<SUBMISSION>
<ACCESSION-NUMBER>0000950147-02-000463
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>3
<PERIOD>20011231
<FILING-DATE>20020327
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>MERITAGE CORP
<CIK>0000833079
<ASSIGNED-SIC>1531
<IRS-NUMBER>860611231
<STATE-OF-INCORPORATION>MD
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-K
<ACT>34
<FILE-NUMBER>001-09977
<FILM-NUMBER>02588768
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>6613 N SCOTTSDALE RD
<STREET2>STE 200
<CITY>SCOTTSDALE
<STATE>AZ
<ZIP>85250
<PHONE>6029988700
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>6613 NORTH SCOTTSDALE ROAD
<STREET2>SUITE200
<CITY>SCOTTSDALE
<STATE>AZ
<ZIP>85250
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>MONTEREY HOMES CORP
<DATE-CHANGED>19970113
</FORMER-COMPANY>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>EMERALD MORTGAGE INVESTMENTS CORP
<DATE-CHANGED>19900502
</FORMER-COMPANY>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>HOMEPLEX MORTGAGE INVESTMENTS CORP
<DATE-CHANGED>19920703
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>e-8318.txt
<DESCRIPTION>ANNUAL REPORT FOR YEAR ENDED 12/31/2001
<TEXT>
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2001

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

              For the transition period from __________to__________

                          Commission File Number 1-9977

                              MERITAGE CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

           Maryland                                               86-0611231
(State or Other Jurisdiction of                                 (IRS Employer
 Incorporation or Organization)                              Identification No.)

  6613 North Scottsdale Road, Suite 200                             85250
         Scottsdale, Arizona                                      (Zip Code)
(Address of Principal Executive Offices)

                                 (480) 998-8700
              (Registrant's Telephone Number, Including Area Code)


           Securities registered pursuant to Section 12(b) of the Act
     Common Stock, $.01 par value                   New York Stock Exchange

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

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days: Yes [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 this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market  value of  common  stock  held by  non-affiliates  of the
registrant  (3,968,028 shares) as of March 15, 2002, was $259,945,514,  based on
the closing sales price per share as reported by the New York Stock  Exchange on
such  date.  For  purposes  of this  computation,  all  executive  officers  and
directors of the Registrant have been deemed to be affiliates.

The number of shares  outstanding of the Registrant's  common stock on March 15,
2002 was 5,660,473.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions from the Registrant's Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 8, 2002 have been  incorporated by reference into
Part III, Items 10, 11, 12 and 13.

================================================================================
<PAGE>
                              MERITAGE CORPORATION
                                    FORM 10-K
                                TABLE OF CONTENTS

                                                                           PAGE
                                                                          NUMBER
PART I

     Item 1. Business......................................................    3

     Item 2. Properties....................................................   10

     Item 3. Legal Proceedings.............................................   10

     Item 4. Submission of Matters to a Vote of Security Holders...........   10

PART II

     Item 5. Market for the Registrant's Common Stock and Related
             Stockholder Matters...........................................   11

     Item 6. Selected Financial Data.......................................   11

     Item 7. Management's Discussion and Analysis of Financial Condition
             and Results of Operations.....................................   12

     Item 7A. Quantitative and Qualitative Disclosures About Market Risk...   23

     Item 8. Financial Statements and Supplementary Data...................   23

     Item 9. Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure......................................   41

PART III

     Item 10. Directors and Executive Officers of the Registrant...........   41

     Item 11. Executive Compensation.......................................   41

     Item 12. Security Ownership of Certain Beneficial Owners
              and Management...............................................   41

     Item 13. Certain Relationships and Related Transactions...............   41

PART IV

     Item 14. Exhibits, Financial Statement Schedules and Reports on
              Form 8-K.....................................................   42

SIGNATURES ................................................................  S-1

                                       2
<PAGE>
                                     PART I

ITEM 1. BUSINESS

     We are a leading designer and builder of single-family homes in the rapidly
growing Sunbelt states of Texas, Arizona and California. We focus on providing a
broad range of  first-time,  move-up and luxury homes to our  targeted  customer
base.  We and our  predecessors  have  operated in Arizona  since 1985, in Texas
since 1987 and in  Northern  California  since 1989.  To expand our  presence in
Arizona, we acquired Hancock Communities,  another well-established  homebuilder
that serves the first-time and move-up markets in the Phoenix area, in 2001.

     We operate in Texas  under the Legacy  Homes  name,  in Arizona as Monterey
Homes,  Meritage Homes and Hancock  Communities,  and in Northern  California as
Meritage  Homes.  At December 31, 2001,  we were  actively  selling  homes in 74
communities,  with base prices  ranging from  $90,000 to  $820,000.  Information
about our active  communities  is  provided  through  our  Internet  web site at
www.meritagehomes.com.  The information on our website is not considered part of
this report.

COMPETITIVE STRENGTHS

     We believe we possess the following competitive strengths:

     CONSERVATIVE  INVENTORY MANAGEMENT.  We seek to minimize land and inventory
risk in order to optimize our use of capital and  maintain low leverage  ratios.
We accomplish this by:

     *    generally purchasing land subject to complete entitlements,  including
          zoning and utility services;
     *    developing  smaller parcels,  generally projects that can be completed
          within a three-year period;
     *    controlling  approximately  70% of our land inventory  through rolling
          options with relatively minimal deposit commitments;
     *    managing  housing  inventory by pre-selling and obtaining  substantial
          customer deposits on our homes prior to starting construction;
     *    limiting speculative home construction; and
     *    minimizing home construction cycles.

     DISCIPLINED FINANCIAL MANAGEMENT. We believe that our disciplined financial
management  policies  enable  us to  achieve  above-average  returns  on  assets
compared to our competitors in the homebuilding industry and maintain reasonable
leverage  ratios.  Our rigorous  investment  requirements for the acquisition of
land enable us to deploy capital  efficiently  and to preserve our cash flow for
debt service.

     SUPERIOR  MARGINS.  Our focus on achieving high margins  results in greater
profitability  during  strong  economic  periods and also  enables us to realize
lower break-even  points and higher pricing  flexibility  during slower economic
periods.  In addition to  maintaining  low overhead  costs,  we actively  manage
construction  costs and pricing and  marketing  strategies  in order to maximize
margins.  We  seek  to  optimize  our  mix of  available  housing  upgrades  and
customization  features to offer the highest  value to  customers  at the lowest
cost.   Within  our  pricing  structure  we  provide  our  sales  and  marketing
professionals   with  the  autonomy  and   flexibility  to  respond  rapidly  to
competitive   offerings  in  our  markets  by  customizing  sales  programs  and
incentives.

     EXPERIENCED  MANAGEMENT TEAM WITH SIGNIFICANT EQUITY OWNERSHIP.  Members of
our  senior  management  team  have  extensive  experience  in the  homebuilding
industry as well as in each of the local  markets  that we serve.  Our  co-chief
executive  officers and senior executives  average over 15 years of homebuilding
experience and each has a successful track record of delivering superior results
in varying  homebuilding  cycles. In addition,  our co-chief  executive officers
together beneficially own approximately 27% of our outstanding common stock.

                                       3
<PAGE>
     PRODUCT  BREADTH.  We  believe  that our  product  breadth  and  geographic
diversity  enhance our growth  potential and help to reduce exposure to economic
cycles.  In Arizona,  we serve the first-time and first and second-time  move-up
markets,  and  beginning  in  2002,  we plan to  begin  delivering  homes in our
active-adult  communities.   We  also  build  for  the  Arizona  luxury  market,
characterized by unique  communities and distinctive  luxury homes. In Texas, we
target the  first-time  and first and second  move-up  markets,  and in Northern
California, we focus on first and second move-up homes.

BUSINESS STRATEGY

     We seek to distinguish ourselves from other production  homebuilders and to
respond rapidly to changing market  conditions  through a business strategy that
incorporates the following:

     FOCUS ON HIGH  GROWTH  MARKETS.  Our  housing  markets are located in three
rapidly growing Sunbelt states. We operate in the Dallas/Ft.  Worth,  Austin and
Houston,  Texas, markets as Legacy Homes, in the  Phoenix/Scottsdale and Tucson,
Arizona,  markets as Monterey Homes,  Meritage Homes and Hancock Communities and
in the East San Francisco Bay and  Sacramento,  California,  markets as Meritage
Homes. These areas are characterized by high job growth and in-migration trends,
creating strong demand for new housing and we believe they represent  attractive
homebuilding  markets with  opportunities  for long-term growth. We also believe
that our  operations in certain  markets are well  established  and that we have
developed  a  reputation  for  building  distinctive  quality  homes  within our
markets.

     MAINTAIN LOW COST  STRUCTURE.  Throughout  our history,  we have focused on
minimizing  construction costs and overhead,  and we believe this attention is a
key factor in maintaining  high cash flow margins and  profitability.  We reduce
costs by:

     *    using  subcontractors  for home construction and site improvement on a
          fixed-price basis;
     *    obtaining  favorable  pricing from  subcontractors  through  long-term
          relationships and high volume;
     *    reducing  interest  carry by  minimizing  our  inventory  of unsold or
          speculative homes and shortening the home construction cycle;
     *    generally beginning  construction on a home once it is under contract,
          we have  received a  satisfactory  earnest money deposit and the buyer
          has obtained approval for a mortgage loan;
     *    minimizing overhead by centralizing certain administrative activities;
          and
     *    monitoring homebuilding  production,  scheduling and budgeting through
          management information systems.

     SUPERIOR  DESIGN,  QUALITY  AND  CUSTOMER  SERVICE.  We believe we maximize
customer  satisfaction  by offering homes that are built with quality  materials
and  craftsmanship,  exhibit  distinctive  design  features  and are situated in
premium  locations.  We believe that we generally  offer higher caliber homes in
their  defined  price  range  or  category   compared  to  those  built  by  our
competitors.  In addition,  we are  committed to achieving  the highest level of
customer  satisfaction as an integral part of our competitive  strategy. As part
of the sales process, our experienced sales personnel keep customers informed of
their  home's  construction   progress.   After  delivery,   our  customer  care
departments respond to homebuyers' questions and warranty matters.

     EXPANSION IN NEW AND EXISTING MARKETS.  Depending on market conditions,  we
may explore expansion opportunities in new or existing geographic areas where we
see an ability to exploit a competitive  advantage.  Expansion may occur through
strategic acquisitions of existing homebuilders,  through start-up operations or
through  internal  growth.  In  pursuing  expansion,  we  explore  markets  with
demographic and other growth characteristics  similar to our current markets and
will pursue the  acquisition of entities with operating  policies and cash flow-
and earnings-focused philosophies similar to ours.

                                       4
<PAGE>
PRODUCTS

     Our homes range from first-time  purchases to semi-custom luxury, with base
prices  ranging  from  $90,000 to  $820,000.  A summary of activity by state and
product type as of and for the year ended December 31, 2001, follows (dollars in
thousands):

<TABLE>
<CAPTION>
                           Number    Average                                                Number of
                          of Homes   Closing    Homes in    Dollar Value    Home Sites       Active
                           Closed     Price      Backlog     of Backlog    Remaining(1)    Communities
                           ------     -----      -------     ----------    ------------    -----------
<S>                       <C>        <C>        <C>         <C>            <C>             <C>
Texas - First-time            532      $149         250      $ 37,073          1,273            11
Texas - Move-up               986       183         441        77,774          3,790            19
Texas - Luxury                 --        --           2           804             82             1
Arizona - First-time          483       124         271        33,977          1,412             3
Arizona - Move-up             638       242         376       103,760          6,016            18
Arizona - Luxury              222       503         129        68,248            423            12
California - Move-up          409       384         133        53,315          1,838            10
                           ------                ------      --------        -------          ----
   Total                    3,270      $227       1,602      $374,951         14,834            74
                           ======                ======      ========        =======          ====
</TABLE>

(1)  "Home Sites  Remaining" - the estimated number of homes that could be built
     both on the remaining lots available for sale and land to be developed into
     lots.

LAND ACQUISITION AND DEVELOPMENT

     We typically option or purchase land only after necessary entitlements have
been obtained so that development or construction may begin as market conditions
dictate.  The term "entitlements"  refers to development  agreements,  tentative
maps or recorded plats,  depending on the jurisdiction  within which the land is
located.  Entitlements generally give the developer the right to obtain building
permits  upon  compliance  with  conditions  that  are  ordinarily   within  the
developer's  control.  Even though entitlements are usually obtained before land
is purchased,  we are still  required to secure a variety of other  governmental
approvals  and  permits  during  development.  The  process  of  obtaining  such
approvals and permits can substantially delay the development  process. For this
reason, we may consider,  on a limited basis,  purchasing unentitled property in
the future when we can do so in a manner consistent with our business strategy.

     We select land for development based upon a variety of factors, including:

     *    internal and external demographic and marketing studies;
     *    project  suitability,  which generally means  developments  with fewer
          than 300 lots;
     *    suitability for development  generally  within a one to four-year time
          period from the beginning of the  development  process to the delivery
          of the last home;
     *    financial  review  as to  the  feasibility  of the  proposed  project,
          including projected profit margins,  returns on capital employed,  and
          the capital payback period;
     *    the ability to secure governmental approvals and entitlements;
     *    results of environmental and legal due diligence;
     *    proximity to local traffic corridors and amenities; and
     *    management's  judgment  as to the  real  estate  market  and  economic
          trends, and our experience in particular markets.

     We occasionally purchase larger properties consisting of 300 to 500 lots or
more if the situation  presents an attractive  profit  potential and  acceptable
risk limitations.

     We acquire land through purchases and rolling option  contracts.  Purchases
are financed through traditional bank financing or working capital. We acquire a
majority of our land through rolling option contracts, which allow us to control
lots and land through third  parties who own or buy  properties on which we plan
to build homes.  We enter into option  contracts to purchase  finished lots from
these third parties as home construction  begins.  These contracts are generally
non-recourse and we generally  require  non-refundable  deposits of 2% to 15% of
the sales price.  At December 31, 2001,  we had  approximately  $45.3 million in
deposits on real estate under option or contract.

                                       5
<PAGE>
     Once we acquire land, we generally initiate development through contractual
agreements  with  subcontractors.  These  activities  include site  planning and
engineering,  as well as constructing road, sewer, water,  utilities,  drainage,
recreation   facilities  and  other   refinements.   We  often  build  homes  in
master-planned  communities  with  home  sites  that  are  along or near a major
amenity, such as a golf course.

     We develop a design and marketing concept for each project,  which includes
determination of size,  style and price range of homes.  For these projects,  we
also  determine  street  layout,  individual  lot size and  layout,  and overall
community  design.  The product line  offered in each project  depends upon many
factors,  including the housing generally  available in the area, the needs of a
particular  market,  and our lot costs for the project;  though we are sometimes
able to use standardized design plans for a product line.

     To a very limited  extent,  we may use  partnerships  or joint  ventures to
purchase and develop land where such  arrangements  are necessary to acquire the
property or appear to be otherwise  economically  advantageous.  At December 31,
2001, we were not involved in any significant partnerships or joint ventures.

     The following table presents information regarding land owned or land under
contract or option by market as of December 31, 2001:

<TABLE>
<CAPTION>
                                    LAND OWNED (1)                      LAND UNDER CONTRACT OR OPTION (1)
                        ---------------------------------------      ----------------------------------------
                                                     LOTS HELD
                                     LOTS UNDER         FOR                       LOTS UNDER    LOTS HELD FOR
                        FINISHED     DEVELOPMENT    DEVELOPMENT      FINISHED     DEVELOPMENT    DEVELOPMENT
                          LOTS       (ESTIMATED)    (ESTIMATED)        LOTS       (ESTIMATED)    (ESTIMATED)       TOTAL
                          ----       -----------    -----------        ----       -----------    -----------       -----
<S>                      <C>         <C>            <C>              <C>          <C>           <C>                <C>
TEXAS:
Dallas/Ft. Worth            515          2,020             --            203            730             --          3,468
Austin                       47            110             --            143            416             --            716
Houston                     205            260             --             32            607             --          1,104
                         ------         ------         ------         ------         ------         ------         ------
Total Texas                 767          2,390             --            378          1,753             --          5,288
                         ------         ------         ------         ------         ------         ------         ------
ARIZONA:
Phoenix/Scottsdale          632            251             --            612          1,540          2,569          5,604
Tucson                      144             --             --            552            397          1,259          2,352
                         ------         ------         ------         ------         ------         ------         ------
Total Arizona               776            251             --          1,164          1,937          3,828          7,956
                         ------         ------         ------         ------         ------         ------         ------
CALIFORNIA:
Sacramento                   53             --             --            270            267             --            590
East San Francisco
  Bay                        72             --             77            208            696            110          1,163
                         ------         ------         ------         ------         ------         ------         ------
Total California            125             --             77            478            963            110          1,753
                         ------         ------         ------         ------         ------         ------         ------
TOTAL                     1,668          2,641             77          2,020          4,653          3,938         14,997
                         ======         ======         ======         ======         ======         ======         ======
</TABLE>

(1)  Excludes lots with finished homes or homes under construction.

CONSTRUCTION OPERATIONS

     We  are  the  general  contractor  for  our  projects  and  typically  hire
subcontractors on a project-by-project or reasonable  geographic-proximity basis
to complete construction at a fixed price. We usually enter into agreements with
subcontractors  and materials  suppliers after receiving  competitive bids on an
individual  basis. We obtain  information  from prospective  subcontractors  and
suppliers with respect to their financial condition and ability to perform their
agreements before formal bidding begins. Occasionally, we enter into longer-term
contracts  with  subcontractors  and  suppliers if we can obtain more  favorable
terms.  Our project  managers  and field  superintendents,  who  coordinate  and
supervise  the  activities  of   subcontractors   and  suppliers,   subject  the
development  and  construction  work to quality  and cost  controls,  and assure
compliance with zoning and building codes. At December 31, 2001, we employed 251
construction operations personnel.

                                       6
<PAGE>
     We specify that quality,  durable  materials be used in construction of our
homes and we do not maintain significant  inventories of construction materials,
except  for  work in  process  materials  for  homes  under  construction.  When
possible,  management  negotiates price and volume discounts with  manufacturers
and suppliers on behalf of its  subcontractors  to take  advantage of production
volume.  Historically,  access to our principal subcontracting trades, materials
and supplies has been readily available in each of our markets. Prices for these
goods and services may fluctuate due to various  factors,  including  supply and
demand shortages that may be beyond the control of our vendors.  We believe that
we have strong relationships with our suppliers and subcontractors.

     We generally  build and sell homes in clusters or phases  within our larger
projects,  which  we  believe  creates  efficiencies  in  land  development  and
construction,  and  improves  customer  satisfaction  by reducing  the number of
vacant lots  surrounding a completed  home.  Our homes are  typically  completed
within four to twelve months from the start of construction, depending upon home
size  and  complexity.   Construction   schedules  may  vary  depending  on  the
availability  of labor,  materials  and  supplies,  product  type,  location and
weather.  Our homes are usually  designed to promote  efficient use of space and
materials, and to minimize construction costs and time. We do not enter into any
weather or materials commodity futures derivative contracts.

MARKETING AND SALES

     We believe  that we have an  established  reputation  for  developing  high
quality homes,  which helps generate  interest in each new project.  We also use
advertising   and  other   promotional   activities,   including   our   website
(meritagehomes.com),  magazine and newspaper advertisements,  brochures,  direct
mailings,  and the  placement of  strategically  located  signs in the immediate
areas of our developments.

     We use  furnished  model homes as tools in  demonstrating  the  competitive
advantages of our home designs and various  features to prospective  homebuyers.
We generally  employ or contract with  interior and landscape  designers who are
responsible for creating an attractive model home for each product line within a
project.  We  generally  build  between one and four model homes for each active
community, depending upon the number of homes to be built in the project and the
products  to be offered.  At times,  we sell our model homes and lease them back
from buyers who purchased the homes for investment purposes or who do not intend
to move in immediately. A summary of model homes owned or leased at December 31,
2001, follows:

                     MODEL HOMES    MODEL HOMES    MONTHLY LEASE    MODELS UNDER
                        OWNED       LEASED BACK       AMOUNT        CONSTRUCTION
                        -----       -----------       ------        ------------
Texas                     41             --                --              5
Arizona                   33             74          $160,700             12
California                --             36            56,000             --
                        ----           ----          --------           ----
     Total                74            110          $216,700             17
                        ====           ====          ========           ====

     Our homes  generally  are sold by  full-time,  commissioned  employees  who
typically  work from a sales office located in the model homes for each project.
At December 31, 2001, we had 127 sales and marketing  employees.  Our goal is to
ensure that the sales force has extensive  knowledge of our  operating  policies
and housing  products.  To achieve this goal,  we train our sales  personnel and
conduct  periodic  meetings  to  update  them on sales  techniques,  competitive
products in the area, financing availability,  construction schedules, marketing
and advertising plans, and the available product lines,  pricing,  options,  and
warranties  offered.  Sales  personnel  are  licensed  real estate  agents where
required by law. Independent brokers also sell our homes, and are usually paid a
sales  commission based on the price of the home. Our sales personnel assist our
customers in selecting upgrades or in adding available customization features to
their  homes.  We attempt to present our  available  upgrade  and  customization
options to appeal to local  consumer  demands while at the same time  minimizing
our costs.  Occasionally we offer various sales incentives,  such as landscaping
and certain interior home  improvements,  to attract buyers. The use and type of
incentives depends largely on economic and competitive market conditions.

                                       7
<PAGE>
BACKLOG

     Most of our home  sales are made  under  standard  sales  contracts  signed
before  construction of the home begins. The contracts require  substantial cash
deposits and are usually  subject to certain  contingencies  such as the buyer's
ability to qualify for financing.  Homes covered by such sales contracts but not
yet  closed  are  considered  "backlog."  Sales  contingent  upon  the sale of a
customer's  existing  home are not  included  as new sales  contracts  until the
contingency  is removed.  We do not  recognize  revenue  upon the sale of a home
until it is delivered to the  homebuyer  and other  criteria for sale and profit
recognition are met. We sometimes build homes before obtaining a sales contract,
however, these homes are excluded from backlog until a sales contract is signed.
At December 31, 2001,  17.5% of our homes under  construction  were  speculative
homes,  and there were 24 completed  speculative  homes in inventory at December
31, 2001. We believe we will deliver almost all homes in backlog at December 31,
2001 to customers during 2002.

     Our  backlog  increased  to 1,602  units with a value of $375.0  million at
December  31, 2001 from 1,246  units with a value of $309.9  million at December
31, 2000.  These  increases are primarily  due to  additional  communities  that
opened for sale in 2001, along with a strong demand for homes.

CUSTOMER FINANCING

      We attempt to help qualified  homebuyers  who require  financing to obtain
loans  from  mortgage  lenders  that offer a variety of  financing  options.  We
provide  mortgage-broker  services in some of our markets through a wholly owned
subsidiary, which originates loans on behalf of third party lenders, and through
joint ventures with independent mortgage banking companies.  In other markets we
use unaffiliated preferred mortgage lenders. We may pay a portion of the closing
costs and discount  mortgage points to assist  homebuyers with financing.  We do
not service or fund the mortgages we originate,  and therefore do not assume the
risks associated with a mortgage  servicing  business.  Since many customers use
long-term  mortgage  financing to purchase homes,  adverse economic  conditions,
increases in unemployment and rising mortgage interest rates may deter or reduce
the number of potential homebuyers.

CUSTOMER RELATIONS, QUALITY CONTROL AND WARRANTY PROGRAMS

     We believe that positive  customer  relations and an adherence to stringent
quality  control  standards are fundamental to continued  success,  and that our
commitment  to  buyer   satisfaction  and  quality  control  has   significantly
contributed to our reputation as a high quality builder.

     A  Meritage  project  manager  or  project  superintendent  and a  customer
relations  representative  generally  oversee  compliance  with quality  control
standards  for each  development.  These  representatives  perform the following
tasks:

     *    oversee home construction;
     *    oversee subcontractor and supplier performance;
     *    review the  progress of each home and conduct  formal  inspections  as
          specific stages of construction are completed; and
     *    regularly update buyers on the progress of their homes.

     We  generally  provide a  one-year  limited  warranty  on  workmanship  and
building  materials  with  each  home.  As  subcontractors  usually  provide  an
indemnity and a certificate of insurance before beginning work,  claims relating
to  workmanship  and  materials  are  generally  the   subcontractors'   primary
responsibility.  Reserves for future  warranty  costs are  established  based on
historical  experience within each division or region, and are recorded when the
homes are  delivered.  Reserves  range from 0.3% to 0.5% of a home's sale price.
Historically, these reserves have been sufficient to cover warranty repairs.

                                       8
<PAGE>
COMPETITION AND MARKET FACTORS

     The  development and sale of residential  property is a highly  competitive
industry.  We compete for sales in each of our markets with national,  regional,
and local developers and  homebuilders,  existing home resales,  and to a lesser
extent,  condominiums  and rental  housing.  Some competitor  homebuilders  have
significantly  greater  financial  resources,  lower costs and/or more favorable
land positions than we do.  Competition  among both small and large  residential
homebuilders is based on a number of interrelated  factors,  including location,
reputation,  amenities,  design,  quality and price.  We believe that we compare
favorably to other homebuilders in the markets in which we operate due to our:

     *    experience  within our  geographic  markets which allows us to develop
          and offer new products;
     *    ability  to  recognize  and  adapt  to  changing  market   conditions,
          including from a capital and human resource perspective;
     *    ability to  capitalize on  opportunities  to acquire land on favorable
          terms; and
     *    reputation for outstanding service and quality products.

     The  homebuilding   industry  is  cyclical  and  is  affected  by  consumer
confidence levels, job availability,  general economic conditions,  and interest
rates.  Other  factors  affecting the  homebuilding  industry and demand for new
homes are changes in costs  associated  with home ownership such as increases in
property taxes and energy costs,  changes in consumer  preferences,  demographic
trends,  availability  of and changes in mortgage  financing  programs,  and the
availability  and cost of land and building  materials.  Any slowing in new home
sales would increase  competition among  homebuilders in our market areas. There
is no  assurance  that we will be able to  compete  successfully  against  other
homebuilders in our current markets in a more competitive  business  environment
or that such increased  competition  will not have a material  adverse affect on
our business and operating results.

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

     We  option  or  purchase  most of our land  after  entitlements  have  been
obtained,  which  provide for zoning and utility  services to project  sites and
give us the right to obtain  building  permits.  Construction  may begin  almost
immediately on such entitled land upon  compliance with and receipt of specified
permits, approvals and other conditions, which generally are within our control.
The time needed to obtain such approvals and permits  affects the carrying costs
of unimproved property acquired for development and construction.  The continued
effectiveness  of permits  already granted is subject to factors such as changes
in government  policies,  rules and regulations,  and their  interpretation  and
application. To date, the government approval processes discussed above have not
had a material adverse effect on our development  activities,  although there is
no assurance that these and other  restrictions will not adversely affect future
operations.

     Local and state governments have broad discretion  regarding the imposition
of  development  fees for  projects  under their  jurisdictions.  These fees are
normally  established  when we receive  recorded maps and building  permits.  In
addition, communities occasionally impose construction moratoriums. Because most
of our land is entitled,  construction  moratoriums generally would affect us if
they arose from health,  safety or welfare issues,  such as insufficient  water,
electric  or sewage  facilities.  We could  become  subject  to delays or may be
precluded entirely from developing communities due to building moratoriums,  "no
growth" or "slow growth"  initiatives or building permit allocation  ordinances,
which could be implemented in the future.

     We are also  subject to a variety of local,  state,  and federal  statutes,
ordinances,  rules and  regulations  concerning the protection of health and the
environment.  In some markets, we are subject to environmentally  sensitive land
ordinances  that  mandate  open space  areas  with  public  elements  in housing
developments, and prevent development on hillsides, wetlands and other protected
areas.  We must also  comply  with flood  plain  restrictions,  desert wash area
restrictions,  native  plant  regulations,  endangered  species  acts  and  view
restrictions.  These and similar  laws may result in delays,  cause  substantial
compliance  and other costs,  and prohibit or severely  restrict  development in
certain  environmentally  sensitive  regions or areas. To date,  compliance with
such ordinances has not materially  affected our operations,  although it may do
so in the future.

                                       9
<PAGE>
     We usually will condition our obligation to option or purchase property on,
among other things,  an  environmental  review of the land. To date, we have not
incurred any unanticipated  liabilities relating to the removal of unknown toxic
wastes or other environmental  matters.  However,  there is no assurance that we
will not incur  material  liabilities  in the  future  relating  to toxic  waste
removal or other  environmental  matters  affecting land currently or previously
owned.

BONDS AND OTHER OBLIGATIONS

     We obtain letters of credit and performance,  maintenance,  and other bonds
in support of our related  obligations  with respect to the  development  of our
projects.  The amount of these  obligations  outstanding  at any time  varies in
accordance  with  pending  development  activities.  In the  event  the bonds or
letters are drawn upon,  we would be obligated  to  reimburse  the issuer of the
bond or letter of credit. At December 31, 2001, there were  approximately  $12.2
million in outstanding  letters of credit and $46.1 million in performance bonds
for such  purposes.  We do not  believe  that any of these  bonds or  letters of
credit are likely to be drawn upon.

EMPLOYEES AND SUBCONTRACTORS

     At December 31, 2001, we had 570 employees, including 192 in management and
administration,  127 in sales and marketing, and 251 in construction operations.
Our employees  are not  unionized,  and we believe that we have strong  employee
relationships.  We act  solely  as a  general  contractor  and all  construction
operations are conducted through project managers and field  superintendents who
manage  third  party   subcontractors.   We  use  independent   contractors  for
construction,  architectural  and advertising  services,  and we believe that we
have strong relationships with our subcontractors and independent contractors.

ITEM 2. PROPERTIES

     We lease  approximately  14,000 square feet of office space in  Scottsdale,
Arizona  and a 13,000  square foot  office in Plano,  Texas,  which serve as our
corporate offices.  The Scottsdale lease expires in August 2004. The Plano lease
expires in May 2002 and the building is leased from a company owned beneficially
by one of our  co-chairmen.  We believe that the Plano lease rate is competitive
with rates for  comparable  space in the area and terms of the lease are similar
to those we could obtain in an arm's length transaction.  In addition,  we lease
approximately  35,200  square feet of office space for our  operating  divisions
under leases expiring between April 2002, and March 2007.

     As of December 31, 2001,  we also had leases for 110 model homes at a total
monthly lease amount of  approximately  $216,700.  The leases have terms ranging
from three months to 27 months, with various renewal options.

ITEM 3. LEGAL PROCEEDINGS

     We are involved in various  routine  legal  proceedings  incidental  to our
business,  some of which are covered by insurance. We believe that none of these
matters  will have a material  adverse  impact upon our  financial  condition or
results of operations.

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

     We did not submit any matters to a vote of  stockholders  during the fourth
quarter of 2001.

                                       10
<PAGE>
                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

GENERAL

     Our common stock is traded on the New York Stock  Exchange  ("NYSE")  under
the symbol  "MTH".  The high and low sales  prices of the  common  stock for the
periods indicated, as reported by the NYSE, follow:

                             2001                2000
                       ---------------     ---------------
                        HIGH     LOW        HIGH     LOW
                       ------   ------     ------   ------
First Quarter          $48.00   $27.40     $11.50   $ 8.88
Second Quarter         $53.75   $26.10     $12.00   $ 9.75
Third Quarter          $59.96   $27.50     $18.25   $10.69
Fourth Quarter         $52.98   $34.00     $41.25   $18.25

     On March 15, 2002,  the closing sales price of the common stock as reported
by the NYSE was $61.50 per share.  At that date,  there were  approximately  205
owners of record.  There are  approximately  2,600  beneficial  owners of common
stock.

     The transfer agent for our common stock is Mellon Investor Services LLC, 85
Challenger Road, Ridgefield Park, NJ 07660. (www.melloninvestor.com)

     We did not declare cash  dividends in 2001,  2000 or 1999, nor do we intend
to declare cash dividends in the foreseeable  future.  Earnings will be retained
to finance the continuing development of the business. Future cash dividends, if
any, will depend upon our financial  condition,  results of operations,  capital
requirements,   compliance  with  debt  covenants,  as  well  as  other  factors
considered relevant by our Board of Directors.

FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE

     The performance of our common stock depends upon several factors, including
those listed  below and in  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Our Future Results
and Financial Condition."

     The market  price of our  common  stock  could be  subject  to  significant
fluctuations in response to certain  factors,  such as variations in anticipated
or actual  results of our  operations or that of other  homebuilding  companies,
changes in conditions affecting the general economy,  widespread industry trends
and  analysts'  reports,  changes in interest  rates,  as well as other  factors
unrelated to our operating results.

ITEM 6. SELECTED FINANCIAL DATA

     The following table presents selected historical consolidated financial and
operating data of Meritage  Corporation  and  subsidiaries as of and for each of
the last five years ended December 31, 2001. The financial data has been derived
from our  consolidated  financial  statements  and related notes audited by KPMG
LLP,  independent  auditors.  For additional  information,  see the consolidated
financial  statements included elsewhere in this Annual Report on Form 10-K. The
following table should be read in conjunction with  Management's  Discussion and
Analysis of Financial Condition and the Results of Operations.  These historical
results may not be indicative of future results.

     The  data  below  includes  the   operations  of  Legacy  Homes,   Sterling
Communities and Hancock  Communities since their respective dates of combination

                                       11
<PAGE>
or acquisition. Those dates are as follows: Legacy Homes, combined in July 1997;
Sterling Communities,  acquired July 1998; and Hancock Communities, acquired May
2001.

<TABLE>
<CAPTION>
                                                        HISTORICAL CONSOLIDATED FINANCIAL DATA
                                                                YEARS ENDED DECEMBER 31,
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                            -------------------------------------------------------------
                                               2001         2000         1999         1998         1997
                                            ---------    ---------    ---------    ---------    ---------
<S>                                         <C>          <C>          <C>          <C>          <C>
STATEMENT OF EARNINGS DATA:
Total sales revenue                         $ 744,174    $ 520,467    $ 341,786    $ 257,113    $ 149,630
Total cost of sales                          (586,914)    (415,649)    (277,287)    (205,188)    (124,594)
                                            ---------    ---------    ---------    ---------    ---------
  Gross profit                                157,260      104,818       64,499       51,925       25,036
Earnings from mortgage assets and other
  income, net(1)                                2,884        1,847        2,064        3,961        5,435
Commissions and other sales costs             (41,085)     (28,680)     (19,243)     (14,292)      (8,295)
General and administrative expenses           (35,723)     (21,215)     (15,100)     (10,632)      (6,812)

Interest expense                                   --           (8)          (6)        (462)        (165)
                                            ---------    ---------    ---------    ---------    ---------
Earnings before income taxes and
  extraordinary items                          83,336       56,762       32,214       30,500       15,199
Income taxes(2)                               (32,444)     (21,000)     (13,269)      (6,497)        (962)
Extraordinary items, net of tax effect(3)        (233)          --           --           --           --
                                            ---------    ---------    ---------    ---------    ---------
     Net earnings                           $  50,659    $  35,762    $  18,945    $  24,003    $  14,237
                                            =========    =========    =========    =========    =========
Net earnings per common share(4)
     Basic                                  $    9.55    $    6.92    $    3.49    $    4.51    $    2.93
     Diluted                                $    8.60    $    6.26    $    3.14    $    3.92    $    2.68

BALANCE SHEET DATA (END OF YEAR):
Real estate                                 $ 330,238    $ 211,307    $ 171,012    $ 104,759    $  63,955
Total assets                                  436,715      267,075      226,559      152,250       96,633
Notes payable                                 177,561       86,152       85,937       37,205       22,892
Total liabilities                             260,128      145,976      136,148       79,971       50,268
Stockholders' equity                          176,587      121,099       90,411       72,279       46,365

SUPPLEMENTAL FINANCIAL DATA:
Cash provided by (used in):
  Operating activities                      $ (19,847)   $   6,252    $ (36,387)   $  (2,366)   $   6,676
  Investing activities                        (73,029)      (8,175)      (9,902)      (3,928)      11,073
  Financing activities                         91,862       (7,102)      47,324       10,436      (25,072)
</TABLE>

(1)  Earnings from mortgage  assets that were obtained from our  predecessor and
     disposed of in 1998 and 1997 are not applicable for 2001, 2000 and 1999.
(2)  Due to the use of our net operating loss  carryforward  (NOL) obtained from
     our  predecessor,  we paid limited income taxes during 1998 and 1997, until
     the NOL was fully utilized.
(3)  The 2001 amount reflects the net effect of  extraordinary  items from early
     extinguishments of long-term debt.
(4)  2001 earnings per share are shown after a $0.04 loss from the extraordinary
     items. Basic and diluted earnings per share before the extraordinary  items
     were $9.59 and $8.64, respectively.

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

     The following discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements,  which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States of  America.  The  preparation  of these  consolidated  financial
statements requires us to make a number of estimates and assumptions that affect
the reported amounts and disclosures in the consolidated  financial  statements.
On an ongoing  basis,  we evaluate  our  estimates  and  assumptions  based upon
historical  experience and various other factors and  circumstances.  We believe
that our estimates and assumptions are reasonable in the circumstances; however,

                                       12
<PAGE>
actual results may differ from these estimates and  assumptions  under different
future conditions.

     The  accounting  policies that we deem most critical to us, and involve the
most difficult,  subjective or complex judgments, include our estimates of costs
to  complete  our  individual  developments,  the  ultimate  recoverability  (or
impairment) of these costs,  the likelihood of closing lots held under option or
contract and the ability to estimate expenses and accruals,  including legal and
warranty reserves. Should we under or over estimate costs to complete individual
projects,  gross  margins in a  particular  period  could be  misstated  and the
ultimate recoverability of costs related to a project from individual home sales
may be uncertain. Furthermore,  non-refundable deposits paid for land options or
contracts  may  have no  economic  value  to us if the  land  is not  ultimately
purchased.  Finally,  our inability to accurately  estimate expenses or accruals
could result in charges or income in the future results of operations related to
activities or transactions in a preceding period.

     We acquired  Hancock  Communities,  a homebuilder  in the Phoenix,  Arizona
metropolitan  area,  on May 31, 2001.  The results  discussed  below include the
operations of Hancock Communities since its date of acquisition.

     The results  presented below are not necessarily  indicative of those to be
expected in the future.

HOME SALES REVENUE, SALES CONTRACTS AND NET SALES BACKLOG

     The tables  provided  below show operating and financial data regarding our
homebuilding activities.

                                                     YEARS ENDED DECEMBER 31,
                                                 ------------------------------
                                                   2001       2000       1999
                                                 --------   --------   --------
HOME SALES REVENUE                                     ($ IN THOUSANDS)
Total
   Dollars                                       $742,576   $515,428   $334,007
   Homes closed                                     3,270      2,227      1,643
   Average sales price                           $  227.1   $  231.4   $  203.3

Texas
   Dollars                                       $259,725   $214,472   $174,850
   Homes closed                                     1,518      1,239      1,135
   Average sales price                           $  171.1   $  173.1   $  154.1

Arizona
   Dollars                                       $325,918   $175,674   $120,909
   Homes closed                                     1,343        623        400
   Average sales price                           $  242.7   $  282.0   $  302.3

California
   Dollars                                       $156,933   $125,282   $ 38,248
   Homes closed                                       409        365        108
   Average sales price                           $  383.7   $  343.2   $  354.1

SALES CONTRACTS
Total
   Dollars                                       $700,104   $604,444   $388,158
   Homes ordered                                    3,016      2,480      1,840
   Average sales price                           $  232.1   $  243.7   $  211.0

Texas
   Dollars                                       $255,811   $240,054   $191,655
   Homes ordered                                    1,516      1,368      1,198
   Average sales price                           $  168.7   $  175.5   $  160.0

                                       13
<PAGE>

Arizona
   Dollars                                       $309,170   $196,567   $127,408
   Homes ordered                                    1,165        643        436
   Average sales price                           $  265.4   $  305.7   $  292.2

California
   Dollars                                       $135,123   $167,823   $ 69,095
   Homes ordered                                      335        469        206
   Average sales price                           $  403.4   $  357.8   $  335.4


                                                          DECEMBER 31,
                                                 ------------------------------
                                                   2001       2000       1999
                                                 --------   --------   --------
NET SALES BACKLOG                                      ($ IN THOUSANDS)
Total
   Dollars                                       $374,951   $309,901   $199,445
   Homes in backlog                                 1,602      1,246        885
   Average sales price                           $  234.1   $  248.7   $  225.4

Texas
   Dollars                                       $115,651   $119,564   $ 93,983
   Homes in backlog                                   693        695        566
   Average sales price                           $  166.9   $  172.0   $  166.0

Arizona
   Dollars                                       $205,985   $115,211   $ 72,878
   Homes in backlog                                   776        344        216
   Average sales price                           $  265.4   $  334.9   $  337.4

California
   Dollars                                       $ 53,315   $ 75,126   $ 32,584
   Homes in backlog                                   133        207        103
   Average sales price                           $  400.9   $  362.9   $  316.3

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     HOME SALES REVENUE. The increases in total home sales revenue and number of
homes closed in 2001  compared to 2000  resulted  mainly from the strong  market
activity  at the time the  orders for these  closings  were taken in some of our
divisions, continued growth in our mid-priced communities in Arizona and the May
2001 addition of Hancock Communities to our Phoenix operations.  These increases
were somewhat offset by decreases in closings in our Monterey Phoenix and Austin
divisions in 2001, due to weaker demand in the luxury price segment and a weaker
local economy, respectively. Hancock contributed 673 closings with a sales value
of  approximately  $122.5 million to our 2001 results.  The decreases in average
home sales  prices in Arizona for the year 2001  reflect a change in our product
mix, as we are now selling  more  first-time  and first and second time  move-up
homes than in 2000, due in large part to the Hancock acquisition.

     SALES  CONTRACTS.  Sales  contracts for any period  represent the aggregate
sales price of all homes ordered by customers,  net of cancellations.  We do not
include sales contingent upon the sale of a customer's  existing home as a sales
contract until the contingency is removed. Contributing to the increase in sales
contracts for the year 2001 from the previous  year were 484 new contracts  from
Hancock Communities  acquisition along with strong markets early in the year. As
a  whole,  we  benefited  from  low  mortgage  interest  rates,   generally  low
unemployment  figures and  improved  home  affordability  early in 2001.  We saw
declines in new orders in our Monterey Phoenix,  Northern  California and Austin
divisions  in 2001,  and  believe  this is due to a slowing in demand for luxury
homes and weaker local economies in the Northern  California and Austin markets.
Historically, we have experienced a cancellation rate approximating 25% of gross
sales, which we believe is consistent with industry norms.

                                       14
<PAGE>
     NET SALES BACKLOG.  Backlog  represents  net sales  contracts that have not
closed.  Total dollar  backlog at December 31, 2001  increased 21% over the 2000
amount due to a 29%  increase in the number of homes in backlog  from  increased
homes sales over last year and  increased  sales  prices in some of our markets.
The  increase  in  the  number  of  homes  resulted   mainly  from  our  Hancock
acquisition,  which  contributed  421 homes with a sales value of  approximately
$84.9  million to our  December  31,  2001,  backlog.  Backlog  in our  Monterey
Phoenix,  Northern  California and Austin  divisions  decreased in 2001 due to a
slowing in demand for  higher-priced  homes and weaker  local  economies  in the
Northern California and Austin markets.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

     HOME SALES REVENUE.  The increase in total home sales revenue and number of
homes  closed in 2000  compared  to 1999  resulted  mainly  from  strong  market
performance in all of our divisions,  as well as the expansion of our operations
in  Northern  California  and in our  mid-priced  Meritage  Phoenix  division in
Arizona.  The  decreases  in average  home sales  prices in Arizona and Northern
California for the year 2000 reflect a change in our product mix, as we are sold
more mid-priced homes in 2000 than in 1999.

     SALES CONTRACTS.  Total sales contracts  increased in 2000 compared to 1999
due mainly to the  expansion of our  operations in Northern  California  and our
mid-priced  Meritage Phoenix division in Arizona,  along with continued economic
strength of our operating markets during 2000.

     NET SALES BACKLOG. Total dollar backlog at December 31, 2000, increased 55%
over the 1999  amount due to an  increase  in the number of homes in backlog and
increased sales prices in most of our markets.  Homes in backlog at December 31,
2000,  increased  41% over the same  period in the prior year.  These  increases
resulted from  expansion of our  operations in Northern  California,  and in our
mid-priced  Meritage  Phoenix  division  in  Arizona,  along with the  continued
strength of our other markets during 2000.

OTHER OPERATING INFORMATION

                                              YEARS ENDED DECEMBER 31,
                                          -------------------------------
                                            2001        2000        1999
                                          --------    --------    -------
HOME SALES GROSS PROFIT                           ($ IN THOUSANDS)

Dollars                                   $157,136    $104,225    $63,810
Percent of home sales revenue                 21.2%       20.2%      19.1%

COMMISSIONS AND OTHER SALES COSTS
Dollars                                   $ 41,085    $ 28,680    $19,243
Percent of home sales revenue                  5.5%        5.6%       5.8%

GENERAL AND ADMINISTRATIVE EXPENSES
Dollars                                   $ 35,723    $ 21,215    $15,100
Percent of total revenue                       4.8%        4.1%       4.4%

INCOME TAXES
Dollars                                   $ 32,444    $ 21,000    $13,269
Percent of earnings before income taxes
and extraordinary items                       38.9%       37.0%      41.2%

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     HOME SALES GROSS  PROFIT.  Home sales gross  profit  represents  home sales
revenue,  net of cost of home sales,  which include  developed  lot costs,  home
construction  costs,  an  allocation  of common  community  costs (such as model
complex costs and architectural,  legal and zoning costs),  interest, sales tax,
warranty,  construction overhead and closing costs. The dollar increase in gross
profit for the year ended December 31, 2001, is attributable to the 47% increase
in the number of 2001 home closings over 2000 closings and to the strong housing
demand in our  markets at the time these  homes were sold.  We were also able to
benefit  from a reasonably  favorable  market for home  construction  materials,

                                       15
<PAGE>
which  resulted in lower  construction  cost  increases  than  incurred in prior
years.

     COMMISSIONS AND OTHER SALES COSTS.  Commissions and other sales costs, such
as advertising and sales office expenses,  were approximately  $41.1 million, or
5.5% of home sales revenue in 2001, as compared to approximately  $28.7 million,
or 5.6% of home sales revenue in 2000. The slight  decrease in these expenses as
a percentage of home sales revenue reflects greater  efficiencies in controlling
costs.

     GENERAL AND ADMINISTRATIVE  EXPENSES.  General and administrative  expenses
were approximately  $35.7 million, or 4.8% of total revenue in 2001, as compared
to  approximately  $21.2  million,  or 4.1% of total revenue in 2000. The higher
expense as a percentage  of total revenue in 2001 in comparison to 2000 resulted
from an  increase  in  insurance  costs and  increased  overhead  related to our
Hancock acquisition.  In addition, the increase in the number of closings in our
Northern  California  region in 2001 resulted in a greater  earn-out payment per
the terms of the purchase contract when we acquired the division.  The earn-out,
which  terminates in June 2002, is calculated based on 20 percent of the pre-tax
earnings of the Northern California region after reduction for a capital charge.

     INCOME  TAXES.  The increase in income taxes to $32.4  million for the year
ended  December 31, 2001,  from $21.0 million in the prior year resulted from an
increase in pre-tax  income.  The tax benefit  associated  with the  exercise of
employee stock options reduced taxes  currently  payable by  approximately  $2.5
million for the year ended December 31, 2001, which resulted in a more favorable
tax rate. The tax benefit was credited to additional paid-in capital.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

     HOME SALES GROSS PROFIT.  The dollar  increase in gross profit for the year
ended  December 31,  2000,  is  attributable  to the increase in number of homes
closed and  continued  growth in all of our  markets in 2000.  The gross  profit
percentage increase in 2000 resulted from home-pricing  increases in many of our
communities due to a continued strong  homebuilding  market and due to decreases
in some of our costs of materials resulting from purchasing efficiencies.

     COMMISSIONS  AND OTHER SALES COSTS.  Commissions and other sales costs were
approximately  $28.7 million, or 5.6% of home sales revenue in 2000, as compared
to  approximately  $19.2  million,  or 5.8% of home sales  revenue in 1999.  The
decrease  in these  expenses  as a  percentage  of home sales  revenue  reflects
greater efficiency related to economies of scale resulting from revenue growth.

     GENERAL AND ADMINISTRATIVE  EXPENSES.  General and administrative  expenses
were approximately  $21.2 million, or 4.1% of total revenue in 2000, as compared
to  approximately  $15.1  million,  or 4.4% of total revenue in 1999. The higher
expense  as a  percentage  of revenue in 1999  includes  approximately  $600,000
related to the buyout of an employment  agreement of a former managing director.
Operating  costs in 1999 were also  higher as a  percentage  of  revenue  due to
overhead increases incurred related to our California expansion and the start-up
of our new Meritage division in Phoenix, Arizona.

     INCOME  TAXES.  The increase in income taxes to $21.0  million for the year
ended  December 31, 2000,  from $13.3 million in the prior year resulted from an
increase in pre-tax income,  partially  offset by a slightly lower effective tax
rate.  The tax benefit  associated  with the exercise of employee  stock options
reduced taxes currently payable by approximately $1.9 million for the year ended
December 31, 2000. This amount was credited to additional paid in capital.

LIQUIDITY AND CAPITAL RESOURCES

     Our principal uses of working capital are land  purchases,  lot development
and home construction. We use a combination of borrowings and funds generated by
operations to meet short-term  working capital  requirements and we issue equity
or debt in order to meet long-term capital requirements.

     Cash  flow  for  each  of our  communities  depends  on the  status  of the
development cycle, and can differ  substantially  from reported earnings.  Early
stages of development  or expansion  require  significant  cash outlays for land

                                       16
<PAGE>
acquisitions,  plat and other approvals, and construction of model homes, roads,
certain utilities,  general landscaping and other amenities. Because these costs
are capitalized,  income reported for financial  statement purposes during those
early  stages  may  significantly   exceed  cash  flow.  Later,  cash  flow  can
significantly exceed earnings reported for financial statement purposes, as cost
of sales includes charges for substantial amounts of previously expended costs.

     At December 31, 2001,  we had  short-term  secured  revolving  construction
loans and  acquisition and development  facilities  totaling $175.0 million,  of
which approximately $16.2 million was outstanding.  An additional $128.4 million
of unborrowed  funds  supported by approved  collateral were available under our
credit  facilities at that date,  subject to  compliance  with the financial and
other covenants in our loan agreements. This additional borrowing was limited to
approximately $93 million under such loan covenants at December 31, 2001.

     On May 30, 2001, we issued $165 million in principal amount of 9.75% senior
notes due June 1, 2011.  Approximately  $66 million of this offering was used to
complete the acquisition of the assets and  liabilities of Hancock  Communities,
approximately $78 million was used to pay down existing bank debt, approximately
$5.1  million  was  used  to  pay  costs   related  to  the  bond  offering  and
approximately  $15.9 million was used to repay existing senior notes. This early
repayment of debt resulted in prepayment fees of approximately $731,000,  which,
net of the related  income tax  benefit,  resulted in an  extraordinary  loss of
approximately $445,000 in the second quarter of 2001.

     In September 2001, we purchased and retired $10 million in principal amount
of our outstanding  9.75% senior notes. The purchases were made at 93.25% of par
at a gain of approximately  $348,000,  which net of related income tax effect of
$136,000, resulted in an extraordinary gain of $212,000.

     Our senior  notes  require  us to comply  with a number of  covenants  that
restrict certain transactions, including:

     *    limitations on additional indebtedness;
     *    limitations  on  the  payment  of  dividends,   redemption  of  equity
          interests and certain investments;
     *    maintenance of a minimum level of consolidated tangible net worth;
     *    limitations on liens securing certain obligations; and
     *    limitations  on the sale of assets,  mergers  and  consolidations  and
          transactions with affiliates.

     We believe that our current  borrowing  capacity,  cash on hand at December
31, 2001,  and  anticipated  cash flows from  operations  are sufficient to meet
liquidity needs for the foreseeable future. There is no assurance, however, that
future cash flows will be sufficient to meet future  capital  needs.  The amount
and  types of  indebtedness  that we incur  may be  limited  by the terms of the
indenture  governing  our  senior  notes and by the  terms of our  other  credit
agreements.

CONTRACTUAL OBLIGATIONS

     The following summarizes our contractual  obligations at December 31, 2001,
and the effect such  obligations  are expected to have on our liquidity and cash
flow in future periods (in thousands):
<TABLE>
<CAPTION>
                                                         PAYMENTS DUE BY PERIOD

                                                   LESS THAN                            AFTER
  CONTRACTUAL OBLIGATIONS                 TOTAL      1 YEAR    1-3 YEARS   4-5 YEARS   5 YEARS
  -----------------------                 -----      ------    ---------   ---------   -------
<S>                                     <C>        <C>         <C>         <C>         <C>
Senior notes                            $155,000         --          --         --     $155,000
Revolving construction facilities         16,207    $15,590     $   617         --           --
A & D facilities                           6,204      3,103       3,101         --           --
Other borrowing obligations                  150        150          --         --           --
Operating lease obligations                6,853      3,049       3,555      $ 249           --
Recourse option obligations               20,378     15,829       4,549         --           --
                                        --------    -------     -------      -----     --------
          Total                         $204,792    $37,721     $11,822      $ 249     $155,000
                                        ========    =======     =======      =====     ========
</TABLE>

                                       17
<PAGE>
     We do not engage in commodity trading or other similar activities.  We have
no derivative financial instruments as of December 31, 2001 and 2000.

     As a component  of our model home  construction  activities,  we enter into
lease transactions with third parties.  The total cost, including land costs, of
model homes leased by us and constructed  under these lease  agreements is $19.0
million,  all of which is  excluded  from our balance  sheet as of December  31,
2001.

     In May 1999, we announced a stock repurchase  program in which our Board of
Directors  approved  the buyback of up to $6 million of our  outstanding  common
stock.  The  amount  was  increased  to $20  million  in July  2000.  In 2001 we
repurchased  7,000 shares of our common stock at an average  price of $29.63 per
share.  As of December  31, 2001,  818,963  shares had been  repurchased  for an
aggregate price of approximately $11.2 million.

CONSOLIDATED CASH FLOW

     In 2001 we used $92.9  million  in cash from our  operating  and  investing
activities,  and available cash decreased by $1.0 million. This decrease in cash
was caused  primarily by our acquisition of Hancock,  repayments on our lines of
credit and  increased  purchases of real  estate,  offset by the issuance of our
9.75% senior notes.

     Operating activities used cash of $19.8 million in 2001, compared with cash
generated  of $6.3 million in 2000 and cash used of $36.4  million in 1999.  The
decrease in 2001 resulted from increases in our real estate, option deposits and
homebuilding  assets in conjunction with our increased  homebuilding  operations
and an  increase  in other  assets  from the  deferred  bond costs  recorded  in
connection  with the  issuance of our senior  notes.  Cash used in 1999 was more
than in 2000 due to higher  real  estate  purchases  in 1999 along  with  higher
payments on accounts  payable and accrued  liabilities.  Also,  there was no tax
benefit from stock option exercises in 1999.

     Investing activities used cash of $73.0 million in 2001, compared with cash
of $8.2  million  and $9.9  million  used in 2000 and  1999,  respectively.  The
increase  in cash used in 2001  primarily  was due to the  Hancock  acquisition,
which used cash of approximately $65.8 million.

     Financing activities generated cash of $91.9 million in 2001, compared with
cash used of $7.1 million in 2000 and cash  generated of $47.3  million in 1999.
The  increase in cash  generated  in 2001 mainly was due to the  issuance of our
9.75%  senior  notes,  compared to 2000.  The cash used of $7.1  million in 2000
compared to cash provided by financing  activities in 1999  primarily was due to
stock  repurchases  in the  amount  of $9.1  million,  partially  offset  by the
proceeds  from the  exercises of stock  options and the  borrowings in excess of
repayments of debt.

SEASONALITY

     We  historically  have  closed  more homes in the second half of the fiscal
year than in the first half, due in part to the slightly  seasonal nature of the
market for our move-up and semi-custom luxury products.  We expect this seasonal
trend to continue, although it may vary as operations continue to expand.

NEW ACCOUNTING STANDARDS

     In July 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 141, BUSINESS COMBINATIONS,  and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS No. 141 requires that the purchase method of accounting be used for
all  business   combinations   initiated   after  June  30,  2001.  Use  of  the
pooling-of-interests  method is no longer permitted.  SFAS No. 141 also includes
guidance on the  initial  recognition  and  measurement  of  goodwill  and other
intangible  assets  acquired in business  combinations  completed after June 30,
2001. We adopted SFAS No. 141 upon issuance.

     SFAS No. 142 requires that goodwill and intangible  assets with  indefinite
useful lives no longer be  amortized,  but instead be tested for  impairment  at
least  annually in accordance  with the provisions of SFAS No. 142. SFAS No. 142
will also require that intangible assets with definite useful lives be amortized

                                       18
<PAGE>
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121,  ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.

     As of  December  31,  2001,  we had  unamortized  goodwill in the amount of
approximately $30.4 million,  which will be subject to the transition provisions
of SFAS No. 142. Amortization expense related to goodwill was approximately $1.4
million  and $1.1  million  for the  years  ended  December  31,  2001 and 2000,
respectively,  and  under  the  provisions  of SFAS No.  142 will no  longer  be
recorded in the future.  We adopted SFAS No. 142 on January 1, 2002. We have not
determined the impact of the adoption of SFAS No. 142 on our financial  position
or results of operations.

     In  October  2001,  the  FASB  issued  SFAS  No.  144,  ACCOUNTING  FOR THE
IMPAIRMENT  OR  DISPOSAL  OF  LONG-LIVED  ASSETS,   which  addresses   financial
accounting  and reporting for the  impairment or disposal of long-lived  assets.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We
believe  the  adoption  of SFAS No. 144 will not have a  material  impact on our
financial position or results of operations.

       FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION

     Future operating  results and financial  condition depend on our ability to
successfully  design,  develop,  construct  and sell homes that satisfy  dynamic
customer  demand  patterns.  Inherent in this  process are factors  that we must
successfully  manage to achieve favorable future operating results and financial
condition. These operating and financial factors, along with many other factors,
could  affect  the price of our  common  stock and  notes.  Potential  risks and
uncertainties that could affect future operating results and financial condition
could include the factors discussed below.

     HOMEBUILDING INDUSTRY FACTORS. The homebuilding industry is cyclical and is
significantly  affected by changes in  economic  and other  conditions,  such as
employment  levels,  availability  of financing,  interest  rates,  and consumer
confidence.  These factors can  negatively  affect the demand for and pricing of
our homes.  Homebuilders  are also subject to various  risks,  many of which are
outside  their  control,   including  delays  in  construction  schedules,  cost
overruns,  changes in governmental  regulations,  increases in real estate taxes
and other local government  fees, and availability and cost of land,  materials,
and  labor.  Although  the  principal  raw  materials  used in the  homebuilding
industry  generally are available  from a variety of sources,  the materials are
subject to periodic price fluctuations.

     The homebuilding  industry is also subject to the potential for significant
variability and fluctuations in real estate availability and values. Write-downs
of our land inventories could occur if market  conditions  deteriorate and these
write-downs  could be  material  in  amount.  Write-downs  may also  occur if we
purchase land at higher prices during stronger  economic cycles and the value of
that land subsequently declines during slower economic cycles.

     FLUCTUATIONS IN OPERATING  RESULTS.  We historically have experienced,  and
expect to continue to experience,  variability in home sales and net earnings on
a quarterly basis. As a result of such variability,  our historical  performance
may not be a meaningful indicator of future results.  Factors that contribute to
this variability include:

     *    timing of home deliveries and land sales;
     *    our ability to acquire  additional land or options for additional land
          on acceptable terms;
     *    conditions  of the real estate market in areas where we operate and of
          the general economy;
     *    the  cyclical  nature  of  the  homebuilding   industry,   changes  in
          prevailing interest rates and the availability of mortgage financing;
     *    costs and availability of materials and labor; and
     *    delays in construction schedules due to strikes, adverse weather, acts
          of  God,   reduced   subcontractor   availability   and   governmental
          restrictions.

                                       19
<PAGE>
     INTEREST  RATES AND  MORTGAGE  FINANCING.  In  general,  housing  demand is
adversely  affected by increases  in interest  rates and the  unavailability  of
mortgage  financing.  Most of our buyers  finance their home  purchases  through
third-party  lenders providing  mortgage  financing.  If mortgage interest rates
increase and,  consequently,  the ability of prospective  buyers to finance home
purchases is adversely  affected,  home sales,  gross  margins and cash flow may
also be  adversely  impacted and the impact may be  material.  Our  homebuilding
activities  depend upon the  availability  and costs of mortgage  financing  for
buyers  of homes  owned by  potential  customers,  as those  customers  (move-up
buyers) often need to sell their residences  before they purchase our homes. Any
reduction of financing availability could adversely affect home sales.

     Changes in federal  income tax laws may also  affect  demand for new homes.
Various  proposals  have been  publicly  discussed  to limit  mortgage  interest
deductions  and to limit  the  exclusion  of gain  from the sale of a  principal
residence.  Enactment  of such  proposals  may  have an  adverse  effect  on the
homebuilding  industry in general, and on demand for our products in particular.
No meaningful  prediction can be made whether any such proposals will be enacted
and, if enacted, the particular form such laws would take.

     COMPETITION.  The homebuilding  industry is highly competitive.  We compete
for sales in each of our markets with  national,  regional and local  developers
and  homebuilders,  existing home resales and, to a lesser extent,  condominiums
and rental  housing.  If we are unable to  successfully  compete,  our financial
results and growth could  suffer.  Some of our  competitors  have  significantly
greater  financial  resources or lower costs than we do.  Competition among both
small and large  residential  homebuilders  is based on a number of interrelated
factors, including location,  reputation,  amenities, design, quality and price.
Competition  is expected to continue and become more  intense,  and there may be
new entrants in the markets in which we currently  operate and in markets we may
enter in the future.

     LACK OF GEOGRAPHIC  DIVERSIFICATION.  We have operations in Texas,  Arizona
and Northern  California.  Failure to be more  geographically  diversified could
adversely impact us if the  homebuilding  business in our current markets should
decline,  since there may not be a balancing opportunity in a stronger market in
other geographic regions.

     ADDITIONAL  FINANCING;  LIMITATIONS.  The homebuilding  industry is capital
intensive and requires  significant  up-front  expenditures  to acquire land and
begin development. Accordingly, we incur substantial indebtedness to finance our
homebuilding  activities.  At December 31, 2001, our debt totaled  approximately
$177.6  million.  We may be required to seek  additional  capital in the form of
equity or debt  financing  from a variety of potential  sources,  including bank
financing and securities  offerings.  Also,  lenders are increasingly  requiring
developers  to  invest  significant  amounts  of  equity  in a  project  both in
connection  with  origination  of new loans as well as the extension of existing
loans. The high level of our indebtedness  could have important  consequences to
our stockholders, including the following:

     *    our  ability  to obtain  additional  financing  for  working  capital,
          capital  expenditures,  acquisitions or general corporate purposes may
          be impaired;
     *    we must use a substantial  portion of our cash flow from operations to
          pay interest and principal on our indebtedness,  which will reduce the
          funds   available   to  use  for  other   purposes   such  as  capital
          expenditures;
     *    we have a higher level of indebtedness  than some of our  competitors,
          which  may  put  us  at a  competitive  disadvantage  and  reduce  our
          flexibility in planning for, or responding to, changing  conditions in
          our industry, including increased competition; and
     *    we are more vulnerable to economic downturns and adverse  developments
          in our business.

     We expect to obtain the money to pay our expenses and to pay the  principal
and interest on our indebtedness from cash flow from operations.  Our ability to
meet our expenses thus depends on our future performance, which will be affected
by  financial,  business,  economic  and other  factors.  We will not be able to
control many of these factors,  such as economic conditions in the markets where
we operate and  pressure  from  competitors.  We cannot be certain that our cash
flow will be  sufficient  to allow us to pay  principal and interest on our debt
and meet  our  other  obligations.  If we do not have  enough  money,  we may be

                                       20
<PAGE>
required to refinance  all or part of our existing  debt,  sell assets or borrow
more  money.  We  cannot  guarantee  that we  will  be  able  to do so on  terms
acceptable  to us, if at all. In addition,  the terms of existing or future debt
agreements may restrict us from pursuing any of these alternatives.

     OPERATING AND FINANCIAL LIMITATIONS. The indenture for our senior notes and
credit facilities impose significant operating and financial restrictions on us.
These restrictions will limit our ability, among other things, to:

     *    incur additional indebtedness;
     *    pay dividends or make other distributions;
     *    repurchase our stock;
     *    make investments;
     *    sell assets;
     *    enter into  agreements  restricting our  subsidiaries'  ability to pay
          dividends;
     *    enter into transactions with affiliates; and
     *    consolidate, merge or sell all or substantially all of our assets.

     In addition,  the indenture for our senior notes  requires us to maintain a
minimum consolidated  tangible net worth and our credit facilities require us to
maintain other specified financial ratios. We cannot assure that these covenants
will not  adversely  affect  our  ability to finance  our future  operations  or
capital needs or to pursue available business  opportunities.  A breach of these
covenants  or our  inability to maintain  the  required  financial  ratios could
result in a default in respect of the related indebtedness. If a default occurs,
the relevant  lenders  could  declare the  indebtedness,  together  with accrued
interest and other fees, to be immediately  due and payable and proceed  against
any collateral securing that indebtedness.

     GOVERNMENT REGULATIONS;  ENVIRONMENTAL CONDITIONS.  Regulatory requirements
could cause us to incur significant liabilities and costs and could restrict our
business  activities.  We are subject to local,  state, and federal statutes and
rules regulating  certain  developmental  matters,  as well as building and site
design.  We are subject to various fees and charges of governmental  authorities
designed  to defray the cost of  providing  certain  governmental  services  and
improvements.  We may be  subject  to  additional  costs  and  delays  or may be
precluded  entirely  from  building  projects  because  of "no  growth" or "slow
growth"  initiatives,  building  permit  ordinances,  building  moratoriums,  or
similar  government  regulations  that  could be  imposed  in the  future due to
health,  safety,  welfare,  or  environmental  concerns.  We  must  also  obtain
licenses,  permits and approvals from  government  agencies to engage in certain
activities, the granting or receipt of which are beyond our control.

     We are also  subject to a variety  of local,  state and  federal  statutes,
ordinances,  rules and  regulations  concerning the protection of health and the
environment.  Environmental  laws or permit  restrictions  may result in project
delays,  may cause  substantial  compliance  and other costs and may prohibit or
severely restrict  development in certain  environmentally  sensitive regions or
geographic areas.  Environmental  regulations can also have an adverse impact on
the availability and price of certain raw materials such as lumber.

     RECENT  ACQUISITION.  During 2001 we acquired  Hancock  Communities  and we
cannot assure you that:

     *    the Hancock business will be integrated with our existing business;
     *    the market and financial  synergies we anticipate  will be achieved in
          our expected time frame, or at all;
     *    the  acquisition  will be  accretive  to  earnings  due to  unexpected
          expenses,  contingencies  or  liabilities,  or due  to  the  financial
          performance of the Hancock business;
     *    the  combined  companies  will  not lose  key  employees,  management,
          suppliers or subcontractors; and
     *    we can  successfully  manage new  housing  lines that were  previously
          managed by Hancock or new lines planned for the future.

     FUTURE  EXPANSION.  We may continue to consider  growth or expansion of our
operations in our current markets or in other areas of the country. There can be
no assurance that we will be able to expand into new or existing markets without

                                       21
<PAGE>
a material  adverse  effect on our cash flows or  profitability.  The magnitude,
timing and nature of any future  expansion  will  depend on a number of factors,
including suitable acquisition candidates,  the negotiation of acceptable terms,
our financial  capabilities,  and general economic and business conditions.  New
acquisitions may result in the incurrence of additional debt.  Acquisitions also
involve  numerous  risks,  including  difficulties  in the  assimilation  of the
acquired company's  operations,  the incurrence of unanticipated  liabilities or
expenses,  the diversion of management's attention from other business concerns,
risks of entering  markets in which we have limited or no direct  experience and
the potential loss of key employees of the acquired company.

     DEPENDENCE ON KEY PERSONNEL.  Our success largely depends on the continuing
services of certain key employees,  including John Landon and Steve Hilton,  and
our  continued  favorable  development  depends on our  ability  to attract  new
personnel.  We do not have employment agreements with certain key officers,  and
the loss of their services could harm our business.

     DEPENDENCE ON SUBCONTRACTORS.  We conduct our construction  operations only
as a general  contractor.  Virtually all  architectural and construction work is
performed by unaffiliated third-party  subcontractors.  As a consequence, we are
dependent upon the continued  availability  of and  satisfactory  performance by
these  subcontractors  for the design and construction of our homes. There is no
assurance  that  there  will  be  sufficient  availability  of and  satisfactory
performance  by these  unaffiliated  third-party  subcontractors.  In  addition,
inadequate  subcontractor  resources could have a material adverse affect on our
business.

     INFLATION.  We, like other  homebuilders,  may be adversely affected during
periods of high inflation, mainly because of higher land and construction costs.
Also, higher mortgage interest rates may significantly  affect the affordability
of mortgage financing to prospective  buyers.  Inflation also increases our cost
of  financing,  materials and labor,  and could cause our  financial  results or
growth to decline. We attempt to pass cost increases on to our customers through
higher sales prices. To date, inflation has not had a material adverse effect on
our results of operations;  however, inflation could impact our future operating
results.

     NATURAL DISASTERS. We have significant homebuilding operations in Texas and
Northern California. Some of our markets in Texas occasionally experience severe
weather conditions such as tornadoes or hurricanes. Northern California has been
heavily impacted at times by earthquakes, flooding, landslides and other natural
disasters.  We do not insure against some of these risks. These conditions could
cause us to incur  damage to or losses of our homes  under  construction  or our
building   lots  that  exceed  our   insurance   and  could  cause   significant
constructions delays or substantial  fluctuations in the pricing or availability
of  building  materials.  Any of these  events  could  cause a  decrease  in our
revenues, cash flow and earnings.

          SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS

     In  passing  the  Private  Securities  Litigation  Reform  Act of 1995 (the
"PSLRA"),   Congress  encouraged  public  companies  to  make   "forward-looking
statements" by creating a safe-harbor to protect  companies from  securities law
liability in connection with  forward-looking  statements.  We intend to qualify
both our written and oral  forward-looking  statements for protection  under the
PSLRA.

     The  words  "believe,"  "expect,"  "anticipate,"  "forecast,"  "plan,"  and
"project" and similar expressions  identify  forward-looking  statements,  which
speak  only  as of  the  date  the  statement  was  made.  Such  forward-looking
statements  are within the meaning of that term in Section 27A of the Securities
Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended.  Forward-looking  statements  in this Form 10-K  include  statements
concerning  the demand for and the pricing of our homes,  our ability to deliver
existing  backlog,  the expected  outcome of legal  proceedings  against us, the
sufficiency of our capital  resources,  the impact of new accounting  standards,
the future  realizability  of deferred tax assets,  the expectation of continued
positive  operating  results in 2002 and beyond,  the  expected  benefits of the
Hancock  acquisition,  including  future  home  closings  and  Hancock's  future
contribution to our revenues and earnings,  and our ability to continue positive
operating results in light of current economic  conditions.  Such statements are
subject to significant risks and uncertainties.

                                       22
<PAGE>
     Important  factors  currently  known to management  that could cause actual
results to differ materially from those in forward-looking  statements, and that
could negatively affect our business, and stock and note prices are discussed in
this report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Our Future Results
and Financial Condition."

     Forward-looking  statements  express  expectations  of future  events.  All
forward-looking statements are inherently uncertain as they are based on various
expectations  and assumptions  concerning  future events and they are subject to
numerous  known and unknown  risks and  uncertainties  that could  cause  actual
events or  results  to differ  materially  from  those  projected.  Due to these
inherent  uncertainties,  the  investment  community is urged not to place undue
reliance on forward-looking statements. In addition, we undertake no obligations
to update or revise  forward-looking  statements to reflect changed assumptions,
the occurrence of anticipated  events or changes to projections  over time. As a
result of these and other  factors,  our  stock and note  prices  may  fluctuate
dramatically.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not enter into derivative financial instruments for trading purposes,
although we do have other financial instruments in the form of notes payable and
senior debt. Our lines of credit and credit  facilities are at variable interest
rates and are subject to market risk in the form of interest rate  fluctuations.
The  interest  rate on our  senior  debt is at a fixed  rate.  We do not have an
obligation  to prepay our  fixed-rate  debt prior to maturity  and, as a result,
interest  rate risk and  changes  in fair value  should  not have a  significant
impact in the fixed rate debt until we would be required to refinance such debt.

     For example,  based on an average bank  borrowings of $81.1 million  during
2001, if the interest rate indices on which our bank  borrowing  rates are based
were to increase 100 basis points in 2002,  interest incurred would increase and
cash flows  would  decrease  in 2002 by  $811,000.  A portion  of the  increased
interest would be expensed as a period cost in 2002,  while the balance would be
capitalized to real estate under  development  and be expensed as a cost of home
sales in 2002 and future years.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our consolidated  financial statements as of December 31, 2001 and 2000 and
for each of the years in the three-year period ended December 31, 2001, together
with related notes and the report of KPMG LLP, independent auditors,  are on the
following pages. Other required financial information is more fully described in
Item 14.

                                       23
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Meritage Corporation:

     We have audited the  accompanying  consolidated  balance sheets of Meritage
Corporation and subsidiaries (the Company) as of December 31, 2001 and 2000, and
the related consolidated  statements of earnings,  stockholders' equity and cash
flows for each of the years in the  three-year  period ended  December 31, 2001.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit 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 financial  position of Meritage
Corporation  and  subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period  ended  December 31,  2001,  in  conformity  with  accounting  principles
generally accepted in the United States of America.


                                            /s/ KPMG LLP


Phoenix, Arizona
February 6, 2002

                                       24
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             ----------------------
                                                                2001         2000
                                                             ---------    ---------
                                                        (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                          <C>          <C>
ASSETS
  Cash and cash equivalents                                  $   3,383    $   4,397
  Real estate                                                  330,238      211,307
  Deposits on real estate under option or contract              45,252       24,251
  Receivables                                                    5,508        2,179
  Deferred tax asset                                             2,612          543
  Goodwill                                                      30,369       17,675
  Property and equipment, net                                    9,667        4,717
  Prepaid expenses and other assets                              9,686        2,006
                                                             ---------    ---------
    Total assets                                             $ 436,715    $ 267,075
                                                             =========    =========

LIABILITIES
  Accounts payable and accrued liabilities                   $  69,029    $  48,907
  Home sale deposits                                            13,538       10,917
  Notes payable                                                177,561       86,152
                                                             ---------    ---------

    Total liabilities                                          260,128      145,976
                                                             ---------    ---------

STOCKHOLDERS' EQUITY
  Common stock, par value $0.01.  Authorized 50,000,000
    shares; issued and outstanding 6,306,969 and 5,922,822
    shares at December 31, 2001 and 2000, respectively              63           59
  Additional paid-in capital                                   109,475      104,443
  Retained earnings                                             78,272       27,613
  Treasury stock at cost, 818,963 and 811,963 shares at
    December 31, 2001 and 2000, respectively                   (11,223)     (11,016)
                                                             ---------    ---------

    Total stockholders' equity                                 176,587      121,099
                                                             ---------    ---------

    Total liabilities and stockholders' equity               $ 436,715    $ 267,075
                                                             =========    =========
</TABLE>

           See accompanying notes to consolidated financial statements

                                       25
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                       -----------------------------------
                                                          2001         2000         1999
                                                       ---------    ---------    ---------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>          <C>          <C>
Home sales revenue                                     $ 742,576    $ 515,428    $ 334,007
Land sales revenue                                         1,598        5,039        7,779
                                                       ---------    ---------    ---------
                                                         744,174      520,467      341,786
                                                       ---------    ---------    ---------

Cost of home sales                                      (585,440)    (411,203)    (270,197)
Cost of land sales                                        (1,474)      (4,446)      (7,090)
                                                       ---------    ---------    ---------
                                                        (586,914)    (415,649)    (277,287)
                                                       ---------    ---------    ---------

Home sales gross profit                                  157,136      104,225       63,810
Land sales gross profit                                      124          593          689
                                                       ---------    ---------    ---------
                                                         157,260      104,818       64,499

Commissions and other sales costs                        (41,085)     (28,680)     (19,243)
General and administrative expenses                      (35,723)     (21,215)     (15,100)
Interest expense                                              --           (8)          (6)
Other income, net                                          2,884        1,847        2,064
                                                       ---------    ---------    ---------

Earnings before income taxes and extraordinary items      83,336       56,762       32,214
Income taxes                                             (32,444)     (21,000)     (13,269)
                                                       ---------    ---------    ---------

Earnings before extraordinary items                       50,892       35,762       18,945
Extraordinary items, net of tax effects                     (233)          --           --
                                                       ---------    ---------    ---------

Net earnings                                           $  50,659    $  35,762    $  18,945
                                                       =========    =========    =========

Earnings per share:

Basic:
  Earnings before extraordinary items                  $    9.59    $    6.92    $    3.49
  Extraordinary items, net of tax effects                  (0.04)          --           --
                                                       ---------    ---------    ---------
    Net earnings per share                             $    9.55    $    6.92    $    3.49
                                                       =========    =========    =========

Diluted:
  Earnings before extraordinary items                  $    8.64    $    6.26    $    3.14
  Extraordinary items, net of tax effects                  (0.04)          --           --
                                                       ---------    ---------    ---------
    Net earnings per share                             $    8.60    $    6.26    $    3.14
                                                       =========    =========    =========
</TABLE>

           See accompanying notes to consolidated financial statements

                                       26
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 RETAINED
                                                                  ADDITIONAL     EARNINGS
                                      NUMBER OF      COMMON        PAID-IN     (ACCUMULATED     TREASURY
                                        SHARES        STOCK        CAPITAL       DEFICIT)         STOCK          TOTAL
                                      ---------     ---------     ---------      ---------      ---------      ---------
<S>                                   <C>           <C>           <C>           <C>             <C>            <C>
Balance at December 31, 1998              5,335     $      53     $  99,320      $ (27,094)     $      --      $  72,279
Net earnings                                 --            --            --         18,945             --         18,945
Exercise of stock options                    51             1           495             --             --            496
Contingent shares issued                     89             1            (1)            --             --             --
Stock option and contingent stock
  compensation expenses                      --            --           593             --             --            593
Purchase of treasury stock                   --            --            --             --         (1,902)        (1,902)
                                      ---------     ---------     ---------      ---------      ---------      ---------

Balance at December 31, 1999              5,475            55       100,407         (8,149)        (1,902)        90,411
Net earnings                                 --            --            --         35,762             --         35,762
Tax benefit from stock option
  exercises                                  --            --         1,917             --             --          1,917
Exercise of stock options                   359             3         2,047             --             --          2,050
Contingent shares issued                     89             1            (1)            --             --             --
Stock option and contingent stock
  compensation expenses                      --            --            73             --             --             73
Purchase of treasury stock                   --            --            --             --         (9,114)        (9,114)
                                      ---------     ---------     ---------      ---------      ---------      ---------

Balance at December 31, 2000              5,923            59       104,443         27,613        (11,016)       121,099
Net earnings                                 --            --            --         50,659             --         50,659
Tax benefit from stock option
  exercises                                  --            --         2,486             --             --          2,486
Exercise of stock options                   384             4         2,546             --             --          2,550
Purchase of treasury stock                   --            --            --             --           (207)          (207)
                                      ---------     ---------     ---------      ---------      ---------      ---------

Balance at December 31, 2001              6,307     $      63     $ 109,475      $  78,272      $ (11,223)     $ 176,587
                                      =========     =========     =========      =========      =========      =========
</TABLE>

           See accompanying notes to consolidated financial statements

                                       27
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                              -----------------------------------
                                                                 2001         2000         1999
                                                              ---------    ---------    ---------
                                                                        (IN THOUSANDS)
<S>                                                           <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net earnings                                                $  50,659    $  35,762    $  18,945
  Adjustments to reconcile net earnings to net
   cash provided by (used in) operating activities:
    Depreciation and amortization                                 5,741        3,407        2,528
    (Increase) decrease in deferred tax asset before
     extraordinary items                                         (2,069)         156        6,236
    Stock option and contingent stock compensation expenses          --           73          593
    Tax benefit from stock option exercises                       2,486        1,917           --
  Changes in assets and liabilities, net of effect of
   acquisition in 2001:
    Increase in real estate                                     (64,386)     (40,295)     (66,254)
    Increase in deposits on real estate under option or
     contract contract                                          (12,102)      (8,551)      (8,361)
    (Increase) decrease in receivables and prepaid expenses
     and other assets                                           (13,526)      (1,241)         680
    Increase in accounts payable and accrued liabilities         13,232       12,368        9,572
    Increase (decrease) in home sale deposits                       118        2,656         (326)
                                                              ---------    ---------    ---------
    Net cash provided by (used in) operating
     activities                                                 (19,847)       6,252      (36,387)
                                                              ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash paid for merger/acquisition                              (65,759)      (5,158)      (6,967)
  Purchases of property and equipment                            (7,270)      (3,017)      (2,935)
                                                              ---------    ---------    ---------
    Net cash used in investing activities                       (73,029)      (8,175)      (9,902)
                                                              ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings                                                    527,910      447,269      273,824
  Repayments of debt                                           (578,391)    (447,054)    (225,093)
  Proceeds from issuance of senior debt                         165,000           --           --
  Repayments of senior debt                                     (25,000)          --           --
  Purchase of treasury stock                                       (207)      (9,114)      (1,902)
  Proceeds from exercises of stock options                        2,550        1,797          495
                                                              ---------    ---------    ---------
    Net cash provided by (used in) financing activities          91,862       (7,102)      47,324
                                                              ---------    ---------    ---------
Net (decrease) increase in cash and cash equivalents             (1,014)      (9,025)       1,035
Cash and cash equivalents, beginning of year                      4,397       13,422       12,387
                                                              ---------    ---------    ---------
Cash and cash equivalents, end of year                        $   3,383    $   4,397    $  13,422
                                                              =========    =========    =========
</TABLE>

See Supplemental Disclosure of Cash Flow Information at Note 9.

           See accompanying notes to consolidated financial statements

                                       28
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 AND 1999


NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BUSINESS.  We are a leading designer and builder of single-family  homes in
the rapidly growing Sunbelt states of Texas, Arizona and California. We focus on
providing a broad range of first-time,  move-up and luxury homes to our targeted
customer base. We and our  predecessors  have operated in Arizona since 1985, in
Texas since 1987 and in Northern  California  since 1989. To expand our presence
in Arizona, we acquired Hancock Communities (Hancock),  another well-established
homebuilder  that serves the first-time and move-up markets in the Phoenix area,
in 2001.

     BASIS OF PRESENTATION.  The accompanying  consolidated financial statements
include the accounts of Meritage  Corporation and our wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation and
certain amounts have been  reclassified to be consistent with current  financial
statement presentation. Financial results include the operations of Hancock from
May 31, 2001, the date of acquisition (See Note 4).

     CRITICAL  ACCOUNTING  POLICIES  AND  ESTIMATES.   The  preparation  of  our
consolidated  financial statements required us to make a number of estimates and
assumptions that affect the reported amounts and disclosures in the consolidated
financial  statements.  On an ongoing  basis,  we evaluate  these  estimates and
assumptions  based upon  historical  experience  and various  other  factors and
circumstances.  We believe that our estimates and  assumptions are reasonable in
the circumstances;  however,  actual results may differ from these estimates and
assumptions under different future conditions.

     The  accounting  policies that we deem most critical to us, and involve the
most difficult,  subjective or complex judgments, include our estimates of costs
to  complete  our  individual  developments,  the  ultimate  recoverability  (or
impairment) of these costs,  the likelihood of closing lots held under option or
contract and the ability to estimate expenses and accruals,  including legal and
warranty reserves. Should we under or over estimate costs to complete individual
projects,  gross  margins in a  particular  period  could be  misstated  and the
ultimate recoverability of costs related to a project from individual home sales
may be uncertain. Furthermore,  non-refundable deposits paid for land options or
contracts  may  have no  economic  value  to us if the  land  is not  ultimately
purchased.  Finally,  our inability to accurately  estimate expenses or accruals
could result in charges or income in the future results of operations related to
activities or transactions in a preceding period.

     CASH AND CASH EQUIVALENTS.  We consider all highly liquid  investments with
an initial maturity of three months or less to be cash  equivalents.  Amounts in
transit from title  companies  for home closings of  approximately  $317,000 and
$5.5 million are included in cash and cash  equivalents at December 31, 2001 and
2000, respectively.

     REAL  ESTATE.  Real estate  consists of raw land,  lots under  development,
homes under  construction,  completed homes and land held for development.  This
real estate is carried at cost unless such costs would not be recovered from the
cash flows generated by future disposition. In such case, amounts are carried at
estimated  fair value less disposal  costs.  Costs  capitalized  include  direct
construction  costs for homes,  development  period  interest and certain common
costs  that  benefit  the  entire  community.  Common  costs are  incurred  on a
community-by-community  basis and  allocated  to  residential  lots based on the
number of lots to be built in the project, which approximates the relative sales
value method.

     Deposits  paid related to land options and  contracts to purchase  land are
capitalized when incurred and classified as deposits on real estate under option
or  contract  until  the  related  land is  purchased.  The  deposits  are  then
transferred  to real estate at the time the lots are acquired.  The deposits are
charged to expense if the land acquisition is no longer considered probable.

                                       29
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     COST OF HOME  SALES.  Cost of home  sales  includes  land  acquisition  and
development costs, direct home construction costs,  development period interest,
closing costs and an allocation of common costs.

     REVENUE  RECOGNITION AND  CLASSIFICATION  OF COSTS.  Revenues from sales of
residential real estate and related activities are recognized when closings have
occurred,  the  buyer  has made the  required  minimum  down  payment  and other
criteria for sale and profit recognition are satisfied.

     Estimated  future warranty costs are charged to cost of sales in the period
when the revenues from the related home closings are recognized. These estimated
warranty costs generally range from 0.3% to 0.5% of the home's sales price.

     PROPERTY AND  EQUIPMENT.  Property and equipment,  generally  consisting of
computer and office equipment and model home furnishings, is stated at cost less
accumulated  depreciation.  Depreciation is calculated  using the  straight-line
method over the estimated useful lives of the assets,  which range from three to
seven years.  Accumulated  depreciation was approximately  $7.1 million and $5.4
million at December  31,  2001 and 2000,  respectively.  Maintenance  and repair
costs are expensed as incurred.

     GOODWILL.  Goodwill represents the excess of purchase price over fair value
of net tangible assets and identifiable intangible assets acquired, and is being
amortized  on  a  straight-line   basis  over  a  20-year  period.   Accumulated
amortization  was  approximately  $4.3  million and $2.8 million at December 31,
2001 and 2000,  respectively.  Management periodically evaluates the business to
which the goodwill  relates to  determine if the carrying  value of goodwill has
been impaired.  The amount of goodwill impairment,  if any, is measured based on
projected   discounted  future  operating  cash  flows  using  a  discount  rate
reflecting our average cost of funds. No goodwill impairment was recorded in the
accompanying  statements of earnings.  In accordance with Statement of Financial
Accounting  Standards (SFAS) No. 142,  "Goodwill and Other  Intangible  Assets,"
effective January 1, 2002, goodwill will no longer be amortized but reviewed for
impairment at least annually.

     DEFERRED BOND COSTS.  We incurred  costs of  approximately  $5.2 million in
relation to the 2001 issuance of our 9.75% senior notes,  due June 2011. We have
deferred these bond costs and are amortizing  them using the effective  interest
method over the life of the bonds.  At December  31,  2001,  approximately  $4.9
million of deferred bond costs, net of amortization, was included on our balance
sheet as prepaid expenses and other assets.

     INCOME TAXES.  We account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability  method of SFAS No.
109,  deferred  tax assets and  liabilities  are  recognized  for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
basis.  Deferred tax assets and  liabilities  are measured using the enacted tax
rates expected to apply to taxable  income in future years and are  subsequently
adjusted  for  changes  in the  rates.  The  effect on  deferred  tax assets and
liabilities  of a change in tax rates is a charge  or  credit  to  deferred  tax
expense in the period of enactment.

     EARNINGS  PER  SHARE.  We  compute  basic  earnings  per share by  dividing
earnings  available to common  stockholders  by the  weighted-average  number of
common shares  outstanding  during the year. Diluted earnings per share reflects
the potential  dilution that could occur if dilutive  securities or contracts to
issue common stock were  exercised or converted into common stock or resulted in
the issuance of common stock that then shared in our earnings.

     STOCK OPTION PLANS. We have elected to account for stock-based compensation
using the  intrinsic  value method  prescribed in  Accounting  Principles  Board
Opinion  (APB) No. 25, as allowed by SFAS No. 123  "Accounting  for  Stock-Based

                                       30
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Compensation."  As such,  compensation  expense would be recorded on the date of
the grant only if the market price of the stock underlying the grant was greater
than the exercise  price. To date, we have only granted options to employees and
non-employee directors.  The pro forma disclosures that are required by SFAS No.
123 are presented in Note 6.

     FAIR VALUE OF FINANCIAL INSTRUMENTS.  Due to the short-term nature of these
investments,  we  consider  the  carrying  amounts of our  short-term  financial
instruments  to be at fair  value.  Our  lines of  credit  and  acquisition  and
development  loans carry interest rates that are variable  and/or  comparable to
current market rates based on the nature of the loans, their terms and remaining
maturity,  and  therefore  are stated at  approximate  fair value.  Considerable
judgment is required in  interpreting  market data to develop  estimates of fair
value.   Accordingly,   these  fair  value  estimates  are  subjective  and  not
necessarily  indicative  of the amounts we would pay or receive in actual market
transactions. (See Note 8.)

NOTE 2 - REAL ESTATE AND CAPITALIZED INTEREST

The components of real estate at December 31 are as follows (in thousands):

                                                       2001           2000
                                                     --------       --------
Homes under contract, in production                  $135,005       $ 92,881
Finished home sites                                    81,151         60,630
Home sites under development                           57,291         27,636
Homes held for resale                                  33,278         15,337
Model homes                                            18,289         11,600
Land held for development                               5,224          3,223
                                                     --------       --------
                                                     $330,238       $211,307
                                                     ========       ========

     We capitalize  certain  interest  costs  incurred  during  development  and
construction.  Capitalized  interest is  allocated to real estate and charged to
cost of sales when the property is closed. Summaries of interest capitalized and
interest expensed follow (in thousands):

                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                       2001           2000
                                                     --------       --------
Interest capitalized, beginning of year              $  5,426       $  3,971
Interest capitalized                                   16,623         10,626
Amortization to cost of home and land sales           (13,303)        (9,171)
                                                     --------       --------
Interest capitalized, end of year                    $  8,746       $  5,426
                                                     ========       ========

Interest incurred                                    $ 16,623       $ 10,634
Interest capitalized                                  (16,623)       (10,626)
                                                     --------       --------
Interest expensed                                    $     --       $      8
                                                     ========       ========

     The  purchase  of  real  estate  under  option   contracts   with  specific
performance  is dependent  upon the  completion of certain  requirements  by the
sellers and us. At December  31,  2001,  we had  approximately  702 lots with an
aggregate  purchase price of approximately  $20.4 million under option contracts
with  specific  performance.  Real  estate  under  option or contact and related
deposits are summarized below (dollars in thousands):

                                                                 DEPOSITS ON
                                                                 REAL ESTATE
                                                                 UNDER OPTION
                                                      # LOTS     OR CONTRACT
                                                      -------    ------------
Real estate under option or contract
  with specific performance                               702      $ 1,730
Real estate under option or contract
  with non-specific performance                         9,909       43,522
                                                      -------      -------
                                                       10,611      $45,252
                                                      =======      =======

                                       31
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 3 - NOTES PAYABLE

Notes payable at December 31 consist of the following:

<TABLE>
<CAPTION>
                                                                                            2001            2000
                                                                                          --------        --------
                                                                                               (IN THOUSANDS)
<S>                                                                                       <C>             <C>
$100 million  bank  revolving  construction  line of  credit,  interest  payable
   monthly  approximating  prime  (4.75% at December  31,2001)  or LIBOR  (rates
   varying from 1.87% to 1.88% at December  31, 2001) plus 2.0%,  payable at the
   earlier of close of escrow, maturity date of individual homes and lots within
   the  collateral  pool or over a 24-month  period  beginning  on June 1, 2003,
   secured by first deeds of trust on real estate                                         $    617        $ 50,354

$75 million bank revolving construction line of credit, interest payable monthly
   approximating  prime or LIBOR plus 2.0%,  payable at the  earlier of close of
   escrow, maturity date of individual homes and lots within the collateral pool
   or May 31, 2002, secured by first deeds of trust on real estate                          15,590          17,269

Acquisition  and  development  seller  carry back  financing,  interest  payable
   monthly at fixed rates of 9% to 10% per annum;  payable at the maturity  date
   of the individual projects, secured by first deeds of trust on land                       6,204           3,516

Senior unsecured notes, maturing June 1, 2011, interest only payments at 9.75% per
   annum, payable semi-annually                                                            155,000              --

Senior unsecured notes, paid in full May 30, 2001                                               --          15,000

Other                                                                                          150              13
                                                                                          --------        --------

     Total                                                                                $177,561        $ 86,152
                                                                                          ========        ========
</TABLE>

     In May 2001,  we issued $165  million in  principal  amount of 9.75% senior
notes due June 1, 2011.  Approximately  $15.9 million of this amount was used to
repay our  existing  senior  notes.  The early  repayment  of debt  resulted  in
prepayment fees of approximately $731,000,  which, net of the related income tax
benefit  of  approximately  $286,000,  resulted  in  an  extraordinary  loss  of
$445,000.

     In September 2001, we purchased and retired $10 million in principal amount
of our outstanding 9.75% senior notes for 93.25% of par. The purchases  resulted
in an extraordinary  gain of $212,000 (net of  approximately  $136,000 in income
taxes).

     Scheduled  maturities  of notes  payable as of December 31, 2001 follow (in
thousands):

          YEARS ENDING
          DECEMBER 31,
          ------------
              2002                                        $ 18,843
              2003                                           3,718
              2004                                              --
              2005                                              --
              2006                                              --
              Thereafter                                   155,000
                                                          --------
                                                          $177,561
                                                          ========

                                       32
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Obligations to pay principal and interest on our senior unsecured notes are
guaranteed by all of our  wholly-owned  subsidiaries  (Guarantor  Subsidiaries),
other than certain  inconsequential  subsidiaries  (collectively,  Non-Guarantor
Subsidiaries).  Such  guarantees  are  full and  unconditional,  and  joint  and
several.  Separate  financial  statements of the Guarantor  Subsidiaries are not
provided  because  Meritage  Corporation (the parent company) has no independent
assets or operations and the Non-Guarantor Subsidiaries are, individually and in
the aggregate,  minor.  There are no significant  restrictions on the ability of
the parent  company or any  guarantor to obtain funds from its  subsidiaries  by
dividend or loan.

     The bank credit  facilities and senior  unsecured  notes contain  covenants
which require  maintenance of certain  levels of tangible net worth,  compliance
with certain minimum  financial  ratios and place  limitations on the payment of
dividends and limit incurrence of indebtedness, asset dispositions and creations
of liens,  among other items. As of December 31, 2001 and 2000 and for the years
ended  December  31,  2001,  2000 and 1999,  we were in  compliance  with  these
covenants. The senior unsecured notes restrict our ability to pay dividends.

NOTE 4 - ACQUISITION

     On May 30, 2001,  we acquired  substantially  all of the  homebuilding  and
related assets of HC Builders, Inc. and Hancock Communities, L.L.C. The purchase
price was $65.8  million  in cash,  plus the  assumption  of  accounts  payable,
accrued  liabilities  and home sales  deposits  totaling $9.4 million and a note
payable  totaling $1.9  million.  In addition,  we granted to Greg Hancock,  the
founder of the company, an earn-out,  payable in cash over three years, equal to
20% of Hancock's pre-tax net income after a 10.5% charge on capital.

     This acquisition was accounted for using the purchase method of accounting.
Accordingly,   we  recorded  goodwill  of  approximately  $11.4  million,  which
represents  the  excess of the  purchase  price  over the fair  value of the net
tangible and identifiable  intangible  assets acquired and liabilities  assumed.
Prior to January 1, 2002,  the goodwill was being  amortized over a period of 20
years (see Note 1).

      The  following  unaudited  pro forma  financial  data for the years  ended
December 31, 2001 and 2000 has been prepared as if the acquisition of the assets
and  liabilities  of Hancock on May 30,  2001 had  occurred  on January 1, 2000.
Unaudited pro forma financial data is presented for informational  purposes only
and is based on historical  information.  This information may not be indicative
of our actual amounts had the transaction occurred on the date listed above, nor
does it purport to  represent  future  periods  (in  thousands  except per share
amounts):

                                                    YEARS ENDED
                                                    DECEMBER 31,
                                               -----------------------
                                                 2001           2000
                                               --------       --------
Revenue                                        $796,884       $704,118
Earnings before extraordinary items              56,617         43,422
Net earnings                                     56,829         42,976
Diluted EPS before extraordinary items             9.62           7.60
Diluted EPS after extraordinary items              9.65           7.52

                                       33
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 5 - EARNINGS PER SHARE

     A summary of the  reconciliation  from basic  earnings per share to diluted
earnings  per share for the years ended  December  31,  follows  (in  thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                              2001        2000       1999
                                                            --------    --------   --------
<S>                                                         <C>         <C>        <C>
BASIC:
Earnings before extraordinary items                         $ 50,892    $ 35,762   $ 18,945
Extraordinary items, net of tax effects                         (233)         --         --
                                                            --------    --------   --------
Net earnings                                                $ 50,659    $ 35,762   $ 18,945
                                                            ========    ========   ========

Weighted average number of shares outstanding                  5,305       5,171      5,431
                                                            --------    --------   --------

Basic earnings per share before extraordinary items         $   9.59    $   6.92   $   3.49
Extraordinary items                                            (0.04)         --         --
                                                            --------    --------   --------
Basic earnings per share                                    $   9.55    $   6.92   $   3.49
                                                            ========    ========   ========

DILUTED:
Earnings before extraordinary items*                        $ 50,892    $ 35,762   $ 18,945
Extraordinary items, net of tax effects                         (233)         --         --
                                                            --------    --------   --------
Net earnings                                                $ 50,659    $ 35,762   $ 18,945
                                                            ========    ========   ========

Weighted average number of shares outstanding                  5,305       5,171      5,431
Effect of dilutive securities:
   Contingent shares and warrants                                 --          19         89
   Options to acquire common stock                               583         524        512
                                                            --------    --------   --------
Diluted weighted common shares outstanding                     5,888       5,714      6,032
                                                            --------    --------   --------

Diluted earnings per share before extraordinary items       $   8.64    $   6.26   $   3.14
Extraordinary items                                            (0.04)         --         --
                                                            --------    --------   --------
Diluted earnings per share                                  $   8.60    $   6.26   $   3.14
                                                            ========    ========   ========

Antidilutive stock options not included in diluted EPS            --          38        279
                                                            ========    ========   ========
</TABLE>

*    There were no reconciling items between earnings before extraordinary items
     on a basic and diluted basis.

NOTE 6 - STOCK OPTIONS

     Our Board of Directors administers our stock option plan. The plan provides
for stock option grants to key personnel and directors,  and provides a means of
performance-based   compensation  in  order  to  attract  and  retain  qualified
employees.

     We apply APB Opinion No. 25 and related  interpretations  in accounting for
our plan.  Under APB No. 25, if the exercise price of our stock options is equal
to the  market  price  of the  underlying  stock on the  date of the  grant,  no
compensation expense is recognized.

                                       34
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Had compensation cost for these plans been determined  pursuant to SFAS No.
123,  our net  earnings  and  earnings  per share would have been reduced to the
following pro forma amounts (in thousands, except per share amounts):

                                                 2001       2000       1999
                                               --------   --------   --------
Net earnings                   As reported     $ 50,659   $ 35,762   $ 18,945
                               Pro forma         49,195     35,464     18,472
Basic earnings per share       As reported         9.55       6.92       3.49
                               Pro forma           9.27       6.86       3.40
Diluted earnings per share     As reported         8.60       6.26       3.14
                               Pro forma           8.36       6.21       3.06


     The per share weighted  average fair values of stock options granted during
2001, 2000 and 1999 were $16.64, $5.67 and $7.81, respectively,  on the dates of
grant  calculated using the  Black-Scholes  pricing model based on the following
weighted average assumptions:

                                                 2001       2000       1999
                                               --------   --------   --------
Expected dividend yield                              0%         0%         0%
Risk-free interest rate                           4.79%      6.71%      4.76%
Expected volatility                                 55%        47%        52%
Expected life (in years)                             6          6          6

THE MERITAGE PLAN

     Meritage  stockholders  approved our current  stock option plan at the 1997
Annual  Stockholders  Meeting.  The plan  authorizes  grants of incentive  stock
options and non-qualified stock options to our executives,  directors, employees
and  consultants.  At December 31,  2001, a total of 662,720  shares of Meritage
common stock are reserved for issuance upon  exercise of stock  options  granted
under this plan.  The options  vest over periods from two to five years from the
date such options were  granted,  are based on continued  employment  and expire
five to ten years after the date of grant.

OTHER OPTIONS

     The 1988 Homeplex Mortgage Investments Corporation Stock Option Plan was in
effect at the time of the  merger.  No new grants  were  issued  under this plan
since the merger, and all remaining options were exercised during 2000.

     In connection with the merger and Legacy combination, Mssrs. Hilton, Landon
and Cleverly each received 166,667  non-qualified  stock options with three year
vesting periods.  The exercise price of these options is $5.25 per share,  which
was negotiated at the time of the transactions.  Mr. Hilton's and Mr. Cleverly's
options expire in December 2002. Mr. Landon exercised his options in 2001. There
are 165,834 shares of Meritage  common stock reserved for issuance upon exercise
of such stock options at December 31, 2001.

                                       35
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


SUMMARY OF STOCK OPTION ACTIVITY:

<TABLE>
<CAPTION>
                                                      2001                    2000                     1999
                                             ---------------------   ---------------------    ---------------------
                                                          WEIGHTED                 WEIGHTED                WEIGHTED
                                                           AVERAGE                  AVERAGE                 AVERAGE
                                                          EXERCISE                 EXERCISE                EXERCISE
                                               SHARES      PRICE       SHARES       PRICE       SHARES      PRICE
                                             ---------    -------    ---------     -------    ---------    -------
<S>                                          <C>          <C>        <C>           <C>        <C>          <C>
Options outstanding at beginning of year       894,000    $  8.73    1,173,226     $  7.65    1,028,302    $  6.25
   Granted                                     321,950      30.34       89,800       10.43      264,500      14.74
   Exercised                                  (384,147)      6.64     (359,026)       5.00      (51,076)      7.08
   Canceled                                    (21,440)     15.75      (10,000)      12.17      (68,500)     14.39
                                             ---------    -------    ---------     -------    ---------    -------
Options outstanding at end of year             810,363    $ 18.12      894,000     $  8.73    1,173,226    $  7.65
                                             =========    =======    =========     =======    =========    =======
Options exercisable at end of year             294,294                 587,700                  801,669
Price range of options exercised                   $5.25 - $17.63          $4.37 - $14.25           $5.62 - $11.25
Price range of options outstanding                 $5.25 - $41.77          $5.25 - $18.00           $4.50 - $17.63
Total shares reserved at end of year           828,554               1,226,571                1,386,583
</TABLE>

STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 2001, WERE:

<TABLE>
<CAPTION>
                                               STOCK OPTIONS OUTSTANDING                STOCK OPTIONS EXERCISABLE
                                   -----------------------------------------------      -------------------------
                                                                          WEIGHTED                       WEIGHTED
                                                    WEIGHTED AVERAGE       AVERAGE                        AVERAGE
                                     NUMBER            REMAINING          EXERCISE         NUMBER        EXERCISE
RANGE OF EXERCISE PRICES           OUTSTANDING      CONTRACTUAL LIFE        PRICE       EXERCISABLE        PRICE
------------------------           -----------      ----------------        -----       -----------        -----
<S>                                <C>              <C>                   <C>           <C>              <C>
$ 5.25 - $12.50                      289,633           2.6 years           $  6.96        216,014         $ 6.00
$14.25 - $18.00                      204,500           3.9                   14.99         77,800          14.84
$28.86 - $41.77                      316,230           6.5                   30.37            480          28.86
                                    --------          ----                 -------       --------         ------
                                     810,363           4.5 years           $ 18.12        294,294         $ 8.37
                                    ========          ====                 =======       ========         ======
</TABLE>

NOTE 7 - INCOME TAXES

Total income tax expense was allocated as follows (in thousands):

                                       2001        2000        1999
                                     --------    --------    --------
Income from continuing operations    $ 32,444    $ 21,000    $ 13,269
Extraordinary items (benefit)            (149)         --          --
                                     --------    --------    --------
                                     $ 32,295    $ 21,000    $ 13,269
                                     ========    ========    ========

                                       36
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Components  of  income  tax  expense  attributable  to  income  from  continuing
operations are (in thousands):

                                       2001        2000        1999
                                     --------    --------    --------
      Current taxes:
           Federal                   $ 29,295    $ 18,255    $  5,748
           State                        5,218       2,589       1,285
                                     --------    --------    --------
                                       34,513      20,844       7,033
                                     --------    --------    --------
      Deferred taxes:
           Federal                     (1,742)        140       6,121
           State                         (327)         16         115
                                     --------    --------    --------
                                       (2,069)        156       6,236
                                     --------    --------    --------

           Total                     $ 32,444    $ 21,000    $ 13,269
                                     ========    ========    ========

Deferred tax assets and  liabilities  have been  recognized in the  consolidated
balance sheets due to the following  temporary  differences at December 31, 2001
and 2000 (in thousands):

                                                  2001        2000
                                                --------    --------
Warranty reserve                                $    931    $    675
Real estate and fixed asset basis differences        247         324
Wages payable                                      1,719          --
Other                                                603         221
                                                --------    --------
                                                   3,500       1,220
Deductible merger/acquisition costs                 (888)       (677)
                                                --------    --------
     Net deferred tax asset                     $  2,612    $    543
                                                ========    ========

     We believe it is more likely than not that future  operating  results  will
generate sufficient taxable income to realize the net deferred tax asset.

RECONCILIATION OF EFFECTIVE INCOME TAX EXPENSE:

     Income taxes differ for the years ended  December 31, 2001,  2000 and 1999,
from the  amounts  computed  using the  federal  statutory  income tax rate as a
result of the following (in thousands):

                                                  2001        2000        1999
                                                --------    --------    --------
Expected taxes at current federal
 statutory income tax rate                      $ 29,355    $ 19,299    $ 10,953
State income taxes                                 3,097       1,719         890
Non-deductible merger/acquisition costs
 and other                                            (8)        (18)      1,426
                                                --------    --------    --------
     Income tax expense                         $ 32,444    $ 21,000    $ 13,269
                                                ========    ========    ========

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value of our 9.75% senior notes at December 31, 2001, is
$160.4 million,  based on independent  dealer quotes. The recorded amount of the
senior notes at December 31, 2001 is $155 million.

                                       37
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 9 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     Additional information related to our Consolidated Statements of Cash Flows
follows (in thousands):

The 2001 acquisition of Hancock resulted in the following  changes in assets and
liabilities:

Increase in real estate                                $(54,545)
Increase in deposits on real estate under option
  or contract                                            (8,899)
Increase in receivables and other assets                   (543)
Increase in goodwill                                    (11,423)
Increase in property and equipment                       (1,632)
Increase in accounts payable and accrued liabilities      6,890
Increase in home sale deposits                            2,503
Increase in notes payable                                 1,890
                                                       --------
Net cash paid for acquisition                          $(65,759)
                                                       ========

                                          2001      2000      1999
                                        -------   -------   -------
Cash paid during the year for:
     Interest                           $14,722   $ 8,403   $ 5,873
     Income taxes                       $31,160   $18,786   $ 5,423

NOTE 10 - RELATED PARTY TRANSACTIONS

     We have transacted  business with related or affiliated  companies and with
certain officers and directors of the Company.

     Since 1997, we have leased office space in Plano, Texas from Home Financial
Services,  a Texas  partnership  owned by a co-chief  executive  officer and his
wife.  The lease  expires  May 15,  2002.  Rents  paid to the  partnership  were
$193,771, $185,613 and $176,773, in 2001, 2000 and 1999, respectively,  and were
recorded as general and administrative expenses.

     We paid legal fees of  approximately  $420,000,  $311,000  and  $334,000 to
Tiffany & Bosco, P.A., a law firm of which one of our directors is a partner, in
2001,  2000 and 1999,  respectively.  These fees were  recorded  as general  and
administrative expenses.

     In 2001,  we  purchased  77 lots for  development  in  Arizona at a cost of
approximately  $3.5 million from a business  controlled by one of our directors.
We  purchased  42 lots at a cost of  approximately  $2.4  million from this same
business in 2000, and no lots in 1999. The land purchased from this business was
recorded as real estate on our balance sheet.

     In connection  with our  acquisition  of Hancock,  we assumed the following
existing  transactions  with affiliates of Greg Hancock,  the founder of Hancock
and now its division president at Meritage.

     Mr.  Hancock is the majority owner of a venture that is developing a master
planned  community  in Casa  Grande,  Arizona.  We have  entered  into an option
contract  to  purchase  approximately  410  acres  of  residential  land in this
community.  At December 31, 2001, we had not  purchased  any land,  but had paid
deposits to the venture for our option, totaling approximately  $750,000,  which
is  included  in  deposits  on real  estate  under  option  or  contract  on our
accompanying  balance sheet.  In addition,  we received from the venture,  at no
cost,  185  acres  of land on  which to  build a golf  course.  We have  assumed
responsibility for the construction of the golf course which, as an amenity,  is
expected to benefit the land under option. We also perform certain

                                       38
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


planning and construction supervision functions for the venture for which we are
paid a  management  fee of 3% of the  development  costs.  For  the  year  ended
December  31,  2001,  we  earned   approximately   $173,000   pursuant  to  this
arrangement, which we recorded as other income in our statement of earnings.

     At December  31,  2001,  we owed  approximately  $1.9  million to a venture
controlled  by Mr.  Hancock that had sold land to Hancock.  The note payable was
repaid in full in January 2002.

     At December 31, 2001, Mr. Hancock owed us approximately  $340,000,  related
to the  resolution  of various  post-closing  matters  pertaining to the Hancock
acquisition.  This  obligation was recorded as a receivable on our balance sheet
and was paid in full in January 2002.

NOTE 11 - SEGMENT INFORMATION

     We classify our operations into two primary management segments: first-time
and volume priced homes and mid to luxury priced homes.  These segments generate
revenue  through the home sales to external  customers.  We are not dependent on
any one major customer.

     Operational   information  relating  to  the  different  business  segments
follows.  Certain  information  has not  been  included  by  segment  due to the
immateriality  of the amount to the  segment or in total.  We  evaluate  segment
performance based on several factors,  of which the primary financial measure is
earnings before interest,  taxes and extraordinary  items (EBIT). The accounting
policies of the  business  segments  are the same as those  described in Note 1.
There are no significant transactions between segments.

                                                  YEARS ENDED DECEMBER 31,
                                            -----------------------------------
                                               2001         2000         1999
                                            ---------    ---------    ---------
                                                       (IN THOUSANDS)
HOME SALES REVENUE:
   First-time and volume priced             $ 433,861    $ 246,953    $ 185,783
   Mid to luxury priced                       308,715      268,475      148,224
                                            ---------    ---------    ---------
          Total                             $ 742,576    $ 515,428    $ 334,007
                                            =========    =========    =========

EBIT:
   First-time and volume priced             $  62,145    $  35,934    $  23,961
   Mid to luxury priced                        40,310       33,633       17,391
   Corporate and other                         (5,815)      (3,626)      (4,094)
                                            ---------    ---------    ---------
          Total                             $  96,640    $  65,941    $  37,258
                                            =========    =========    =========

                                                  DECEMBER 31,
                                            ----------------------
                                               2001         2000
                                            ---------    ---------
                                               (IN THOUSANDS)
ASSETS AT YEAR END:
   First-time and volume priced             $ 261,825    $ 140,348
   Mid to luxury priced                       164,156      124,359
   Corporate and other                         10,734        2,368
                                            ---------    ---------
          Total                             $ 436,715    $ 267,075
                                            =========    =========

                                       39
<PAGE>
                      MERITAGE CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


NOTE 12 - COMMITMENTS AND CONTINGENCIES

     We are  involved  in legal  proceedings  and claims that have arisen in the
normal course of business. Also, at December 31, 2001, we had approximately $5.2
million in  reserve  for  various  warranty  claims.  We  believe  the  ultimate
liabilities,  if any,  with  respect to these  matters  will not have a material
adverse effect on our financial position or results of operations.

     In the normal course of business,  we provide standby letters of credit and
performance  bonds issued to third parties to secure  performance  under various
contracts.  At  December  31,  2001,  outstanding  letters of credit  were $12.2
million and  performance  bonds were $46.1  million.  We do not believe that any
such letters of credit or bonds are likely to be drawn upon.

     As a component  of our model home  construction  activities,  we enter into
lease transactions with third parties.  The total cost, including land costs, of
model homes leased by us and constructed  under these lease  agreements is $19.0
million,  all of which is  excluded  from our balance  sheet as of December  31,
2001.

     We lease  office  facilities,  model  homes  and  equipment  under  various
operating   lease   agreements.   Approximate   minimum   lease   payments   for
non-cancelable  operating  leases as of December  31,  2001,  are as follows (in
thousands):

          DECEMBER 31,
             2002..................................           $ 3,049
             2003..................................             1,637
             2004..................................             1,128
             2005..................................               790
             2006..................................               227
             Thereafter............................                22
                                                              -------
                                                              $ 6,853
                                                              =======

     Rent expense  approximated  $2.5 million,  $1.6 million and $1.1 million in
2001,  2000 and 1999,  respectively.  Included in these  amounts  are  $151,000,
$185,600 and $415,000 in 2001,  2000 and 1999,  respectively,  related to office
facilities  leased  from  companies  owned  beneficially  either  by  one of our
co-chairmen or by a co-chairman and a director.

     We have certain  obligations  related to  post-construction  warranties and
defects related to homes constructed and sold. Historically,  these amounts have
not been material and we do not anticipate future obligations to be material.

NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                        HOME SALES                   BASIC EARNINGS    DILUTED EARNINGS
                                         REVENUE     NET EARNINGS      PER SHARE          PER SHARE
                                         -------     ------------      ---------          ---------
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                     <C>          <C>             <C>               <C>
2001 - THREE MONTHS ENDED:
March 31                                $ 116,113      $  7,389          $ 1.44             $ 1.28
June 30                                   174,403        12,493            2.36               2.12
September 30                              207,177        14,887            2.77               2.50
December 31                               244,883        15,890            2.93               2.69

2000 - THREE MONTHS ENDED:
March 31                                $  91,653      $  4,771          $ 0.90             $ 0.82
June 30                                   120,802         8,573            1.62               1.50
September 30                              134,464        10,509            2.06               1.85
December 31                               168,509        11,909            2.38               2.12
</TABLE>

                                       40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information  required by this item is included under the captions "Election
of Directors," "Director and Officer Information," and "Section 16(a) Beneficial
Ownership  Reporting  Compliance" in our Notice and Proxy Statement  relating to
our 2002 Annual Meeting of  Stockholders  and is  incorporated by reference into
this Form 10-K Report. With the exception of the foregoing information and other
information  specifically  incorporated by reference into this Form 10-K Report,
our 2002 Proxy Statement is not being filed as a part of this report.

ITEM 11. EXECUTIVE COMPENSATION

     Information required by this item is included under the captions "Executive
Compensation,"  "Director Compensation," and "Employment Agreements" in our 2002
Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information  required  by this item is included  under the  caption  "Stock
Owned by Principal  Stockholders and Management" in our 2002 Proxy Statement and
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  required by this item is included  under the caption  "Certain
Transactions and  Relationships" in our 2002 Proxy Statement and is incorporated
herein by reference.

                                       41
<PAGE>
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
                                                                                                 PAGE OR
                                                                                             METHOD OF FILING
                                                                                             ----------------
<S>                                                                                          <C>
(a)  FINANCIAL STATEMENTS AND SCHEDULES

     (i)  Financial Statements:
          (1)  Report of KPMG LLP                                                                Page 24
          (2)  Consolidated  Financial  Statements  and  Notes  to  Consolidated                 Page 25
               Financial  Statements  of  the  Company,  including  Consolidated
               Balance  Sheets  as of  December  31,  2001 and 2000 and  related
               Consolidated  Statements  of Earnings,  Stockholders'  Equity and
               Cash Flows for each of the years in the  three-year  period ended
               December 31, 2001

     (ii) Financial Statement Schedules:
          Schedules have been omitted because of the absence of conditions under
          which they are required or because the required  material  information
          is included in the Consolidated  Financial  Statements or Notes to the
          Consolidated Financial Statements included herein.

(b)  REPORTS ON FORM 8-K
     We filed no reports on Form 8-K in the fourth quarter of 2001.

(c)  EXHIBITS

EXHIBIT
 NUMBER                     DESCRIPTION                                              PAGE OR METHOD OF FILING
 ------                     -----------                                              ------------------------

  2.1     Agreement and Plan of Reorganization, dated as of           Incorporated by reference to Exhibit 2 of Form S-4
          September 13, 1996, by and among Homeplex, the              Registration Statement No. 333-15937.
          Monterey Merging Companies and the Monterey
          Stockholders

  2.2     Agreement of Purchase and Sale of Assets, dated as          Incorporated by reference to Exhibit 2 of Form
          of May 20, 1997, by and among Monterey, Legacy              8-K/A dated June 18, 1997.
          Homes, Ltd., Legacy Enterprises, Inc., and John
          and Eleanor Landon

  2.3     Agreement of Purchase and Sale of Assets, dated as          Incorporated by reference to Exhibit 2.2 of Form
          of June 15, 1998, by and among the Company,                 10-Q for the quarterly period ended June 30, 1998.
          Sterling Communities, S.H. Capital, Inc., Sterling
          Financial Investments, Inc., Steve Hafener and W.
          Leon Pyle

  2.4     Master Transaction Agreement (with exhibits),               Incorporated by reference to Exhibit 2.1 of Form
          dated May 7, 2001 by and among the Company,                 8-K dated May 10, 2001.
          Hancock-MTH Builders, Inc., Hancock-MTH
          Communities, Inc., HC Builders, Inc. and Hancock
          Communities, L.L.C.
</TABLE>

                             42
<PAGE>
<TABLE>
<S>       <C>                                                         <C>
 2.4.1    Amendment No. 1 to Master Transaction Agreement             Incorporated by reference to Exhibit 2.1 of Form
          and Agreement of Purchase and Sale of Assets,               8-K dated June 6, 2001.
          dated May 30, 2001 by and between Meritage
          Corporation, Meritage-MTH Communities, Inc., HC
          Builders, Inc., Hancock Communities, L.L.C. and
          American Homes West, Incorporated

  3.1     Amendment to Articles of Incorporation                      Incorporated by reference to Exhibit 3.1 of Form
                                                                      10-Q for the quarterly period ended September 30,
                                                                      1998.

  3.2     Restated Articles of Incorporation                          Incorporated by reference to Exhibit 3.2 of Form
                                                                      10-Q for the quarterly period ended September 30,
                                                                      1998.

  3.3     Amended and Restated Bylaws                                 Incorporated by reference to Exhibit 3.3 of Form
                                                                      S-3 #333-58793.

  4.1     Specimen of Common Stock Certificate                        Incorporated by reference to Exhibit 4 of Form
                                                                      10-K for the year ended December 31, 1996.

  4.2     Indenture dated as of May 31, 2001, by and among            Incorporated by reference to Exhibit 4.1 of Form
          Meritage Corporation, the Guarantors named therein          8-K dated June 6, 2001.
          and Wells Fargo Bank, N.A.

 10.1     $70 Million Borrowing Base Loan Agreement by and            Incorporated by reference to Exhibit 10.4 of Form
          among the Company, Norwest Bank, Arizona, N.A. and          10-K for the year ended December 31, 1999.
          California Bank and Trust, dated as of September
          15, 1999

10.1.1    Modification to Loan Agreement with Wells Fargo             Incorporated by reference to Exhibit 10.1 of Form
          Bank, Arizona, N.A. and California Bank and Trust,          10-Q for the quarterly period ended June 30, 2000.
          dated as of May 16, 2000

10.1.2    Second Modification to Loan Agreement with Wells            Incorporated by reference to Exhibit 10.1.2 of
          Fargo Bank, Arizona, N.A. and California Bank and           Form S-4 dated July 3, 2001.
          Trust, dated June 1, 2001

 10.2     Modification to Guaranty Federal Bank Loan, dated           Incorporated by reference to Exhibit 10.1 of Form
          as of May 19, 1998                                          10-Q for the quarterly period ended June 30, 1998.


10.2.1    Modification to Guaranty Federal Bank Loan, dated           Incorporated by reference to Exhibit 10.4 of Form
          as of July 31, 1999                                         10-K for the year ended December 31, 1999.

10.2.2    Modification to Guaranty Federal Bank Loan, dated           Incorporated by reference to Exhibit 10.1 of Form
          as of March 29, 2000                                        10-Q for the quarterly period ended March 31,
                                                                      2000.


10.2.3    Extension of Guaranty Federal Bank Loan, dated as           Incorporated by reference to Exhibit 10.2 of Form
          of July 31, 2000                                            10-Q for the quarterly period ended June 30, 2000.


10.2.4    Modification to Guaranty Federal Bank Loan, dated           Incorporated by reference to Exhibit 10.1 of Form
          as of July 31, 2000                                         10-Q for the quarterly period ended September 30,
                                                                      2000.

10.2.5    Seventh Modification Agreement to Guaranty Federal          Incorporated by reference to Exhibit 10.2.4 of
          Bank Loan, dated as of May 29, 2001                         Form S-4 dated July 3, 2001.

10.2.6    Modification Letter to the Guaranty Federal Bank            Incorporated by reference to Exhibit 10.1 of Form
          Loan, dated as of May 29, 2001                              10-Q for the quarterly period ended June 30, 2001.
</TABLE>

                             43
<PAGE>
<TABLE>
<S>       <C>                                                         <C>
 10.3     $3.3 Million Construction Loan Agreement by and             Incorporated by reference to Exhibit 10.2 of Form
          between the Company and Compass Bank, Dated as of           10-Q for the quarterly period ended March 31,
          February 10, 2000                                           2000.

 10.4     Amended 1997 Stock Option Plan *                            Incorporated by reference to Exhibit 4.1 of
                                                                      Registration Statement No. 333-39036 filed on June
                                                                      12, 2000.

 10.5     2001 Annual Incentive Plan*                                 Incorporated by reference to Exhibit B of the
                                                                      Proxy Statement for the 2001 Annual Meeting of
                                                                      Stockholders.

 10.6     Employment Agreement, dated as of May 30, 2001, by          Incorporated by reference to Exhibit 10.2 of Form
          and among Meritage Corporation, Hancock MTH                 8-K dated June 6, 2001.
          Builders, Inc., Hancock Communities, Inc. and Greg
          Hancock*

 10.7     Employment Agreement between the Company and                Incorporated by reference to Exhibit 10.10 to the
          William W. Cleverly*                                        Form 10-K for the year ended December 31, 1996.

 10.8     Separation and Consulting Agreement between the             Incorporated by reference to Exhibit C of the Form
          Company and William W. Cleverly*                            8-K filed on March 23, 1999.

 10.9     Employment Agreement between the Company and                Incorporated by reference to Exhibit 10.11 to the
          Steven J. Hilton*                                           Form 10-K for the year ended December 31, 1996.

10.10     Employment Agreement between the Company and John           Incorporated by reference to Exhibit C of the Form
          R. Landon*                                                  8-K filed on June 18, 1997.

10.11     Stock Option Agreement between the Company and              Incorporated by reference to Exhibit 10.12 of the
          William W. Cleverly*                                        Form 10-K for the year ended December 31, 1996.

10.12     Stock Option Agreement between the Company and              Incorporated by reference to Exhibit 10.13 to the
          Steven J. Hilton*                                           Form 10-K for the year ended December 31, 1996.

10.13     Stock Option Agreement between the Company and              Incorporated by reference to Exhibit C of the Form
          John R. Landon*                                             8-K filed on June 18, 1997.

10.14     Registration Rights Agreement between the Company           Incorporated by reference to Exhibit 10.14 to the
          and William W. Cleverly*                                    Form 10-K for the year ended December 31, 1996.

10.15     Registration Rights Agreement between the Company           Incorporated by reference to Exhibit 10.15 to the
          and Steven J. Hilton*                                       Form 10-K for the year ended December 31, 1996.

10.16     Registration Rights Agreement between the Company           Incorporated by reference to Exhibit C of the Form
          and John R. Landon*                                         8-K filed on June 18, 1997.

10.17     Employment Agreement between the Company and                Incorporated by reference to Exhibit 10.1 of Form
          Larry W. Seay*                                              10-Q for the quarterly period ended September 30,
                                                                      2001.

10.18     Change of Control Agreement between the Company             Incorporated by reference to Exhibit 10.3 of Form
          and Steven J. Hilton*                                       10-Q for the quarterly period ended March 30,
                                                                      2000.

10.19     Change of Control Agreement between the Company             Incorporated by reference to Exhibit 10.4 of Form
          and John R. Landon*                                         10-Q for the quarterly period ended March 30,
                                                                      2000.

10.20     Change of Control Agreement between the Company             Incorporated by reference to Exhibit 10.5 of Form
          and Larry W. Seay*                                          10-Q for the quarterly period ended March 30,
                                                                      2000.
</TABLE>

                             44
<PAGE>
<TABLE>
<S>       <C>                                                         <C>
10.21     Change of Control Agreement between the Company             Incorporated by reference to Exhibit 10.6 of Form
          and Richard T. Morgan*                                      10-Q for the quarterly period ended March 30,
                                                                      2000.

  21      List of Subsidiaries                                        Filed herewith.

  23      Consent of KPMG LLP                                         Filed herewith.

  24      Powers of Attorney                                          See signature page.
</TABLE>

-------
*    Indicates a management contract or compensation plan.

                             45
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 27th
day of March 2002.

                                      MERITAGE CORPORATION,
                                      a Maryland Corporation

                                      By /s/ JOHN R. LANDON
                                         ---------------------------------------
                                         John R. Landon
                                         CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER

                                      By /s/ STEVEN J. HILTON
                                         ---------------------------------------
                                         Steven J. Hilton
                                         CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER

                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS,  that each person whose  signature  appears
below  constitutes  and appoints  John R. Landon,  Steven J. Hilton and Larry W.
Seay, and each of them, his true and lawful  attorneys-in-fact  and agents, with
full power of substitution  and  resubstitution,  for him and in his name, place
and stead,  in any and all  capacities,  to sign any and all  amendments to this
Form 10-K Annual  Report,  and to file the same,  with all exhibits  thereto and
other documents in connection  therewith the Securities and Exchange Commission,
granting unto said  attorneys-in-fact  and agents,  and each of them, full power
and  authority  to do and  perform  each and every act of things  requisite  and
necessary to be done in and about the premises,  as fully and to all intents and
purposes as he might or could do in person hereby  ratifying and  confirming all
that said  attorneys-in-fact  and agents, or his substitute or substitutes,  may
lawfully do or cause to be done by virtue hereof.

     Pursuant to these requirements of the Securities  Exchange Act of 1934, the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated have signed this report on Form 10-K below:

       SIGNATURE                          TITLE                        DATE
       ---------                          -----                        ----

/s/ JOHN R. LANDON           Co-Chairman and                      March 27, 2002
--------------------------   Chief Executive Officer
    John R. Landon

/s/ STEVEN J. HILTON         Co-Chairman and                      March 27, 2002
--------------------------   Chief Executive Officer
    Steven J. Hilton

/s/ LARRY W. SEAY            Chief Financial Officer, Vice        March 27, 2002
--------------------------   President-Finance, Secretary and
    Larry W. Seay            Treasurer (Principal Financial and
                             Accounting Officer)

/s/ WILLIAM W. CLEVERLY      Director                             March 27, 2002
--------------------------
    William W. Cleverly

/s/ RAYMOND OPPEL            Director                             March 27, 2002
--------------------------
    Raymond Oppel

/s/ ROBERT G. SARVER         Director                             March 27, 2002
--------------------------
    Robert G. Sarver

/s/ C. TIMOTHY WHITE         Director                             March 27, 2002
--------------------------
    C. Timothy White

/s/ PETER L. AX              Director                             March 27, 2002
--------------------------
    Peter L. Ax

                                      S-1

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>3
<FILENAME>ex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
                                                                      Exhibit 21

                              Meritage Corporation
                              List of Subsidiaries

Monterey Homes Arizona, Inc.

Monterey Homes Construction, Inc.

Meritage Homes of Arizona, Inc.

Meritage Paseo Crossing, LLC

Meritage Homes Construction, Inc.

Meritage Paseo Construction, LLC

Hancock-MTH Communities, Inc.

Hancock-MTH Builders, Inc.

MTH-Texas GP, Inc.

MTH-Texas LP, Inc.

Legacy/Monterey Homes, L.P.

Meritage Holdings, L.L.C.

Legacy Operating Company, L.P.

Hulen Park Venture, L.L.C.

Texas Home Mortgage Corporation

Meritage Homes of Northern California, Inc.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>4
<FILENAME>ex23-1.txt
<DESCRIPTION>CONSENT OF KPMG LLP
<TEXT>
                                                                      EXHIBIT 23

                          INDEPENDENT AUDITORS' CONSENT


The Board of Directors
Meritage Corporation:


We consent to incorporation by reference in Registration Statement No. 333-58793
on Form  S-3 of  Meritage  Corporation  and to  incorporation  by  reference  in
Registration  Statement Nos.  333-38230,  333-37859,  333-75629 and 333-39036 on
Form S-8 of Meritage  Corporation  of our report  dated  February 6, 2002,  with
respect  to  the  consolidated   balance  sheets  of  Meritage  Corporation  and
subsidiaries  as of  December  31, 2001 and 2000,  and the related  consolidated
statements  of  earnings,  stockholders'  equity  and cash flows for each of the
years in the three-year  period ended December 31, 2001, which report appears in
the December 31, 2001 annual report on Form 10-K of Meritage Corporation.


                                            /s/ KPMG LLP


Phoenix, Arizona
March 27, 2002

</TEXT>
</DOCUMENT>
</SUBMISSION>
