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 June 30, 2006

OR

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

For the Transition Period From                      To                     

D.R. Horton, Inc.

(Exact name of registrant as specified in its charter)

Delaware		75-2386963
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

301 Commerce Street, Suite 500, Fort Worth, Texas		76102
(Address of principal executive offices)		(Zip Code)

(817) 390-8200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Yes þ       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.01 par value — 313,116,035 shares as of August 3, 2006

 

 

D.R. HORTON, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Consolidated Balance Sheets — June 30, 2006 and September 30, 2005			3
		Consolidated Statements of Income — Three and Nine Months Ended June 30, 2006 and 2005			4
		Consolidated Statements of Cash Flows — Nine Months Ended June 30, 2006 and 2005			5
		Notes to Consolidated Financial Statements			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			41
ITEM 4.		Controls and Procedures			42
PART II.		OTHER INFORMATION
ITEM 6.		Exhibits			43
SIGNATURE					45
Statement of Computation of Ratio of Earnings to Fixed Charges
Certification of CEO Pursuant to Section 302(a)
Certification of CFO Pursuant to Section 302(a)
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES

		June 30,				September 30,
		2006				2005
		(In millions)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	100.3			$	1,111.6
Inventories:
Construction in progress and finished homes			5,298.6				3,105.9
Residential land and lots — developed and under development			6,462.1				5,174.3
Land held for development			102.3				6.2
Consolidated land inventory not owned			142.4				200.4
			12,005.4				8,486.8
Property and equipment (net)			130.7				107.2
Earnest money deposits and other assets			760.8				756.0
Goodwill			578.9				578.9
			13,576.1				11,040.5
Financial Services:
Cash and cash equivalents			59.8				38.2
Mortgage loans held for sale			846.1				1,358.7
Other assets			77.7				77.4
			983.6				1,474.3
Total assets		$	14,559.7			$	12,514.8
LIABILITIES
Homebuilding:
Accounts payable		$	957.4			$	820.7
Accrued expenses and other liabilities			1,004.2				1,196.9
Notes payable			5,489.7				3,660.1
			7,451.3				5,677.7
Financial Services:
Accounts payable and other liabilities			24.4				24.0
Notes payable to financial institutions			724.3				1,249.5
			748.7				1,273.5
			8,200.0				6,951.2
Minority interests			145.6				203.2
STOCKHOLDERS’ EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued			—				—
Common stock, $.01 par value, 1,000,000,000 shares authorized, 316,572,187 shares issued and 312,919,387 shares outstanding at June 30, 2006 and 315,591,668 shares issued and 312,938,868 shares outstanding at September 30, 2005			3.2				3.2
Additional capital			1,650.3				1,624.8
Retained earnings			4,656.3				3,791.3
Treasury stock, 3,652,800 shares at June 30, 2006 and 2,652,800 shares at September 30, 2005, at cost			(95.7	)			(58.9	)
			6,214.1				5,360.4
Total liabilities and stockholders’ equity		$	14,559.7			$	12,514.8

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
						(In millions, except per share data)
						(Unaudited)
Homebuilding:
Revenues:
Home sales		$	3,581.4			$	3,277.1			$	9,842.7			$	8,432.9
Land/lot sales			12.2				32.4				119.2				177.5
			3,593.6				3,309.5				9,961.9				8,610.4
Cost of sales:
Home sales			2,788.7				2,413.7				7,400.6				6,279.8
Land/lot sales			6.7				17.0				46.2				105.4
			2,795.4				2,430.7				7,446.8				6,385.2
Gross profit:
Home sales			792.7				863.4				2,442.1				2,153.1
Land/lot sales			5.5				15.4				73.0				72.1
			798.2				878.8				2,515.1				2,225.2
Selling, general and administrative expense			356.4				302.0				1,046.9				826.7
Interest expense			—				—				15.0				—
Other (income)			(2.9	)			(0.5	)			(13.4	)			(11.4	)
			444.7				577.3				1,466.6				1,409.9
Financial Services:
Revenues			74.2				60.7				206.6				156.5
General and administrative expense			50.8				38.5				147.6				105.1
Interest expense			8.7				4.1				24.7				9.1
Other (income)			(12.8	)			(9.0	)			(40.4	)			(22.0	)
			27.5				27.1				74.7				64.3
Income before income taxes			472.2				604.4				1,541.3				1,474.2
Provision for income taxes			179.4				232.7				585.7				567.5
Net income		$	292.8			$	371.7			$	955.6			$	906.7
Basic net income per common share		$	0.94			$	1.19			$	3.06			$	2.91
Net income per common share assuming dilution		$	0.93			$	1.17			$	3.02			$	2.85
Cash dividends declared per common share		$	0.10			$	0.09			$	0.29			$	0.2175

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Nine Months
		Ended June 30,
		2006				2005
		(In millions)
		(Unaudited)
OPERATING ACTIVITIES
Net income		$	955.6			$	906.7
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			40.7				39.2
Amortization of debt premiums, discounts and fees			3.6				3.1
Stock option compensation expense			8.1				—
Income tax benefit from stock option exercises			(8.2	)			—
Loss on redemption of 9.375% senior notes			10.6				—
Changes in operating assets and liabilities:
Increase in construction in progress and finished homes			(2,192.7	)			(1,066.8	)
Increase in residential land and lots — developed, under development and held for development			(1,345.1	)			(937.0	)
Decrease (increase) in earnest money deposits and other assets			25.5				(133.3	)
Decrease (increase) in mortgage loans held for sale			512.6				(205.4	)
(Decrease) increase in accounts payable and other liabilities			(74.8	)			292.6
NET CASH USED IN OPERATING ACTIVITIES			(2,064.1	)			(1,100.9	)
INVESTING ACTIVITIES
Net purchases of property and equipment			(66.2	)			(44.7	)
NET CASH USED IN INVESTING ACTIVITIES			(66.2	)			(44.7	)
FINANCING ACTIVITIES
Proceeds from notes payable			4,829.2				2,344.0
Repayment of notes payable			(3,577.9	)			(1,497.8	)
Purchase of treasury stock			(36.8	)			—
Proceeds from stock associated with certain employee benefit plans			8.5				21.5
Income tax benefit from exercise of stock options			8.2				—
Cash dividends paid			(90.6	)			(68.3	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,140.6				799.4
DECREASE IN CASH AND CASH EQUIVALENTS			(989.7	)			(346.2	)
Cash and cash equivalents at beginning of period			1,149.8				518.0
Cash and cash equivalents at end of period		$	160.1			$	171.8
Supplemental disclosures of noncash activities:
Notes payable issued for inventory		$	38.8			$	17.8

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its wholly-owned, majority-owned and controlled subsidiaries (which are referred to as the Company, unless the context otherwise requires), as well as certain variable interest entities required to be consolidated pursuant to Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended (FIN 46), issued by the Financial Accounting Standards Board (FASB). All significant intercompany accounts, transactions and balances have been eliminated in consolidation. The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. These financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2005.

Seasonality - Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and nine-month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2006.

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

Business - The Company is a national homebuilder that is engaged primarily in the construction and sale of single-family housing in 83 markets and 27 states in the United States at June 30, 2006. The Company designs, builds and sells single-family detached houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. To a lesser extent, the Company also builds and sells attached homes. Periodically, the Company sells land and lots it has developed or bought. The Company also provides title agency and mortgage brokerage services, principally to its homebuyers. The Company does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors.

NOTE B — SEGMENT INFORMATION

The Company’s reportable business segments consist of homebuilding and financial services. Homebuilding is the Company’s core business, generating 98% of consolidated revenues during the nine months ended June 30, 2006 and 2005. Homebuilding operations also generated 95% and 96% of consolidated income before income taxes during the nine-month periods ended June 30, 2006 and 2005, respectively. The homebuilding reporting segment is comprised of the aggregate of the Company’s regional homebuilding operations and generates most of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

NOTE C — EARNINGS PER SHARE

Basic earnings per share for the three and nine months ended June 30, 2006 and 2005 is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

The following table sets forth the denominators used in the computation of basic and diluted earnings per share:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(In millions)
Denominator for basic earnings per share— weighted average common shares			312.8				312.4				312.7				312.0
Effect of dilutive securities:
Employee stock options			3.0				5.9				4.0				5.8
Denominator for diluted earnings per share— adjusted weighted average common shares			315.8				318.3				316.7				317.8

Options to purchase 3.0 million shares of common stock during the three and nine months ended June 30, 2006 were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, their effect would be antidilutive. All options outstanding during the three and nine months ended June 30, 2005 were included in the computation of diluted earnings per share.

NOTE D — CONSOLIDATED LAND INVENTORY NOT OWNED

In the ordinary course of its homebuilding business, the Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under such option purchase contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company’s discretion. Under the requirements of FIN 46, certain of the Company’s option purchase contracts result in the creation of a variable interest in the entity holding the land parcel under option.

In applying the provisions of FIN 46, the Company evaluates those land and lot option purchase contracts with variable interest entities to determine whether the Company is the primary beneficiary based upon analysis of the variability of the expected gains and losses of the entity. Based on this evaluation, if the Company is the primary beneficiary of an entity with which the Company has entered into a land or lot option purchase contract, the variable interest entity is consolidated.

The consolidation of these variable interest entities and other inventory obligations added $142.4 million in land inventory not owned and minority interests related to entities not owned to the Company’s balance sheet at June 30, 2006. The Company’s obligations related to these land or lot option contracts are guaranteed by cash deposits totaling $21.8 million and performance letters of credit, promissory notes and surety bonds totaling $5.4 million. Creditors of these variable interest entities have no recourse against the Company.

At June 30, 2006, including the deposits with the variable interest entities above, the Company had deposits amounting to $248.4 million to purchase land and lots with a total remaining purchase price of $5.0 billion. For the variable interest entities which are unconsolidated because the Company is not subject to a majority of the risk of loss or entitled to receive a majority of the entities’ residual returns, the maximum exposure to loss is generally limited to the amounts of the Company’s option deposits, which totaled $168.0 million at June 30, 2006.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

NOTE E — NOTES PAYABLE

The Company’s notes payable at their principal amounts, net of unamortized discount or premium, as applicable, consist of the following:

		June 30,				September 30,
		2006				2005
		(In millions)
Homebuilding:
Unsecured:
Revolving credit facility due 2010		$	1,250.0			$	—
7.5% senior notes due 2007			215.0				215.0
5% senior notes due 2009, net			199.7				199.6
8% senior notes due 2009, net			384.2				384.1
4.875% senior notes due 2010, net			248.9				248.7
9.75% senior subordinated notes due 2010, net			149.4				149.3
7.875% senior notes due 2011, net			199.0				198.8
9.375% senior subordinated notes due 2011, net			—				199.8
6% senior notes due 2011, net			249.4				—
10.5% senior subordinated notes due 2011, net			149.5				150.2
8.5% senior notes due 2012, net			248.6				248.4
5.375% senior notes due 2012			300.0				300.0
6.875% senior notes due 2013			200.0				200.0
5.875% senior notes due 2013			100.0				100.0
6.125% senior notes due 2014, net			197.6				197.4
5.625% senior notes due 2014, net			248.2				248.1
5.25% senior notes due 2015, net			297.9				297.8
5.625% senior notes due 2016, net			297.6				297.5
6.5% senior notes due 2016, net			499.0				—
Other secured			55.7				25.4
		$	5,489.7			$	3,660.1
Financial Services:
Mortgage warehouse facility due 2007		$	424.3			$	549.5
Commercial paper conduit facility due 2007			300.0				700.0
		$	724.3			$	1,249.5

On June 13, 2006, the Company filed with the Securities and Exchange Commission an automatically effective universal shelf registration statement registering debt and equity securities which the Company may issue from time to time in amounts to be determined.

Homebuilding:

In December 2005, the Company entered into a $2.15 billion unsecured revolving credit facility, which includes a $1.0 billion letter of credit sub-facility. The revolving credit facility has an uncommitted $750 million accordion feature which could be used to increase the facility to $2.9 billion. The new credit facility, which matures on December 16, 2010, replaced the Company’s previous $1.21 billion credit facility. The Company’s borrowing capacity under the new facility is reduced by the amount of letters of credit outstanding. At June 30, 2006, the Company’s borrowing capacity under the facility was $781.8 million. The facility is guaranteed by substantially all of the Company’s wholly-owned subsidiaries other than its financial services subsidiaries. Borrowings bear interest at rates based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company’s ratio of homebuilding debt to total capitalization and its senior unsecured debt rating. The interest rate applicable to the revolving credit facility at June 30, 2006 was 6.2% per annum. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

On March 15, 2006, the Company redeemed its 9.375% senior subordinated notes due 2011 at an aggregate redemption price of approximately $209.4 million, plus accrued interest. Concurrent with the redemption, the Company recorded interest expense of approximately $10.6 million, representing the call premium and the unamortized discount and fees related to the redeemed notes.

In April 2006, the Company issued $500 million principal amount of 6.5% senior notes due April 15, 2016 and $250 million principal amount of 6.0% senior notes due April 15, 2011. The notes, which were issued as separate series with interest payable semi-annually, represent unsecured obligations of the Company. The Company may redeem the notes in whole at any time or in part from time to time, at a redemption price equal to the greater of 100% of their principal amount or the present value of the remaining scheduled payments on the redemption date, discounted at a rate equal to the yield to maturity of a United States Treasury security with a comparable maturity, plus 25 basis points (0.25%) with respect to the $500 million senior notes, and plus 20 basis points (0.20%) with respect to the $250 million senior notes, plus, in each case, accrued interest. The annual effective interest rate of the $500 million senior notes and the $250 million senior notes, after giving effect to the amortization of deferred financing costs is 6.6% and 6.2%, respectively. The Company used the proceeds from these offerings for the repayment of borrowings under the revolving credit facility.

In June 2006, the Company called for redemption its 10.5% senior subordinated notes due 2011. The notes, which were originally issued by Schuler Homes, Inc. and were assumed by the Company in its merger with Schuler in February 2002, were redeemed on July 15, 2006 at an aggregate price of approximately $152.4 million, plus accrued interest. Concurrent with the redemption, the Company recorded interest expense of approximately $2.8 million, representing the call premium, net of the unamortized premium related to the redeemed notes.

The revolving credit facility and the indentures governing the senior subordinated notes impose restrictions on the Company’s operations and activities. The most significant restrictions relate to limits on investments, cash dividends, stock repurchases and other restricted payments, incurrence of indebtedness, creation of liens and asset dispositions, and require maintenance of certain levels of leverage, interest coverage and tangible net worth. In addition, the indentures governing the senior notes impose restrictions on the creation of liens.

The indentures governing approximately $2.0 billion of the senior notes provided for the termination of specified covenants upon the Company’s attainment of investment grade ratings from both Standard & Poor’s Ratings Group and Moody’s Investors Service Inc. These covenants included restrictions on cash dividends, stock repurchases and other restricted payments, incurrence of indebtedness and asset dispositions. The Company achieved both of the required ratings as of April 2006. As a result, the foregoing restrictions have ceased to apply with respect to these senior notes and will not apply in the future with respect to them even if the Company’s ratings change.

At June 30, 2006, under the most restrictive covenants in effect, cash dividend payments for the remainder of fiscal 2006 were limited to $615.0 million, and a maximum of $1.8 billion was available for all restricted payments in the future.

Financial Services:

The Company’s mortgage subsidiary has a mortgage warehouse loan facility. Upon its maturity in April 2006, the loan agreement was amended and restated to extend its maturity date to April 6, 2007. This amendment also changed the total capacity of the mortgage warehouse loan facility from $600 million to $670 million until May 1, 2006 and then to $540 million thereafter, subject to increases upon consent of the lenders to $750 million under the accordion feature of the credit agreement.

The mortgage warehouse facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. The borrowing capacity under this facility is limited to the lesser of the unused portion of the facility or an amount determined under a borrowing base arrangement. Under the borrowing base limitation, the amount drawn on the facility may not exceed 98% of all

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

eligible mortgage loans held for sale and made available to the lenders to secure any borrowings under the facility. Borrowings bear daily interest at the 30-day LIBOR rate plus a fixed premium. The interest rate of the mortgage warehouse facility at June 30, 2006 was 6.1% per annum.

The Company’s mortgage subsidiary also has a commercial paper conduit facility (the “CP conduit facility”). Upon its maturity in June 2006, the loan agreement was amended and restated, increasing the total capacity of the CP conduit facility from $650 million to $1.2 billion. The new agreement expires June 27, 2009, subject to the annual renewal of the 364-day backup liquidity feature.

The CP conduit facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. The mortgage loans assigned to secure the CP conduit facility are used as collateral for asset-backed commercial paper issued by multi-seller conduits in the commercial paper market. The interest rate of the CP conduit facility at June 30, 2006 was 5.6% per annum.

NOTE F — HOMEBUILDING INTEREST

The Company capitalizes homebuilding interest costs to inventory during development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. The following table summarizes the Company’s homebuilding interest costs incurred, capitalized, charged to cost of sales and expensed directly during the three and nine-month periods ended June 30, 2006 and 2005:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(In millions)
Capitalized interest, beginning of period		$	246.8			$	189.7			$	200.6			$	152.7
Interest incurred — homebuilding			85.4				68.8				251.0				204.7
Interest expensed:
Directly — homebuilding			—				—				(15.0	)			—
Amortized to cost of sales			(60.1	)			(59.7	)			(164.5	)			(158.6	)
Capitalized interest, end of period		$	272.1			$	198.8			$	272.1			$	198.8

NOTE G — WARRANTY

The Company typically provides its homebuyers a one-year comprehensive limited warranty for all parts and labor and a ten-year limited warranty for major construction defects. The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

Changes in the Company’s warranty liability were as follows:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
		(In millions)
Warranty liability, beginning of period		$	124.7			$	100.9			$	121.6			$	96.0
Warranties issued			18.8				17.2				51.7				44.5
Changes in liability for pre-existing warranties			(1.8	)			(1.2	)			(7.7	)			(3.3	)
Settlements made			(13.3	)			(10.9	)			(37.2	)			(31.2	)
Warranty liability, end of period		$	128.4			$	106.0			$	128.4			$	106.0

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

NOTE H — MORTGAGE LOANS

Mortgage Loans - Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. Loans that have been closed but not committed to a third-party investor are matched with either forward sales of mortgage-backed securities (FMBS) or Eurodollar Futures Contracts (EDFC) that are designated as fair value hedges. Hedged loans are either committed to third-party investors within three days of origination or pooled and committed in bulk to third-party investors typically within 30 days of origination. The notional amounts of the FMBS and the EDFC used to hedge mortgage loans held for sale can vary in relationship to the underlying loan amounts, depending on the typical movements in the value of each hedging instrument relative to the value of the underlying mortgage loans. The effectiveness of the fair value hedges is continuously monitored and any ineffectiveness, which for the three and nine months ended June 30, 2006 and 2005 was not significant, is recognized in current earnings. As of June 30, 2006, the Company had $193.3 million in loans not committed to third-party investors which were hedged with $336.2 million of FMBS and EDFC.

Loan Commitments - To meet the financing needs of its customers, the Company is party to interest rate lock commitments (IRLCs) which are extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria. In accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and related Derivatives Implementation Group conclusions, the Company classifies and accounts for IRLCs as non-designated derivative instruments at fair value. At June 30, 2006, the Company’s IRLCs totaled $966.9 million.

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments, FMBS and the purchase of EDFC. These instruments are considered non-designated derivatives and are accounted for at fair value with gains and losses recognized in current earnings. As of June 30, 2006, the Company had approximately $625.1 million of best-efforts whole loan delivery commitments and $267.8 million outstanding of FMBS and EDFC related to its IRLCs.

In an effort to stimulate home sales by potentially offering homebuyers a below market interest rate on their home financing, the Company began a program during the three months ended June 30, 2006, which protects the Company from future increases in interest rates related to potential mortgage originations of approximately $766 million. To accomplish this, the Company purchases forward rate agreements (FRAs) and economic interest rate hedges in the form of FMBS and put options on both EDFC and mortgage-backed securities (MBS). At June 30, 2006, the notional amount of the FRAs was $445 million, while economic interest rate hedges totaled $2.3 billion in EDFC put options, $143 million in MBS put options and $51 million of FMBS, hedging a notional principal of $321 million in mortgage loan commitments. Both the FRAs and economic interest rate hedges have various maturities not exceeding twelve months. These instruments are also considered non-designated derivatives and are accounted for at fair value with gains and losses recognized in current earnings. The gains and losses for the three and nine months ended June 30, 2006 were not significant.

NOTE I — STOCKHOLDERS’ EQUITY

During the three months ended June 30, 2006, the Board of Directors declared a quarterly cash dividend of $0.10 per common share, which was paid on May 19, 2006 to stockholders of record on May 5, 2006. A quarterly cash dividend of $0.09 per common share was declared during the three months ended June 30, 2005.

On June 13, 2006, the Company filed with the Securities and Exchange Commission an automatically effective universal shelf registration statement registering debt and equity securities which the Company may issue from time to time in amounts to be determined. Also, at June 30, 2006, the Company had the capacity to issue approximately 22.5 million shares of common stock under its acquisition shelf registration statement, to effect, in whole or in part, possible future business acquisitions.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

In November 2005, the Board of Directors authorized the repurchase of up to $500 million of the Company’s common stock, replacing the previous common stock repurchase authorization. During the nine months ended June 30, 2006, the Company repurchased 1,000,000 shares of its common stock at a total cost of $36.8 million, all of which occurred during the three months ended December 31, 2005. As of June 30, 2006, the Company had $463.2 million remaining of the Board of Directors’ authorization for repurchases of common stock.

On January 26, 2006, the Company’s shareholders approved an amendment to the Company’s charter which increased the number of authorized shares of common stock to one billion shares.

NOTE J — STOCK-BASED COMPENSATION

On October 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share Based Payment,” which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. Prior to October 1, 2005, the Company accounted for stock option grants using the intrinsic value method in accordance with the Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and recognized no compensation expense for stock option grants since all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

SFAS No. 123(R) was adopted using the modified prospective method. Under this method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. In addition, compensation expense must be recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period. The fair values of the options are calculated using a Black-Scholes option pricing model. Results of prior periods have not been restated. For the three and nine months ended June 30, 2006, the Company’s compensation expense related to stock option grants was $3.2 million and $8.1 million, respectively. At June 30, 2006, there was $73.8 million of total unrecognized compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 7.7 years. In addition, SFAS No. 123(R) requires the benefits of tax deductions in excess of recognized compensation expense to be reported in the Statement of Cash Flows as a financing cash flow rather than an operating cash flow as previously reported.

SFAS No. 123(R) requires disclosure of pro forma information for periods prior to the adoption. The following table sets forth the effect on net income and earnings per share as if SFAS No. 123(R) had been applied to the three and nine-month periods ended June 30, 2005:

		Three Months Ended				Nine Months Ended
		June 30, 2005				June 30, 2005
		(In millions, except per share data)
Net income as reported		$	371.7			$	906.7
Total stock-based employee compensation expense determined under fair value based method, net of tax			(1.9	)			(5.9	)
Pro forma net income		$	369.8			$	900.8
Reported basic earnings per share		$	1.19			$	2.91
Pro forma basic earnings per share		$	1.18			$	2.89
Reported diluted earnings per share		$	1.17			$	2.85
Pro forma diluted earnings per share		$	1.16			$	2.83

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

The Company Stock Incentive Plans provide for the granting of stock options to certain key employees of the Company to purchase shares of common stock. Options are granted at exercise prices which equal the market value of the Company’s common stock at the date of grant. Options generally expire 10 years after the dates on which they were granted. Options generally vest over periods of 5 to 9.75 years. The following table provides additional information related to the Company Stock Incentive Plans:

		Nine Months Ended June 30, 2006
										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contract Life				Value
		Options				Price				(Years)				(In millions)
Stock Options
Outstanding at beginning of period			13,965,644			$	11.55				6.0
Granted			3,005,500				29.44
Exercised			(918,480	)			6.65
Canceled			(1,102,540	)			14.22
Outstanding at end of period			14,950,124			$	15.25				6.2			$	145.4
Exercisable at end of period			4,419,079			$	9.06				4.4			$	65.2

The total intrinsic value of options exercised during the nine months ended June 30, 2006 and 2005 was $24.6 million and $37.7 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

A summary of the Company’s nonvested options as of and for the nine-month period ended June 30, 2006 is as follows:

						Weighted
						Average
						Grant-Date
		Options				Fair Value
Nonvested at beginning of period			9,527,341			$	7.52
Granted			3,005,500				14.85
Vested			(905,188	)			7.24
Canceled			(1,096,608	)			8.05
Nonvested at end of period			10,531,045			$	9.59

On January 26, 2006, the Company’s shareholders approved the D.R. Horton, Inc. 2006 Stock Incentive Plan, which replaced the Company’s 1991 Stock Incentive Plan. The aggregate number of shares available under the 2006 Stock Incentive Plan includes the new authorization of 28.0 million shares, plus approximately 1.9 million shares that remained available for awards under the 1991 Stock Incentive Plan on that date. Total shares available for awards under the 2006 Stock Incentive Plan are subject to increase by subsequent specified terminations of awards under the 1991 Stock Incentive Plan that were outstanding on January 26, 2006. For awards other than options or stock appreciation rights, the shares available for issuance under the 2006 Stock Incentive Plan will be reduced at the rate of 1.75 shares for each share subject to the award.

On May 2, 2006, the Compensation Committee of the Company’s Board of Directors granted stock options to the Company’s executive officers, other officers and certain of its employees, and the Company’s Board of Directors granted stock options to its outside directors, to purchase approximately 3.0 million shares of its common stock, at a price of $29.44 per share, the closing market price of its common stock on the date of grant.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

The weighted average fair value of grants made in the nine months ended June 30, 2006 was $14.85 per share. The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option pricing model based on the following weighted average assumptions:

Risk free interest rate			4.89	%
Expected life (in years)			7.74
Expected volatility			44.63	%
Expected dividend yield			1.00	%

At June 30, 2006, a total of 27.8 million shares remained available for awards under the 2006 Stock Incentive Plan.

NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109.” FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48, however it is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which provides an approach to simplify efforts to obtain hedge-like (offset) accounting by allowing the Company the option to carry mortgage servicing rights at fair value. This new Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. Since the Company does not retain the servicing rights when it sells its mortgage loans held for sale, the adoption of SFAS No. 156 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement changes the requirements for the accounting for and reporting of a change in accounting principle, and requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for the Company for accounting changes and corrections of errors made after October 1, 2006, the beginning of fiscal year 2007. The adoption of SFAS No. 154 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued Staff Position 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP 109-1). The American Jobs Creation Act, which was signed into law in October 2004, provides a tax deduction on qualified domestic production activities. When fully phased-in, the deduction will be up to 9% of the lesser of “qualified production activities income” or taxable income. Based on the guidance provided by FSP 109-1, this deduction should be accounted for as a special deduction under SFAS No. 109 and will reduce tax expense in the period or periods that the amounts are deductible on the tax return. The tax benefit resulting from the new deduction was effective beginning in the Company’s first quarter of fiscal 2006, and is reflected in the effective income tax rate of 38.0% for the three and nine months ended June 30, 2006, reduced from 38.5% for the comparable periods of fiscal 2005. The Company is continuing to evaluate the impact of this law on its future

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

financial statements and currently estimates the fiscal 2006 reduction in its federal income tax rate from fiscal 2005 will be in the range of 0.50% to 0.75% of taxable income.

NOTE L — CONTINGENCIES AND COMMITMENTS

The Company has been named as defendant in various claims, complaints and other legal actions arising in the ordinary course of business, including warranty and construction defect claims on closed homes. The Company has established reserves for such contingencies, based on the expected costs of the self-insured portion of such claims. The Company’s estimates of such reserves are based on the facts and circumstances of individual pending claims and historical data and trends, including estimates of the costs of unreported claims related to past operations. These reserve estimates are subject to ongoing revision as the circumstances of individual pending claims and historical data and trends change. Adjustments to estimated reserves are recorded in the accounting period in which the change in estimate occurs.

Management believes that, while the outcome of such contingencies cannot be predicted with certainty, the liabilities arising from these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds management’s estimates reflected in the reserves relating to such matter, the Company could incur additional charges that could be significant.

In the ordinary course of business, the Company enters into land and lot option purchase contracts in order to procure land or lots for the construction of homes. At June 30, 2006, the Company had cash deposits of $223.2 million, promissory notes of $14.8 million, and letters of credit and surety bonds of $10.4 million to purchase land and lots with a total remaining purchase price of $5.0 billion. Only $128.7 million of the $5.0 billion in land and lot option purchase contracts contain specific performance clauses which may require the Company to purchase the land or lots upon the land seller meeting certain obligations. The majority of land and lots under contract are expected to be purchased within three years.

During the three and nine-month periods ended June 30, 2006, the Company wrote off $57.1 million and $67.6 million, respectively, of earnest money and due diligence costs related to land and lot purchase option contracts for which the Company does not intend to exercise its option to purchase the land or lots. Write-offs of earnest money and due diligence costs in the comparable three and nine-month periods of 2005 were $3.5 million and $7.9 million, respectively.

Additionally, in the normal course of its business activities, the Company provides standby letters of credit and surety bonds, issued by third parties, to secure performance under various contracts. At June 30, 2006, outstanding standby letters of credit were $131.6 million and surety bonds were $2.3 billion.

NOTE M — OTHER EVENTS

The staff of the Securities and Exchange Commission (SEC Staff) recently conducted a review of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and Quarterly Reports on Form 10-Q for the respective quarters ended December 31, 2005 and March 31, 2006 and issued a letter commenting on certain aspects of those reports. The Company believes that all matters addressed in the comment letter have been resolved, with one exception. The SEC Staff has requested additional documentation and information regarding the Company’s historical reporting of its operating segments under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company has provided supporting documentation and information and is awaiting further response from the SEC Staff. The Company believes that this matter will not affect the Company’s previously reported consolidated financial position, results of operations or cash flows.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

NOTE N — SUMMARIZED FINANCIAL INFORMATION

All of the Company’s senior and senior subordinated notes and the $2.15 billion unsecured revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s direct and indirect subsidiaries (collectively, Guarantor Subsidiaries), other than financial services subsidiaries and certain other inconsequential subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

Certain balances in the following Consolidating Statement of Income and Consolidating Statement of Cash Flows for the three and nine months ended June 30, 2005 have been revised to conform with the current presentation and the presentation in the Company’s consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2005. These revisions primarily consist of separate reporting of equity in income of subsidiaries and other income/expense in the Consolidating Statement of Income and the reclassification of equity in income of subsidiaries from cash flows from financing activities to cash flows from operating activities in the Consolidating Statement of Cash Flows. Such reclassifications on the Statement of Cash Flows resulted in a decrease in operating cash flows and an increase in financing cash flows for the D.R. Horton, Inc. column of $732.2 million for the nine months ended June 30, 2005.

Consolidating Balance Sheet
June 30, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
ASSETS
Cash and cash equivalents		$	—			$	96.5			$	64.9			$	(1.3	)		$	160.1
Investments in subsidiaries			3,280.3				—				—				(3,280.3	)			—
Inventories			3,379.7				8,462.1				163.6				—				12,005.4
Property and equipment (net)			40.2				72.5				18.0				—				130.7
Earnest money deposits and other assets			416.4				339.9				103.5				(21.3	)			838.5
Mortgage loans held for sale			—				—				846.1				—				846.1
Goodwill			—				578.9				—				—				578.9
Intercompany receivables			5,441.0				—				—				(5,441.0	)			—
Total Assets		$	12,557.6			$	9,549.9			$	1,196.1			$	(8,743.9	)		$	14,559.7
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	863.1			$	1,051.5			$	94.0			$	(22.6	)		$	1,986.0
Intercompany payables			—				5,399.5				41.5				(5,441.0	)			—
Notes payable			5,480.4				9.3				724.3				—				6,214.0
Total Liabilities			6,343.5				6,460.3				859.8				(5,463.6	)			8,200.0
Minority interests			—				—				145.6				—				145.6
Total Equity			6,214.1				3,089.6				190.7				(3,280.3	)			6,214.1
Total Liabilities & Equity		$	12,557.6			$	9,549.9			$	1,196.1			$	(8,743.9	)		$	14,559.7

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

NOTE N — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Balance Sheet
September 30, 2005

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
ASSETS
Cash and cash equivalents		$	726.6			$	381.0			$	42.2			$	—			$	1,149.8
Investments in subsidiaries			2,563.4				—				—				(2,563.4	)			—
Inventories			2,157.4				6,113.4				216.0				—				8,486.8
Property and equipment (net)			13.8				74.8				18.6				—				107.2
Earnest money deposits and other assets			364.3				369.6				99.5				—				833.4
Mortgage loans held for sale			—				—				1,358.7				—				1,358.7
Goodwill			—				578.9				—				—				578.9
Intercompany receivables			3,969.3				—				—				(3,969.3	)			—
Total Assets		$	9,794.8			$	7,517.7			$	1,735.0			$	(6,532.7	)		$	12,514.8
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	782.4			$	1,194.2			$	65.0			$	—			$	2,041.6
Intercompany payables			—				3,893.3				76.0				(3,969.3	)			—
Notes payable			3,652.0				8.1				1,249.5				—				4,909.6
Total Liabilities			4,434.4				5,095.6				1,390.5				(3,969.3	)			6,951.2
Minority interests			—				—				203.2				—				203.2
Total Equity			5,360.4				2,422.1				141.3				(2,563.4	)			5,360.4
Total Liabilities & Equity		$	9,794.8			$	7,517.7			$	1,735.0			$	(6,532.7	)		$	12,514.8

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

NOTE N — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Three Months Ended June 30, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues:
Home sales		$	742.4			$	2,832.0			$	7.0			$	—			$	3,581.4
Land/lot sales			4.3				7.9				—				—				12.2
			746.7				2,839.9				7.0				—				3,593.6
Cost of sales:
Home sales			553.3				2,231.1				4.3				—				2,788.7
Land/lot sales			3.1				3.6				—				—				6.7
			556.4				2,234.7				4.3				—				2,795.4
Gross profit:
Home sales			189.1				600.9				2.7				—				792.7
Land/lot sales			1.2				4.3				—				—				5.5
			190.3				605.2				2.7				—				798.2
Selling, general and administrative expense			123.7				230.2				2.5				—				356.4
Equity in income of subsidiaries			(403.4	)			—				—				403.4				—
Other (income) expense			(2.2	)			(1.5	)			0.8				—				(2.9	)
			472.2				376.5				(0.6	)			(403.4	)			444.7
Financial Services:
Revenues			—				—				74.2				—				74.2
General and administrative expense			—				—				50.8				—				50.8
Interest expense			—				—				8.7				—				8.7
Other (income)			—				—				(12.8	)			—				(12.8	)
			—				—				27.5				—				27.5
Income before income taxes			472.2				376.5				26.9				(403.4	)			472.2
Provision for income taxes			179.4				143.1				10.2				(153.3	)			179.4
Net income		$	292.8			$	233.4			$	16.7			$	(250.1	)		$	292.8

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

NOTE N — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Nine Months Ended June 30, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues:
Home sales		$	2,195.7			$	7,635.7			$	11.3			$	—			$	9,842.7
Land/lot sales			42.5				76.7				—				—				119.2
			2,238.2				7,712.4				11.3				—				9,961.9
Cost of sales:
Home sales			1,508.3				5,885.6				6.7				—				7,400.6
Land/lot sales			11.1				35.1				—				—				46.2
			1,519.4				5,920.7				6.7				—				7,446.8
Gross profit:
Home sales			687.4				1,750.1				4.6				—				2,442.1
Land/lot sales			31.4				41.6				—				—				73.0
			718.8				1,791.7				4.6				—				2,515.1
Selling, general and administrative expense			328.8				711.0				7.1				—				1,046.9
Equity in income of subsidiaries			(1,157.1	)			—				—				1,157.1				—
Interest expense			15.0				—				—				—				15.0
Other (income)			(9.2	)			(2.8	)			(1.4	)			—				(13.4	)
			1,541.3				1,083.5				(1.1	)			(1,157.1	)			1,466.6
Financial Services:
Revenues			—				—				206.6				—				206.6
General and administrative expense			—				—				147.6				—				147.6
Interest expense			—				—				24.7				—				24.7
Other (income)			—				—				(40.4	)			—				(40.4	)
			—				—				74.7				—				74.7
Income before income taxes			1,541.3				1,083.5				73.6				(1,157.1	)			1,541.3
Provision for income taxes			585.7				411.7				28.0				(439.7	)			585.7
Net income		$	955.6			$	671.8			$	45.6			$	(717.4	)		$	955.6

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2006

NOTE N — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Three Months Ended June 30, 2005

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues:
Home sales		$	743.1			$	2,528.7			$	5.3			$	—			$	3,277.1
Land/lot sales			14.4				18.0				—				—				32.4
			757.5				2,546.7				5.3				—				3,309.5
Cost of sales:
Home sales			496.2				1,913.7				3.8				—				2,413.7
Land/lot sales			6.7				10.3				—				—				17.0
			502.9				1,924.0				3.8				—				2,430.7
Gross profit:
Home sales			246.9				615.0				1.5				—				863.4
Land/lot sales			7.7				7.7				—				—				15.4
			254.6				622.7				1.5				—				878.8
Selling, general and administrative expense			121.8				174.5				1.8				3.9				302.0
Equity in income of subsidiaries			(472.1	)			—				—				472.1				—
Other (income) expense			0.5				(0.5	)			(0.5	)			—				(0.5	)
			604.4				448.7				0.2				(476.0	)			577.3
Financial Services:
Revenues			—				—				60.7				—				60.7
General and administrative expense			—				—				42.4				(3.9	)			38.5
Interest expense			—				—				4.1				—				4.1
Other (income)			—				—				(9.0	)			—				(9.0	)
			—				—				23.2				3.9				27.1
Income before income taxes			604.4				448.7				23.4				(472.1	)			604.4
Provision for income taxes			232.7				172.9				8.9				(181.8	)			232.7
Net income		$	371.7			$	275.8			$	14.5			$	(290.3	)		$	371.7