UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

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

PULTE HOMES, INC.

(Exact name of registrant as specified in its charter)

MICHIGAN		38-2766606
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

100 Bloomfield Hills Parkway, Suite 300
Bloomfield Hills, Michigan 48304
(Address of principal executive offices) (Zip Code)

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ

Number of shares of common stock outstanding as of October 31, 2005: 258,470,568

Our internet website address is www.pulte.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers, our corporate governance guidelines and the charters of the Audit, Compensation, and Nominating and Governance committees of our Board of Directors, are also posted on our website and are available in print upon request.

 

 

PULTE HOMES, INC.

INDEX

		Page No.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004		3
Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004		4
Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2005 and 2004		5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004		6
Notes to Condensed Consolidated Financial Statements		7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3 Quantitative and Qualitative Disclosures About Market Risk		36
Item 4 Controls and Procedures		36
PART II OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 5 Other Information		37
Item 6 Exhibits		38
SIGNATURES		39
Second Amended & Restated Credit Agreement
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive & Chief Financial Officers

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)

		September 30,				December 31,
		2005				2004
		(Unaudited)				(Note)
ASSETS
Cash and equivalents		$	214,897			$	314,634
Unfunded settlements			96,269				118,471
House and land inventory			9,379,528				7,390,791
Land held for sale			186,752				230,743
Land, not owned, under option agreements			88,243				106,380
Residential mortgage loans available-for-sale			554,900				697,077
Investments in unconsolidated entities			289,771				258,868
Goodwill			312,975				307,693
Intangible assets, net			129,267				135,454
Other assets			1,031,155				846,786
Total assets		$	12,283,757			$	10,406,897
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued and other liabilities, including book overdrafts of $406,853 and $304,394 in 2005 and 2004, respectively		$	2,147,569			$	1,862,051
Customer deposits			482,932				341,050
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets			461,740				617,415
Income taxes			213,048				202,557
Senior notes and unsubordinated notes			3,511,170				2,861,550
Total liabilities			6,816,459				5,884,623
Shareholders’ equity			5,467,298				4,522,274
Total liabilities and shareholders’ equity		$	12,283,757			$	10,406,897

Note: The condensed consolidated balance sheet at December 31, 2004, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Revenues:
Homebuilding		$	3,798,000			$	2,931,974			$	9,574,526			$	7,428,959
Financial services			42,383				27,706				108,917				76,152
Corporate			1,120				125				3,625				1,584
Total revenues			3,841,503				2,959,805				9,687,068				7,506,695
Expenses:
Homebuilding, principally cost of sales			3,193,707				2,514,195				8,148,234				6,484,290
Financial services			23,922				19,092				66,614				50,806
Corporate, net			25,853				24,695				80,220				70,250
Total expenses			3,243,482				2,557,982				8,295,068				6,605,346
Other income:
Equity income			15,681				16,146				54,317				33,752
Income from continuing operations before income taxes			613,702				417,969				1,446,317				935,101
Income taxes			225,983				158,845				536,513				355,330
Income from continuing operations			387,719				259,124				909,804				579,771
Income from discontinued operations			7,702				10,812				7,570				9,397
Net income		$	395,421			$	269,936			$	917,374			$	589,168
Per share data:
Basic:
Income from continuing operations		$	1.51			$	1.02			$	3.56			$	2.31
Income from discontinued operations			.03				.04				.03				.04
Net income		$	1.54			$	1.07			$	3.59			$	2.34
Assuming dilution:
Income from continuing operations		$	1.47			$	.99			$	3.46			$	2.24
Income from discontinued operations			.03				.04				.03				.04
Net income		$	1.50			$	1.03			$	3.49			$	2.27
Cash dividends declared		$	.04			$	.03			$	.09			$	.08
Number of shares used in calculation:
Basic:
Weighted-average common shares outstanding			256,081				253,133				255,611				251,402
Assuming dilution:
Effect of dilutive securities			7,827				7,837				7,201				7,780
Adjusted weighted-average common shares and effect of dilutive securities			263,908				260,970				262,812				259,182

See accompanying Notes to Condensed Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($000’s omitted)
(Unaudited)

														Accumulated
														Other
						Additional								Comprehensive
		Common				Paid-in				Unearned				Income				Retained
		Stock				Capital				Compensation				(Loss)				Earnings				Total
Shareholders’ Equity, December 31, 2004		$	2,558			$	1,114,739			$	(44	)		$	(14,380	)		$	3,419,401			$	4,522,274
Stock option exercise, including tax benefit of $28,341			26				54,146				—				—				—				54,172
Stock-based compensation			—				33,368				—				—				—				33,368
Restricted stock award			11				(11	)			—				—				—				—
Restricted stock award amortization			—				—				44				—				—				44
Cash dividends declared			—				—				—				—				(23,421	)			(23,421	)
Stock repurchases			(10	)			(4,626	)			—				—				(36,435	)			(41,071	)
Comprehensive income (loss):
Net income			—				—				—				—				917,374				917,374
Change in fair value of derivatives			—				—				—				780				—				780
Foreign currency translation adjustments			—				—				—				3,778				—				3,778
Total comprehensive income																							921,932
Shareholders’ Equity, September 30, 2005		$	2,585			$	1,197,616			$	—			$	(9,822	)		$	4,276,919			$	5,467,298
Shareholders’ Equity, December 31, 2003		$	2,504			$	1,014,739			$	(656	)		$	(39,142	)		$	2,470,678			$	3,448,123
Stock option exercise, including tax benefit of $31,425			44				68,393				—				—				—				68,437
Stock-based compensation			—				16,834				—				—				—				16,834
Restricted stock award			4				(4	)			—				—				—				—
Restricted stock award amortization			—				—				479				—				—				479
Cash dividends declared			—				—				—				—				(19,058	)			(19,058	)
Comprehensive income (loss):
Net income			—				—				—				—				589,168				589,168
Change in fair value of derivatives			—				—				—				406				—				406
Foreign currency translation adjustments			—				—				—				(1,779	)			—				(1,779	)
Total comprehensive income																							587,795
Shareholders’ Equity, September 30, 2004		$	2,552			$	1,099,962			$	(177	)		$	(40,515	)		$	3,040,788			$	4,102,610

See accompanying Notes to Condensed Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)

		For The Nine Months Ended
		September 30,
		2005				2004
Cash flows from operating activities:
Net income		$	917,374			$	589,168
Adjustments to reconcile net income to net cash flows used in operating activities:
Amortization and depreciation			44,810				34,041
Stock-based compensation expense			33,412				17,313
Deferred income taxes			17,972				5,607
Undistributed earnings of affiliates			(23,426	)			(31,252	)
Other, net			1,423				1,994
Increase (decrease) in cash due to:
Inventories			(2,025,797	)			(2,376,800	)
Residential mortgage loans available-for-sale			142,177				185,470
Other assets			(82,970	)			34,177
Accounts payable, accrued and other liabilities			435,859				277,547
Income taxes			38,832				74,899
Net cash used in operating activities			(500,334	)			(1,187,836	)
Cash flows from investing activities:
Investment in subsidiary			(31,172	)			—
Distributions from unconsolidated entities			135,126				50,029
Investments in unconsolidated entities			(142,262	)			(155,982	)
Proceeds from sales of subsidiaries			11,366				—
Proceeds from sales of property and equipment			3,526				4,946
Capital expenditures			(61,074	)			(54,784	)
Other, net			—				503
Net cash used in investing activities			(84,490	)			(155,288	)
Cash flows from financing activities:
Proceeds from borrowings			679,289				1,469,115
Repayment of borrowings			(155,735	)			(431,193	)
Issuance of common stock			25,831				37,012
Common stock repurchases			(41,071	)			—
Dividends paid			(23,421	)			(19,058	)
Net cash provided by financing activities			484,893				1,055,876
Effect of exchange rate changes on cash and equivalents			194				(134	)
Net decrease in cash and equivalents			(99,737	)			(287,382	)
Cash and equivalents at beginning of period			314,634				401,883
Cash and equivalents at end of period		$	214,897			$	114,501
Supplemental disclosure of cash flow information—cash paid during the period for:
Interest, net of amounts capitalized		$	57,986			$	35,390
Income taxes		$	479,158			$	272,832

See accompanying Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.

Basis of presentation and significant accounting policies

     The consolidated financial statements include the accounts of Pulte Homes, Inc. and all of its direct and indirect subsidiaries (the “Company”) and variable interest entities in which the Company is deemed to be the primary beneficiary. The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (“International”) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s former thrift subsidiary, First Heights Bank, fsb (“First Heights”) is classified as a discontinued operation. The Company also has a mortgage banking company, Pulte Mortgage LLC (“Pulte Mortgage”), which is a subsidiary of Pulte Home Corporation.

     In January 2005, the Company sold all of its Argentina operations. At December 31, 2004, the Argentina operations were classified as held for sale and presented as discontinued operations in the consolidated financial statements.

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

     Certain amounts previously reported in the 2004 financial statements and notes thereto were reclassified to conform to the 2005 presentation. In addition, all share and per share amounts have been restated to retroactively reflect the Company’s two-for-one stock split effected September 1, 2005.

Allowance for warranties

     Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. The Company estimates the costs to be incurred under these warranties and records a liability for the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

     Changes to the Company’s allowance for warranties are as follows ($000’s omitted):

		Nine Months Ended
		September 30,
		2005				2004
Allowance for warranties at beginning of period		$	83,652			$	62,091
Warranty reserves provided			101,297				70,694
Payments and other adjustments			(93,269	)			(64,870	)
Allowance for warranties at end of period		$	91,680			$	67,915

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

1.

Basis of presentation and significant accounting policies (continued)

Stock-based compensation

     The Company currently has several stock-based employee compensation plans. Effective January 1, 2003, the Company adopted the preferable fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Issued to Employees.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the prospective method, the Company recognizes compensation expense on an accelerated basis over the vesting period based on the fair value provisions of SFAS No. 123. Grants made prior to January 1, 2003 continue to be accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With the exception of certain variable stock option grants, no stock-based employee compensation cost is reflected in net income for grants made prior to January 1, 2003, as all options granted in those years had an exercise price equal to the market value of the underlying common stock on the date of grant.

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock based employee compensation. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net income, as reported ($000’s omitted)		$	395,421			$	269,936			$	917,374			$	589,168
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects ($000’s omitted)			3,401				2,803				11,417				7,721
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ($000’s omitted)			(3,861	)			(3,499	)			(12,174	)			(11,582	)
Pro forma net income ($000’s omitted)		$	394,961			$	269,240			$	916,617			$	585,307
Earnings per share:
Basic — as reported		$	1.54			$	1.07			$	3.59			$	2.34
Basic — pro forma		$	1.54			$	1.06			$	3.59			$	2.33
Diluted — as reported		$	1.50			$	1.03			$	3.49			$	2.27
Diluted — pro forma		$	1.50			$	1.03			$	3.49			$	2.26

     The Company also recorded compensation expense for restricted stock awards, net of related tax effects, of $3.1 million and $9.6 million for the three and nine months ended September 30, 2005, compared with $0.9 million and $3 million for the three and nine months ended September 30, 2004. These amounts have been excluded from the reconciliation above, as they would have no impact on pro forma net income as presented.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

1.

Basis of presentation and significant accounting policies (continued)

Land, not owned, under option agreements

     In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, the Company will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended by FIN 46-R issued in December 2003 (collectively referred to as “FIN 46”), if the entity holding the land under option is a variable interest entity, the Company’s deposit represents a variable interest in that entity. Creditors of the variable interest entities have no recourse against the Company.

     In applying the provisions of FIN 46, the Company evaluated all land option agreements and determined that the Company was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, the Company is required to consolidate variable interest entities at fair value. At September 30, 2005 and December 31, 2004, the Company classified $88.2 million and $106.4 million, respectively, as land, not owned, under option agreements on the balance sheet, representing the fair value of land under contract, including deposits of $14.3 million and $18.9 million, respectively. The corresponding liability has been classified within accounts payable, accrued and other liabilities on the balance sheet.

     Land option agreements that did not require consolidation under FIN 46 at September 30, 2005 and December 31, 2004, had a total purchase price of $8 billion and $6.3 billion, respectively. In connection with these agreements, the Company had deposits and advanced costs of $442.2 million and $311.7 million, included in other assets, as well as letters of credit and surety bonds posted in lieu of cash deposits at September 30, 2005 and December 31, 2004, respectively.

New accounting pronouncements

     On December 15, 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), Share-Based Payment, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires that all share-based payments to employees, including grants of employee stock options, be accounted for at fair value. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The Company previously adopted the fair-value-based method of accounting for share-based payments under SFAS No. 123 effective January 1, 2003 using the prospective method described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, the Company uses the Black-Scholes option pricing model to estimate the value of stock options granted to employees and is considering the lattice model. Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and the Company adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that was not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R). Because these amounts are not significant, the adoption of SFAS No. 123(R) is not expected to have a material impact on the Company’s results of operations or financial position. This statement is effective for fiscal periods beginning after December 15, 2005.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

1.

Basis of presentation and significant accounting policies (continued)

New accounting pronouncements (continued)

     In March 2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment. SAB No. 107 provides the SEC staff position regarding the application of SFAS No. 123(R) and contains interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. Additionally, SAB No. 107 highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company does not expect the adoption of SAB No. 107 to have a material impact on its results of operations or financial position.

2.

Segment information

     The Company’s operations are classified into two reportable business segments, Homebuilding and Financial Services, and one non-operating segment, Corporate.

     The Homebuilding segment consists of the following operations:

	•		Domestic Homebuilding, the Company’s core business, is engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for the first-time, first and second move-up, and active adult home buyers.
	•		International Homebuilding is primarily engaged in the acquisition and development of land principally for residential purposes, and the construction of housing on such land in Mexico and Puerto Rico.

     The Financial Services segment consists principally of mortgage banking and title operations conducted through Pulte Mortgage and other subsidiaries.

     Corporate is a non-operating segment that supports the operations of the Company’s subsidiaries by acting as the internal source of financing, developing and implementing strategic initiatives centered on new business development and operating efficiencies, and providing the administrative support associated with being a publicly traded entity listed on the New York Stock Exchange.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2.

Segment information (continued)

		Operating Data by Segment ($000’s omitted)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Revenues:
Homebuilding		$	3,798,000			$	2,931,974			$	9,574,526			$	7,428,959
Financial services			42,383				27,706				108,917				76,152
Corporate			1,120				125				3,625				1,584
Total revenues			3,841,503				2,959,805				9,687,068				7,506,695
Cost of sales (a):
Homebuilding			2,904,136				2,242,371				7,303,760				5,751,616
Selling, general and administrative:
Homebuilding			280,109				257,298				817,482				700,339
Financial services			19,756				17,417				56,378				46,157
Corporate			12,492				12,252				35,775				32,577
Total selling, general and administrative			312,357				286,967				909,635				779,073
Interest:
Financial services			4,166				1,675				10,236				4,649
Corporate			13,333				12,306				44,488				37,511
Total interest			17,499				13,981				54,724				42,160
Other (income) expense, net:
Homebuilding			9,462				14,526				26,992				32,335
Corporate			28				137				(43	)			162
Total other (income) expense, net			9,490				14,663				26,949				32,497
Total costs and expenses			3,243,482				2,557,982				8,295,068				6,605,346
Equity income:
Homebuilding			15,099				13,466				51,967				29,346
Financial services			582				2,680				2,350				4,406
Total equity income			15,681				16,146				54,317				33,752
Income (loss) before income taxes:
Homebuilding			619,392				431,245				1,478,259				974,015
Financial services			19,043				11,294				44,653				29,752
Corporate			(24,733	)			(24,570	)			(76,595	)			(68,666	)
Total income before income taxes		$	613,702			$	417,969			$	1,446,317			$	935,101

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2.

Segment information (continued)

		Asset Data by Segment ($000’s omitted)
						Financial
		Homebuilding				Services				Corporate				Total
At September 30, 2005:
Inventory		$	9,379,528				—				—			$	9,379,528
Total assets		$	11,489,532				577,255				216,970			$	12,283,757
At December 31, 2004:
Inventory		$	7,390,791				—				—			$	7,390,791
Total assets		$	9,448,050				719,505				239,342			$	10,406,897

3.

Inventory

Major components of the Company’s inventory were as follows ($000’s omitted):

		September 30,				December 31,
		2005				2004
Homes under construction		$	4,108,258			$	2,616,027
Land under development			4,431,128				4,089,878
Land held for future development			840,142				684,886
Total		$	9,379,528			$	7,390,791

4.

Investments in unconsolidated entities

     The Company’s investments in unconsolidated entities totaled $289.8 million at September 30, 2005 and $258.9 million at December 31, 2004. All of these investments are accounted for under the equity method, except for the Company’s ownership interest in a Mexican mortgage banking company, as described below.

     During February 2005, 25% of the Company’s investment in the capital stock of a mortgage banking company in Mexico was redeemed for a gain of approximately $620 thousand. The remaining ownership interest of 16.66% is accounted for under the cost method.

5.

Acquisition

     During January 2005, the minority shareholders of Pulte Mexico S. de R.L. de C.V. (“Pulte Mexico”) exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to the Company, the consummation of which has resulted in the Company owning 100% of Pulte Mexico. In March 2005, the Company purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million in cash. In June 2005, the Company purchased the remaining 40% of the minority interest of Pulte Mexico for approximately $12.5 million in cash. The Company has assigned approximately $17.6 million of the purchase price premium to house and land inventory, which will be amortized through cost of sales as homes are sold. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed, of $5.3 million, was recorded as goodwill. During the three and nine months ended September 30, 2005, approximately $2.8 million and $5.5 million of purchase price premium was amortized through cost of sales.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6.

Senior notes and unsubordinated notes

     In October 2005, the Company restructured and amended the 5-year unsecured revolving credit facility, increasing the borrowing availability from $1.38 billion to $1.615 billion, and extending the maturity date from September 2009 to October 2010, with pricing more favorable to the Company. The credit facility includes an uncommitted accordion feature, under which the credit facility may be increased to $2.25 billion. The Company has the capacity to issue letters of credit up to $1.125 billion. Borrowing availability is reduced by the amount of letters of credit outstanding. The credit facility contains restrictive covenants, the most restrictive of which requires the Company not to exceed a debt-to-total capitalization ratio of 60% as defined in the agreement.

     The Company’s $125 million, 7.3% unsecured senior notes were due in October 2005. The Company repaid these notes in October 2005 using its revolving credit facility and cash provided by operations.

     During May 2005, the Company amended its credit agreement to increase its committed unsecured revolving credit facility from $1.345 billion to $1.38 billion. The Company had no outstanding borrowings under this unsecured revolving credit facility at September 30, 2005.

     In February 2005, the Company sold $350 million of 5.2% senior notes, which mature on February 15, 2015, and $300 million of 6% senior notes, which mature on February 15, 2035, which are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of the Company’s other unsecured and unsubordinated indebtedness. Proceeds from the sale were used to repay the indebtedness of the Company’s revolving credit facility and for general corporate purposes, including continued investment in the Company’s business.

     In connection with the sale of the $300 million unsecured senior notes, as noted above, $250 million in securities were available for sale under the Company’s shelf registration statement on Form S-3. As permitted by the rules of the Securities and Exchange Commission (the “SEC”), the additional $50 million of securities were to be registered through a supplemental registration statement filed at the time of sale pursuant to Rule 462(b) of the Securities Act of 1933, as amended (the “Securities Act”). Due to an administrative error, the supplemental registration statement was not filed with the SEC. Consequently, $50 million of the notes were sold without registration under the Securities Act, which may give rise to certain claims by purchasers of the notes under Section 12(a)(1) of the Securities Act. The Company would vigorously defend against any such claims and believes that the aggregate impact of any such claims, if successful, would be immaterial. The Company further believes it would be impossible to determine which notes have been affected by its administrative error.

7.

Discontinued operations

     The Company recorded non-cash, after-tax gains of $7.8 million and $10.8 million during the third quarter of 2005 and 2004, respectively, related to the favorable resolution of certain tax matters in connection with its former thrift operation, which was discontinued in 1994.

8.

Shareholders’ equity

     Pursuant to the $100 million stock repurchase program authorized by the Company’s Board of Directors in October 2002, the Company repurchased 461,000 shares and 1,031,000 shares of Pulte Homes, Inc. common stock in open-market transactions or otherwise, for a total of $20 million and $41.1 million, for the three and nine months ended September 30, 2005, respectively. As of September 30, 2005, the Company had remaining authorization to purchase common stock aggregating $21.7 million.

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8.

Shareholders’ equity (continued)

     In October 2005, the Company’s Board of Directors approved an increase to the Company’s stock repurchase authorization of up to $100 million in open-market transactions or otherwise. After approval of the increase, the Company had $121.7 million available for stock repurchases.

     In July 2005, the Company’s Board of Directors declared a two-for-one stock split effected in the form of a 100 percent stock dividend. The additional shares of common stock were distributed on September 1, 2005, to the shareholders of record as of August 15, 2005. All share and per share amounts have been restated to retroactively reflect the stock split.

Accumulated other comprehensive income (loss)

     The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):

		September 30,				December 31,
		2005				2004
Foreign currency translation adjustments:
Mexico		$	(10,740	)		$	(14,518	)
Change in fair value of derivatives, net of income taxes of $562 in 2005 and $84 in 2004			918				138
		$	(9,822	)		$	(14,380	)

9.

Supplemental Guarantor information

     At September 30, 2005, Pulte Homes, Inc. had the following outstanding senior note obligations: (1) $125 million, 7.3%, due 2005, (2) $400 million, 4.875%, due 2009, (3) $200 million, 8.125%, due 2011, (4) $499 million, 7.875%, due 2011, (5) $300 million, 6.25%, due 2013, (6) $500 million, 5.25%, due 2014, (7) $350 million, 5.2%, due 2015, (8) $150 million, 7.625%, due 2017, (9) $300 million, 7.875%, due 2032, (10) $400 million, 6.375%, due 2033, and (11) $300 million, 6%, due 2035. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by Pulte Homes, Inc.’s 100%-owned Domestic Homebuilding subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional.

     Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting, except as described in Note 4. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by and the operations of the combined groups.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9.

Supplemental Guarantor information (continued)

CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2005
($000’s omitted)

		Unconsolidated
		Pulte				Guarantor				Non-Guarantor				Eliminating				Consolidated
		Homes, Inc.				Subsidiaries				Subsidiaries				Entries				Pulte Homes, Inc.
ASSETS
Cash and equivalents		$	—			$	81,597			$	133,300			$	—			$	214,897
Unfunded settlements			—				144,082				(47,813	)			—				96,269
House and land inventory			—				9,166,560				212,968				—				9,379,528
Land held for sale			—				186,038				714				—				186,752
Land, not owned, under option agreements			—				88,243				—				—				88,243
Residential mortgage loans available-for-sale			—				—				554,900				—				554,900
Investments in unconsolidated entities			1,448				254,516				33,807				—				289,771
Goodwill			—				306,993				5,982				—				312,975
Intangible assets, net			—				129,267				—				—				129,267
Other assets			50,283				866,589				114,283				—				1,031,155
Investment in subsidiaries			10,253,394				77,776				1,684,871				(12,016,041	)			—
		$	10,305,125			$	11,301,661			$	2,693,012			$	(12,016,041	)		$	12,283,757
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued and other liabilities		$	147,901			$	2,164,301			$	318,299			$	—			$	2,630,501
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets			—				—				461,740				—				461,740
Income taxes			213,606				—				(558	)			—				213,048
Senior notes and unsubordinated notes			3,511,170				—				—				—				3,511,170
Advances (receivable) payable — subsidiaries			965,150				(1,140,205	)			175,055				—				—
Total liabilities			4,837,827				1,024,096				954,536				—				6,816,459
Shareholders’ equity			5,467,298				10,277,565				1,738,476				(12,016,041	)			5,467,298
		$	10,305,125			$	11,301,661			$	2,693,012			$	(12,016,041	)		$	12,283,757

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9. Supplemental Guarantor information (continued)

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2004
($000’s omitted)

		Unconsolidated
		Pulte				Guarantor				Non-Guarantor				Eliminating				Consolidated Pulte
		Homes, Inc.				Subsidiaries				Subsidiaries				Entries				Homes, Inc.
ASSETS
Cash and equivalents		$				$	185,375			$	129,259			$	—			$	314,634
Unfunded settlements			—				158,795				(40,324	)			—				118,471
House and land inventory			—				7,224,777				166,014				—				7,390,791
Land held for sale			—				230,086				657				—				230,743
Land, not owned, under option agreements			—				106,380				—				—				106,380
Residential mortgage loans available-for-sale			—				—				697,077				—				697,077
Investments in unconsolidated entities			44				222,358				36,466				—				258,868
Goodwill			—				306,993				700				—				307,693
Intangible assets, net			—				135,454				—				—				135,454
Other assets			64,807				663,967				118,012				—				846,786
Investment in subsidiaries			8,725,758				75,162				2,201,365				(11,002,285	)			—
		$	8,790,609			$	9,309,347			$	3,309,226			$	(11,002,285	)		$	10,406,897
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued and other liabilities		$	154,958			$	1,758,644			$	289,499			$	—			$	2,203,101
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets			—				—				617,415				—				617,415
Income taxes			203,806				—				(1,249	)			—				202,557
Senior notes and unsubordinated notes			2,861,550				—				—				—				2,861,550
Advances (receivable) payable — subsidiaries			1,048,021				(1,239,413	)			191,392				—				—
Total liabilities			4,268,335				519,231				1,097,057				—				5,884,623
Shareholders’ equity			4,522,274				8,790,116				2,212,169				(11,002,285	)			4,522,274
		$	8,790,609			$	9,309,347			$	3,309,226			$	(11,002,285	)		$	10,406,897

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

9. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended September 30, 2005
($000’s omitted)

		Unconsolidated
																		Consolidated
		Pulte				Guarantor				Non-Guarantor				Eliminating				Pulte
		Homes, Inc.				Subsidiaries				Subsidiaries				Entries				Homes, Inc.
Revenues:
Homebuilding		$	—			$	3,750,669			$	47,331			$	—			$	3,798,000
Financial services			—				7,361				35,022				—				42,383
Corporate			75				900				145				—				1,120
Total revenues			75				3,758,930				82,498				—				3,841,503
Expenses:
Homebuilding:
Cost of sales			—				2,863,617				40,519				—				2,904,136
Selling, general and administrative and other expense			4,140				281,530				3,901				—				289,571
Financial services			536				2,014				21,372				—				23,922
Corporate, net			32,446				(3,931	)			(2,662	)			—				25,853
Intercompany interest			36,368				(36,368	)			—								—
Total expenses			73,490				3,106,862				63,130				—				3,243,482
Other Income:
Equity income			—				13,732				1,949				—				15,681
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries			(73,415	)			665,800				21,317				—				613,702
Income taxes (benefit)			(27,953	)			245,114				8,822				—				225,983
Income (loss) from continuing operations before equity in income of subsidiaries			(45,462	)			420,686				12,495								387,719
Income (loss) from discontinued operations			7,691				—				11				—				7,702
Income (loss) before equity in income of subsidiaries			(37,771	)			420,686				12,506				—				395,421
Equity in income (loss) of subsidiaries:
Continuing operations			433,181				8,514				144,127				(585,822	)			—
Discontinued operations			11				—				—				(11	)			—
			433,192				8,514				144,127				(585,833	)			—
Net income		$	395,421			$	429,200			$	156,633			$	(585,833	)		$	395,421