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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2002 — Commission File Number 0-7616

AVATAR HOLDINGS INC.

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

Convertible Subordinated Notes Due 2005,
Convertible into Common Stock, $1.00 Par Value
Common Stock, $1.00 Par Value

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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes  [X]  No  [  ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes [X] No [  ]

Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $250,526,156 as of June 30, 2002.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

    As of March 20, 2003, there were 8,550,900 shares of common stock, $1.00 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

AVATAR HOLDINGS INC.

2002 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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FORWARD-LOOKING STATEMENTS

     Certain statements discussed in Item 1 (Business), Item 3 (Legal Proceedings), Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: the successful implementation of Avatar’s business strategy; shifts in demographic trends affecting demand for active adult communities and other real estate development; the level of immigration and in-migration to the regional market areas; international (in particular Latin America), national and local economic conditions and events, including employment levels, interest rates, consumer confidence, the availability of mortgage financing and demand for new and existing housing; access to future financing; geopolitical risks; competition; changes in, or the failure or inability to comply with, government regulations; and other factors as are described at the end of Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of this Form 10-K.

     Dollar amounts specified herein are in thousands, except for per share amounts or as otherwise indicated.

PART I

Item 1. Business

General

     Avatar is engaged in real estate operations. Currently, our primary activities include the development of an active adult community and primary residential communities in Florida and a residential community in Arizona. We recently entered into a joint venture for development of a highrise condominium in Hollywood, Florida.

     Our primary residential community development activities include semi-custom and mid-priced homebuilding. We also engage in a variety of other activities, including the operation of amenities, the development, leasing and management of improved commercial properties, the sale of industrial properties, cable television operations, title insurance agency, and water and wastewater utilities operation at Rio Rico, Arizona.

     Avatar Holdings Inc. was incorporated in the state of Delaware in 1970. Our principal executive offices are located at 201 Alhambra Circle, Coral Gables, Florida 33134 (telephone (305) 442-7000).

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Item 1. Business – continued

Business Strategy

     Our primary business strategy continues to be the development of lifestyle communities, primarily active adult, semi-custom and mid-priced residential communities, some of which are gated. We also build homes on scattered lots within our Poinciana and Rio Rico communities. We have been developing communities on our existing land portfolio and recently expanded our operations to newly-acquired land parcels and a joint venture for development of a highrise condominium project. We anticipate further expansion, either through direct investments in real estate or through joint ventures or management arrangements. We may also pursue other opportunities unrelated to our current operations.

     As part of our ongoing plan to reposition our operations and increase our liquidity, from time to time we dispose of historical non-core assets that we believe do not represent significant long-term opportunities for Avatar. During 2002, we sold the Rio Rico Resort and golf course and substantially all of our remaining land in Cape Coral, Golden Gate and Leisure Lakes, Florida.

     In 2002, we commenced development of property adjacent to Poinciana, Florida; exercised options to acquire a residential parcel in Tampa, Florida; signed a contract to purchase additional acreage in Poinciana; entered into a joint venture for development and construction of a highrise condominium in Hollywood, Florida; and expanded our title insurance agency in Florida.

     We are actively pursuing other long-term investment and business opportunities. Future opportunities may be in those real estate businesses in which we are presently engaged or may extend to other real estate activities or unrelated businesses.

Real Estate Operations

     Active Adult Community Development

     Recognizing the potential of highly amenitized communities to accommodate the active lifestyles of retirees and pre-retirees, in 1998 we commenced the design and development of an active adult community, Solivita, within our Central Florida master-planned community of Poinciana.

     We developed recreation and service facilities, approximating 100,000 square feet, which include a fitness center, a golf clubhouse, restaurants, arts and crafts rooms, a café/newsstand and other meeting and theater facilities. We also developed a Ron Garl-designed 18-hole golf course, which incorporates many of the property’s natural and manmade environmental features. The community’s active park houses a variety of sporting and games facilities, including an official softball field, a basketball court and five tennis courts. Future plans may include the development and construction of additional recreation and service facilities.

     We have financed development and construction of Solivita through available capital. In addition, we formed a Community Development District that issued tax-exempt bonds to own, fund and manage portions of infrastructure consisting primarily of stormwater management facilities, drainage works, irrigation facilities, water and wastewater utilities and offsite roadways.

     The 3,300-acre Solivita community incorporates the natural topography of the land, its natural resources including more than 1,200 acres of wetlands and an oak hammock. The community, designed to accommodate in excess of 4,000 homes, opened during the second quarter of 2000. From inception, 600 homes have been closed, and approximately 1,000 individuals resided in the community, as of December 31, 2002.

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Item 1. Business – continued

     Primary Residential Community Development

     Our primary residential community development includes construction of mid-priced homes, both on scattered lots and on contiguous parcels as part of planned communities, within our existing Poinciana, Florida, and Rio Rico, Arizona, communities. Our primary residential operations also include the development and construction of semi-custom homes within our Harbor Islands, Florida, community. In May 2002, we commenced development of our Central Florida community of Bellalago which opened for sales in late 2002. We have also commenced development at the recently-acquired parcel within Cory Lake Isles, in Tampa, Florida.

     Commercial and Industrial, Resorts and Other Real Estate Operations

     The lease to a third party operator for the golf course in Poinciana expired in March 2002, at which time we closed the course for renovations and upgrade. We closed on the sale of the Rio Rico Resort and golf course in October 2002. We continue to realize revenues through rental and other operations, including a small community shopping center in each of Poinciana and Rio Rico, the marina at Harbor Islands, cable television operations at Poinciana, recreational facilities and title insurance agency operations.

     At Poinciana, Avatar is in position to capitalize on the need for additional commercial and industrial facilities created by population growth within the community and surrounding areas. Negotiations during 2002 resulted in the sale early in 2003 of a 150-acre site to Lowe’s Home Improvement Warehouse for construction of a 1.3 million square foot state-of-the-art regional distribution center.

     In October 2002, Avatar entered into a contract for sale to Wal-Mart Stores East, L.P. of a 26.09 acre site adjacent to the Poinciana Shopping Center for construction by Wal-Mart of a 203,622 square foot super store.

     Highrise Joint Venture

     In late-December 2002, an Avatar subsidiary entered into a joint venture for development of a 38-story, 250-unit highrise condominium on a 3.5 acre oceanfront site in Hollywood, Florida.

Real Estate Assets

     Avatar’s assets include real estate in the states of Florida and Arizona. In the Florida communities of Harbor Islands, Poinciana, Solivita, Bellalago and Cory Lake Isles, the Arizona community of Rio Rico and properties in Ocala Springs, Florida, Avatar’s aggregate landholdings consist of over 21,400 developed, partially developed or developable acres, of which approximately 16,300 acres have been platted and/or zoned and approximately 5,100 acres have not been platted. Avatar owns other sites including Banyan Bay in Martin County, Florida; and a small number of homesites and other acreage at Golden Gate, Leisure Lakes and Cape Coral, Florida.

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Item 1. Business – continued

     We recently acquired approximately 200 developed and developable acres within the 600-acre water-oriented, master-planned community of Cory Lake Isles in Tampa, Florida. Plans for the property include construction of 358 homes in three separate neighborhoods on 50-, 60- and 65-foot homesites and 12 custom homes on 85-foot homesites. The remaining site of approximately 30 acres is currently contemplated for development of approximately 225 townhomes.

     The residential community development of Harbor Islands encompasses 192 acres, including 30 acres conveyed to the City of Hollywood for parks, adjoining the Intracoastal Waterway in Hollywood, Florida. When completed, Harbor Islands will consist of distinctive, separate villages on three connected islands. This community also includes a 196-boat slip marina. During 2002, we sold 49 units with a sales value of approximately $46,575.

     Poinciana, one of our residential community developments, is located in Central Florida approximately 21 miles south of Orlando and 20 miles from Walt Disney World and consists of 47,000 acres of land. Of approximately 13,800 acres owned by Avatar, approximately 7,500 acres are not currently developable and are reserved for open space and other purposes. This master-planned community development includes subdivisions for single- and multi-family housing, as well as commercial/industrial areas. As of December 31, 2002, approximately 6,300 developed and developable acres remained in inventory, of which approximately 3,900 acres are zoned and/or platted for single- and multi-family housing and approximately 2,400 acres are zoned and/or platted for industrial and commercial usage.

     Avatar’s housing programs in Poinciana include the residential communities of Crescent Lakes, Cypress Woods and the Estates of Deerwood, as well as scattered lot housing programs. During 2002, we sold 555 single-family homes with a total sales value of approximately $72,765. Recreational facilities owned by Avatar at the Poinciana development include an 18-hole Devlin Von-Hagge championship golf course which was closed during March 2002 for renovation and upgrade. Avatar also owns and operates a cable television subsidiary and conducts title insurance agency business at Poinciana.

     Avatar is also developing in Poinciana its 3,300-acre active adult community of Solivita. During 2002, we sold 452 units at Solivita, with a sales value of approximately $78,035 (see “Real Estate Operations – Active Adult Community Development”).

     In 1999 and 2001, Avatar acquired 1,308 acres of undeveloped land adjacent to Poinciana for a total acquisition price of $10,094. These parcels, now combined as our Bellalago community, include approximately one-mile frontage along Lake Tohopekaliga, one of the largest lakes in Florida, and frontage on Pleasant Hill Road for commercial opportunities. During 2002, we commenced development of Bellalago, to consist of more than 2,000 dwelling units, the majority of which will be single-family units. Through February 2003 development expenditures totaled $13,855. From commencement of sales for the first phase of the community in mid-November through December 31, 2002, we sold 47 single-family units, with a sales value of approximately $8,957.

     Rio Rico, located 57 miles south of Tucson, is a 55,000-acre community development in southern Arizona. Of approximately 12,000 acres owned by Avatar approximately 5,100 acres are considered developable and 6,900 acres include areas reserved for open space, areas which are not developable and areas for which development is not economically feasible. In 2002, we sold the 180-room hotel complex and the 18-hole golf course. We retained the 36,800 square foot shopping center, which was fully occupied as of December 31, 2002. In 2002, we sold 98 single-family homes with sales value of approximately $12,679.

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Item 1. Business – continued

     Ocala Springs, located five miles northeast of Ocala in Marion County, Florida, is comprised of approximately 4,600 acres of land.

     Banyan Bay, located in Martin County, Florida, with frontage on the St. Lucie River, consists of 250 acres.

     Cape Coral, located on Florida’s west coast seven miles west of Fort Myers, is a 60,700-acre community which was developed over many years substantially by Avatar. Following the 1999 sale of substantially all of the previously owned real estate assets in Cape Coral, we retained approximately 740 acres, of which 704 acres were sold in 2002.

     During 2001, we sold the 350-acre Natoma tract located in Woodland Hills in northwest Los Angeles County, California.

Title Insurance Agency

     Prominent Title Insurance Agency, Inc., a subsidiary of Avatar Properties Inc., maintains operations at Avatar’s headquarters in Coral Gables, Florida, as well as within the community of Poinciana, Florida. Services are offered to purchasers of Avatar’s homes as well as unrelated parties.

Utilities

     Avatar currently maintains and operates water and wastewater utilities operations in Rio Rico, Arizona.

Business Segment Information

     Avatar’s business segment information regarding revenues, results of operations and assets is incorporated herein by reference to Note Q to the Consolidated Financial Statements included in Item 8 of Part II of this Report.

Employees

     As of December 31, 2002, Avatar employed approximately 351 individuals on a full-time or part-time basis. Avatar also utilizes on a daily basis such additional personnel as may be required in connection with various land development activities. Avatar’s relations with its employees are satisfactory and there have been no work stoppages.

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Item 1. Business – continued

Investor Information

     Avatar is subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Accordingly, Avatar files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

     You can access financial and other information on Avatar’s website. The address is www.avatarholdings.com. Avatar makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise with the SEC.

Regulation

     Avatar’s operations, including matters such as planning, zoning, design, construction of improvements, environmental considerations and sales activities are regulated by various local, regional, state and federal agencies, including the Federal Trade Commission. For its community developments in Florida and Arizona, state laws and regulations may require the filing of registration statements, copies of promotional materials and numerous supporting documents, and the delivery of an approved disclosure report to purchasers, prior to the execution of a sales contract. In addition to Florida and Arizona, certain states impose requirements relating to the inspection of properties, approval of sales literature, disclosures to purchasers of specified information, assurances of future improvements, approval of terms of sale and delivery to purchasers of a report describing the property. Federal regulations adopted pursuant to the Interstate Land Sales Full Disclosure Act provide for the filing or certification of a registration statement with the Office of Interstate Land Sales Regulation of the Department of Housing and Urban Development.

     Avatar’s limited utilities operations and rate structures are regulated by various federal, state and county agencies and must comply with federal and state treatment standards. All sources of water and wastewater effluent are required to be tested on a regular basis and purified in order to comply with governmental standards.

     Avatar believes it is in compliance with applicable laws and regulations in all material respects.

Competition

     Avatar’s residential homebuilding, planned community development and other real estate operations, particularly in the state of Florida, are highly competitive. In its sales of housing units, Avatar competes, as to price and product, with several national and regional homebuilding companies for the discretionary income of individuals who desire eventually to relocate or establish a second home in Florida or Arizona. In recent years, there has been extensive residential development by other developers in the geographical areas in which Avatar operates.

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Item 2. Properties

     Avatar’s real estate operations are described in Item 1 above. Land developed and in the process of being developed, or held for investment and/or future development, has an aggregate cost of approximately $95,947 at December 31, 2002.

     Avatar’s corporate headquarters are located at 201 Alhambra Circle, Coral Gables, Florida, in 26,300 square feet of leased office space. For additional information concerning properties leased by Avatar, see Item 8, “Notes to Consolidated Financial Statements.”

Item 3. Legal Proceedings

     The information, which is set forth in Note O (Contingencies) of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Report, is incorporated herein by reference.

     Avatar is involved in various pending litigation matters primarily arising in the normal course of its business. Although the outcome of these matters cannot be determined, management believes that the resolution of these matters will not have a material effect on Avatar’s business or financial statements.

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

     None.

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Executive Officers of the Registrant

     Pursuant to General Instruction G (3) to Form 10-K, the following list is included as an unnumbered item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2003.

     The following is a list of names and ages of all of the executive officers of Avatar, indicating principal positions and offices with Avatar or a subsidiary held by each such person and each such person’s principal occupation(s) or employment during the past five years unless otherwise indicated. Officers of Avatar have been elected to serve until the next annual election of officers (which is expected to occur on May 29, 2003), when they are re-appointed or their successors are elected or until their earlier resignation or removal.

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Executive Officers of the Registrant – continued

     The above executive officers have held their present positions with Avatar for more than five years, except as otherwise noted.

     No director or executive officer of Avatar has any family relationship with any other director or executive officer of Avatar.

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PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

     The Common Stock of Avatar Holdings Inc. is traded through The Nasdaq Stock Market under the symbol AVTR. There were 6,390 record holders of Common Stock at February 28, 2003.

     High and low quotations, as reported, for the last two years were:

     Avatar has not declared any cash dividends on Common Stock since its issuance and has no present intention to pay cash dividends.

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Item 6. Selected Financial Data

FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
Dollars in thousands (except per share data)

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands)

     The following discussion should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, included elsewhere in this Form 10-K.

OVERVIEW

     Avatar is engaged in real estate operations. Currently, our primary activities include the development of an active adult community and primary residential communities in Florida and a residential community in Arizona. We recently entered into a joint venture for development of a highrise condominium in Hollywood, Florida.

     Our primary residential community development activities include semi-custom and mid-priced homebuilding. We also engage in a variety of other activities, including the operation of amenities, the development, leasing and management of improved commercial properties, the sale of industrial properties, cable television operations, title insurance agency, and water and wastewater utilities operation at Rio Rico, Arizona.

     Active Adult Community. Recognizing the potential of highly amenitized communities to accommodate the active lifestyles of retirees and pre-retirees, in 1998 we commenced the design and development of a 3,300-acre active adult community, Solivita, within our Central Florida master-planned community of Poinciana.

     We developed recreation and service facilities, approximating 100,000 square feet, which include a fitness center, a golf clubhouse, restaurants, arts and crafts rooms, a café/newsstand and other meeting and theater facilities. We also developed a Ron Garl-designed 18-hole golf course, which incorporates many of the property’s natural and man made environmental features. The community’s active park houses a variety of sporting and games facilities, including an official softball field, a basketball court and five tennis courts. Future plans may include the development and construction of additional recreation and service facilities.

     We have financed development and construction of Solivita through available capital. In addition, we formed a Community Development District that issued tax-exempt bonds to fund and manage portions of infrastructure consisting primarily of stormwater management facilities, drainage works, irrigation facilities, water and wastewater utilities and offsite roadways.

     The 3,300-acre Solivita community incorporates the natural topography of the land, its natural resources including more than 1,200 acres of wetlands and an oak hammock. The community, designed to accommodate in excess of 4,000 homes, opened during the second quarter of 2000. From inception, 600 homes have been closed, and approximately 1,000 individuals resided in the community, as of December 31, 2002.

     Residential Development. Our primary residential community development includes construction of mid-priced homes, both on scattered lots and on contiguous parcels as part of planned communities, within our existing Poinciana, Florida, and Rio Rico, Arizona, communities. Our primary residential operations also include the development and construction of semi-custom homes within our Harbor Islands, Florida, community. In May 2002, we commenced development of our Central Florida community of Bellalago which opened for sales in late 2002. We have also commenced development at the recently-acquired parcel within Cory Lake Isles, in Tampa, Florida. Residential activities in Cape Coral closed out during 2000.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

     The following table sets forth revenues and sales data derived from primary residential and active adult communities homebuilding operations for the years ended December 31, 2002, 2001 and 2000:

     Commercial and Industrial and Other Land Sales. At Poinciana, Avatar is in position to capitalize on the need for additional commercial and industrial facilities created by population growth within the community and surrounding areas. Negotiations during 2002 resulted in the sale early in 2003 of a 150-acre site to Lowe’s Home Improvement Warehouse for construction of a 1.3 million square foot state-of-the-art regional distribution center. In October 2002, Avatar entered into a contract for sale to Wal-Mart Stores East, L.P. of a 26.09 acre site adjacent to the Poinciana Shopping Center for construction of a 203,622 square foot super store. Revenues from commercial and industrial and other land sales were $12,989, $12,473 and $7,372 in 2002, 2001 and 2000, respectively.

     Resort Operations. The lease to a third party operator for the golf course in Poinciana expired in March 2002, at which time we closed the course for renovations and upgrade. We closed on the sale of the Rio Rico Resort and golf course in October 2002 (see discussion below under caption “Discontinued Operations”).

     Other Real Estate Revenues. We also generate revenues through rental and other operations, including a small community shopping center in each of Poinciana and Rio Rico, the marina at Harbor Islands, cable television operations at Poinciana, recreational facilities and title insurance agency operations. Revenues from these operations were $5,649, $7,092 and $5,802 in 2002, 2001 and 2000, respectively. The decrease in revenues in 2002 compared to 2001 is a result of lower earnings from an unconsolidated joint venture completed in 2002.

     Discontinued Operations. On October 17, 2002, Avatar closed on the sale of the assets of the Rio Rico Resort and golf course located in Arizona for a sales price of $5,500. The pre-tax gain of approximately $2,649 on this sale and the operating results for 2002, 2001 and 2000 have been reported as discontinued operations. Reference is made to Note T in Item 8 under the caption “Notes to Consolidated Financial Statements.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

CRITICAL ACCOUNTING POLICIES

     In the preparation of its financial statements, Avatar applies accounting principles generally accepted in the United States of America. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results.

     As discussed in Note A to Avatar’s consolidated financial statements, housing and other real estate sales are recognized when the sale closes and title passes to the purchaser and certain other conditions are met. As a result, Avatar’s revenue recognition process does not involve significant judgments or estimations.

     Avatar relies on certain estimates to determine the construction and land costs and resulting gross margins. Avatar’s land and construction costs are comprised of direct and allocated costs, including estimated costs for future warranties. Land, land development and other common costs are assigned to individual components based on specific identification or other allocation methods. Land and land development costs generally include interest incurred until development is substantially completed.

     Avatar also reviews its land and other inventories and property, plant and equipment for impairment of value. This includes considering certain indications of impairment such as significant changes in asset usage, significant deterioration in the surrounding economy or environmental problems. If such indications are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying value, Avatar will adjust the carrying value down to its estimated fair value. Fair value may be based on management’s estimate of the property’s fair value or third-party appraisals.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

RESULTS OF OPERATIONS

     The following is management’s discussion and analysis of certain significant factors that have affected Avatar during the periods included in the accompanying consolidated statements of operations.

     A summary of the period to period changes in the items included in the consolidated statements of income is shown below.

     When required, Avatar uses the installment method of profit recognition for homesite sales. Under the installment method the gross profit on recorded homesite sales is deferred and recognized in income of future periods, as principal payments on contracts are received. Fluctuations in deferred gross profit result from collections of principal payments on contracts and cancellations from prior years’ homesite sales.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

RESULTS OF OPERATIONS – continued

     Data from primary residential and active adult communities homebuilding operations for the years ended December 31, 2002, 2001 and 2000 is summarized as follows:

     Increases in units closed and sold from 2000 to 2001 and from 2001 to 2002 are related to the commencement of homebuilding activities in Solivita during 2000, an improvement in activities in primary homebuilding at Poinciana, commencement of sales at Bellalago in late 2002 and commencement of closings of units in newly developed parcels at Harbor Islands in March 2002. It is anticipated that closings of all units at Harbor Islands will be completed by mid-2005, and Avatar is not currently developing comparable products in a comparable price range.

     Results for Solivita included in the above table are: for 2002, 2001 and 2000, 452, 278 and 222 contracts were signed, with an aggregate sales volume of $78,035, $46,497 and $32,055, respectively; 286, 244 and 70 homes closed, generating revenues from Solivita homebuilding operations of $46,944, $37,670 and $10,381, respectively. Backlog at December 31, 2002, 2001 and 2000 totaled 352 units at $61,592, 186 units at $30,501, and 152 units at $21,674, respectively.

     Operations for the years ended December 31, 2002, 2001 and 2000 resulted in net income of $5,627 or $0.64 per share, $3,010 or $0.36 per share and $9,314 or $1.11 per share, respectively. The increase in income for 2002 compared to 2001 is primarily attributable to increases in real estate operating results and decreases in interest expense partially mitigated by decreases in interest income, trading account profits and other revenues and increases in general and administrative expenses. The decrease in income for 2001 compared to 2000 is primarily attributable to decreases in interest income and other revenues partially mitigated by an increase in real estate operating results and a decrease in general and administrative expenses, interest expense and other expenses.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

RESULTS OF OPERATIONS – continued

     Gross real estate revenues increased $43,691 or 31.4% during 2002 when compared to 2001 and increased $9,191 or 7.1% during 2001 when compared to 2000. The increase in real estate revenues for 2002 when compared to 2001 is generally a result of increased revenues generated from active adult community operations, primary residential communities operations and the closing of the sale of the remaining 692-acre tract in Cape Coral, Florida at a sales price of approximately $9,000. Revenues from active adult community operations increased $10,090 or 25.6% during 2002 when compared to 2001 due to increased revenues from closings and amenity operations. Revenues from primary residential communities operations increased $34,528 or 43.1% in 2002 when compared to 2001 due to increased closings at Poinciana, Harbor Islands and Rio Rico. The increase in real estate revenues for 2001 when compared to 2000 is generally a result of increased revenues generated from Avatar’s active adult operations and the property asset sale of the Natoma tract, located in Woodland Hills, California, partially mitigated by reduced residential homebuilding revenues. Revenues from active adult community operations increased $28,437 or 259.8% during 2001 when compared to 2000 due to increased revenues from closings and amenity operations. Revenues from primary residential communities operations decreased $25,637 or 24.3% in 2001 when compared to 2000 due to the close-out of the developed parcels at Harbor Islands but partially mitigated by the increased closings at Poinciana. During the last quarter of 2000, we commenced development and sales of single-family detached homes and attached townhomes on additional parcels at Harbor Islands, closings on which commenced during March 2002.

     Real estate expenses increased $31,468 or 23.5% during 2002 when compared to 2001 and increased $7,413 or 5.8% during 2001 when compared to 2000. The increase in real estate expenses for 2002 when compared to 2001 is generally a result of increased expenses from active adult community operations and primary residential communities operations. The increase in real estate expenses for 2001 when compared to 2000 is generally a result of increased operational expenses from active adult operations partially mitigated by reduced residential homebuilding expenses associated with the close-out of the developed parcels at Harbor Islands.

     Operating income from primary residential communities increased $11,188 or 113.9% during 2002 when compared to 2001 and decreased $4,501 or 31.4% during 2001 when compared to 2000. The increase in primary residential communities operating income for 2002 is primarily due to increased closings at Poinciana, Harbor Islands and Rio Rico. The decrease in primary residential communities operating income for 2001 is primarily due to decreased closings at Harbor Islands partially mitigated by increased closings at Poinciana.

     Interest income decreased $2,647 or 44.0% during 2002 when compared to 2001 and $1,275 or 17.5% during 2001 when compared to 2000. The decrease in both 2002 and 2001 when compared to the previous periods is attributable to lower interest rates on cash and cash equivalents and lower interest income earned on declining principal balances of contracts receivable. The average balance of the receivable portfolio was $5,728, $8,728, and $13,019 for 2002, 2001 and 2000, respectively.

     Trading account profits recognized was $0, $6,829 and $6,636 for 2002, 2001 and 2000, respectively. Trading account profits represent realized and unrealized gains related to the trading investment portfolio, and include commissions payable to investment brokers.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

RESULTS OF OPERATIONS – continued

     General and administrative expenses increased $3,104 or 29.7% in 2002 compared to 2001 and decreased $571 or 5.2% in 2001 compared to 2000. The increase in 2002 when compared to 2001 was primarily due to increased professional fees as well as accruals of $2,163 for executive compensation related to the Cash Bonus Award Agreements pursuant to the Executive Incentive Compensation Plan. The decrease in 2001 when compared to 2000 was primarily due to reductions in professional fees and rental expense partially mitigated by $707 in executive compensation related to the restricted stock units granted pursuant to the Amended and Restated 1997 Incentive and Capital Accumulation Plan, as amended.

     Interest expense decreased $521 or 11.9% in 2002 when compared to 2001 and decreased $2,051 or 31.9% in 2001 when compared to 2000. The decrease in 2002 when compared to 2001 is primarily attributable to a reduction of the outstanding 7% Convertible Subordinated Notes (Notes). The decrease in 2001 when compared to 2000 is primarily attributable to a reduction of the outstanding debt and an increase in capitalized interest.

     Other revenues and expenses for 2002 decreased $781 and $123, respectively, compared to 2001; and for 2001, decreased $7,747 and $1,832, respectively, compared to 2000. The decreases for 2002 when compared to 2001 were primarily attributable to the decline in management fees and expenses under a management agreement for water facility operations in Florida. The decreases for 2001 when compared to 2000 are primarily attributable to non-recurring revenues recorded during 2000 of $1,475 associated with the sale of certain Utility Assets, $1,761 due to the reduction of eligible employees under the utilities non-contributory benefit postretirement plan that provides medical and life insurance benefits to employees after retirement, and $1,480 recognized and earned from escrowed funds associated with the Florida Utilities sale that closed on April 15, 1999. Pursuant to the Utility System Asset Acquisition Agreement (Agreement) dated April 1, 1999, proceeds from the closing in the amount of $1,480 were deposited into an escrow account guaranteeing that billed revenues for the twelve-month period commencing on April 16, 1999 would be at least equal to an amount as defined in the Agreement. During the second quarter of 2000, Florida Utilities met the required minimum guaranteed billed revenues and the escrowed funds were released during the third quarter of 2000.

     On October 17, 2002, Avatar closed on the sale of the assets of the Rio Rico Resort and golf course located in Arizona for a sales price of $5,500. The pre-tax gain of approximately $2,649 on this sale and the operating results for 2002, 2001 and 2000 have been reported as discontinued operations. Although the sale transaction produced a pre-tax gain for book purposes, this transaction generated an income tax loss due to a higher tax basis because of different depreciation methods used for income tax purposes. This is the cause for the income tax benefit on discontinued operations for 2002.

     Income taxes were provided for at an effective tax rate of 40.2%, 39.2% and 3.1% for 2002, 2001 and 2000. For the year 2000, Avatar decreased the valuation allowance for deferred income tax assets by $4,000. This decrease is the primary cause for the change in the effective tax rate. Reference is made to the Income Taxes note to the Consolidated Financial Statements included in Item 8 of Part II of this Report.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

LIQUIDITY AND CAPITAL RESOURCES

     Avatar’s real estate business strategy is designed to capitalize on its distinct competitive advantages and emphasize higher profit margin businesses by concentrating on the development and management of active adult communities, semi-custom and mid-priced homes and communities, and commercial and industrial properties in its existing community developments. Avatar also seeks to identify additional sites that are suitable for development consistent with its business strategy and anticipates that it will acquire or develop them directly or through joint venture, partnership or management arrangements. Avatar’s primary business activities are capital intensive in nature. Significant capital resources are required to finance planned primary residential and active adult communities, homebuilding construction in process, community infrastructure, selling expenses and working capital needs, including funding of debt service requirements, operating deficits and the carrying cost of land.

     Subsequent to the issuance of the Notes in 1998 and sales of substantial non-core assets in 1999, Avatar has funded its operations through internal sources. From time to time Avatar invests some portion of its cash in marketable securities or considers potential business opportunities that may require use of available cash resources.

     Avatar’s operating cash flows fluctuate relative to the status of development within its existing communities, development expenditures for new and/or planned communities or other real estate activities and sales of various homebuilding product lines within those communities. From time to time Avatar has generated, and may continue to generate, additional cash flow through sales of non-core assets.

     Future activities, which may extend to non-real estate related business opportunities, may include the use of joint ventures, partnerships and/or financing alternatives.

     During the third quarter of 2002, Avatar closed on the acquisition of property in the community of Cory Lake Isles in Tampa, Florida, at a purchase price approximating $15,053 including a prior deposit of $6,429. The balance paid at closing approximated: $2,177 of cash, assumption of $3,492 Community Development District obligations, a purchase money note and mortgage of $2,765 and assumption of other liabilities of $190. During December 2002, Avatar paid $559 of the purchase money note and mortgage reducing the outstanding balance to $2,206 as of December 31, 2002.

     At Avatar’s community of Solivita, bond financing is utilized to fund a portion of the cost of the construction and development of portions of offsite roadways, stormwater management facilities and earthwork, drainage structures, mitigation creation, mitigation area and stormwater area acquisition, utility mains, utility plant improvements and wastewater facilities. The bond financing was obtained by the Poinciana Community Development District (the “CDD”), a local government district operating in accordance with Chapter 190 of the Florida Statutes. The bonds are serviced by special assessment taxes levied on certain property within Solivita, which property is collateral for the obligations and such assessments, with Avatar paying the assessments on the parcels owned by Avatar until such parcels are sold. At such point, the liability for the assessments related to parcels sold becomes the responsibility of the purchasers through a tax assessment on their property. The special assessment taxes are designed to cover debt service on the bonds, including principal and interest payments, as well as the operating budgets of the CDD. The use of this type of bond financing is a common practice for major land developers in Florida. The CDD issued $27,315 of fixed rate term bonds. The outstanding balance as of December 31, 2002 is $26,990. The bonds, which bear interest at 7.125% and mature in May 2031, are not a liability of Avatar.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

LIQUIDITY AND CAPITAL RESOURCES – continued

     During 2001, Avatar’s investment portfolio consisted of held-to-maturity securities and trading securities. Held-to-maturity securities include debt securities with the intent and ability to hold to maturity and are measured at amortized cost. During 2000, Avatar invested in U.S. Government issues, which matured in 2001. During the second quarter of 2001, Avatar sold substantially all of its then existing trading securities investment portfolio for $34,806. The aggregate purchase price of the trading securities sold was $19,393 producing a total pre-tax realized gain of $15,413, of which $6,829 was recognized for the year ended December 31, 2001.

     On January 27, 2000, Avatar’s Board of Directors authorized the expenditure of up to $20,000 to purchase, from time to time, shares of its common stock and/or the Notes in the open market, through privately negotiated transactions or otherwise, depending on market and business conditions and other factors. During 2002, Avatar repurchased $174 of its common stock (representing 7,700 shares) and $1,050 of the Notes.

     During 2002, Avatar exchanged $4,667 principal amount of its Notes for 193,000 shares of common stock. Avatar may consider future exchanges, thereby further reducing the outstanding balance of the Notes. These transactions were not induced exchanges. The outstanding balance of the Notes as of December 31, 2002 was $102,014.

     From January 1, 2003 through March 7, 2003, Avatar repurchased an additional $5,225 of its common stock (representing 229,758 shares) and $7,585 principal amount of the Notes. As of March 20, 2003, there were 8,550,900 shares of common stock outstanding and the outstanding balance of the Notes was $94,429.

     Avatar utilized approximately $14,200 of the $20,000 January 27, 2000 authorization. On March 20, 2003, Avatar’s Board of Directors authorized the expenditure of up to $30,000 to purchase, from time to time, shares of its common stock and/or the Notes in the open market, through privately negotiated transactions or otherwise, depending on market and business conditions and other factors. The unused portion of the $20,000 authorization expired upon adoption of the new authorization.

     As of December 31, 2002, cash and cash equivalents totaled $118,839. Expenditures subsequent to December 31, 2002 for purchases of common stock, purchases of Notes and funding of investment in the highrise condominium project will reduce cash and cash equivalents to approximately $96,000 as of March 31, 2003. We anticipate that after expenditures for completion of development of Solivita, expenditures related to development at Harbor Islands, development expenses at Bellalago and Cory Lake Isles and the balance of our commitment to fund up to $25,000 for the development and construction of the condominium project in Hollywood, Florida we will have sufficient liquidity to enable us to realize opportunities on existing landholdings. However, depending upon new real estate or other business opportunities, available liquidity may not be sufficient to fund new ventures, develop and realize the potential of our existing landholdings, fund operating activities and repay debt. Therefore, we may consider financing alternatives which may include the use of real estate assets as collateral for future borrowings.

     In 2002, net cash provided by operating activities amounted to $8,265, mainly as a result of a decrease in receivables of $2,095, an increase in accounts payable and accrued and other liabilities of $3,295, reduced by an increase in inventories of $7,330. Net cash provided by investing activities of $1,884 resulted from proceeds from the sale of the Rio Rico Resort and golf course of $5,250 offset by investments in property, plant and equipment for $3,366. Net cash used in financing activities of $3,083 resulted from the payment of real estate notes payable and the repurchase of 7% Convertible Subordinated Notes of $1,859 and $1,050, respectively.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

LIQUIDITY AND CAPITAL RESOURCES – continued

     In 2001, net cash used in operating activities amounted to $12,304, mainly as a result of an increase in other assets and inventories of $9,575 and $5,355, respectively. Net cash provided by investing activities of $76,109 resulted from proceeds from sale of marketable securities of $76,806 partially offset by investments in property, plant and equipment of $697. Net cash used in financing activities of $1,193 resulted from the payment of real estate notes payable.

     In 2000, net cash used in operating activities amounted to $29,410, primarily as a result of a decrease in accounts payable and other liabilities of $26,460, and expenditures on land development and construction of primary residential and active adult communities of $14,726. Net cash used in investing activities of $60,080 resulted from investments in property, plant and equipment of $12,297 and marketable securities of $47,783. Net cash used in financing activities of $4,608 resulted from the payment of notes payable.

EFFECTS OF INFLATION AND ECONOMIC CONDITIONS

     Inflation has had a minimal impact on Avatar’s operations over the past several years, and management believes its effect has been neither significant nor greater than its effect on the real estate industry as a whole. It is anticipated that the impact of inflation on Avatar’s operations for 2003 will not be significant.

     Avatar’s operations are affected by general economic conditions. The events of September 11, 2001 negatively affected the general economy within the State of Florida and may continue to have an adverse impact for the foreseeable future. Other economic conditions could affect operations (see “Forward-Looking Statements”).

IMPACT OF TAX INSTALLMENT METHOD

     In years 1988 through 1998, Avatar elected the installment method for recording a substantial amount of its homesite and vacation ownership sales in its federal income tax return, which deferred taxable income into future fiscal periods. As a result of this election, Avatar will be required to pay compound interest on certain federal income taxes in 2002 attributable to the taxable income deferred under the installment method to the extent that any of this deferred income is realized in 2002. Avatar anticipates that the interest amount for 2002 will be approximately $300 net of tax benefits. Avatar believes that any potential future interest amounts, if any, will not be material to its financial position and results of operations of the affected future periods.

FORWARD-LOOKING STATEMENTS

     Certain statements discussed under the captions “Business,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others:

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

FORWARD-LOOKING STATEMENTS – continued

Access to Financing

     Avatar’s business is capital intensive and requires expenditures for land and infrastructure development, housing construction and working capital. Accordingly, Avatar anticipates incurring indebtedness to fund its real estate development activities. As of December 31, 2002 total consolidated indebtedness was $107,712 (including $102,014 outstanding principal of the 7% Convertible Subordinated Notes). Avatar may not sustain profitability or positive cash flows from operating activities. There can be no assurance that the amounts available from internally generated funds, cash on hand and the sale of non-strategic assets will be sufficient to fund the anticipated operations or meet its debt service or working capital requirements. Avatar may be required to seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financing and sales of debt or equity securities. No assurance can be given that such financing will be available or, if available, will be on favorable terms. If Avatar is not successful in obtaining sufficient capital to fund the implementation of its business strategy and other expenditures, development projects may be delayed or abandoned. Any such delay or abandonment could result in a reduction in sales and would adversely affect future results of operations.

Interest Rates; Mortgage Financing

     Certain purchasers of Avatar’s homes finance their purchases through third-party lenders providing mortgage financing or, to some extent, rely upon investment income. In general, housing demand is dependent on home equity, consumer savings and third-party financing and could be adversely affected by increases in interest rates, decreases in investment income, unavailability of mortgage financing, increasing housing costs and unemployment levels. The amount or value of discretionary income and savings, including retirement assets, available to home purchasers can be affected by a decline in the capital markets. If mortgage interest rates increase or the capital markets decline or undergo a major correction, the ability of prospective buyers to finance home purchases may be adversely affected, which may have an adverse effect on Avatar’s business.

Real Estate Business Strategy

     Implementation of Avatar’s real estate business strategy has required, and will continue to require, among other things, the addition of new management personnel and employees, as well as the development of additional expertise by existing management personnel and employees and the expenditure of significant amounts of capital. The loss of the services of certain members of the senior management team could have a material adverse effect on Avatar and, in particular, on the success of the real estate business strategy. In addition, Avatar’s ability to manage growth and to redeploy its resources effectively will require it to continue to implement and improve its operational, financial and sales systems. There can be no assurance that Avatar will be able to compete successfully with its current or potential competitors or that the implementation of the current business strategy will be successful.

     Avatar continues to seek other opportunities including those which are in other geographic areas or in different kinds of real estate or other business activities. While transactions and opportunities in other areas may not materialize, we are of the view that changing economic and market conditions may justify a change in strategy and the use of financial resources.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

FORWARD-LOOKING STATEMENTS – continued

Future Business Opportunities

     Avatar has under development or in the planning process a substantial portion of its historical landholdings that Avatar believes can be profitably developed at this time or in the near future. Avatar has identified and has sold or is in the process of selling various landholdings and other assets it believes do not represent significant long-term opportunities for Avatar. Avatar is actively pursuing other long-term investment and business opportunities and recently entered into a joint venture for development and construction of a 250-unit highrise condominium. Other future opportunities may be in those real estate businesses in which Avatar is presently engaged - such as active adult and primary residential community development - or may extend to other real estate activities or unrelated businesses.

Real Estate, Economic, and Other Conditions Generally

     The real estate industry is highly cyclical and is affected by changes in national, global and local economic conditions and events, such as employment levels, availability of financing, interest rates, consumer confidence and the demand for housing and other types of construction. Real estate developers are subject to various risks, many of which are outside the control of the developer, including real estate market conditions (both where its communities and homebuilding operations are located and in areas where its potential customers reside), and changing demographic conditions, adverse weather conditions and natural disasters, such as hurricanes, tornadoes, wildfires, delays in construction schedules, cost overruns, changes in government regulations or requirements, increases in real estate taxes and other local government fees and availability and cost of land, materials and labor. The occurrence of any of the foregoing could have a material adverse effect on Avatar’s financial condition.

Geographic Concentration

     Avatar’s development activities are primarily focused on locations in Florida and therefore depend to a significant degree on the levels of immigration to Florida from outside the United States and in-migration to Florida from within the United States in addition to other local market conditions. Avatar’s geographic concentration and limited number of projects may create increased vulnerability to regional economic downturns or other adverse project-specific matters. A decline in the economy in Florida could have an adverse effect on Avatar’s financial condition.

Development of Communities

     Avatar’s communities will be developed over time. Therefore, the medium- and long-term future of Avatar will be dependent on its ability to develop and market existing and future communities successfully. Committing the financial and managerial resources to develop a community involves significant risks. Before a community generates any revenues, material expenditures are required, among other things, to obtain development approvals to construct project infrastructure, recreation centers, model homes and sales facilities and, where opportunities are suitable and appropriate, to acquire land. It generally takes several years for a community development to achieve cumulative positive cash flow. No assurance can be given that Avatar will successfully develop and market communities in the future. Avatar’s inability to develop and market its communities successfully and to generate positive cash flows from such operations in a timely manner would have an adverse effect on its ability to service its debt and to meet its working capital requirements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

FORWARD-LOOKING STATEMENTS – continued

Joint Venture and Partnership Risks

     In connection with its business strategy, Avatar may seek joint venture or partnership arrangements with entities whose complementary resources or other business strengths will contribute to Avatar’s competitive position. A joint venture or other partnership may involve special risks associated with the possibility that a partner or partnership (i) at any time may have economic or business interests or goals that are inconsistent with those of Avatar, (ii) may take actions contrary to Avatar’s instructions or requests or contrary to Avatar’s policies or objectives with respect to its real estate investments or (iii) could experience financial difficulties. Actions by a partner may have the result of subjecting property owned by the joint venture or partnership to liabilities in excess of those contemplated by the terms of the joint venture or partnership agreement or have other adverse consequences. As a participant in certain joint ventures or partnerships, Avatar may be jointly and severally liable for the debts and liabilities of a joint venture or partnership. No assurance can be given that any joint venture or partnership arrangements entered into will achieve the results anticipated or otherwise prove successful.

Period-to-Period Fluctuations

     Avatar’s real estate projects are long-term in nature. Sales activity at newly planned active adult and other community and real estate developments varies from period to period, and the ultimate success of any community cannot be determined from results in any particular period or periods. A community may generate significantly higher sales levels at inception (whether because of local pent-up demand or other reasons) than it does during later periods over the life of the community. Revenues and earnings will also be affected by period-to-period fluctuations in the mix of product, subdivisions and home closings among Avatar’s communities and conventional homebuilding operations. Thus, the timing and amount of revenues arising from capital expenditures are subject to considerable uncertainty. The inability to manage effectively its cash flows from operations would have an adverse effect on Avatar’s ability to service its debt and to meet its working capital requirements.

Competition

     Avatar’s homebuilding, planned community development and other real estate operations are subject to substantial existing and potential competition (including increased competition from a number of national homebuilders). Some current and potential competitors have longer operating histories and greater financial, sales, marketing, technical and other competitive resources than Avatar. Existing and future competition may have an adverse effect on Avatar’s financial condition.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) – continued

FORWARD-LOOKING STATEMENTS – continued

Governmental Regulation and Environmental Considerations

     Avatar’s business is subject to extensive federal, state and local regulatory requirements, the broad discretion that governmental agencies have in administering those requirements and “no growth” or “slow growth” policies, all of which can prevent, delay, make uneconomic or significantly increase the costs of its developments. Various governmental approvals and permits are required throughout the development process (to the extent they have not already been obtained), and no assurance can be given as to the receipt (or timing of receipt) of these approvals or permits. The incurrence of substantial compliance costs and the imposition of delays and other regulatory burdens could have a material adverse effect on Avatar’s operations.

     Furthermore, various federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances released on a property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the release of the hazardous substances. The presence of such hazardous substances at one or more properties, and the requirement to remove or remediate such substances, may result in significant cost.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Avatar is subject to market risk associated with changes in interest rates and cyclical nature of the real estate industry. Certain purchasers of Avatar’s homes finance their purchases through third-party lenders providing mortgage financing or, to some extent, rely upon investment income. In general, housing demand is dependent on home equity, consumer savings and third-party financing and could be adversely affected by increases in interest rates, unavailability of mortgage financing, increasing housing costs and unemployment levels. The amount or value of discretionary income and savings, including retirement assets, available to home purchasers can be affected by a decline in the capital markets. Fluctuations in interest rates could adversely affect Avatar’s real estate results of operations and liquidity because of the negative impact on the housing industry. Real estate developers are subject to various risks, many of which are outside the control of the developer, including real estate market conditions (both where its communities and homebuilding operations are located and in areas where its potential customers reside), and changing demographic conditions, adverse weather conditions and natural disasters, such as hurricanes, tornadoes, wildfires, delays in construction schedules, cost overruns, changes in government regulations or requirements, increases in real estate taxes and other local government fees and availability and cost of land, materials and labor. See Notes H and R (debt payout and fair values) to the Consolidated Financial Statements included in Item 8 of Part II of this Report. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of risks.)

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Item 8. Financial Statements and Supplementary Data

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Stockholders and Board of Directors
Avatar Holdings Inc.

We have audited the accompanying consolidated balance sheets of Avatar Holdings Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and related schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avatar Holdings Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note A to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards no. 142, “Goodwill and Other Intangible Assets.”

ERNST & YOUNG LLP     

Miami, Florida
February 26, 2003, except for
Note U as to which the date
is March 20, 2003

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AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands except per-share amounts)

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands)

There are 10,000,000 authorized shares of preferred stock, none of which are issued.

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)