UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

BROOKFIELD HOMES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		37-1446709 (I.R.S. Employer Identification No.)

8500 Executive Park Avenue Suite 300 Fairfax, Virginia (Address of Principal Executive Offices)		22031 (Zip Code)

(703) 270-1700
(Registrant’s Telephone Number, Including Area Code)

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                    Accelerated filer þ                    Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

As of August 3, 2007, the registrant had outstanding 26,628,207 shares of its common stock, $0.01 par value per share.

 

 

INDEX

BROOKFIELD HOMES CORPORATION

				PAGE
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets — June 30, 2007 and December 31, 2006			1
		Consolidated Statements of Income — Three Months and Six Months Ended June 30, 2007 and 2006			2
		Consolidated Statements of Stockholders’ Equity — Six Months Ended June 30, 2007 and 2006			3
		Consolidated Statements of Cash Flows — Three Months and Six Months Ended June 30, 2007 and 2006			4
		Notes to the Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			21
Item 4.		Controls and Procedures			21
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			22
Item 1A.		Risk Factors			22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3.		Defaults Upon Senior Securities			22
Item 4.		Submission of Matters to a Vote of Security Holders			23
Item 5.		Other Information			23
Item 6.		Exhibits			23
SIGNATURES					24
EXHIBITS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED BALANCE SHEETS

(all dollar amounts are in thousands of U.S. dollars)

						(Unaudited)
						June 30,				December 31,
		Note				2007				2006
Assets
Housing and land inventory			2			$	1,119,447			$	1,075,192
Investments in housing and land joint ventures			3				107,437				90,325
Consolidated land inventory not owned			2				71,490				59,381
Receivables and other assets							38,043				37,031
Cash and cash equivalents							3,707				86,809
Deferred income taxes			6				46,259				52,715
						$	1,386,383			$	1,401,453
Liabilities and Equity
Project specific and other financings						$	655,462			$	617,931
Accounts payable and other liabilities			4				218,324				320,061
Minority interest							105,689				92,055
Preferred stock — 10,000,000 shares authorized, no shares issued							—				—
Common — 65,000,000 shares authorized, 32,073,781 shares issued (December 31, 2006 — 32,073,781 shares issued)							321				321
Additional paid-in-capital							146,066				146,730
Treasury stock, at cost — 5,445,956 shares (December 31, 2006 — 5,519,275 shares)							(245,304	)			(248,606	)
Retained earnings							505,825				472,961
						$	1,386,383			$	1,401,453

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(all dollar amounts are in thousands of U.S. dollars, except per share amounts)

						(Unaudited)								(Unaudited)
						Three Months Ended								Six Months Ended
						June 30,								June 30,
		Note				2007				2006				2007				2006
Revenue
Housing						$	154,632			$	193,682			$	258,672			$	315,505
Land and other revenues							8,026				38,780				11,932				59,855
							162,658				232,462				270,604				375,360
Direct Cost of Sales			2				(129,062	)			(158,461	)			(215,643	)			(250,185	)
							33,596				74,001				54,961				125,175
Equity in earnings from housing and land joint ventures			3				56				763				380				1,670
Selling, general and administrative expense							(17,518	)			(1,819	)			(34,030	)			(21,072	)
Minority interest							(763	)			(3,153	)			(928	)			(5,404	)
Net Income Before Taxes							15,371				69,792				20,383				100,369
Income tax recovery / (expense)			6				(5,841	)			(26,730	)			17,807				(38,441	)
Net Income						$	9,530			$	43,062			$	38,190			$	61,928
Earnings Per Share
Basic			5			$	0.36			$	1.60			$	1.43			$	2.28
Diluted			5			$	0.35			$	1.57			$	1.42			$	2.24
Weighted Average Common Shares Outstanding
(in thousands)
Basic			5				26,628				26,996				26,621				27,185
Diluted			5				26,886				27,388				26,890				27,602

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(all dollar amounts are in thousands of U.S. dollars)

		(Unaudited)
		Six Months Ended
		June 30,
		2007				2006
Common Stock		$	321			$	321
Additional Paid-in Capital
Opening balance			146,730				146,249
Stock option exercises			(664	)			481
Ending balance			146,066				146,730
Treasury Stock
Opening balance			(248,606	)			(217,182	)
Share repurchases			—				(36,671	)
Stock option exercises			3,302				6,498
Ending balance			(245,304	)			(247,355	)
Retained Earnings
Opening balance			472,961				335,261
Net income			38,190				61,928
Dividends			(5,326	)			(5,343	)
Ending balance			505,825				391,846
Total stockholders’ equity		$	406,908			$	291,542

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(all dollar amounts are in thousands of U.S. dollars)

		(Unaudited)								(Unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Cash Flows From Operating Activities
Net income		$	9,530			$	43,062			$	38,190			$	61,928
Adjustments to reconcile net income to net cash used in operating activities:
Distributed income from housing and land joint ventures			—				504				266				990
Minority interest			763				3,153				928				5,404
Deferred income taxes			5,240				3,096				6,456				3,778
Other changes in operating assets and liabilities:
(Increase)/decrease in receivables and other assets			(11,421	)			2,016				(1,012	)			52,774
Increase in housing and land inventory			(19,476	)			(1,833	)			(50,547	)			(91,626	)
(Decrease)/increase in accounts payable and other			6,838				(10,690	)			(93,499	)			(81,147	)
Net cash (used in)/provided by operating activities			(8,526	)			39,308				(99,218	)			(47,899	)
Cash Flows From Investing Activities
Investments in housing and land joint ventures			(13,652	)			(10,158	)			(21,057	)			(19,091	)
Recovery from housing and land joint ventures			2,844				5,651				3,679				6,630
Net cash (used in)/provided by investing activities			(10,808	)			(4,507	)			(17,378	)			(12,461	)
Cash Flows From Financing Activities
Net (repayments)/borrowings under revolving project specific and other financings			12,583				9,189				37,531				(10,206	)
Distributions to minority interest			—				(2,100	)			(1,750	)			(14,117	)
Contributions from minority interest			1,492				1,222				2,966				2,889
Repurchase of common shares			—				(26,973	)			—				(36,671	)
Exercise of stock options			—				56				73				164
Dividends paid in cash			(5,326	)			(5,343	)			(5,326	)			(5,343	)
Net cash (used in)/provided by financing activities			8,749				(23,949	)			33,494				(63,284	)
(Decrease)/increase in cash and cash equivalents			(10,585	)			10,852				(83,102	)			(123,644	)
Cash and cash equivalents at beginning of period			14,292				63,915				86,809				198,411
Cash and cash equivalents at end of period		$	3,707			$	74,767			$	3,707			$	74,767
Supplemental Cash Flow Information
Interest paid		$	16,743			$	13,071			$	32,145			$	25,097
Income taxes paid		$	605			$	24,245			$	22,154			$	38,810
Non-cash increase / (decrease) in consolidated land inventory not owned		$	(4,247	)		$	(1,192	)		$	5,817			$	(7,257	)

See accompanying notes to financial statements

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Note 1. Significant Accounting Policies

(a) Basis of Presentation

Brookfield Homes Corporation (the “Company” or “Brookfield Homes”) was incorporated on August 28, 2002 as a wholly-owned subsidiary of Brookfield Properties Corporation (“Brookfield Properties”) to acquire as of October 1, 2002 all of the California and Washington D.C. Area homebuilding and land development operations (the “Land and Housing Operations”) of Brookfield Properties pursuant to a reorganization of its business (the “Spin-off”). On January 6, 2003, Brookfield Properties completed the Spin-off by distributing all of the issued and outstanding common stock it owned in the Company to its common stockholders. Brookfield Homes began trading as a separate company on the New York Stock Exchange on January 7, 2003.

The consolidated financial statements include the accounts of Brookfield Homes and its subsidiaries and investments in joint ventures and variable interests in which the Company is the primary beneficiary.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Since they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements, they should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all adjustments necessary for fair presentation of the accompanying consolidated financial statements have been made.

The Company historically has experienced, and expects to continue to experience, variability in quarterly results. The consolidated statements of income for the three months and six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

(b) Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 allows companies to choose to measure certain financial instruments and other items at fair value. Companies electing the fair value option are required to report subsequent changes in fair value in earnings. This Statement is effective for fiscal years beginning after November 15, 2007 (the Company’s fiscal year beginning January 1, 2008). The Company is currently reviewing the impact of this SFAS on its consolidated financial statements.

In September 2006, FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2007 (the Company’s fiscal year beginning January 1, 2008), and interim periods within those fiscal years. The Company is currently reviewing the impact of this SFAS on its consolidated financial statements.

In July 2006, FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, the impact of an uncertain tax position on the income tax

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company adopted the provisions of FIN 48 on January 1, 2007. See Note 6 “Income Taxes,” for further discussions.

(c) Reclassification

Certain prior period amounts in the consolidated balance sheet have been reclassified to conform with the June 30, 2007 presentation. Specifically, Accounts payable and other liabilities now includes deferred compensation which had previously been shown as a component of project specific and other financings.

Note 2. Housing and Land Inventory

Housing and land inventory includes homes completed and under construction and lots ready for construction, model homes and land under and held for development which will be used in the Company’s homebuilding operations or sold as building lots to other homebuilders. The following summarizes the components of housing and land inventory:

		June 30,				December 31,
		2007				2006
Housing inventory		$	571,736			$	571,352
Model homes			50,549				42,706
Land and land under development			497,162				461,134
		$	1,119,447			$	1,075,192

The Company capitalizes interest which is expensed as housing units and building lots are sold. For the three months ended June 30, 2007 and 2006, and for the six months ended June 30, 2007 and 2006, interest incurred and capitalized by the Company was $16.7 million and $13.1 million, $32.1 million and $25.1 million, respectively. Capitalized interest expensed for the same periods was $8.8 million and $3.6 million, $14.9 million and $6.3 million, respectively.

Capitalized costs are expensed as costs of sales on a specific identification basis or on a relative value basis in proportion to anticipated revenue. Included in direct cost of sales is $126.6 million and $210.4 million of costs related to housing revenue for the three months and six months ended June 30, 2007 (June 30, 2006 — $140.6 million and $225.3 million, respectively) and $2.4 million and $5.2 million of costs related to land sales and other revenues (June 30, 2006 — $17.9 million and $24.9 million, respectively).

In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has reviewed its housing and land assets for recoverability. Recoverability is measured by comparing the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. To arrive at this amount, the Company estimates the cash flow for the life of each project. These projections take into account the specific business plans for each project and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market area. Such projections assume current home selling prices and cost estimates and sales rates for short term projects assume recent sales activity. For longer term projects, sales rates for 2007 and 2008 assume recent sales activity and normalized sales rates beyond 2008. If these assets are considered to be impaired, they are then written down to fair value less estimated selling costs. The ultimate fair values for the Company’s housing and land inventory are dependent upon future market and economic conditions. For the three months and six months ended June 30, 2007, the Company did not recognize any impairment charges (June 30, 2006 — nil); however, should the ongoing challenges of the housing market not stabilize in the near future, it is possible impairment charges will be recognized in future results.

In the ordinary course of business, the Company has entered into a number of option contracts to acquire lots in the future in accordance with specific terms and conditions of such agreements. Under these option agreements, the Company will fund deposits to secure the right to purchase land or lots at a future point in time. The Company has evaluated its option contracts and determined that for those entities considered to be variable interest entities (“VIE’s”), it is the primary beneficiary of options for 1,091 lots with an aggregate exercise price of $71.5 million

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

(December 31, 2006 — 1,083 lots with an aggregate exercise price of $59.4 million), which are required to be consolidated. In these cases, the only asset recorded is the Company’s exercise price for the option to purchase, with an increase in minority interest of $46.4 million (December 31, 2006 — $40.5 million) for the assumed third party investment in the VIE. Where the land sellers are not required to provide the Company financial information related to the VIE, certain assumptions by the Company were required in its assessment as to whether or not it is the primary beneficiary.

Housing and land inventory includes non-refundable deposits and other entitlement costs totaling $87.0 million (December 31, 2006 — $76.6 million) in connection with options that are not required to be consolidated under the provisions of FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities”. The total exercise price of these options is $644.6 million (December 31, 2006 — $670.3 million) including the non-refundable deposits identified above. The number of lots for which the Company has obtained an option to purchase, excluding those already consolidated, and their respective dates of expiry and their exercise price are as follows:

		Number				Total
		of				Exercise
Year of Expiry		Lots				Price
2007			2,062			$	131,425
2008			3,503				106,324
2009			628				69,158
Thereafter			7,355				337,700
			13,548			$	644,607

The Company holds agreements for a further 4,178 acres of longer term land, with non-refundable deposits and other entitlement costs of $11.0 million which is included in housing and land inventory that may provide additional lots upon obtaining entitlements with an aggregate exercise price of $350.9 million. However, given that the Company is in the initial stage of land entitlement, the Company has concluded at this time that the level of uncertainty in entitling these properties does not warrant including them in the above totals.

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Note 3. Investments in Housing and Land Joint Ventures

The Company participates in a number of joint ventures in which it has less than a controlling interest. Summarized condensed financial information on a combined 100% basis of the joint ventures is as follows:

		June 30,				December 31,
		2007				2006
Assets
Housing and land inventory		$	493,960			$	452,359
Other assets			43,838				38,063
		$	537,798			$	490,422
Liabilities and Equity
Project specific financings		$	285,928			$	253,529
Accounts payable and other liabilities			41,963				32,319
Investment and advances
Brookfield Homes			107,437				90,325
Others			102,470				114,249
		$	537,798			$	490,422

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenue and Expenses
Revenue		$	32,620			$	19,391			$	39,808			$	30,223
Expenses			(74,266	)			(17,677	)			(80,722	)			(26,523	)
Net income (loss)			(41,646	)			1,714			$	(40,914	)		$	3,700
Company’s share of net income		$	56			$	763			$	380			$	1,670

In reporting the Company’s share of net income, all inter-company profits or losses from housing and land joint ventures are eliminated on lots purchased by the Company.

The net loss for the three months ended June 30, 2007, results from an impairment charge of $41.7 million recognized in one of the joint ventures. In calculating the Company’s share of the joint venture net loss, the Company did not require an impairment charge as its carrying value in this joint venture is below its proportionate share of the underlying net assets.

Joint ventures in which the Company has a non-controlling interest are accounted for using the equity method. In addition, the Company has performed an evaluation of its existing joint venture relationships by applying the provisions of FIN 46R. The Company has determined that for those entities for which this interpretation applies, none of these joint ventures were considered to be a VIE requiring consolidation pursuant to the requirements of FIN 46R.

The Company and/or its joint venture partners have provided varying levels of guarantees of debt in its joint ventures. At June 30, 2007, the Company had recourse guarantees of $15.6 million (December 31, 2006 — $12.7 million) and limited maintenance guarantees of $102.7 million (December 31, 2006 — $89.4 million) with respect to debt in its joint ventures. As of June 30, 2007, the fair market value of the recourse guarantees was insignificant.

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

Note 4. Accounts Payable and Other Liabilities

The components of accounts payable and other liabilities included in the Company’s balance sheet are summarized as follows:

		June 30,				December 31,
		2007				2006
Trade payables and cost to complete accruals		$	62,054			$	70,187
Warranty costs			19,030				19,569
Customer deposits			4,399				4,030
Stock-based compensation			26,981				33,824
Due to minority interest			26,190				31,863
Accrued and deferred compensation			49,490				89,636
Income tax liabilities and other			30,180				70,952
		$	218,324			$	320,061

Note 5. Earnings Per Share

Basic and diluted earnings per share for the three months and six months ended June 30, 2007 and 2006 were calculated as follows (in thousands except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Numerator:
Net income		$	9,530			$	43,062			$	38,190			$	61,928
Denominator:
Basic average shares outstanding			26,628				26,996				26,621				27,185
Net effect of stock options assumed to be exercised			258				392				269				417
Diluted average shares outstanding			26,886				27,388				26,890				27,602
Basic earnings per share		$	0.36			$	1.60			$	1.43			$	2.28
Diluted earnings per share		$	0.35			$	1.57			$	1.42			$	2.24

For the three months and six months ended June 30, 2007 and 2006, outstanding options to purchase 0.5 million shares and 0.3 million shares, respectively, were considered anti-dilutive and were excluded from the computation of diluted earnings per share.

Note 6. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The differences that give rise to the net deferred tax asset are as follows:

		June 30,				December 31,
		2007				2006
Compensation deductible for tax purposes when paid		$	27,690			$	39,047
Differences relating to properties			11,798				14,013
Other			6,771				(345	)
		$	46,259			$	52,715

Included in income tax liabilities and other is $25.0 million (December 31, 2006 — $51.1 million) related to uncertainties in tax attributes which were recorded at the time of the Spin-off discussed in Note 1(a). On the Spin-off, the Company

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

left the Brookfield Properties consolidated tax group with $115.0 million of net operating losses. The tax provisions that apply in connection with the reorganization, including the departure of a member of a consolidated group, are detailed and complex and thereby subject to uncertainty. In addition, if any member of the consolidated group were reassessed for taxation years prior to 2003, this could have a direct impact on the net operating losses available to the Company on the Spin-off. The exact amount of this tax liability will be determined at the earlier of the review of the Spin-off transaction by taxation authorities or September 2007. Should the amount be substantially different it will have a significant impact on the Company’s effective tax rate.

Effective January 1, 2007, the Company adopted the provisions of FIN 48. There was no impact to the Company’s financial statements as a result of adopting FIN 48.

A reconciliation of unrecognized tax benefits / (liabilities) is as follows:

Balance, January 1, 2007		$	(51,480	)
Additions based on tax positions related to the current year			—
Additions for tax positions of prior years			—
Reductions for tax positions of prior years			—
Position settled during the period			26,480
Balance, June 30, 2007		$	(25,000	)

During the first quarter of 2007, the Company received an assessment as a result of a review by the taxation authorities of a previously filed tax return. As a result of the assessment, the Company paid additional taxes of $3.0 million, including interest and penalties of $0.9 million and the Company also released $26.5 million of accrued liabilities related primarily to the tax cost of properties in excess of fair value deducted against taxable income in previous years. The Company’s 2004 federal income tax return is currently being examined by the taxation authorities and federal taxation years 2005 and 2006 remain open for examination.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax recovery / expense.

Note 7. Stock Based Compensation

Option Plan

Pursuant to the Company’s stock option plan, Brookfield Homes grants options to purchase shares of the Company’s common stock at the market price of the shares on the day the options are granted. A maximum of two million shares is authorized for issuance under the plan.

The financial statement impact related to the Company’s stock options during the three months and six months ended June 30, 2007 was income of $0.7 million and $2.4 million (2006 — income of $6.2 million and $3.4 million).

The fair value of each of the Company’s stock option awards is estimated at each reporting date using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of the Company’s stock option awards, which are subject to graded vesting, is expensed over the vesting period of the stock options. Expected volatility is based on historical volatility of the Company’s stock. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the stock option award granted. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The expected term of stock option awards granted for some participants is derived from historical exercise experience under the Company’s share-based payment plan and represents the period of time that stock option awards granted are expected to be outstanding. The expected term of stock options granted for the remaining participants is derived by using the simplified method.

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

The significant weighted average assumptions relating to the valuation of the Company’s stock options for the three months and six months ended June 30, 2007 were as follows:

		2007
Dividend yield			0.00% — 1.51	%
Volatility rate			41	%
Risk-free interest rate			4.8% — 5.0	%
Expected option life (years)			1.0 — 7.0

The following table sets out the number of common shares that employees of the Company may acquire under options granted under the Company’s stock option plan:

		June 30, 2007
						Weighted
						Average per
						Share Exercise
		Shares				Price
Outstanding, January 1, 2007			678,051			$	21.02
Granted			260,000			$	36.41
Exercised			(73,319	)		$	1.00
Cancelled			—				—
Outstanding, June 30, 2007			864,732			$	27.35
Options exercisable at June 30, 2007			230,807			$	20.13

The weighted average grant date fair value of options granted during the six months ended June 30, 2007 was $12.17 per option compared to $15.17 per option during the six months ended June 30, 2006. The intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was $2.6 million and $5.6 million, respectively. Shares were issued out of treasury stock for options exercised during the period. At June 30, 2007, the aggregate intrinsic value of options currently exercisable is $3.1 million and the aggregate intrinsic value of options outstanding is $7.1 million.

Deferred Share Unit Plan

The Company has adopted a Deferred Share Unit Plan (“DSUP”) under which certain of its executive officers, and directors may, at their option, receive all or a portion of their annual bonus awards or retainers, respectively, in the form of deferred share units. As of June 30, 2007, the Company had granted 615,631 units under the DSUP, all of which were outstanding at June 30, 2007, and of which 442,853 units are currently vested and 172,778 vest over the next five years.

In addition, the Company has adopted a Senior Operating Management Deferred Share Unit Plan, (“MDSUP”) under which certain senior operating management employees receive a portion of their annual compensation in the form of deferred share units. As of June 30, 2007, the Company had granted 70,021 units under the MDSUP, all of which were outstanding at June 30, 2007.

The financial statement impact relating to the DSUP and MDSUP for the three months and six months ended June 30, 2007 were income of $1.7 million and $4.4 million, respectively (2006 — $9.3 million and $7.3 million).

Note 8. Commitments, Contingent Liabilities and Other

(a) The Company is party to various legal actions arising in the ordinary course of business. Management believes that none of these actions, either individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company.

(b) During 2006, the Company entered into an unsecured revolving credit facility that was amended in March, 2007 with a subsidiary of Brookfield Asset Management Inc., the Company’s largest stockholder. The facility is for an

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

aggregate principal amount not to exceed $100 million. Included in project specific and other financings is $40.0 million related to this facility. The interest rate on this facility is LIBOR plus 2.50% per annum. During the six months ended June 30, 2007, interest of $1.9 million was incurred related to this facility.

(c) When selling a home, the Company’s subsidiaries provide customers with a limited warranty. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. In addition, the Company has insurance in place where its subsidiaries are subject to the respective warranty statutes in the State where the Company conducts business which range up to ten years for latent construction defects. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The following table reflects the changes in the Company’s warranty liability for the six months ended June 30, 2007 and 2006:

		2007				2006
Balance, January 1		$	19,569			$	17,743
Payments and other adjustments made during the period			(2,817	)			(1,588	)
Warranties issued during the period			2,278				2,472
Balance, June 30		$	19,030			$	18,627

(d) From time to time, the Company enters into interest rate swap contracts. As at June 30, 2007, the Company had six interest rate swap contracts outstanding which effectively fixed $235.0 million of the Company’s variable rate debt at an average rate of 6.63% per annum. The contracts expire between 2009 and 2017. At June 30, 2007, the fair market value of the contracts was $6.0 million (December 31, 2006 — $2.2 million) and was included in Receivables and other assets. Income of $4.4 million and $3.8 million            was recognized during the three months ended and six months ended June 30, 2007 (2006 — $0.9 million and $2.3 million) and was included in Land and other revenues. All interest rate swaps are recorded at fair market value because hedge accounting has not been applied.

(e) During the third quarter of 2006, the Company entered into an equity swap transaction maturing in July 2007 at an average cost per share of $26.72, which effectively fixed the stock compensation liability on 620,000 shares. During the second quarter of 2007, the Company amended the equity swap transaction. The revised equity swap matures July 2008 at an average cost of $28.41, and effectively fixes the stock compensation liability on 1,003,302 shares which is included in Accounts payable and other Liabilities. At June 30, 2007, the fair market value of the equity swap was nil (December 31, 2006 — $6.5 million) and was included in Receivables and other assets. An expense of $3.1 million and $6.5 million was recognized during the three months and six months ended June 30, 2007 and was included in selling, general and administrative expense. The equity swap is recorded at fair market value because hedge accounting has not been applied.

(f) During the second quarter of 2007, the Company formed a joint venture with California State Teachers’ Retirement System (“CalSTRS”) to entitle and develop land for residential uses, primarily in California. Both the Company and CalSTRS will contribute up to $200.0 million, in total $400.0 million of equity to finance the acquisition, entitlement and development of land for sale to residential homebuilders and developers.

Note 9. Segment Information

As defined in SFAS 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company has five operating segments. The Company has four reportable segments: Northern California, Southland / Los Angeles, San Diego / Riverside, and the Washington D.C. Area. The fifth operating segment is quantitatively immaterial.

The Company is a residential homebuilder and land developer. The Company is organized and manages its business based on the geographical areas in which it operates. Each of the Company’s segments specialize in lot entitlement and development and the construction of single-family and multi-family homes. The Company evaluates performance and allocates capital based primarily on return on assets together with a number of other risk factors. Earnings performance

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

is measured using segment operating income. The accounting policies of the segments are the same as those described in Note 1, “Significant Accounting Policies”.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues
Northern California		$	30,245			$	26,943			$	40,030			$	35,288
Southland / Los Angeles			53,498				92,129				105,317				106,312
San Diego / Riverside			34,679				52,648				50,188				95,168
Washington, D.C. Area			37,908				51,378				59,331				118,260
Corporate and Other			6,328				9,364				15,738				20,332
Total Revenues		$	162,658			$	232,462			$	270,604			$	375,360
Segment Operating Income (Loss)
Northern California		$	3,398			$	4,701			$	2,098			$	4,137
Southland / Los Angeles			5,729				25,281				12,021				25,794
San Diego / Riverside			4,445				15,637				6,618				31,767
Washington D.C. Area			1,472				9,801				1,186				26,921
Corporate and Other			1,090				17,525				(612	)			17,154
Total Operating Income			16,134				72,945				21,311				105,773
Minority Interest			(763	)			(3,153	)			(928	)			(5,404	)
Net Income before Taxes		$	15,371			$	69,792			$	20,383			$	100,369

		June 30,				December 31,
		2007				2006
Housing and Land Assets 1)
Northern California		$	327,656			$	302,424
Southland / Los Angeles			204,079				203,829
San Diego / Riverside			399,536				376,717
Washington, D.C. Area			321,168				293,117
Corporate and Other			45,935				48,811
		$	1,298,374			$	1,224,898

BROOKFIELD HOMES CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands of U.S. dollars except per share amounts)

The following tables set forth additional financial information relating to the Company’s reportable operating segments:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Equity in earnings/(loss) from Housing and Land Joint Ventures:
Northern California		$	—			$	—			$	—			$	—
Southland / Los Angeles			—				(52	)			—				(52	)
San Diego / Riverside			—				—				—				—
Washington, D.C. Area			56				815				(9	)			1,722
Corporate and Other			—				—				389				—
Total		$	56			$	763			$	380			$	1,670

		June				December
		30, 2007				31, 2006
Investments in Housing and Land Joint Ventures
Northern California		$	7,491			$	6,791
Southland / Los Angeles			7,015				6,872
San Diego / Riverside			37,010				32,536
Washington, D.C. Area			48,353				36,256
Corporate and Other			7,568				7,870
Total		$	107,437			$	90,325

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion includes forward-looking statements that reflect our current views with respect to future events and financial performance and that involve risks and uncertainties. Our actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements as a result of certain factors including risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements” and Item 1A — “Risk Factors” elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2006.

Outlook

During the first six months of 2007, we continued to experience challenging housing market conditions and these conditions continued into the month of July mainly as a result of historically high levels of inventory for resale and new homes and weak homebuyer confidence. Despite these challenging market conditions that are negatively affecting our current housing operations, we continue to focus on our core strategies, including controlling land through option contracts and adding value by entitling raw land and creating communities.

Overview

We design, construct and market single-family and multi-family homes primarily to move-up and luxury homebuyers and develop land for sale to other homebuilders.

We operate in the following geographic regions which are presented as our reportable segments: Northern California (San Francisco Bay Area and Sacramento), Southland / Los Angeles, San Diego / Riverside and Washington D.C. Area. Our other operations that do not meet the quantitative thresholds for separate segment disclosure are included in “Corporate and Other.”

Our goal is to maximize the total return on our common stockholders’ equity over the long term. We plan to achieve this by actively managing our assets and creating value on the lots we own or control. Since going public in 2003, we have limited the capital placed at risk, and have returned, through share buybacks and dividends, $573 million to shareholders, or in excess of $20 per share. At current share prices, this equates to a return on stockholders’ equity of approximately 40%.

The 27,573 lots that we control, 12,934 of which we own directly or through joint ventures, provide a strong foundation for our future homebuilding business and visibility on our future cash flow and earnings. We believe we add value to the lots we control through entitlements, development and the construction of homes. In allocating capital to our operations we generally limit our risk on unentitled land by optioning such land positions in all our markets thereby mitigating our capital at risk. Option contracts for the purchase of land permit us to control lots for an extended period of time. We have controlled our 27,573 lots since the following specified years:

														Total
Year		% of Lots				Owned				Optioned				Controlled Lots
Pre-2003			31	%			4,449				4,153				8,602
2003			33	%			3,721				5,239				8,960
2004			21	%			2,886				2,992				5,878
2005			10	%			1,084				1,807				2,891
2006			4	%			544				448				992
2007			1	%			250				—				250
			100	%			12,934				14,639				27,573

Homebuilding is our primary source of revenue and has represented approximately 90% of our total revenue since 2002. Our operations are positioned to allow us to close up to 2,000 homes annually. Operating in markets with higher price points and catering to move-up and luxury buyers, our average sales price for the six months ended June 30, 2007 of $674,000 was well in excess of the national average sales price. We also sell serviced and unserviced lots to other homebuilders generally on an opportunistic basis where we can redeploy capital to an asset providing higher returns or reduce risk, in a market.

In addition to our housing and land inventory and investments in housing and land joint ventures, which together comprised 94 % of our total assets as of June 30, 2007, we had $4 million in cash and cash equivalents and $84 million in other assets. Other assets consist of homebuyer receivables of $9 million, deferred income taxes of $46 million, fair value of interest rate swaps of $6 million, and mortgages and other receivables of $23 million. Homebuyer receivables consist primarily of proceeds due from homebuyers on the closing of homes.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the three months and six months ended June 30, 2007 compared to those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2006.

Results of Operations

		Three Months Ended								Six Months Ended
Selected Financial Information		June 30,								June 30,
($ millions)		2007				2006				2007				2006
Revenue:
Housing		$	155			$	193			$	259			$	315
Land and other revenues			8				39				12				60
Total revenues			163				232				271				375
Direct cost of sales			(129	)			(158	)			(216	)			(250	)
Gross margin			34				74				55				125
Equity in earnings from housing and land joint ventures			—				1				—				2
Selling, general and administrative expense			(18	)			(2	)			(34	)			(21	)
Operating income			16				73				21				106
Minority interest			(1	)			(4	)			(1	)			(6	)
Net income before taxes			15				69				20				100
Income tax expense			(6	)			(26	)			18				(38	)
Net income		$	9			$	43			$	38			$	62
Segment Information
Housing revenue ($ millions):
Northern California		$	30			$	27			$	40			$	35
Southland / Los Angeles			53				64				105				78
San Diego / Riverside			35				46				50				76
Washington D.C. Area			35				48				53				110
Corporate and Other			2				8				11				16
Total		$	155			$	193			$	259			$	315
Land and Other revenues ($ millions):
Northern California		$	—			$	—			$	—			$	—
Southland / Los Angeles			1				28				1				28
San Diego / Riverside			—				6				—				19
Washington D.C. Area			2				3				6				8
Corporate and Other			5				2				5				5
Total		$	8			$	39			$	12			$	60
Gross Margin ($ millions):
Northern California		$	6			$	6			$	7			$	8
Southland / Los Angeles			10				30				21				33
San Diego / Riverside			8				19				12				38
Washington D.C. Area			4				14				8				36
Corporate and Other			6				5				7				10
Total		$	34			$	74			$	55			$	125
Home closings (units):
Northern California			31				23				43				30
Southland / Los Angeles			70				78				142				97
San Diego / Riverside			61				72				84				119
Washington D.C. Area			72				78				102				186
Corporate and Other			2				11				13				22
Total			236				262				384				454

		Three Months Ended								Six Months Ended
Selected Financial Information		June 30,								June 30,
($ millions)		2007				2006				2007				2006
Average selling price:
Northern California		$	975,000			$	1,164,000			$	931,000			$	1,175,000
Southland / Los Angeles			761,000				827,000				739,000				806,000
San Diego / Riverside			566,000				644,000				593,000				641,000
Washington D.C. Area			488,000				619,000				520,000				594,000
Corporate and Other			718,000				700,000				837,000				696,000
Average		$	655,000			$	739,000			$	674,000			$	695,000
Net new orders (units): (1)
Northern California			34				30				63				45
Southland / Los Angeles			53				91				134				184
San Diego / Riverside			25				54				89				94
Washington D.C. Area			79				76				187				145
Corporate and Other			6				4				10				14
Total			197				255				483				482
Backlog (units at end of period): (2)
Northern California			37				27
Southland / Los Angeles			92				192
San Diego / Riverside			40				57
Washington D.C. Area			160				155
Corporate and other			17				52
Total			346				483
Lots controlled (units at end of period):
Lots owned:
Northern California			1,352				1,318
Southland / Los Angeles			1,393				891
San Diego / Riverside			6,130				6,576
Washington D.C. Area			3,916				3,523
Corporate and Other			143				158
			12,934				12,466
Lots under option			14,639				16,985
Total			27,573				29,451

Three Months and Six Months Ended June 30, 2007 Compared with Three Months and Six Months Ended June 30, 2006

Net Income

Net income was $9 million and $38 million for the three months and six months ended June 30, 2007, a decrease of $34 million and $24 million respectively, when compared to the same periods in 2006. The decrease in net income was due to lower home and lot sales and reduced margins as a result of continued housing market challenges.

Results of Operations

Company-wide: Housing revenue was $155 million and $259 million for the three months and six months ended June 30, 2007, a decrease of $38 million and $56 million respectively, when compared to the same periods in 2006. The decrease in housing revenue was a result of 26 and 70 fewer homes closed during the three months and six months ended June 30, 2007 when compared to the same periods in 2006. The gross margin on housing revenue for the three months ended June 30, 2007 was $28 million or 18% compared with $53 million or 27% for the same period in 2006. The gross margin on housing revenue for the six months ended June 30, 2007 was $48 million or 19% compared with $90 million or 29% for the same period in 2006. The decrease in the gross margin percentage was a result of an increase in homebuyer incentives and product mix.

Land and other revenues totaled $8 million and $12 million for the three months and six months ended June 30, 2007, compared with $39 million and $60 million for the three months and six months ended June 30, 2006. The decrease was primarily the result of 310 fewer lots sold during the three months ended June 30, 2007 when compared to the same period in 2006. The gross margin on land and other revenues totaled $6 million and $7 million for the three months and six months ended June 30, 2007, respectively, compared with $21 million and $35 million for the same periods in 2006.

Our land revenues may vary significantly from period to period due to the timing and nature of land sales as they generally occur on an opportunistic basis and additionally such revenues are also affected by local market conditions.

Northern California: Housing revenue was $30 million and $40 million for the three months and six months ended June 30, 2007, respectively, an increase of $3 million and $5 million when compared to the same periods in 2006. The increase in revenue was primarily attributable to an increase in homes closed. The gross margin on housing revenue for the three months ended June 30, 2007 was $6 million or 19% compared with $6 million or 25% for the same period in 2006. The gross margin on housing revenue for the six months ended June 30, 2007 was $7 million or 18% compared with $8 million or 25% for the same period in 2006. The decrease in the gross margin percentage was a result of an increase in homebuyer incentives and product mix.

Southland / Los Angeles: Housing revenue was $53 million and $105 million for the three months and six months ended June 30, 2007, respectively, a decrease of $11 million and an increase of $27 million when compared to the three months and six months ended June 30, 2006. The decrease when comparing the three months ended June 30, 2007 and 2006 was primarily due to a decrease in homes closed and a decrease in our average selling price. The gross margin on housing revenue for the three months ended June 30, 2007 was $9 million or 18% compared with $14 million or 22% for the same period in 2006. The gross margin on housing revenue for the six months ended June 30, 2007 was $20 million or 19% compared with $17 million or 22% for the same period in 2006.

San Diego / Riverside: Housing revenue was $35 million and $50 million for the three months and six months ended June 30, 2007, respectively, a decrease of $11 million and $26 million when compared to the three months and six months ended June 30, 2006. The decrease was primarily due to a decrease in homes closed. The gross margin on housing revenue for the three months ended June 30, 2007 was $7 million or 21% compared with $16 million or 33% for the same period in 2006. The gross margin on housing revenue for the six months ended June 30, 2007 was $11 million or 23% compared with $26 million or 34% for the same period in 2006.

Washington D.C. Area: Housing revenue was $35 million and $53 million for the three months and six months ended June 30, 2007, respectively, a decrease of $13 million and $57 million when compared to the three months and six months ended June 30, 2006. The decrease was primarily attributable to a decrease in homes closed. The gross margin on housing revenue for the three months ended June 30, 2007 was $4 million or 12% compared with $14 million or 28% for the same period in 2006. The gross margin on housing revenue for the six months ended June 30, 2007 was $7 million or 14% compared with $35 million or 31% for the same period in 2006. The decrease in the gross margin percentage was a result of an increase in homebuyer incentives and product mix.

Other Income and Expenses:

Equity in earnings from housing and land joint venture was nil for the three months and six months ended June 30, 2007, a decrease of $1 million and $2 million when compared to the same period in 2006. During the three months ended June 30, 2007, an impairment charge of $41.7 million was recognized in one of our joint ventures. In calculating our share of the joint venture net loss, we did not require an impairment charge as our carrying value in this joint venture is below our proportionate share of the underlying net assets.

Selling, general and administrative expenses were $18 million and $34 million for the three months and six months ended June 30, 2007, respectively, compared with $2 million and $21 million for the same periods in 2006. Included in selling, general and administrative expense was net stock compensation expense of $1 million and income of $15 million for the three months ended June 30, 2007 and 2006, respectively.

Sales Activity:

Inventories of resale and new homes for the sale are at historic highs and homebuyer confidence has been weak. We had lower than anticipated sales in the months of May and June, resulting in a decrease in net new orders for the three months ended June 30, 2007 to 212 units from 252 units for the same periods in 2006. We are now targeting between 1,000 and 1,100 home closings for 2007. This is approximately a 12% decline from our January, 2007 home closings estimate.

Liquidity and Capital Resources

Financial Position

Our total assets as of June 30, 2007 were $1,386 million, a decrease of $15 million compared to December 31, 2006. The decrease is due primarily to decreases in cash and cash equivalents and deferred taxes, partially offset by an increase in housing and land inventory.

Our total debt as of June 30, 2007 was $655 million, an increase of $37 million compared to December 31, 2006. Total debt as of June 30, 2007 consisted mainly of project specific financings, which represent construction and development loans that are repaid from home and lot sales proceeds. As new homes are constructed, further loan facilities are arranged on a rolling basis. Our major project specific lenders are Bank of America, Housing Capital Corporation, Wells Fargo and Union Bank of California. Other debt includes loans outstanding relating to mortgages we originated that are repaid when the underlying mortgages are sold to permanent lenders, a promissory note due to a subsidiary of our largest stockholder, Brookfield Asset Management Inc., and project specific financings related to our other operations. As of June 30, 2007, the average interest rate on our debt was 7.8% per year, with maturities as follows:

		Maturities
($ millions)		2007				2008				2009				Post 2009				Total
Northern California		$	—			$	100			$	58			$	—			$	158
Southland / Los Angeles			19				32				26				—				77
San Diego / Riverside			36				112				68				8				224
Washington D.C. Area			74				40				34				—				148
Other			3				40				5				—				48
Total		$	132			$	324			$	191			$	8			$	655