortized to costs of sales as related homes, lots, amenity memberships and parcels are sold. For tower buildings, capitalized interest and real estate taxes are amortized to costs of sales under the percentage-of-completion method. Interest capitalized to property and equipment is depreciated on the straight-line method over the estimated useful lives of the related assets.
	The following table is a summary of interest expense, net, and real estate taxes, net:

	Warranty
	The Company provides its single- and multi-family home buyers with a one to three year limited warranty, respectively for all material and labor and a ten year warranty for certain structural defects. The Company provides its tower home buyers a three year warranty for the unit and common elements of the tower.
	Since the Company subcontracts traditional and tower homebuilding work to subcontractors who provide it with an indemnity, claims relating to workmanship and materials are generally the primary responsibility of the subcontractors. Warranty reserves have been established by charging cost of sales and crediting a warranty liability. The amounts charged are estimated by management to be adequate to cover expected warranty-related costs under all unexpired warranty obligation periods. The Company’s warranty cost accruals are based upon historical warranty cost experience and are adjusted as appropriate to reflect qualitative risks associated with the types of towers and homes built.

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

The following table presents the activity in the Company’s warranty liability account for the year ended December 31, 2004:

	Cash, Cash Equivalents and Restricted Cash
	The Company considers all highly liquid instruments with an original purchased maturity of three months or less as cash equivalents. Restricted cash consists principally of escrow accounts representing customer deposits restricted as to use. Cash as of December 31, 2004 and 2003 included $57,679 and $56,044, respectively, of amounts in transit from title companies for transactions closed at or near year-end.
	Property and Equipment
	Property and equipment, including amenities retained and operated by the Company, are recorded at cost less accumulated depreciation and are depreciated on the straight-line method over their estimated useful lives. If an operating amenity is converted to an equity club, the related assets are reclassified from property and equipment to real estate inventories, depreciation is ceased and accounted for in accordance with SFAS 144. Upon reclassification, the sale of equity memberships and the recognition of related cost of sales is determined in the same manner as other amenities that are being sold through an equity membership program. Provisions for impairment are recorded when estimated future undiscounted cash flows from operations and projected sales proceeds are less than the net carrying value.
	Expenditures for maintenance and repairs are charged to expense as incurred. Costs of major renewals and improvements, which extend useful lives, are capitalized.
	Other Assets
	Other assets primarily consist of prepaid expenses, acquisition deposits and debt issue costs. Debt issue costs, principally loan origination and related fees, are deferred and amortized over the life of the respective debt using the straight-line method, which approximates the effective interest method.
	Goodwill and Other Intangible Assets
	Goodwill represents the excess of the Company’s cost of business operations acquired over the fair value of identifiable assets acquired net of liabilities assumed. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill and certain identifiable intangible assets with indefinite useful lives are no longer amortized over their expected lives (see Note 9) but are subject to annual impairment tests. In the event facts and circumstances indicate the carrying value of goodwill is impaired, it would be written down to its estimated fair value.
	The Company currently has one identifiable intangible asset with an estimated finite useful life of 30 years. The asset was acquired through an acquisition and is being amortized on the straight-line basis over its estimated useful life.

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

	Accounts Payable and Other Liabilities
	Accounts payable and other liabilities primarily consist of the following:

	Customer Deposits
	Customer deposits primarily represents amounts received from customers under real estate sales contracts.
	Debt
	For the years ended December 31, 2004 and 2003, aggregate debt had a weighted average annual effective interest rate of 7.5% and 8.3%, respectively.
	Derivative Instruments and Hedging Activities
	Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income, and recognized in the statement of earnings when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment.
	The Company’s strategy was to hedge the risk of variability in the cash flows attributable to changes in the benchmark interest rate related to a portion of the Company’s variable rate debt. The Company recognized gains or losses for amounts received or paid when the underlying transaction settles.
	The Company had an interest rate swap agreement with counterparties that are major financial institutions. The interest rate swap agreement expired February 2004. The swap agreement was designated as a cash flow hedge and reflected at fair value in the consolidated balance sheet. The fair value of the interest rate swap agreement was estimated based on quoted market rates of similar financial instruments. The related gains or losses are recorded in stockholders’ equity as accumulated other comprehensive income or loss. Amounts to be received or paid as a result of swap agreements are recognized as adjustments to interest incurred on the related debt instruments.
	Fair Value of Financial Instruments
	Financial instruments consist primarily of cash and cash equivalents, mortgage notes and accounts receivable, accounts payable and contract retainage, customer deposits, senior unsecured credit facilities, mortgage and notes payable, community development district obligations, senior subordinated debt and contingent convertible senior subordinated debt. For financial instruments other than senior subordinated debt, the

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

	carrying amounts approximate their fair value because of their short maturity and in some cases because they bear interest at market rates. The estimated fair value of senior subordinated debt, including convertible debt, was $899,194 at December 31, 2004 and was based on dealer quotes.
	Advertising Costs
	Advertising costs consists primarily of television, radio, newspaper, direct mail, billboard, brochures and other media advertising programs. The Company expenses advertising costs as incurred to selling, general and administrative costs. Tangible advertising costs such as architectural models and visual displays are capitalized to property and equipment or real estate inventories. Advertising expense was approximately $30,243, $25,011 and $21,795 for the years ended December 31, 2004, 2003 and 2002, respectively.
	Income Taxes
	The Company accounts for income taxes in accordance SFAS 109, Accounting for Income Taxes. This approach requires recognition of income tax currently payable, as well as deferred tax assets and liabilities resulting from temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of assets and liabilities.
	Stock-Based Compensation
	At December 31, 2004, the Company has two stock option plans, which are described more fully in Note 17. The Company has elected to use APB 25 and related interpretations in accounting for its stock option plans. No compensation costs are recorded upon issuance or exercise of stock options as the options were issued at the current market price of the stock on the date of grant. Had the Company elected to recognize compensation expense under the fair value method, pro forma net income would be as follows:

These pro forma amounts may not be representative of the effect on pro forma net income in future years, since the estimated fair value of stock options is amortized over the vesting period and additional options may be granted in future years.

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

	In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, Share-Based Payment (SFAS 123R), which is a revision of SFAS 123 and supersedes APB 25 and SFAS 148. This statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.
	SFAS 123R applies to all awards granted after the required effective date (the beginning of the first interim or annual reporting period that begins after June 15, 2005) and to awards modified, repurchased, or cancelled after that date. As of the required effective date, all public entities that used the fair value based method for either recognition or disclosure under Statement 123 will apply this Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures. For periods before the required effective date, those entities may elect to apply a modified version of the retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123. As a result, beginning July 1, 2005, the Company will adopt SFAS 123R and begin reflecting the stock option expense determined under fair value based methods in our income statement rather than as pro forma disclosure in the notes to the financial statements. The Company is currently reviewing the effect of this statement on its financial statements but does not believe it is material.
	Employee Benefit Plan
	Company employees who meet certain requirements as to age and service are eligible to participate in the Company’s 401(k) benefit plan. For the years ended December 31, 2004, 2003 and 2002, the Company’s expenses related to the plan were $2,297, $1,923 and $2,820, respectively.
	Shareholders’ Equity
	On February 7, 2002, the Company’s Board of Directors declared a 1.43408 for 1 stock split. Unless otherwise indicated, all references to the numbers of shares, options for purchase of common stock and per-share information in the financial statements and related notes have been adjusted to reflect this stock split on a retroactive basis.
	On March 4, 2002, the Company’s shareholders approved an increase in the authorized number of shares from 50,000 to 100,000.
	During March 2002, the Company issued 7,935 shares of common stock in a public offering realizing approximately $138,201 in aggregate net proceeds.
	In addition to its common stock, the Company has 100,000 shares authorized of series common stock, $.01 par value per share, and 100,000 shares authorized of preferred stock, $.01 par value per share. No shares of series common stock or preferred stock are issued and outstanding.
	Treasury stock is recorded at cost. Issuance of treasury shares is accounted for on a first-in, first-out basis. In April 2003, the Board of Directors approved the repurchase of up to 1,000 shares of the Company’s common stock. Pursuant to this authorization, 1,000 unregistered common shares were repurchased in a private transaction for an aggregate purchase price of approximately $13,000. In May 2004, the Company reissued

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WCI Communities, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except per share data)

	439 shares of the Company’s treasury common stock with a fair value of $10,000 in connection with the acquisition of Spectrum Communities (See Note 3).
	Earnings Per Share
	Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of stock options. All stock options outstanding for 2004 and 2003 were included in the computation of diluted earnings per share. Options to purchase 798 shares of common stock were excluded from the computation of diluted earnings per share for 2002 due to their antidilutive effect. The diluted weighted average shares did not include any contingent convertible shares. (See Note 12).
	Information pertaining to the calculation of earnings per share for each of the three years ended December 31 is as follows:

Consolidated Statement of Cash Flows – Supplemental Disclosures