<p><em>We've been moving to transparent pricing, what that means, as we do a lot of work around finding the right selling price for our neighborhood and then adjust the base price to that level. By doing these buyers know what the real price is, the price is not up-scaled with give-away and gimmicks. We can then attract the right buyers that, those that can qualify for mortgage and can afford the payment.</em></p>
<p><em>Solid, well founded prices also instill buyer confidence. The positive of this strategy is that it allows us to sell to a backlog more predictably. The short-term down side though, is it means adjusting our existing backlogs to those new price realities.</em></p>
<p><em>Further our unsold inventory is down 10% sequentially. We are emphasizing pre-sales and as our cancellation rates moderate, I'm confident we'll continue to reduce our unsold inventory. Our cancellation rate at 33% for the quarter is down sequentially and year-over-year. <strong>We are focused on selling homes to people who can afford them and can qualify for mortgage. We've moved quickly to reduce our prices to the new mortgage realities</strong>. And CTX Mortgage ensures we've well qualified buyers, so we can close sold home.</em></p>
<p><em>Slide 7, provides the details around the home building operations for the third quarter. We closed 6,657 homes in the quarter, 20% lower than last year. The average sales price declined 11% to $259,000. This is a 5% reduction sequentially. The <strong>average selling price will continue to decline</strong> on our closed homes in the near term reflecting our aggressive response to the tighter credit standards. <strong>The dramatic price adjustments the industry has experienced is a healthy step towards addressing the industry's affordability challenge</strong>. Unfortunately, it comes at a cost which is evidence in gross margin reductions.</em></p>
<p><em><strong>Carl Reichardt - Wachovia Securities</strong></em></p>
<p><em>Hi, Tim, can you explain to me specifically how you expect the transparent pricing move to impact margins over the longer run? And then I have a second question with cash flow?</em></p>
<p><em><strong>Timothy Eller - Chairman and Chief Executive Officer</strong></em></p>
<p><em>Well, the way we view it, this is a necessary step in returning to something normal. Now, we have yet to see prices stabilize to call anything normal and we have yet to see inventories stabilize. But, we need to get back to pricing that is reflective of value. It's also important to do that for financing reasons, because right now, what people can qualify for is generally a Fannie Mae, a Freddie Mac or increasingly only FHA. So, it's important to have a price that reflects the values that attract the customers that can qualify for those mortgages.</em></p>
<p><em>Once we understand the pricing and where the pricing needs to be relative to our customer ability to... to qualify for a mortgage, then we can really focus on the cost aspects having a right product, with the right cost structure and the right set of subcontractors and suppliers to provide that house. So, what we've seen is just as I said in previous calls, just a resetting of values from Alt-A which could have been as high as 500,000, 600,000 into Fannie Mae and as we have seen underwriting standards tighten and down payments increase because these are now declining price markets according to appraisals increasingly move into FHA.</em></p>
<p><em>If you recall Carl, back in our history if not that long ago, about half of our business was FHA business and we are actually just moving back to where we once were. Doing all of this, is really a precursor to establishing a predictable set of prices and a predictable set of costs and a predictable set of margins.</em></p>
<p><em><strong>Stephen East - Pali Capital</strong></em></p>
<p><em>Cathy on the pricing that you mentioned, moving forward it will continue to decline. How should we look at... I guess how you all factored in land... factored in debt pricing in your land charges this quarter or if you did and also on operating margins sort of looking at least qualitatively where those margins go?</em></p>
<p><em><strong>Cathy R. Smith - Executive Vice President and Chief Financial Officer</strong></em></p>
<p><em>Yes. The... as we always do with our impairment methodology, we look at where we think price will go over the life of that asset or life of that neighborhood. So our impairments contemplate well what visibility or what insight or what judgments we think. And we do use some objective third party data to help us understand where the economics of the market, individual markets are going. So to that extent we should have contemplated everything that we expect in the way of additional price declines by market in our impairment analysis. And so that should be there. And then... best way to get to profitability is to adjust our cost structure to those new price realities and we are doing that as fast as we possibly can.</em></p>
<p><em><strong>Stephen East - Pali Capital</strong></em></p>
<p><em>Okay. And then Tim, just one another question for you on the transparent pricing, are you seeing particularly I am thinking about in California and you all mentioned Vegas etcetera. Are you all seeing competitors follow suit or what's the environment and what's the competitive landscape? How they are responding to that?</em></p>
<p><em><strong>Timothy Eller - Chairman and Chief Executive Officer</strong></em></p>
<p><em>Yes. More and more, that as the reality of what we need to do from a mortgage standpoint and a qualification standpoint, I think prices adjust. Now we have the advantage in many cases of having A locations, so that gives us a little bit of pricing power there. But we've tended to be... again very thoughtful about how we adjust our prices relative to the mortgage realities.</em></p>
<p><em><strong>Jay McCanless - FTN Midwest</strong></em></p>
<p><em>Couple of questions on the transparent pricing strategy. First one it implies... I am thinking about it in all the different neighborhoods it implies that you either expect or you have some type of pricing leverage with the customers. What are you seeing in the current conditions around the country that make all of you believe that you can push forward with this strategy and stick firm on pricing?</em></p>
<p><em><strong>Timothy Eller - Chairman and Chief Executive Officer</strong></em></p>
<p><em>If you could just think about the process that evolves through a cycle. What I would attribute it to is just a more mature point in the cycle. Historically, we price houses by and large was very, very little incentive. When the market changes dramatically as it has been, builders tend to provide incentives in order to keep the backlog priced at a higher level. What's happening now is we're having to renegotiate everything because of the loan product changes that have occurred in the mortgage market. So we've just accelerated our point of arrival if you will in terms of where we need to be in this cycle to... how business should really be run in this industry. And doing that it was buyer's confidence that the price to paying is a fair value and we can demonstrate that it is in the marketplace.</em></p>
<p><em>It also allows us to pre-sell homes because people understand that we're not offering excessive... incentives or inventory in order to provide per sales. So it is gives us some more stable foundation in order... in which to manage the business and also very clearly demonstrates to our sub-contractors and suppliers and ultimately land sellers what the realties of the market are in terms of house prices.</em></p>
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