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

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

 

(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company 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 – 316,757,597 shares as of February 2, 2009

 

 

D.R. HORTON, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Consolidated Balance Sheets at December 31, 2008 (unaudited) and September 30, 2008 (unaudited)			3
		Consolidated Statements of Operations for the three months ended December 31, 2008 and 2007 (unaudited)			4
		Consolidated Statements of Cash Flows for the three months ended December 31, 2008 and 2007 (unaudited)			5
		Notes to Consolidated Financial Statements (unaudited)			6
ITEM 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations			29
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			54
ITEM 4.		Controls and Procedures			55
PART II.		OTHER INFORMATION
ITEM 1.		Legal Proceedings			56
ITEM 5.		Other Information			56
ITEM 6.		Exhibits			57
SIGNATURE					58
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES

		December 31,				September 30,
		2008				2008
		(In millions)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	1,882.8			$	1,355.6
Inventories:
Construction in progress and finished homes			1,529.4				1,681.6
Residential land and lots — developed and under development			2,273.9				2,409.6
Land held for development			586.2				531.7
Land inventory not owned			36.6				60.3
			4,426.1				4,683.2
Property and equipment, net			70.7				65.9
Income taxes receivable			54.5				676.2
Deferred income taxes, net of valuation allowance of $984.4 million and $961.3 million at December 31, 2008 and September 30, 2008, respectively			213.5				213.5
Earnest money deposits and other assets			217.8				247.5
Goodwill			15.9				15.9
			6,881.3				7,257.8
Financial Services:
Cash and cash equivalents			30.3				31.7
Mortgage loans held for sale			204.2				352.1
Other assets			59.1				68.0
			293.6				451.8
Total assets		$	7,174.9			$	7,709.6
LIABILITIES
Homebuilding:
Accounts payable		$	154.3			$	254.0
Accrued expenses and other liabilities			738.8				814.9
Notes payable			3,405.4				3,544.9
			4,298.5				4,613.8
Financial Services:
Accounts payable and other liabilities			28.3				27.5
Repurchase agreement			55.9				203.5
			84.2				231.0
			4,382.7				4,844.8
Commitments and contingencies (Note L)
Minority interests			29.3				30.5
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, 320,321,116 shares issued and 316,665,883 shares outstanding at December 31, 2008 and 320,315,508 shares issued and 316,660,275 shares outstanding at September 30, 2008			3.2				3.2
Additional capital			1,719.4				1,716.3
Retained earnings			1,136.0				1,210.5
Treasury stock, 3,655,233 shares at December 31, 2008 and September 30, 2008, at cost			(95.7	)			(95.7	)
			2,762.9				2,834.3
Total liabilities and stockholders’ equity		$	7,174.9			$	7,709.6

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Three Months
		Ended December 31,
		2008				2007
		(In millions, except per share data)
		(Unaudited)
Homebuilding:
Revenues:
Home sales		$	885.8			$	1,607.0
Land/lot sales			14.5				100.6
			900.3				1,707.6
Cost of sales:
Home sales			748.7				1,377.9
Land/lot sales			11.7				82.6
Inventory impairments and land option cost write-offs			56.2				245.5
			816.6				1,706.0
Gross profit:
Home sales			137.1				229.1
Land/lot sales			2.8				18.0
Inventory impairments and land option cost write-offs			(56.2	)			(245.5	)
			83.7				1.6
Selling, general and administrative expense			127.0				213.1
Interest expense			25.6				—
(Gain) on early retirement of debt			(6.2	)			—
Other (income)			(4.3	)			(1.7	)
			(58.4	)			(209.8	)
Financial Services:
Revenues			17.7				35.0
General and administrative expense			23.2				30.5
Interest expense			0.7				1.3
Interest and other (income)			(3.3	)			(3.7	)
			(2.9	)			6.9
Loss before income taxes			(61.3	)			(202.9	)
Provision for (benefit from) income taxes			1.3				(74.1	)
Net loss		$	(62.6	)		$	(128.8	)
Basic and diluted net loss per common share		$	(0.20	)		$	(0.41	)
Cash dividends declared per common share		$	0.0375			$	0.15

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Three Months
		Ended December 31,
		2008				2007
		(In millions)
		(Unaudited)
OPERATING ACTIVITIES
Net loss		$	(62.6	)		$	(128.8	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			8.2				14.9
Amortization of debt discounts and fees			2.0				1.6
Stock option compensation expense			3.0				2.7
Income tax benefit from stock option exercises			—				(0.2	)
Deferred income taxes			—				(76.2	)
Gain on early retirement of debt			(6.2	)			—
Inventory impairments and land option cost write-offs			56.2				245.5
Changes in operating assets and liabilities:
Decrease in construction in progress and finished homes			131.2				313.1
Decrease in residential land and lots — developed, under development, and held for development			43.3				162.8
Decrease in earnest money deposits and other assets			25.4				40.2
Decrease in income taxes receivable			621.7				—
Decrease in mortgage loans held for sale			147.9				278.4
Decrease in accounts payable, accrued expenses and other liabilities			(152.5	)			(296.3	)
Net cash provided by operating activities			817.6				557.7
INVESTING ACTIVITIES
Purchases of property and equipment			(2.5	)			(4.1	)
Cash used in investing activities			(2.5	)			(4.1	)
FINANCING ACTIVITIES
Proceeds from notes payable			—				110.0
Repayment of notes payable			(277.5	)			(757.4	)
Proceeds from stock associated with certain employee benefit plans			0.1				0.4
Income tax benefit from stock option exercises			—				0.2
Cash dividends paid			(11.9	)			(47.3	)
Net cash used in financing activities			(289.3	)			(694.1	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			525.8				(140.5	)
Cash and cash equivalents at beginning of period			1,387.3				269.6
Cash and cash equivalents at end of period		$	1,913.1			$	129.1

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 — an interpretation of ARB No. 51,” as amended (FIN 46R), 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 and the asset impairment charges and deferred tax asset valuation allowance discussed below) 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, 2008.

Seasonality

     Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three-month period ended December 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2009.

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 77 markets and 27 states in the United States at December 31, 2008. The Company designs, builds and sells single-family detached houses on lots it developed and on finished lots purchased ready for home construction. To a lesser extent, the Company also builds and sells attached homes, such as town homes, duplexes, triplexes and condominiums (including some mid-rise buildings), which share common walls and roofs. Periodically, the Company sells land and lots. The Company also provides title agency and mortgage financing services, principally to its homebuyers. The Company generally does not retain or service the mortgages that it originates but, rather, seeks to sell the mortgages and related servicing rights to investors.

NOTE B — INVENTORY IMPAIRMENTS AND LAND OPTION COST WRITE-OFFS

     The factors hurting demand for new homes that prevailed during fiscal 2008 continued in the first quarter of fiscal 2009. High inventory levels of both new and existing homes, elevated cancellation rates, low sales absorption rates and overall weak consumer confidence have persisted. The effects of these factors have been further magnified by credit tightening in the mortgage markets, increasing home foreclosures and severe shortages of liquidity in the financial markets. In recent months, the overall economy has weakened significantly and fears of a prolonged recession are now pronounced due to rising unemployment levels, further deterioration in consumer confidence and reduced consumer spending. These factors, combined with the Company’s continued declines in sales order volumes and prices caused the Company’s outlook for the homebuilding industry and the impact on its business to remain cautious.

     During the first quarter of fiscal 2009, when the Company performed its quarterly inventory impairment analysis in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the assumptions utilized reflected its outlook for the broader homebuilding industry and the Company’s markets, which impact its business. This outlook incorporates the Company’s belief that housing market conditions may continue to deteriorate, and that challenging conditions will persist for some time. Accordingly, the Company’s impairment evaluation as of December 31, 2008 again indicated a significant number of communities with impairment indicators. Communities with a combined carrying value of $1,373.0 million as of December 31, 2008, had indicators of potential impairment and were evaluated for impairment. The analysis of each of these communities generally assumed that sales prices in future periods will be equal to or lower than current sales order prices in each community or in comparable communities in order to generate an acceptable absorption rate. While it is difficult to determine a timeframe for a given community in the current market conditions, the remaining lives of these communities were estimated to be in a range from six months to in excess of ten years. Through this evaluation process, it was determined that communities with a carrying value of $211.9 million as of December 31, 2008, the largest portion of which was in the West region, were impaired. As a result, during the three months ended December 31, 2008, impairment charges of $55.1 million were recorded to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $243.5 million in the same period of the prior year. In performing its quarterly inventory impairment analysis, the Company increased the discount rates utilized in its estimated discounted cash flow analyses used for valuation purposes of communities determined to be impaired from a range of 13% to 17%, to a range of 15% to 19%, which reflects its estimate of the increasing level of market risk present in the homebuilding and related mortgage lending industries. The increase in the discount rates increased the inventory impairment charge by $2.9 million. In the three months ended December 31, 2008, approximately 62% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 38% of the charges were recorded to residential construction in progress and finished homes inventory, compared to 60% and 40%, respectively, in the same period of 2007.

     It is possible that the Company’s estimate of undiscounted cash flows from communities analyzed may change and could result in a future need to record impairment charges to adjust the carrying value of these assets to their estimated fair value. There are several factors which could lead to changes in the estimates of undiscounted future cash flows for a given community. The most significant of these include pricing and incentive levels actually realized by the community, the rate at which the homes are sold and the costs incurred to construct the homes. The pricing and incentive levels are often inter-related with sales pace within a community such that a price reduction can be expected to increase the sales pace. Further, both of these factors are heavily influenced by the competitive pressures facing a given community from both new homes and existing homes which may result from foreclosures. Additionally, if conditions in the broader economy, homebuilding industry or specific markets in which the Company operates worsen beyond current expectations, and as the Company re-evaluates specific community pricing and incentives, construction and development plans, and its overall land sale strategies, it may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. These evaluations may result in additional impairment charges, which could be significantly higher than the current quarter charges.

     At December 31, 2008, the Company had $38.8 million of land held for sale, consisting of land held for development and land under development that has met the criteria of available for sale in accordance with SFAS No. 144.

     Based on a quarterly review of land and lot option contracts, the Company has written off earnest money deposits and pre-acquisition costs related to contracts which it no longer plans to pursue. During the three-month periods ended December 31, 2008 and 2007, the Company wrote off $1.1 million and $2.0 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts. Should the current weak homebuilding market conditions persist and the Company is unable to successfully renegotiate certain land purchase contracts, it may write off additional earnest money deposits and pre-acquisition costs.

     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 these 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 46R, 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 46R, 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. The expected gains and losses are primarily determined by the amount of deposit required by the contract, the time period or term of the contract, and by analyzing the volatility in home sales prices as well as development and entitlement risk in each specific market. 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 added $21.5 million in land inventory not owned and minority interests related to entities not owned to the Company’s balance sheet at December 31, 2008. The Company’s obligations related to these land or lot option contracts are guaranteed by cash deposits totaling $2.6 million and promissory notes and surety bonds totaling $0.3 million. Creditors, if any, of these variable interest entities have no recourse against the Company.

     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. At December 31, 2008, such exposure totaled $18.7 million.

     Additionally, the Company evaluated land and lot option purchase contracts in accordance with SFAS No. 49, “Accounting for Product Financing Arrangements,” and added $3.4 million in land inventory not owned, with a corresponding increase to accrued expenses and other liabilities, to the Company’s balance sheet at December 31, 2008 as a result of this evaluation.

     Included in land inventory not owned at December 31, 2008, was $11.7 million of land for which the Company does not have title because the land was sold during the fourth quarter of fiscal 2008. The recognition of these sales has been deferred because their terms, primarily related to the Company’s continuing involvement with the properties, did not meet the full accrual method criteria of SFAS No. 66, “Accounting for Sales of Real Estate.”

     NOTE D — NOTES PAYABLE

     The Company’s notes payable at their principal amounts, net of any unamortized discounts, consist of the following:

		December 31,				September 30,
		2008				2008
		(In millions)
Homebuilding:
Unsecured:
Revolving credit facility, maturing 2011		$	—			$	—
5% senior notes due 2009, net			155.2				200.0
8% senior notes due 2009, net			304.3				349.6
4.875% senior notes due 2010, net			209.7				249.6
9.75% senior notes due 2010			93.1				96.8
9.75% senior subordinated notes due 2010, net			15.3				15.3
6% senior notes due 2011, net			249.7				249.6
7.875% senior notes due 2011, net			199.4				199.4
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			198.3				198.2
5.625% senior notes due 2014, net			248.7				248.6
5.25% senior notes due 2015, net			298.4				298.3
5.625% senior notes due 2016, net			298.2				298.1
6.5% senior notes due 2016, net			496.9				499.2
Secured and other			38.2				42.2
		$	3,405.4			$	3,544.9
Financial Services:
Mortgage repurchase facility, maturing 2009		$	55.9			$	203.5
		$	55.9			$	203.5

     The Company has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission (SEC), registering debt and equity securities that the Company may issue from time to time in amounts to be determined. Under SEC rules, this shelf registration statement expires in June 2009. The Company expects to renew the registration statement prior to that time.

Homebuilding:

     The Company has a $1.65 billion unsecured revolving credit facility, which includes a $1.0 billion letter of credit sub-facility. The revolving credit facility, which matures December 16, 2011, has an uncommitted accordion provision of $400 million which can be used to increase the size of the facility to $2.05 billion upon obtaining additional commitments from lenders. The Company’s borrowing capacity, including the issuance of additional letters of credit, under this facility is reduced by the amount of letters of credit outstanding, and is further reduced by the limitations in effect under the borrowing base arrangement described below. 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, its ratio of adjusted EBITDA to adjusted interest incurred and its senior unsecured debt rating. At December 31, 2008, the Company had no cash borrowings and $67.7 million of standby letters of credit outstanding on the homebuilding revolving credit facility. The interest rate of this facility at December 31, 2008 was 3.1%. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees.

     Under the debt covenants associated with the revolving credit facility, if the Company has fewer than two investment grade senior unsecured debt ratings from Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings, it is subject to a borrowing base limitation and restrictions on unsold homes and residential land and lots. The Company’s senior debt ratings, which are currently below investment grade, are as follows: Moody’s (Ba3); Standard & Poor’s (BB-); and Fitch (BB). Consequently, these additional limitations are currently in effect.

     Under the borrowing base limitation, the sum of the Company’s senior debt and the amount drawn on the revolving credit facility may not exceed the lesser of (a) certain percentages of the acquisition cost of various categories of unencumbered inventory or (b) certain percentages of the book value of various categories of unencumbered inventory, cash and cash equivalents. At December 31, 2008, the borrowing base arrangement limited the Company’s additional borrowing capacity from any source, including the issuance of additional letters of credit, to $15.1 million.

     The revolving credit facility imposes restrictions on the Company’s operations and activities by requiring the Company to maintain certain levels of leverage, tangible net worth and components of inventory. If the Company does not maintain the requisite levels, it may not be able to pay dividends or available financing could be reduced or terminated. In addition, the indentures governing the Company’s senior notes and senior subordinated notes impose restrictions on the creation of secured debt.

     In November 2008, upon expiration of the previous authorization, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities. The new authorization is effective from December 1, 2008 to November 30, 2009. At December 31, 2008, $466.8 million of the authorization was remaining.

     During the three months ended December 31, 2008, through unsolicited transactions, the Company repurchased $44.8 million principal amount of its 5% senior notes due 2009, $45.3 million of its 8% senior notes due 2009, $40.0 million of its 4.875% senior notes due 2010, $3.7 million of its 9.75% senior notes due 2010, and $2.3 million of its 6.5% senior notes due 2016 for an aggregate purchase price of $129.7 million, plus accrued interest. The gain of $6.2 million, net of unamortized discounts and fees, is included in the consolidated statement of operations for the three months ended December 31, 2008.

     On January 15, 2009, the Company repaid the $155.2 million principal amount of its 5% senior notes which were due on that date. Also, during the second quarter of fiscal 2009, the Company repaid $304.3 million principal amount of its 8% senior notes, which were due on February 1, 2009.

     At December 31, 2008, the Company was in compliance with all of the covenants, limitations and restrictions that form a part of the bank revolving credit facility and the public debt obligations. The Company’s continued borrowing availability depends on its ability to remain in compliance with these covenants, limitations and restrictions. If it appears that the Company will not be able to comply with these requirements in the future, it could be more difficult and expensive to maintain the current level of financing or obtain additional financing.

Financial Services:

     On March 28, 2008, DHI Mortgage entered into a mortgage sale and repurchase agreement (the “mortgage repurchase facility”), that matures March 26, 2009. The mortgage repurchase facility provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party investors in the secondary market or within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase facility. As of December 31, 2008, $182.1 million of mortgage loans held for sale were pledged under this repurchase arrangement, with a carrying value of $185.0 million. The mortgage repurchase facility is accounted for as a secured financing. The facility has a capacity of $275 million, subject to an accordion

feature that could increase the total capacity to $500 million based on obtaining increased commitments from existing counterparties, new commitments from prospective counterparties, or a combination of both. In addition, DHI Mortgage has the option to fund a portion of its repurchase obligations in advance. As a result of advance fundings totaling $113.0 million, DHI Mortgage had an obligation of $55.9 million outstanding under the mortgage repurchase facility at December 31, 2008 at a 1.4% interest rate.

     The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth, its minimum required net income and its minimum required liquidity. At December 31, 2008, the mortgage subsidiary was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

     The liquidity of the Company’s financial services business is dependent upon its continued ability to renew and extend the mortgage repurchase facility or to obtain other additional financing in sufficient capacities. In the past, the Company has been able to renew or extend its mortgage credit facilities on satisfactory terms prior to their maturities, and obtain temporary additional commitments through amendments of the respective credit agreements during periods of higher than normal volumes of mortgages held for sale. The Company is currently exploring alternatives with regard to the mortgage repurchase facility, and in light of the Company’s reduced mortgage origination volume expectations, the size of the renewed or replacement facility will likely be smaller. The recent volatility in the credit markets and losses sustained by many banks will likely make renewing this facility or arranging a replacement credit source more challenging and more expensive.

NOTE E — 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. Additionally, the Company writes off a portion of the capitalized interest related to communities for which inventory impairments are recorded in accordance with SFAS No. 144. Historically, the Company’s inventory eligible for interest capitalization (“active inventory”) exceeded its debt levels. However, due to the Company’s inventory reduction strategies of slowing or suspending land development in certain communities and limiting the construction of unsold homes, the Company’s active inventory is now lower than its debt level. Therefore, a portion of the interest incurred is being expensed directly to interest expense. As all interest incurred is ultimately expensed, this only accelerates the expense recognition. In the three months ended December 31, 2008, the portion of interest incurred that was expensed directly to interest expense was $25.6 million.

     The following table summarizes the Company’s homebuilding interest costs incurred, capitalized, expensed as interest expense, charged to cost of sales and written off during the three-month periods ended December 31, 2008 and 2007:

		Three Months Ended
		December 31,
		2008				2007
		(In millions)
Capitalized interest, beginning of period		$	160.6			$	338.7
Interest incurred			56.7				61.5
Interest expensed:
Directly to interest expense			(25.6	)			—
Amortized to cost of sales			(31.1	)			(58.0	)
Written off with inventory impairments			(2.8	)			(14.7	)
Capitalized interest, end of period		$	157.8			$	327.5

     The Company typically provides its homebuyers a one-year limited warranty for all materials 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 during the three-month periods ended December 31, 2008 and 2007 were as follows:

		Three Months Ended
		December 31,
		2008				2007
		(In millions)
Warranty liability, beginning of period		$	83.4			$	116.0
Warranties issued			4.2				7.6
Changes in liability for pre-existing warranties			(7.1	)			(5.6	)
Settlements made			(7.1	)			(11.3	)
Warranty liability, end of period		$	73.4			$	106.7

NOTE G — MORTGAGE LOANS

     To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using various derivative instruments, which include forward sales of mortgage-backed securities (MBS), Eurodollar Futures Contracts (EDFC) and put options on both MBS and EDFC. Use of the term “hedging instruments” in the following discussion refers to these securities collectively, or in any combination. The Company does not enter into or hold derivatives for trading or speculative purposes.

Mortgage Loans Held for Sale

     Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. Newly originated loans that have been closed but not committed to third-party investors are hedged to mitigate the risk of changes in their fair value. Hedged loans are committed to third-party investors typically within three days after origination. Effective October 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” for all loans originated on or after October 1, 2008. These mortgage loans held for sale are initially recorded at fair value based on either sale commitments or current market quotes and are adjusted for subsequent changes in fair value until the loan is sold. Mortgage loans held for sale originated prior to October 1, 2008 are carried at lower of cost or market. While the Company’s risk management policies with respect to interest rate risk and fair value changes in mortgage loans held for sale have not changed, the effect of this standard alleviated the complex documentation requirements to account for these instruments as designated fair value accounting hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Additionally, the recognition of net origination costs and fees associated with mortgage loans originated on or after October 1, 2008 are no longer deferred until the time of sale. There were no required cumulative adjustments to retained earnings because the Company chose to continue to account for mortgage loans held for sale originated prior to October 1, 2008 at the lower of cost or market. The implementation of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     At December 31, 2008, mortgage loans held for sale accounted for under SFAS No. 159 had an aggregate fair value of $204.3 million and an aggregate outstanding principal balance of $201.2 million. The amount of mortgage loans held for sale originated prior to October 1, 2008 was not significant, with an outstanding principal balance of $1.6 million, and none of these mortgage loans were past due for 90 days or more. During the three months ended

December 31, 2008 and 2007, the Company had net gains on sales of loans of $7.3 million and $17.6 million, respectively.

     The notional amounts of the hedging instruments used to hedge mortgage loans held for sale vary in relationship to the underlying loan amounts, depending on the movements in the value of each hedging instrument relative to the value of the underlying mortgage loans. The fair value change related to the hedging instruments generally offsets the fair value change in the mortgage loans held for sale, which for the three months ended December 31, 2008 was not significant, and is recognized in current earnings. In accordance with SFAS No. 133, the effectiveness of the fair value hedge in the prior year was monitored and any ineffectiveness, which for the three months ended December 31, 2007 was not significant, was recognized in current earnings. As of December 31, 2008, the Company had $41.2 million in mortgage loans held for sale not committed to third-party investors and the notional amounts of the hedging instruments related to those loans totaled $41.7 million.

     Generally, mortgage loans are sold by the Company with limited recourse provisions which include industry-standard representations and warranties, primarily involving a minimum number of payments to be made by the borrower and/or misrepresentation by the borrower. The Company does not retain any other continuing interest related to mortgage loans sold in the secondary market. The Company’s other mortgage loans generally consist of loans repurchased due to these limited recourse obligations. Typically, these loans are impaired and often become real estate owned through the foreclosure process.

     Based on historical performance and current housing and credit market conditions, the Company has estimated and recorded a total loss reserve of $29.8 million and $30.5 million at December 31, 2008 and September 30, 2008, respectively. These reserves are for estimated losses on other mortgage loans, real estate owned and loans to be repurchased in the future due to the limited recourse provisions. Other mortgage loans, subject to nonrecurring fair value measurement, totaled $54.5 million at December 31, 2008, and had corresponding loss reserves of $17.9 million. Remaining loss reserves at December 31, 2008 included $4.0 million for real estate owned and a $7.9 million liability for loans anticipated to be repurchased in the future due to the limited recourse provisions. It is possible that future losses may exceed the amount of reserves and, if so, additional charges will be required.

     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 SFAS No. 133 and related Derivatives Implementation Group conclusions, the Company classifies and accounts for IRLCs as derivative instruments recorded at fair value. In November 2007, the SEC issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109), which requires that the expected net future cash flows related to the associated servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings at the time of the commitment. SAB 109 was effective for the Company on January 1, 2008 and has been applied prospectively to commitments issued or modified after that date.

     The Company adopted SAB 109 in the second quarter of fiscal 2008. The related valuation of the IRLCs resulted in a $5.1 million reduction of revenues during the three months ended December 31, 2008. At December 31, 2008, the Company’s IRLCs totaled $214.8 million.

     The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments. These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in current earnings. As of December 31, 2008, the Company had approximately $35.2 million of best-efforts whole loan delivery commitments and $198.3 million of hedging instruments related to its IRLCs not yet committed to investors.

     As part of a program to potentially offer homebuyers a below market interest rate on their home financing, the Company acquired $37.3 million in MBS which are accounted for at fair value with gains and losses recognized in current earnings. These gains and losses for the three months ended December 31, 2008 and 2007 were not significant.

NOTE H — FAIR VALUE MEASUREMENTS

     Effective October 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for fair value measurements of certain financial instruments. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange (exit) price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This standard establishes a three-level hierarchy for fair value measurements based upon the inputs to the valuation of an asset or liability. Observable inputs are those which can be easily seen by market participants while unobservable inputs are generally developed internally, utilizing management’s estimates and assumptions.

	•		Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.
	•		Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.
	•		Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

     When available, the Company uses quoted market prices in active markets to determine fair value. The Company considers the principal market and nonperformance risk associated with the Company’s counterparties when determining the fair value measurements. Fair value measurements under SFAS No. 157 are used for IRLCs, mortgage loans held for sale, other mortgage loans and hedging instruments.

     The value of mortgage loans held for sale includes changes in estimated fair value from the date the loan is closed until the date the loan is sold. The fair value of mortgage loans held for sale is generally calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics; therefore, they have been classified as a Level 2 valuation. After consideration of nonperformance risk, no additional adjustments have been made by the Company to the fair value measurement of mortgage loans held for sale. Closed mortgage loans are typically sold within 30 days of origination limiting any nonperformance exposure period. In addition, the Company actively monitors the financial strength of its counterparties and has limited the number of counterparties utilized in loan sale transactions due to the current market volatility in the mortgage and bank environment.

     The hedging instruments utilized by the Company to manage its interest rate risk and hedge the changes in the fair value of mortgage loans held for sale are publicly traded derivatives with fair value measurements based on quoted market prices. Exchange-traded derivatives are considered Level 1 valuations because quoted prices for identical assets are used for fair value measurements. The Company had no exchange-traded derivatives at December 31, 2008. Over-the-counter derivatives, such as MBS, are classified as Level 2 valuations because quoted prices for similar assets are used for fair value measurements. The Company mitigates exposure to nonperformance risk associated with over-the-counter derivatives by limiting the number of counterparties and actively monitoring their financial strength and creditworthiness. Nonperformance risk associated with exchange-traded derivatives is considered minimal as these items are traded on the Chicago Mercantile Exchange. After consideration of nonperformance risk, no additional adjustments have been made by the Company to the fair value measurement of hedging instruments.

     The fair values of IRLCs are also calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics; therefore, they have been classified as Level 2 valuations. These valuations do not contain adjustments for expirations as any expired commitments are excluded from the fair value measurement. After consideration of nonperformance risk, no additional adjustments have been made by the Company to the fair value measurements of IRLCs. The company generally only issues IRLCs for products that meet specific investor guidelines. Should any investor become insolvent, the Company would not be required to close the transaction based on the terms of the commitment. Since not all IRLCs will become closed loans, the Company adjusts its fair value measurements for the estimated amount of IRLCs that will not close, which historically has not been a significant adjustment.

     A summary of assets and liabilities at December 31, 2008 measured at fair value on a recurring basis were as follows:

		As of				Fair Value Measurements at
		December 31,				Reporting Date Using
		2008				Level 1				Level 2				Level 3
		(in millions)
Financial Services:
Mortgage Loans Held for Sale (a)		$	204.3							$	204.3
Interest Rate Lock Commitments (a)		$	4.6							$	4.6
Other Liabilities (a) (b)		$	(4.3	)						$	(4.3	)

     Related interest income for mortgage loans held for sale continues to be measured based on contractual interest rates and is included in financial services revenues.

     Other mortgage loans are measured at fair value on a nonrecurring basis and include performing and nonperforming mortgage loans. Other mortgage loans are reported in other assets at fair value based on the Company’s assessment of the value of the underlying collateral and are classified as Level 3 valuations.

     The Company’s provision for income taxes for the three months ended December 31, 2008 was $1.3 million, compared with a benefit of $74.1 million in the corresponding prior year period. The Company’s effective income tax expense rate was 2.1% for the three-month period ended December 31, 2008, compared to an effective tax benefit rate of 36.5% for the three-month period ended December 31, 2007. The difference in the Company’s effective tax rate primarily results from the recording of valuation allowances against the Company’s deferred tax assets beginning in the second quarter of fiscal year 2008. The current period tax provision results primarily from state income taxes on business operations conducted in states where the Company is profitable and small adjustments to the previously recorded valuation allowance.

     At December 31, 2008, the Company had a federal income tax receivable of $54.5 million, relating to a net operating loss carryback from its 2008 year. During the three months ended December 31, 2008, the Company received a federal income tax refund of $621.7 million with respect to its 2008 year. The Company expects to receive the $54.5 million receivable in the form of a refund after it files its final tax return for fiscal 2008 in June, 2009. The refund will be created from the carryback of a tax loss generated in fiscal 2008 against taxable income in fiscal 2006.

     At December 31, 2008 and September 30, 2008, the Company had deferred tax assets of $1.2 billion, offset by valuation allowances of $984.4 million and $961.3 million, respectively. A substantial portion of the net deferred tax asset of $213.5 million at December 31, 2008 is expected to be recovered through the carryback of federal tax losses to be generated in fiscal 2009, primarily through the sale of homes which had been impaired in fiscal 2008 and before. Federal tax losses realized in fiscal 2009 can be carried back to fiscal 2007 when the Company had taxable income of $616.0 million. The remainder of the net deferred tax asset is expected to be recovered through state income tax loss carrybacks. The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcome of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position. The Company’s ability to sell and close an adequate amount of previously impaired homes in fiscal 2009 is a significant assumption required for full recovery of the net deferred tax asset. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.

     The total amount of unrecognized tax benefits was $18.7 million as of December 31, 2008 and September 30, 2008 (which includes interest, penalties, and the tax benefit relating to the deductibility of interest and state income taxes). All tax positions, if recognized, would affect the Company’s effective income tax rate. The Company does not expect the total amount of unrecognized tax benefits to significantly decrease or increase within twelve months of the current reporting date.

     The Company is subject to federal income tax and to income tax in multiple states. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2004 through 2008. The Company is currently being audited by the IRS and various states. The IRS commenced an examination of the Company’s tax returns for 2004 and 2005 in January 2007 that is anticipated to be completed within the next twelve months. The Company does not anticipate the results of the examination will have a material impact on its consolidated financial position, results of operations or cash flows.

NOTE J — LOSS PER SHARE

     The following table sets forth the numerators and denominators used in the computation of basic and diluted loss per share for the three months ended December 31, 2008 and 2007. In both periods, all outstanding stock options were excluded from the computation because they were antidilutive due to the net loss recorded during each period.

		Three Months Ended
		December 31,
		2008				2007
		(In millions)
Numerator:
Net loss		$	(62.6	)		$	(128.8	)
Denominator:
Denominator for basic and diluted loss per share— adjusted weighted average common shares			316.7				315.0

NOTE K — STOCKHOLDERS’ EQUITY

     The Company has an automatically effective universal shelf registration statement registering debt and equity securities that it may issue from time to time in amounts to be determined. Under SEC rules, this shelf registration statement expires in June 2009. The Company expects to renew the registration of the universal shelf prior to that time. Also, at December 31, 2008, 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.

     In November 2008, upon expiration of the previous authorization, the Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock. The new authorization is effective from December 1, 2008 to November 30, 2009. All of the $100 million authorization was remaining at December 31, 2008.

     During the three months ended December 31, 2008, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, which was paid on December 18, 2008 to stockholders of record on December 8, 2008. In January 2009, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, payable on February 26, 2009 to stockholders of record on February 16, 2009. Quarterly cash dividends of $0.15 per common share were declared in the comparable quarters of fiscal 2008.

NOTE L — COMMITMENTS AND CONTINGENCIES

     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 and claims related to its mortgage activities. 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 costs relative to revenues, home closings and product types, and include 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 these 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 recorded reserves relating to these matters, the Company could incur additional charges that could be significant.

     On June 15, 2007, a putative class action, John R. Yeatman, et al. v. D.R. Horton, Inc., et al., was filed by one of the Company’s customers against it and its affiliated mortgage company subsidiary in the United States District Court for the Southern District of Georgia. The complaint sought certification of a class alleged to include persons who, within the year preceding the filing of the suit, purchased a home from the Company and obtained a mortgage for such purchase from its affiliated mortgage company subsidiary. The complaint alleged that the Company violated Section 8 of the Real Estate Settlement Procedures Act by effectively requiring its homebuyers to use its affiliated mortgage company to finance their home purchases by offering certain discounts and incentives. The action sought damages in an unspecified amount and injunctive relief. On April 23, 2008, the Court ruled on the Company’s motion to dismiss and dismissed this complaint with prejudice. The plaintiffs filed a notice of appeal, which is currently pending.

     On March 24, 2008, a putative class action, James Wilson, et al. v. D.R. Horton, Inc., et al., was filed by five customers of Western Pacific Housing, Inc., one of the Company’s wholly-owned subsidiaries, against the Company, Western Pacific Housing, Inc., and the Company’s affiliated mortgage company subsidiary, in the United States District Court for the Southern District of California. The complaint seeks certification of a class alleged to include persons who, within the four years preceding the filing of the suit, purchased a home from the Company, or any of its subsidiaries, and obtained a mortgage for such purchase from the Company’s affiliated mortgage company subsidiary. The complaint alleges that the Company violated Section 1 of the Sherman Antitrust Act and Sections 16720, 17200 and 17500 of the California Business and Professions Code by effectively requiring its homebuyers to apply for a loan through its affiliated mortgage company. The complaint alleges that the homebuyers were either deceived about loan costs charged by the Company’s affiliated mortgage company or coerced into using its affiliated mortgage company, or both, and that discounts and incentives offered by the Company or its subsidiaries to buyers who obtained financing from its affiliated mortgage company were illusory. The action seeks treble damages in an unspecified amount and injunctive relief. Management believes the claims alleged in this action are without merit

and will defend them vigorously. However, as the action is still in its early stages, the Company is unable to express an opinion as to the likelihood of an unfavorable outcome or the amount of damages, if any.

     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 December 31, 2008, the Company had total deposits of $40.7 million, comprised of cash deposits of $35.1 million, promissory notes of $3.0 million, and letters of credit and surety bonds of $2.6 million, to purchase land and lots with a total remaining purchase price of $614.8 million. Within the land and lot option purchase contracts in force at December 31, 2008, there were a limited number of contracts, representing only $30.8 million of remaining purchase price, subject to specific performance clauses which may require the Company to purchase the land or lots upon the land sellers meeting their obligations.

     Included in the total deposits of $40.7 million were $17.5 million of deposits related to land and lot option purchase contracts for which the Company does not expect to exercise its option to purchase the land or lots, but the contract has not yet been terminated. The remaining purchase price of land and lots subject to those contracts was $195.4 million. Consequently, the deposits relating to these contracts have been written off, resulting in a net deposit balance of $23.2 million at December 31, 2008. The majority of land and lots under contract are currently expected to be purchased within three years, based on the Company’s assumptions as to the extent it will exercise its options to purchase such land and lots.

     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 December 31, 2008, outstanding standby letters of credit were $67.7 million and surety bonds were $1.4 billion. The Company’s revolving credit facility provides for additional capacity of up to $932.3 million for standby letters of credit, subject to the borrowing base limitation of $15.1 million as discussed in Note D.

NOTE M — RECENT ACCOUNTING PRONOUNCEMENTS

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective as of the beginning of an entity’s fiscal year that begins after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, which partially defers the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. The partial adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows (see Note H). The Company is currently evaluating the impact of adopting the remaining provisions of SFAS No. 157; however, it is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” The statement clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, and earlier adoption is prohibited. The Company is currently evaluating the impact of the adoption of SFAS No. 160; however, it is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (SFAS No. 141(R)). The statement replaces SFAS No. 141, “Business Combinations” and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008, and is to be applied prospectively. The Company does not expect the

adoption of SFAS No. 141(R) to have a material impact on its consolidated financial position, results of operations or cash flows.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” The statement amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” It requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The principal impact of this statement will be to require the Company to expand its disclosure regarding its derivative instruments, and will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements for nongovernmental entities that are presented in conformity with GAAP. SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS No. 162 to have a material impact on its consolidated financial position, results of operations or cash flows.

     In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60.” The statement requires that an insurance entity recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS No. 163 also clarifies the application of SFAS No. 60 “Accounting and Reporting by Insurance Enterprises” to financial guarantee insurance contracts and expands disclosure requirements surrounding such contracts. SFAS No. 163 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 163; however, it is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In December 2008, the FASB issued FASB Staff Position (FSP) No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The staff position amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46(R) to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. This position is effective for financial statements issued for interim periods and fiscal years ending after December 15, 2008. The adoption of this pronouncement, which is related to disclosure only, did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     The Company’s 32 homebuilding operating divisions and its financial services operation are its operating segments under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” As reflected in the current year presentation, the homebuilding operating segments are aggregated into six reporting segments and the financial services operating segment is its own reporting segment. Previously, the Company presented seven homebuilding reporting segments, based on its seven operating regions which had been determined to be its operating segments. During the fourth quarter of fiscal 2008, the Company reassessed the level at which the SFAS No. 131 operating segment criteria is met, and as a result, changed its operating segments from the operating regions to the operating divisions. This determination was based on changes to the Company’s management structure and decision-making processes, which have evolved primarily due to the difficult market conditions and the decrease in size of the Company’s operations.

     As a result of the change in operating segments described above, the composition of the Company’s reporting segments was also revised. The California markets, which were previously presented as a separate reporting segment are now included in the West reporting segment. Additionally, the Salt Lake City, Utah market, which was previously included in the Southwest reporting segment, is now included in the West reporting segment. Furthermore, the name of the Northeast reporting segment has been changed to the East reporting segment, although the markets comprising it remain the same.

     Under the revised presentation, the Company’s reportable homebuilding segments are: East, Midwest, Southeast, South Central, Southwest and West. These reporting segments have homebuilding operations located in the following states:

East:		Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia
Midwest:		Colorado, Illinois, Minnesota and Wisconsin
Southeast:		Alabama, Florida and Georgia
South Central:		Louisiana, Mississippi, Oklahoma and Texas
Southwest:		Arizona and New Mexico
West:		California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington

     Consequently, the Company has restated the prior year segment information provided in this note to conform to the current year presentation.

     Homebuilding is the Company’s core business, generating 98% of consolidated revenues during the three months ended December 31, 2008 and 2007. The Company’s homebuilding segments are primarily engaged in the acquisition and development of land for residential purposes and the construction and sale of residential homes on such land in 27 states and 77 markets in the United States. The homebuilding segments generate most of their revenues from the sale of completed homes, with a lesser amount from the sale of land and lots.

     The Company’s financial services segment provides mortgage financing and title agency services principally to customers of the Company’s homebuilding segments. The Company generally does not retain or service the mortgages that it originates, but, rather, seeks to sell the mortgages and related servicing rights to investors. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

     The accounting policies of the reporting segments are described throughout Note A in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2008.

		Three Months Ended December 31,
						Restated
		2008				2007
		(In millions)
Revenues
Homebuilding revenues:
East		$	75.9			$	158.7
Midwest			71.7				158.9
Southeast			147.1				234.4
South Central			255.0				348.8
Southwest			137.5				391.4
West			213.1				415.4
Total homebuilding revenues		$	900.3			$	1,707.6
Financial services revenues		$	17.7			$	35.0
Consolidated revenues		$	918.0			$	1,742.6
Inventory Impairments
East		$	4.1			$	19.1
Midwest			3.8				4.2
Southeast			3.8				21.8
South Central			—				10.1
Southwest			1.9				—
West			41.5				188.3
Total inventory impairments		$	55.1			$	243.5
Income (Loss) before Income Taxes (1)
Homebuilding income (loss) before income taxes:
East		$	(10.9	)		$	(25.9	)
Midwest			(11.6	)			0.5
Southeast			(5.1	)			(21.3	)
South Central			11.8				2.8
Southwest			3.0				36.1
West			(45.6	)			(202.0	)
Total homebuilding loss before income taxes		$	(58.4	)		$	(209.8	)
Financial services income (loss) before income taxes		$	(2.9	)		$	6.9
Consolidated loss before income taxes		$	(61.3	)		$	(202.9	)

		December 31,				September 30,
		2008				2008
		(In millions)
Homebuilding Inventories (2):
East		$	592.4			$	594.5
Midwest			467.2				473.8
Southeast			757.6				799.6
South Central			883.1				939.7
Southwest			374.6				423.6
West			1,162.2				1,258.4
Corporate and unallocated (3)			189.0				193.6
Total homebuilding inventory		$	4,426.1			$	4,683.2

     All of the Company’s senior and senior subordinated notes and the 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 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.

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
ASSETS
Cash and cash equivalents		$	1,864.0			$	15.0			$	34.1			$	—			$	1,913.1
Investments in subsidiaries			1,077.1				—				—				(1,077.1	)			—
Inventories			1,361.4				3,006.9				57.8				—				4,426.1
Property and equipment, net			23.8				26.5				20.4				—				70.7
Income taxes receivable			54.5				—				—				—				54.5
Deferred income taxes, net			67.2				146.3				—				—				213.5
Earnest money deposits and other assets			69.4				108.1				101.7				(2.3	)			276.9
Mortgage loans held for sale			—				—				204.2				—				204.2
Goodwill			—				15.9				—				—				15.9
Intercompany receivables			1,898.5				—				—				(1,898.5	)			—
Total Assets		$	6,415.9			$	3,318.7			$	418.2			$	(2,977.9	)		$	7,174.9
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	248.9			$	566.5			$	108.3			$	(2.3	)		$	921.4
Intercompany payables			—				1,857.6				40.9				(1,898.5	)			—
Notes payable			3,404.1				1.3				55.9				—				3,461.3
Total Liabilities			3,653.0				2,425.4				205.1				(1,900.8	)			4,382.7
Minority interests			—				—				29.3				—				29.3
Total Equity			2,762.9				893.3				183.8				(1,077.1	)			2,762.9
Total Liabilities & Equity		$	6,415.9			$	3,318.7			$	418.2			$	(2,977.9	)		$	7,174.9

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
ASSETS
Cash and cash equivalents		$	1,261.5			$	90.1			$	35.7			$	—			$	1,387.3
Investments in subsidiaries			1,073.4				—				—				(1,073.4	)			—
Inventories			1,443.8				3,177.8				61.6				—				4,683.2
Property and equipment, net			16.1				29.1				20.7				—				65.9
Income taxes receivable			676.2				—				—				—				676.2
Deferred income taxes, net			67.2				146.3				—				—				213.5
Earnest money deposits and other assets			91.1				118.2				109.5				(3.3	)			315.5
Mortgage loans held for sale			—				—				352.1				—				352.1
Goodwill			—				15.9				—				—				15.9
Intercompany receivables			2,056.4				—				—				(2,056.4	)			—
Total Assets		$	6,685.7			$	3,577.4			$	579.6			$	(3,133.1	)		$	7,709.6
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	307.9			$	681.7			$	110.1			$	(3.3	)		$	1,096.4
Intercompany payables			—				2,008.1				48.3				(2,056.4	)			—
Notes payable			3,543.5				1.4				203.5				—				3,748.4
Total Liabilities			3,851.4				2,691.2				361.9				(2,059.7	)			4,844.8
Minority interests			—				—				30.5				—				30.5
Total Equity			2,834.3				886.2				187.2				(1,073.4	)			2,834.3
Total Liabilities & Equity		$	6,685.7			$	3,577.4			$	579.6			$	(3,133.1	)		$	7,709.6

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues		$	180.3			$	714.4			$	5.6			$	—			$	900.3
Cost of sales			185.2				626.0				5.4				—				816.6
Gross profit (loss)			(4.9	)			88.4				0.2				—				83.7
Selling, general and administrative expense			44.8				80.8				1.4				—				127.0
Equity in (income) of subsidiaries			(4.3	)			—				—				4.3				—
Interest expense			25.6				—				—				—				25.6
(Gain) on early retirement of debt			(6.2	)			—				—				—				(6.2	)
Other (income) expense			(3.5	)			0.9				(1.7	)			—				(4.3	)
			(61.3	)			6.7				0.5				(4.3	)			(58.4	)
Financial Services:
Revenues			—				—				17.7				—				17.7
General and administrative expense			—				—				23.2				—				23.2
Interest expense			—				—				0.7				—				0.7
Interest and other (income)			—				—				(3.3	)			—				(3.3	)
			—				—				(2.9	)			—				(2.9	)
Income (loss) before income taxes			(61.3	)			6.7				(2.4	)			(4.3	)			(61.3	)
Provision for (benefit from) income taxes			1.3				1.0				—				(1.0	)			1.3
Net income (loss)		$	(62.6	)		$	5.7			$	(2.4	)		$	(3.3	)		$	(62.6	)

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues		$	308.9			$	1,385.3			$	13.4			$	—			$	1,707.6
Cost of sales			341.5				1,354.6				9.9				—				1,706.0
Gross profit (loss)			(32.6	)			30.7				3.5				—				1.6
Selling, general and administrative expense			85.1				125.8				2.2				—				213.1
Equity in loss of subsidiaries			85.6				—				—				(85.6	)			—
Other (income)			(0.4	)			(1.3	)			—				—				(1.7	)
			(202.9	)			(93.8	)			1.3				85.6				(209.8	)
Financial Services:
Revenues			—				—				35.0				—				35.0
General and administrative expense			—				—				30.5				—				30.5
Interest expense			—				—				1.3				—				1.3
Interest and other (income)			—				—				(3.7	)			—				(3.7	)
			—				—				6.9				—				6.9
Income (loss) before income taxes			(202.9	)			(93.8	)			8.2				85.6				(202.9	)
Provision for (benefit from) income taxes			(74.1	)			(34.2	)			3.0				31.2				(74.1	)
Net income (loss)		$	(128.8	)		$	(59.6	)		$	5.2			$	54.4			$	(128.8	)

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
OPERATING ACTIVITIES
Net cash provided by operating activities		$	588.3			$	75.2			$	154.1			$	—			$	817.6
INVESTING ACTIVITIES
Purchases of property and equipment			(1.3	)			(1.2	)			—				—				(2.5	)
Net cash used in investing activities			(1.3	)			(1.2	)			—				—				(2.5	)
FINANCING ACTIVITIES
Net change in notes payable			(129.9	)			—				(147.6	)			—				(277.5	)
Net change in intercompany receivables/payables			157.2				(149.1	)			(8.1	)			—				—
Proceeds from stock associated with certain employee benefit plans			0.1				—				—				—				0.1
Cash dividends paid			(11.9	)			—				—				—				(11.9	)
Net cash provided by (used in) financing activities			15.5				(149.1	)			(155.7	)			—				(289.3	)
Increase (decrease) in cash and cash equivalents			602.5				(75.1	)			(1.6	)			—				525.8
Cash and cash equivalents at beginning of period			1,261.5				90.1				35.7				—				1,387.3
Cash and cash equivalents at end of period		$	1,864.0			$	15.0			$	34.1			$	—			$	1,913.1

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
OPERATING ACTIVITIES
Net cash provided by operating activities		$	64.1			$	201.8			$	290.2			$	1.6			$	557.7
INVESTING ACTIVITIES
Purchases of property and equipment			(1.6	)			(2.5	)			—				—				(4.1	)
Net cash used in investing activities			(1.6	)			(2.5	)			—				—				(4.1	)
FINANCING ACTIVITIES
Net change in notes payable			(365.6	)			—				(281.8	)			—				(647.4	)
Net change in intercompany receivables/payables			411.8				(400.6	)			(11.2	)			—				—
Proceeds from stock associated with certain employee benefit plans			0.4				—				—				—				0.4
Income tax benefit from stock option exercises			0.2				—				—				—				0.2
Cash dividends paid			(47.3	)			—				—				—				(47.3	)
Net cash used in financing activities			(0.5	)			(400.6	)			(293.0	)			—				(694.1	)
Increase (decrease) in cash and cash equivalents			62.0				(201.3	)			(2.8	)			1.6				(140.5	)
Cash and cash equivalents at beginning of period			—				225.3				45.9				(1.6	)			269.6
Cash and cash equivalents at end of period		$	62.0			$	24.0			$	43.1			$	—			$	129.1