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, 2008

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		(I.R.S. Employer Identification No.)
or organization)
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 – 316,608,676 shares as of August 1, 2008

 

 

D.R. HORTON, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets at June 30, 2008 (unaudited) and September 30, 2007 (unaudited)			3
Consolidated Statements of Operations for the three and nine months ended June 30, 2008 and 2007 (unaudited)			4
Consolidated Statements of Cash Flows for the nine months ended June 30, 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			30
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			61
ITEM 4. Controls and Procedures			62
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			63
ITEM 1A. Risk Factors			63
ITEM 6. Exhibits			66
SIGNATURE			67
Statement of Computation of Ratio of Earnings to Fixed Charges
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
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

CONSOLIDATED BALANCE SHEETS

		June 30,				September 30,
		2008				2007
		(In millions)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	819.4			$	228.3
Inventories:
Construction in progress and finished homes			2,064.1				3,346.8
Residential land and lots — developed and under development			3,505.3				5,334.7
Land held for development			735.4				540.1
Land inventory not owned			91.9				121.9
			6,396.7				9,343.5
Property and equipment, net			78.9				110.2
Deferred income taxes, net of valuation allowance of $887.7 million and $4.7 million at June 30, 2008 and September 30, 2007, respectively			518.7				863.8
Earnest money deposits and other assets			230.8				291.2
Goodwill			95.3				95.3
			8,139.8				10,932.3
Financial Services:
Cash and cash equivalents			31.8				41.3
Mortgage loans held for sale			246.4				523.5
Other assets			46.5				59.2
			324.7				624.0
Total assets		$	8,464.5			$	11,556.3
LIABILITIES
Homebuilding:
Accounts payable		$	285.2			$	566.2
Accrued expenses and other liabilities			803.7				933.3
Notes payable			3,581.6				3,989.0
			4,670.5				5,488.5
Financial Services:
Accounts payable and other liabilities			17.2				24.7
Repurchase agreement and notes payable to financial institutions			86.5				387.8
			103.7				412.5
			4,774.2				5,901.0
Minority interests			32.5				68.4
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, 319,965,087 shares issued and 316,309,854 shares outstanding at June 30, 2008 and 318,569,673 shares issued and 314,914,440 shares outstanding at September 30, 2007			3.2				3.2
Additional capital			1,716.2				1,693.3
Retained earnings			2,034.1				3,986.1
Treasury stock, 3,655,233 shares at June 30, 2008 and September 30, 2007, at cost			(95.7	)			(95.7	)
			3,657.8				5,586.9
Total liabilities and stockholders’ equity		$	8,464.5			$	11,556.3

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In millions, except per share data)
		(Unaudited)
Homebuilding:
Revenues:
Home sales		$	1,415.0			$	2,470.5			$	4,619.8			$	7,753.1
Land/lot sales			18.3				77.6				145.1				212.7
			1,433.3				2,548.1				4,764.9				7,965.8
Cost of sales:
Home sales			1,271.7				2,058.8				4,097.1				6,380.2
Land/lot sales			14.2				65.6				118.0				187.6
Inventory impairments and land option cost write-offs			330.4				852.0				1,410.0				1,010.8
			1,616.3				2,976.4				5,625.1				7,578.6
Gross profit (loss):
Home sales			143.3				411.7				522.7				1,372.9
Land/lot sales			4.1				12.0				27.1				25.1
Inventory impairments and land option cost write-offs			(330.4	)			(852.0	)			(1,410.0	)			(1,010.8	)
			(183.0	)			(428.3	)			(860.2	)			387.2
Selling, general and administrative expense			194.7				267.5				616.1				858.9
Goodwill impairment			—				425.6				—				425.6
Interest expense			11.7				—				22.9				—
Loss on early retirement of debt			2.6				12.1				2.6				12.1
Other (income)			(3.5	)			(3.9	)			(7.0	)			(5.7	)
			(388.5	)			(1,129.6	)			(1,494.8	)			(903.7	)
Financial Services:
Revenues			30.9				50.0				98.8				158.3
General and administrative expense			23.1				36.0				76.4				119.3
Interest expense			0.6				4.1				2.7				20.5
Interest and other (income)			(2.2	)			(8.3	)			(8.5	)			(34.2	)
			9.4				18.2				28.2				52.7
Loss before income taxes			(379.1	)			(1,111.4	)			(1,466.6	)			(851.0	)
Provision for (benefit from) income taxes			20.2				(287.6	)			367.2				(188.7	)
Net loss		$	(399.3	)		$	(823.8	)		$	(1,833.8	)		$	(662.3	)
Basic and diluted net loss per common share		$	(1.26	)		$	(2.62	)		$	(5.81	)		$	(2.11	)
Cash dividends declared per common share		$	0.075			$	0.15			$	0.375			$	0.45

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months
		Ended June 30,
		2008				2007
		(In millions)
		(Unaudited)
OPERATING ACTIVITIES
Net loss		$	(1,833.8	)		$	(662.3	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			42.1				48.3
Amortization of debt discounts and fees			5.3				4.9
Stock option compensation expense			9.6				9.1
Income tax benefit from stock option exercises			(2.7	)			(8.0	)
Deferred income taxes			345.1				(361.9	)
Loss on early retirement of debt			2.6				12.1
Inventory impairments and land option cost write-offs			1,410.0				1,010.8
Goodwill impairment			—				425.6
Changes in operating assets and liabilities:
Decrease (increase) in construction in progress and finished homes			991.2				(96.7	)
Decrease (increase) in residential land and lots – developed, under development, and held for development			518.8				(84.2	)
Decrease in earnest money deposits and other assets			58.6				129.4
Decrease in mortgage loans held for sale			277.1				553.9
Decrease in accounts payable, accrued expenses and other liabilities			(423.5	)			(433.8	)
Net cash provided by operating activities			1,400.4				547.2
INVESTING ACTIVITIES
Purchases of property and equipment			(9.1	)			(32.7	)
Cash used in investing activities			(9.1	)			(32.7	)
FINANCING ACTIVITIES
Proceeds from notes payable and repurchase agreement			204.4				2,560.0
Repayment of notes payable			(907.8	)			(3,745.3	)
Decrease in restricted cash			—				248.3
Increase in book overdraft			—				18.9
Proceeds from stock associated with certain employee benefit plans			9.2				10.0
Income tax benefit from stock option exercises			2.7				8.0
Cash dividends paid			(118.2	)			(141.2	)
Net cash used in financing activities			(809.7	)			(1,041.3	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			581.6				(526.8	)
Cash and cash equivalents at beginning of period			269.6				587.6
Cash and cash equivalents at end of period		$	851.2			$	60.8
Supplemental disclosures of noncash activities:
Notes payable issued for inventory		$	—			$	4.3

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2008

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 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 and the asset impairment charges and deferred income 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, 2007.

  Seasonality

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

  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 80 markets and 27 states in the United States at June 30, 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

     In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” land inventory and related communities under development are reviewed for potential write-downs when impairment indicators are present. The Company reviews its inventory at

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

the community level and determines if impairment indicators exist on inventory held and used by analyzing a variety of factors including, but not limited to, the following:

	•		gross margins on homes closed in recent months;
	•		projected gross margins on homes sold but not closed;
	•		projected gross margins based on community budgets;
	•		trends in gross margins, average selling prices or cost of sales;
	•		sales absorption rates; and
	•		performance of other communities in nearby locations.

     If indicators of impairment are present for a community, SFAS No. 144 requires an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, and if so, impairment charges are required to be recorded if the fair value of such assets is less than their carrying amounts. These estimates of cash flows are significantly impacted by community specific factors including estimates of the amounts and timing of future revenues and estimates of the amount of land development, materials and labor costs which, in turn, may be impacted by the following local market conditions:

	•		supply and availability of new and existing homes;
	•		location and desirability of the Company’s communities;
	•		variety of product types offered in the area;
	•		pricing and use of incentives by the Company and its competitors;
	•		alternative uses for the Company’s land or communities such as the sale of land, finished lots or home sites to third parties;
	•		amount of land and lots the Company owns or controls in a particular market or sub-market; and
	•		local economic and demographic trends.

     Due to uncertainties in the estimation process, actual results could differ from such estimates. For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

     The Company performs its impairment analysis based on total inventory at the community level. The Company’s determination of fair value is primarily based on discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams. When an impairment charge for a community is determined, the charge is then allocated to each lot in the community in the same manner as land and development costs are allocated to each lot. The inventory within each community is categorized as construction in progress and finished homes, residential land and lots—developed and under development, and land held for development, based on the stage of production or plans for future development.

     At June 30, 2008, the Company had $296.8 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. Land held for sale is carried at the lesser of its carrying value or fair value less estimated costs to sell. Additionally, impairment charges are also recorded on finished homes in substantially completed communities when events or circumstances indicate that the carrying values are greater than the fair value less estimated costs to sell these homes.

     During the first nine months of fiscal 2008, the difficult conditions within the homebuilding industry that prevailed during fiscal 2007 became more challenging. High inventory levels of both new and existing homes, elevated cancellation rates, low sales absorption rates, affordability issues and overall weak consumer confidence persisted throughout the period. The effects of these factors continued to be magnified by the tightening of credit standards in the mortgage markets, which has caused a decline in the availability of certain mortgage products. More

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

recently, increasing home foreclosures and indications of weakness in the general economy have caused additional weakness in many housing markets.

     The market factors mentioned above, combined with continued weakness in sales order prices and gross profit from home sales revenues, have caused the Company’s outlook for the homebuilding industry and its impact on its business to remain cautious. The Company’s continuing outlook is that housing market conditions will be challenging and may deteriorate further, and the timing of a recovery in the housing market remains unclear.

     When the Company performed its quarterly inventory impairment analysis in accordance with SFAS No. 144, the assumptions utilized reflected the expectation that the challenging conditions in the homebuilding industry will persist. Therefore, the current quarter impairment evaluation continued to indicate a significant number of communities with impairment indicators. Communities with a combined carrying value of $2,646.8 million as of June 30, 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 for 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 was 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 $915.3 million as of June 30, 2008, the largest portions of which were in the California, West and Midwest regions, were impaired. As a result, during the three months ended June 30, 2008, impairment charges totaling $323.2 million were recorded to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $835.8 million in the same period of the prior year. During the nine months ended June 30, 2008 and 2007, impairment charges totaled $1,383.7 million and $943.9 million, respectively. In the three and nine months ended June 30, 2008, approximately 79% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 21% of the charges were recorded to residential construction in progress and finished homes inventory.

     If conditions in the 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 and land sale strategies, the Company may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. These evaluations may result in additional impairment charges, and such charges could be material.

     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 June 30, 2008 and 2007, the Company wrote off $7.2 million and $16.2 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts. During the nine-month periods ended June 30, 2008 and 2007, the Company wrote off $26.3 million and $66.9 million, respectively, of such deposits and costs.

NOTE C — 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     The consolidation of these variable interest entities added $22.9 million in land inventory not owned and minority interests related to entities not owned to the Company’s balance sheet at June 30, 2008. The Company’s obligations related to these land or lot option contracts are guaranteed by cash deposits totaling $4.2 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 June 30, 2008, such exposure totaled $30.5 million.

     Additionally, the Company evaluated land and lot option purchase contracts in accordance with SFAS No. 49, “Accounting for Product Financing Arrangements,” and added $69.0 million in land inventory not owned, with a corresponding increase to accrued expenses and other liabilities, to the Company’s balance sheet at June 30, 2008 as a result of this evaluation.

NOTE D — NOTES PAYABLE

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

		June 30,				September 30,
		2008				2007
		(In millions)
Homebuilding:
Unsecured:
Revolving credit facility, maturing 2011		$	—			$	150.0
7.5% senior notes due 2007			—				215.0
5% senior notes due 2009, net			199.9				199.8
8% senior notes due 2009, net			384.8				384.6
4.875% senior notes due 2010, net			249.5				249.3
9.75% senior notes due 2010			96.8				—
9.75% senior subordinated notes due 2010, net			16.7				149.5
6% senior notes due 2011, net			249.6				249.5
7.875% senior notes due 2011, net			199.3				199.2
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			198.1				197.9
5.625% senior notes due 2014, net			248.6				248.5
5.25% senior notes due 2015, net			298.3				298.1
5.625% senior notes due 2016, net			298.1				297.9
6.5% senior notes due 2016, net			499.2				499.1
Secured and other			42.7				50.6
		$	3,581.6			$	3,989.0
Financial Services:
Mortgage repurchase facility, maturing 2009		$	86.5			$	—
Mortgage warehouse facility, matured March 28, 2008			—				267.8
Commercial paper conduit facility, terminated April 1, 2008			—				120.0
		$	86.5			$	387.8

     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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

  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 could be used to increase the size of the facility to $2.05 billion upon obtaining additional commitments from lenders. The Company’s borrowing capacity under this facility is reduced by the amount of letters of credit outstanding, and may be 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 June 30, 2008, the Company had no cash borrowings and $71.3 million of standby letters of credit outstanding on the homebuilding revolving credit facility and the interest rate was 4.2%. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees.

     In January 2008, through an amendment to the credit agreement, the size of the revolving credit facility was reduced from $2.5 billion to $2.25 billion. The amendment also revised certain financial covenants, including reducing the required level of minimum tangible net worth and reducing the maximum leverage ratio. Additionally, the amendment modified the adjusted EBITDA to adjusted interest incurred covenant such that it can no longer result in an event of default.

     In June 2008, through an amendment to the credit agreement, the size of the revolving credit facility was reduced from $2.25 billion to $1.65 billion. The amendment further reduced the minimum tangible net worth requirement and modified the leverage ratio calculation to allow all cash in excess of $50 million to be deducted from notes payable. In addition, the amendment increased the maximum residential land and lots to tangible net worth ratio and modified tangible net worth to include certain capital stock. The amendment also changed the pricing terms of the revolving credit facility, whereby the interest rate spread on borrowings and on unused committed capacity was increased.

     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, Fitch Ratings and Standard and Poor’s Ratings Services, it is subject to a borrowing base limitation and restrictions on unsold homes and residential land and lots. During the first quarter of fiscal 2008 both Standard & Poor’s and Moody’s downgraded the Company’s senior debt rating to below investment grade status; therefore, these additional limitations became effective and are currently in effect. During the third quarter of fiscal 2008, the Company’s senior debt rating was downgraded by all three rating agencies to their current levels as follows: Moody’s (Ba2); Standard and Poor’s (BB); and Fitch (BB+).

     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 June 30, 2008, the borrowing base arrangement limited the Company’s additional borrowing capacity from any source to $880 million.

     In November 2007, the Board of Directors extended its authorization for the repurchase of up to $500 million of the Company’s outstanding debt securities to November 30, 2008. At June 30, 2008, $463.5 million of the authorization was remaining.

     On December 1, 2007, the Company repaid the $215 million principal amount of its 7.5% senior notes which became due on that date.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     In February 2008, the Company, through an unsolicited transaction, repurchased $36.5 million principal amount of its 9.75% senior subordinated notes due 2010 for a purchase price of $36.0 million, plus accrued interest. The gain of $0.5 million is included in homebuilding other income in the consolidated statements of operations for the nine months ended June 30, 2008.

     In May 2008, the Company commenced an offer to exchange any and all of its outstanding 9.75% senior subordinated notes due 2010 for an equal principal amount of new 9.75% senior notes due 2010. In conjunction with the exchange offer, the Company solicited consents to an amendment to the indenture governing the senior subordinated notes that would eliminate many of the restrictive covenants applicable to the senior subordinated notes. For each $1,000 principal amount of senior subordinated notes tendered prior to the expiration of the consent solicitation on June 4, 2008, holders received a consent payment of $10. On June 20, 2008, the exchange offer and related solicitation of consents to amend the indenture were successfully closed, with $96.8 million principal amount of the senior subordinated notes having been tendered for exchange, and $16.7 million principal amount of the 9.75% senior subordinated notes remaining under the amended indenture. As a result of the amendment to the indenture, many of the restrictive covenants contained in the indenture were eliminated.

     In July 2008, the Company, through an unsolicited transaction, repurchased $23.1 million principal amount of its 8% senior notes due 2009 at their face value, plus accrued interest.

     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 liens.

     At June 30, 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. However, 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:

     The Company’s mortgage subsidiary had a $540 million mortgage warehouse loan facility that matured March 28, 2008. This facility was replaced with the mortgage repurchase facility described below.

     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, which replaced the mortgage warehouse loan 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 upon a specified time per the terms of the mortgage repurchase facility. As of June 30, 2008, $206.0 million of mortgage loans held for sale were pledged under this repurchase arrangement. Under generally accepted accounting principles, 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 $94.3 million, DHI Mortgage had an obligation of $86.5 million outstanding under the mortgage repurchase facility at June 30, 2008 and the interest rate was 3.5%.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     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 June 30, 2008, the mortgage subsidiary was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

     The Company’s mortgage subsidiary also had a $600 million commercial paper conduit facility (the “CP conduit facility”) with a maturity date of June 27, 2009. Effective April 1, 2008, the CP conduit facility was voluntarily terminated by agreement of the parties, as the Company believes its mortgage repurchase facility entered into in March 2008 will provide sufficient liquidity for its mortgage operations.

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. As a result of the Company’s reduction of its inventories and suspension of development activities in many projects, in recent quarters the Company’s active inventory has been lower than its debt level, so a portion of the interest incurred during those periods was expensed directly to interest expense. As all interest incurred is ultimately expensed, this occurrence only accelerates the expense recognition of the interest incurred during the period. In the three and nine months ended June 30, 2008, the portion of interest incurred that was recognized as interest expense was $11.7 million and $22.9 million, respectively. 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 and nine-month periods ended June 30, 2008 and 2007:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In millions)
Capitalized interest, beginning of period		$	253.3			$	334.7			$	338.7			$	288.9
Interest incurred			58.5				76.0				177.9				232.5
Interest expensed:
Directly to interest expense			(11.7	)			—				(22.9	)			—
Amortized to cost of sales			(44.9	)			(60.8	)			(178.1	)			(171.5	)
Written off with inventory impairments			(30.4	)			(25.1	)			(90.8	)			(25.1	)
Capitalized interest, end of period		$	224.8			$	324.8			$	224.8			$	324.8

NOTE F — WARRANTY COSTS

     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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     Changes in the Company’s warranty liability during the three and nine-month periods ended June 30, 2008 and 2007 were as follows:

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
						(In millions)
Warranty liability, beginning of period		$	98.7			$	120.8			$	116.0			$	130.4
Warranties issued			6.7				11.6				21.9				36.9
Changes in liability for pre-existing warranties			(4.8	)			(4.2	)			(16.1	)			(12.8	)
Settlements made			(9.2	)			(12.2	)			(30.4	)			(38.5	)
Warranty liability, end of period		$	91.4			$	116.0			$	91.4			$	116.0

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 (FMBS), Eurodollar Futures Contracts (EDFC) and put options on mortgage-backed securities (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 a third-party investor are matched with hedging instruments that are designated as fair value hedges. Hedged loans are committed to third-party investors typically within three days of origination. Loans held for sale are generally carried at cost that is adjusted for changes in fair value after the date of designation of an effective accounting hedge, based on either sale commitments or current market quotes. During the nine months ended June 30, 2008 and 2007, the Company had net gains on sales of loans of $52.8 million and $75.2 million, respectively.

     Some of the loans sold by DHI Mortgage are sold with limited recourse provisions related to loan performance. Based on historical experience and current housing and credit market conditions, the Company has estimated and recorded a total loss reserve for mortgage loans held in portfolio, mortgage loans held for sale, and estimated future obligations related to loans sold with recourse of $33.1 million and $24.6 million at June 30, 2008 and September 30, 2007, respectively.

     The notional amounts of the hedging instruments 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, 2008 and 2007 was not significant, is recognized in current earnings. As of June 30, 2008, the Company had $92.3 million in loans not committed to third-party investors and hedging instruments related to those loans totaling $170.3 million.

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 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. 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. SAB 109 was

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

effective for the Company on January 1, 2008 and has been applied prospectively to commitments issued or modified after that date. The adoption of SAB 109 in the second quarter of fiscal 2008 and its required valuation of the IRLCs resulted in the recognition of an additional $6.8 million of revenues during the nine months ended June 30, 2008. At June 30, 2008, the Company’s IRLCs totaled $194.6 million.

     The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments as described above. 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, 2008, the Company had approximately $45.3 million of best-efforts whole loan delivery commitments and $355.6 million outstanding of hedging instruments related to its IRLCs not yet committed to investors.

     The Company also purchases forward rate agreements (FRAs) and economic interest rate hedges as part of a program to potentially offer homebuyers a below market interest rate on their home financing. At June 30, 2008, these potential mortgage loan originations totaled approximately $96.9 million and were hedged with FRAs of $8.5 million and economic interest rate hedges of $1,113.7 million in EDFC put options and $47.1 million in MBS put options. Both the FRAs and economic interest rate hedges have various maturities not exceeding twelve months. These instruments are considered non-designated derivatives and are accounted for at fair value with gains and losses recognized in current earnings. These gains and losses for the three and nine months ended June 30, 2008 and 2007 were not significant.

NOTE H — INCOME TAXES

     SFAS No. 109, “Accounting for Income Taxes,” requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Company based on the SFAS No. 109 more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the taxable income available in current statutory carryback periods; reversals of existing taxable temporary differences; tax planning strategies; the nature, frequency and severity of current and cumulative losses; the duration of statutory carryforward periods; the Company’s historical experience in generating operating profits; and expectations for future profitability. In making such judgments, significant weight is given to evidence that can be objectively verified. SFAS No. 109 provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable and also restricts the amount of reliance on projections of future taxable income to support the recovery of deferred tax assets.

     Due to the challenging market conditions in the homebuilding industry during the past two years, the Company has recorded significant impairment charges for both inventory and goodwill and now anticipates being in a three-year cumulative pre-tax loss position for fiscal years 2006 through 2008. While the Company has a long history of profitable operations prior to the current downturn in the homebuilding industry, the expected cumulative loss position is significant negative evidence in assessing the recoverability of the Company’s deferred tax assets. Therefore, at March 31, 2008 the Company recorded a $714.3 million valuation allowance on its deferred tax assets, representing those deferred tax asset amounts for which ultimate realization is dependent upon the generation of future taxable income during the periods in which the related temporary differences become deductible. During the current quarter, the Company updated its assessment and recorded an additional $168.7 million valuation allowance for deferred tax assets primarily created during the three months ended June 30, 2008. The remaining deferred tax assets of $518.7 million for which there are no valuation allowances relate to amounts that are expected to be primarily realized through net operating loss carrybacks to tax years 2006 and 2007. The realization of approximately $153 million of these deferred taxes assets is largely dependent upon the Company executing its current plan to dispose of certain properties before September 30, 2008.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.

     On October 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 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 the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The cumulative effect of adopting FIN 48 had no impact on the Company’s beginning retained earnings. As of the date of adoption and at June 30, 2008, total reserves for uncertain tax positions were $14.5 million, of which the entire amount would favorably impact the Company’s effective tax rate if recognized. Effective with the Company’s adoption of FIN 48, interest and penalties related to unrecognized tax benefits are recognized in the financial statements as a component of the income tax provision. Interest and penalties related to unrecognized tax benefits were previously included in interest expense and in selling, general and administrative expense, respectively. During the three and nine-month periods ended June 30, 2008, interest and penalties were $0.1 million and $0.6 million, respectively. At June 30, 2008, the Company’s total accrued interest and penalties relating to uncertain tax positions was $1.6 million. 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 Internal Revenue Service is currently examining the Company’s fiscal years 2004 and 2005 and the Company is being audited by various states. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2004 through 2008.

     In the three and nine months ended June 30, 2008, the provision for income taxes was $20.2 million and $367.2 million, respectively. In the three and nine months ended June 30, 2007, the benefit from income taxes was $287.6 million and $188.7 million, respectively. The Company’s effective tax rates for the three and nine-month periods ended June 30, 2008 differ from the statutory rate, primarily because of the establishment of the valuation allowance as discussed above.

NOTE I — 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 and nine months ended June 30, 2008 and 2007. In all four 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								Nine Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
						(In millions)
Numerator:
Net loss		$	(399.3	)		$	(823.8	)		$	(1,833.8	)		$	(662.3	)
Denominator:
Denominator for basic and diluted loss per share— adjusted weighted average common shares			316.0				314.3				315.5				313.9

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

NOTE J — 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. Also, at June 30, 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 2007, the Board of Directors extended its authorization for the repurchase of up to $463.2 million of the Company’s common stock to November 30, 2008. All of the $463.2 million authorization was remaining at June 30, 2008.

     During the three months ended June 30, 2008, the Board of Directors declared a quarterly cash dividend of $0.075 per common share, which was paid on May 29, 2008 to stockholders of record on May 19, 2008. In July 2008, the Executive Committee of the Board of Directors, pursuant to prior authorization and approval by the Board of Directors, declared a quarterly cash dividend of $0.075 per common share, payable on August 28, 2008 to stockholders of record on August 18, 2008. Quarterly cash dividends of $0.15 per common share were declared in the comparable quarters of fiscal 2007.

     On February 11, 2008, stock options were granted to executive officers, certain other officers and employees, and outside directors of the Company by the Compensation Committee of the Board of Directors or the Board of Directors. The recipients of these stock options may purchase approximately 6.4 million shares of the Company’s common stock, at an exercise price of $14.50 per share, the closing market price of the Company’s common stock on the date of grant.

NOTE K — 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 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 recorded reserves relating to such matter, 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     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. Consequently, the Company has not recorded any liabilities for damages in the accompanying consolidated balance sheet.

     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, 2008, the Company had total deposits of $74.1 million, comprised of cash deposits of $66.1 million, promissory notes of $3.7 million, and letters of credit and surety bonds of $4.3 million, to purchase land and lots with a total remaining purchase price of $1.0 billion. Within the land and lot option purchase contracts in force at June 30, 2008, there were a limited number of contracts, representing only $49.3 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 $74.1 million were $21.0 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 those contracts was $234.7 million. Consequently, the deposits relating to these contracts have been written off, resulting in a net deposit balance of $53.1 million at June 30, 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 June 30, 2008, outstanding standby letters of credit were $71.3 million and surety bonds were $1.8 billion. The Company has additional capacity of $928.7 million for standby letters of credit under its revolving credit facility.

NOTE L — 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 Company is currently evaluating the impact of the adoption 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” The statement permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of the adoption of SFAS No. 159; 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

NOTE M — SEGMENT INFORMATION

     The Company’s seven homebuilding operating regions and its financial services operation are its operating segments under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The seven homebuilding operating regions are presented as separate reportable segments. Previously, the Company presented six homebuilding reporting segments, aggregating both its Northeast and Midwest operating regions into its Northeast reporting segment. However, because of a realignment of the Company’s management structure during the fourth quarter of fiscal 2007, the Colorado markets are now included in its Midwest operating region, rather than in its Southwest operating region. As a result, the Company determined that each of its seven homebuilding operating regions constitutes a reportable segment, as reflected in the current year presentation. All prior year segment information has been restated to conform to the fiscal 2008 presentation.

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

		Northeast:		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, New Mexico and Utah
		California:		California and Nevada (Reno only)
		West:		Hawaii, Idaho, Nevada, Oregon and Washington

     Homebuilding is the Company’s core business, generating approximately 98% of consolidated revenues during the nine months ended June 30, 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 80 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

     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, 2007.

		Three Months Ended								Nine Months Ended
		June 30 ,								June 30,
						Restated								Restated
		2008				2007				2008				2007
						(In millions)
Revenues
Homebuilding revenues:
Northeast		$	135.1			$	251.0			$	447.1			$	790.0
Midwest			117.2				247.5				403.6				814.9
Southeast			189.0				367.9				625.8				1,082.3
South Central			345.0				493.4				1,058.0				1,422.4
Southwest			259.9				450.4				934.8				1,378.6
California			237.3				473.9				828.5				1,671.9
West			149.8				264.0				467.1				805.7
Total homebuilding revenues		$	1,433.3			$	2,548.1			$	4,764.9			$	7,965.8
Financial services revenues		$	30.9			$	50.0			$	98.8			$	158.3
Consolidated revenues		$	1,464.2			$	2,598.1			$	4,863.7			$	8,124.1
Inventory Impairments
Northeast		$	19.3			$	62.4			$	128.6			$	66.2
Midwest			67.5				112.6				93.0				145.4
Southeast			45.5				136.5				243.8				138.9
South Central			1.0				—				30.5				0.3
Southwest			30.3				23.4				57.2				23.4
California			82.9				319.4				533.3				388.2
West			76.7				181.5				297.3				181.5
Total inventory impairments		$	323.2			$	835.8			$	1,383.7			$	943.9
Goodwill Impairments
Northeast		$	—			$	39.4			$	—			$	39.4
Midwest			—				—				—				—
Southeast			—				11.5				—				11.5
South Central			—				—				—				—
Southwest			—				—				—				—
California			—				300.3				—				300.3
West			—				74.4				—				74.4
Total goodwill impairments		$	—			$	425.6			$	—			$	425.6

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

		Three Months Ended								Nine Months Ended
		June 30 ,								June 30,
						Restated								Restated
		2008				2007				2008				2007
						(In millions)
Income (Loss) Before Income Taxes (1)
Homebuilding income (loss) before income taxes:
Northeast		$	(38.6	)		$	(92.6	)		$	(180.9	)		$	(72.4	)
Midwest			(74.7	)			(124.0	)			(107.3	)			(167.8	)
Southeast			(62.9	)			(129.6	)			(286.4	)			(83.0	)
South Central			13.6				38.1				6.7				101.2
Southwest			(35.6	)			27.4				(13.5	)			129.7
California			(103.9	)			(619.0	)			(593.4	)			(632.2	)
West			(86.4	)			(229.9	)			(320.0	)			(179.2	)
Total homebuilding loss before income taxes		$	(388.5	)		$	(1,129.6	)		$	(1,494.8	)		$	(903.7	)
Financial services income before income taxes		$	9.4			$	18.2			$	28.2			$	52.7
Consolidated loss before income taxes		$	(379.1	)		$	(1,111.4	)		$	(1,466.6	)		$	(851.0	)

		June 30,				September 30,
		2008				2007
		(In millions)
Homebuilding Inventories (2):
Northeast		$	760.8			$	1,022.3
Midwest			578.4				801.3
Southeast			1,043.3				1,580.7
South Central			1,055.7				1,222.4
Southwest			848.2				1,136.7
California			755.7				1,661.7
West			1,071.4				1,519.9
Corporate and unallocated (3)			283.2				398.5
Total homebuilding inventory		$	6,396.7			$	9,343.5

     In accordance with SFAS No. 142, the Company has allocated its goodwill to its reporting segments. During fiscal 2007, the recording of goodwill impairment charges resulted in the write-off of goodwill balances in five of the seven homebuilding segments. As of June 30, 2008 and September 30, 2007, allocation of the Company’s remaining goodwill balance of $95.3 million was as follows: South Central $15.9 million and Southwest $79.4 million. If conditions in the homebuilding industry or specific markets in which the Company operates worsen beyond current expectations, the Company may determine that some or all of its remaining goodwill balance has become impaired, which could result in additional goodwill impairment charges.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION

     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.

Consolidating Balance Sheet
June 30, 2008

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
ASSETS
Cash and cash equivalents		$	751.6			$	63.3			$	36.3			$	—			$	851.2
Investments in subsidiaries			1,653.7				—				—				(1,653.7	)			—
Inventories			2,012.0				4,319.5				65.2				—				6,396.7
Property and equipment, net			20.7				40.8				17.4				—				78.9
Deferred income taxes			169.6				349.1				—				—				518.7
Earnest money deposits and other assets			72.2				124.2				86.4				(5.5	)			277.3
Mortgage loans held for sale			—				—				246.4				—				246.4
Goodwill			—				95.3				—				—				95.3
Intercompany receivables			2,854.1				—				—				(2,854.1	)			—
Total Assets		$	7,533.9			$	4,992.2			$	451.7			$	(4,513.3	)		$	8,464.5
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	294.6			$	725.5			$	91.5			$	(5.5	)		$	1,106.1
Intercompany payables			—				2,806.7				47.4				(2,854.1	)			—
Notes payable			3,581.5				0.1				86.5				—				3,668.1
Total Liabilities			3,876.1				3,532.3				225.4				(2,859.6	)			4,774.2
Minority interests			—				—				32.5				—				32.5
Total Equity			3,657.8				1,459.9				193.8				(1,653.7	)			3,657.8
Total Liabilities & Equity		$	7,533.9			$	4,992.2			$	451.7			$	(4,513.3	)		$	8,464.5

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Balance Sheet
September 30, 2007

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
ASSETS
Cash and cash equivalents		$	—			$	225.3			$	45.9			$	(1.6	)		$	269.6
Investments in subsidiaries			2,808.6				—				—				(2,808.6	)			—
Inventories			2,839.5				6,392.4				111.6				—				9,343.5
Property and equipment, net			32.9				58.8				18.5				—				110.2
Deferred income taxes			270.6				593.2				—				—				863.8
Earnest money deposits and other assets			94.3				163.9				96.8				(4.6	)			350.4
Mortgage loans held for sale			—				—				523.5				—				523.5
Goodwill			—				95.3				—				—				95.3
Intercompany receivables			4,005.3				—				—				(4,005.3	)			—
Total Assets		$	10,051.2			$	7,528.9			$	796.3			$	(6,820.1	)		$	11,556.3
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	482.5			$	955.8			$	92.1			$	(6.2	)		$	1,524.2
Intercompany payables			—				3,938.2				67.1				(4,005.3	)			—
Notes payable			3,981.8				3.6				391.4				—				4,376.8
Total Liabilities			4,464.3				4,897.6				550.6				(4,011.5	)			5,901.0
Minority interests			—				—				68.4				—				68.4
Total Equity			5,586.9				2,631.3				177.3				(2,808.6	)			5,586.9
Total Liabilities & Equity		$	10,051.2			$	7,528.9			$	796.3			$	(6,820.1	)		$	11,556.3

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Three Months Ended June 30, 2008

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues		$	272.6			$	1,154.3			$	6.4			$	—			$	1,433.3
Cost of sales			336.2				1,274.4				5.7				—				1,616.3
Gross profit (loss)			(63.6	)			(120.1	)			0.7				—				(183.0	)
Selling, general and administrative expense			78.1				113.9				2.7				—				194.7
Equity in loss of subsidiaries			226.8				—				—				(226.8	)			—
Interest expense			11.7				—				—				—				11.7
Loss on early retirement of debt			2.6				—				—				—				2.6
Other (income) expense			(3.7	)			0.8				(0.6	)			—				(3.5	)
			(379.1	)			(234.8	)			(1.4	)			226.8				(388.5	)
Financial Services:
Revenues			—				—				30.9				—				30.9
General and administrative expense			—				—				23.1				—				23.1
Interest expense			—				—				0.6				—				0.6
Interest and other (income)			—				—				(2.2	)			—				(2.2	)
			—				—				9.4				—				9.4
Income (loss) before income taxes			(379.1	)			(234.8	)			8.0				226.8				(379.1	)
Provision for (benefit from) income taxes			20.2				12.8				3.1				(15.9	)			20.2
Net income (loss)		$	(399.3	)		$	(247.6	)		$	4.9			$	242.7			$	(399.3	)

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
June 30, 2008

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Nine Months Ended June 30, 2008

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues		$	885.8			$	3,849.0			$	30.1			$	—			$	4,764.9
Cost of sales			1,198.1				4,402.7				24.3				—				5,625.1
Gross profit (loss)			(312.3	)			(553.7	)			5.8				—				(860.2	)
Selling, general and administrative expense			240.9				368.5				6.7				—				616.1
Equity in loss of subsidiaries			891.8				—				—				(891.8	)			—
Interest expense			22.9				—				—				—				22.9
Loss on early retirement of debt			2.6				—				—				—				2.6
Other (income) expense			(3.9	)			(1.1	)			(2.0	)			—				(7.0	)
			(1,466.6	)			(921.1	)			1.1				891.8				(1,494.8	)
Financial Services:
Revenues			—				—				98.8				—				98.8
General and administrative expense			—				—				76.4				—				76.4
Interest expense			—				—				2.7				—				2.7
Interest and other (income)			—				—				(8.5	)			—				(8.5	)
			—				—				28.2				—				28.2
Income (loss) before income taxes			(1,466.6	)			(921.1	)			29.3				891.8				(1,466.6	)
Provision for (benefit from) income taxes			367.2				252.2				11.1				(263.3	)			367.2
Net income (loss)		$	(1,833.8	)		$	(1,173.3	)		$	18.2			$	1,155.1			$	(1,833.8	)