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 December 31, 2007

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		(I.R.S. Employer Identification No.)
incorporation 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.

Large accelerated filer þ            Accelerated filer o                      Non-accelerated filer o                      Smaller reporting company o

                          (Do not check if a smaller reporting company)

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 — 315,149,537 shares as of February 4, 2008

 

 

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, 2007 (unaudited) and September 30, 2007 (unaudited)			3
		Consolidated Statements of Operations for the three months ended December 31, 2007 and 2006 (unaudited)			4
		Consolidated Statements of Cash Flows for the three months ended December 31, 2007 and 2006 (unaudited)			5
		Notes to Consolidated Financial Statements (unaudited)			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			47
ITEM 4.		Controls and Procedures			48
PART II.		OTHER INFORMATION
ITEM 1.		Legal Proceedings			49
ITEM 5.		Other Information			49
ITEM 6.		Exhibits			50
SIGNATURE					51
Amended and Restated 2000 Incentive Bonus Plan
2008 Performance Unit Plan
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

		December 31,				September 30,
		2007				2007
		(In millions)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	90.4			$	228.3
Inventories:
Construction in progress and finished homes			2,937.4				3,346.8
Residential land and lots — developed and under development			4,673.5				5,334.7
Land held for development			886.8				540.1
Land inventory not owned			88.6				121.9
			8,586.3				9,343.5
Property and equipment, net			99.9				110.2
Deferred income taxes			940.0				863.8
Earnest money deposits and other assets			258.8				291.2
Goodwill			95.3				95.3
			10,070.7				10,932.3
Financial Services:
Cash and cash equivalents			38.7				41.3
Mortgage loans held for sale			245.1				523.5
Other assets			46.5				59.2
			330.3				624.0
Total assets		$	10,401.0			$	11,556.3
LIABILITIES
Homebuilding:
Accounts payable		$	358.6			$	566.2
Accrued expenses and other liabilities			849.9				933.3
Notes payable			3,618.3				3,989.0
			4,826.8				5,488.5
Financial Services:
Accounts payable and other liabilities			16.1				24.7
Notes payable to financial institutions			105.9				387.8
			122.0				412.5
			4,948.8				5,901.0
Minority interests			38.1				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, 318,632,182 shares issued and 314,976,949 shares outstanding at December 31, 2007 and 318,569,673 shares issued and 314,914,440 shares outstanding at September 30, 2007			3.2				3.2
Additional capital			1,696.6				1,693.3
Retained earnings			3,810.0				3,986.1
Treasury stock, 3,655,233 shares at December 31, 2007 and September 30, 2007, at cost			(95.7	)			(95.7	)
			5,414.1				5,586.9
Total liabilities and stockholders’ equity		$	10,401.0			$	11,556.3

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Three Months
		Ended December 31,
		2007				2006
		(In millions, except per share data)
		(Unaudited)
Homebuilding:
Revenues:
Home sales		$	1,607.0			$	2,761.1
Land/lot sales			100.6				40.4
			1,707.6				2,801.5
Cost of sales:
Home sales			1,377.9				2,246.9
Land/lot sales			82.6				32.9
Inventory impairments and land option cost write-offs			245.5				77.7
			1,706.0				2,357.5
Gross profit:
Home sales			229.1				514.2
Land/lot sales			18.0				7.5
Inventory impairments and land option cost write-offs			(245.5	)			(77.7	)
			1.6				444.0
Selling, general and administrative expense			213.1				295.3
Other (income)			(1.7	)			(1.1	)
			(209.8	)			149.8
Financial Services:
Revenues			35.0				66.5
General and administrative expense			30.5				45.0
Interest expense			1.3				9.7
Interest and other (income)			(3.7	)			(15.3	)
			6.9				27.1
Income (loss) before income taxes			(202.9	)			176.9
Provision for (benefit from) income taxes			(74.1	)			67.2
Net income (loss)		$	(128.8	)		$	109.7
Basic and diluted net income (loss) per common share		$	(0.41	)		$	0.35
Cash dividends declared per common share		$	0.15			$	0.15

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Three Months
		Ended December 31,
		2007				2006
		(In millions)
		(Unaudited)
OPERATING ACTIVITIES
Net income (loss)		$	(128.8	)		$	109.7
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			14.9				15.7
Amortization of debt discounts and fees			1.6				1.6
Stock option compensation expense			2.7				3.0
Income tax benefit from stock option exercises			(0.2	)			(2.4	)
Deferred income taxes			(76.2	)			(3.0	)
Inventory impairments and land option cost write-offs			245.5				77.7
Changes in operating assets and liabilities:
Decrease in construction in progress and finished homes			313.1				149.1
Decrease (increase) in residential land and lots – developed, under development, and held for development			162.8				(208.2	)
Decrease in earnest money deposits and other assets			40.2				68.3
Decrease in mortgage loans held for sale			278.4				370.7
Decrease in accounts payable, accrued expenses and other liabilities			(296.3	)			(286.7	)
Net cash provided by operating activities			557.7				295.5
INVESTING ACTIVITIES
Purchases of property and equipment			(4.1	)			(11.2	)
Cash used in investing activities			(4.1	)			(11.2	)
FINANCING ACTIVITIES
Proceeds from notes payable			110.0				800.0
Repayment of notes payable			(757.4	)			(1,739.1	)
Decrease in restricted cash			—				248.3
Proceeds from stock associated with certain employee benefit plans			0.4				3.3
Income tax benefit from stock option exercises			0.2				2.4
Cash dividends paid			(47.3	)			(47.0	)
Net cash used in financing activities			(694.1	)			(732.1	)
DECREASE IN CASH AND CASH EQUIVALENTS			(140.5	)			(447.8	)
Cash and cash equivalents at beginning of period			269.6				587.6
Cash and cash equivalents at end of period		$	129.1			$	139.8

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

NOTE A — BASIS OF PRESENTATION

     The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its wholly-owned, majority-owned and controlled subsidiaries (which are referred to as the Company, unless the context otherwise requires), as well as certain variable interest entities required to be consolidated pursuant to Interpretation No. 46, “Consolidation of Variable Interest Entities – 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 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. Certain reclassifications have been made in the prior year’s financial statements to conform to classifications used in the current year.

Seasonality

     Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three-month period ended December 31, 2007 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 82 markets and 27 states in the United States at December 31, 2007. 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 it has developed or bought. The Company also provides title agency and mortgage brokerage services, principally to its homebuyers. The Company generally does not retain or service the mortgages that it originates but, rather, sells 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. SFAS No. 144 requires that in the event the undiscounted cash flows estimated to be generated by those assets are less than their carrying values, impairment charges are required to be recorded if the fair value of such assets is less than their carrying values. These estimates of cash flows are significantly impacted by estimates of the amounts and timing of revenues and costs and other factors which, in turn, are impacted by local market economic conditions and the actions of competitors. 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 value of the assets exceeds the fair value of the assets. The Company’s determination of fair value is primarily based on discounting the

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams.

     In accordance with SFAS No. 144, impairment charges are also recorded on finished homes in substantially completed projects when events or circumstances indicate that the carrying values are greater than the fair value less costs to sell these homes.

     During the first quarter 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 quarter. Additionally, the effects of these factors have been further magnified by the tightening of credit in the mortgage markets, which has caused a decline in the availability of certain mortgage products. These factors, combined with the Company’s disappointing sales results and declines in sales order prices and gross profit from home sales revenues during the quarter, have caused the Company’s outlook for the homebuilding industry and its impact on the Company’s business to remain cautious. The Company’s continuing outlook is that housing market conditions will be challenging and may deteriorate further, and that 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 projects with impairment indicators. Communities with a combined carrying value of $2,879.6 million as of December 31, 2007, had indicators of potential impairment and were evaluated for impairment. The analysis of each of these projects generally assumed that sales prices in future periods will be equal to or lower than current sales order prices in each project or for comparable projects in order to generate an acceptable absorption rate. While it is difficult to determine a timeframe for a given project in the current market conditions, the remaining lives of these projects was estimated to be in a range from six months to in excess of ten years. Through this evaluation process, it was determined that projects with a carrying value of $748.8 million as of December 31, 2007, the largest portions of which were in the California, West and Southeast regions, were impaired. As a result, during the three months ended December 31, 2007, impairment charges totaling $243.5 million were recorded to reduce the carrying value of the impaired projects to their estimated fair value. During the three months ended December 31, 2006, inventory impairment charges totaled $40.9 million.

     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 project pricing and incentive strategies, the Company may be required to evaluate additional projects or re-evaluate previously impaired projects 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 December 31, 2007 and 2006, the Company wrote off $2.0 million and $36.8 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts.

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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

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

     The consolidation of these variable interest entities added $31.7 million in land inventory not owned and minority interests related to entities not owned to the Company’s balance sheet at December 31, 2007. The Company’s obligations related to these land or lot option contracts are guaranteed by cash deposits totaling $5.1 million and performance letters of credit, 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, 2007, such exposure totaled $40.8 million.

     Additionally, the Company evaluates land and lot option purchase contracts in accordance with SFAS No. 49, “Accounting for Product Financing Arrangements,” and added $56.9 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, 2007 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:

		December 31,				September 30,
		2007				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			384.7				384.6
4.875% senior notes due 2010, net			249.3				249.3
9.75% senior subordinated notes due 2010, net			149.6				149.5
6% senior notes due 2011, net			249.6				249.5
7.875% senior notes due 2011, net			199.2				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			198.0				197.9
5.625% senior notes due 2014, net			248.5				248.5
5.25% senior notes due 2015, net			298.2				298.1
5.625% senior notes due 2016, net			297.9				297.9
6.5% senior notes due 2016, net			499.1				499.1
Secured and other			44.3				50.6
		$	3,618.3			$	3,989.0
Financial Services:
Mortgage warehouse facility, maturing 2008		$	105.9			$	267.8
Commercial paper conduit facility, maturing 2008			—				120.0
		$	105.9			$	387.8

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

     The Company has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

Homebuilding:

     The Company has an unsecured revolving credit facility which matures on December 16, 2011. The size of the facility, which was $2.5 billion from November 2006 through December 2007, includes a $1.0 billion letter of credit sub-facility. The facility has an uncommitted accordion provision which could be used to increase its size by $400 million upon obtaining additional commitments from lenders. The Company’s borrowing capacity under this facility is reduced by the amount of letters of credit outstanding. At December 31, 2007, the Company’s borrowing capacity was limited to $1.9 billion under the borrowing base arrangement. The facility is guaranteed by substantially all of the Company’s wholly-owned subsidiaries other than its financial services subsidiaries. Borrowings bear interest at rates based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company’s ratio of homebuilding debt to total capitalization and its senior unsecured debt rating. The interest rate of the unsecured revolving credit facility at December 31, 2007 was 5.5% per annum. 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, with an uncommitted accordion feature of $400 million which can increase the size of the facility to $2.65 billion upon obtaining additional commitments from lenders. 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 amended facility modified the Adjusted EBITDA to Interest Incurred covenant such that it can no longer result in an event of default.

     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 by one level to below investment grade status; therefore, at December 31, 2007, these additional limitations were 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 certain percentages of the various categories of unencumbered inventory. At December 31, 2007, the borrowing base arrangement would have limited the Company’s additional borrowing capacity from any source to $1.9 billion.

     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. All of the $500 million authorization was remaining at December 31, 2007.

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

     The revolving credit facility and the indenture governing the senior subordinated notes impose restrictions on the Company’s operations and activities. The most significant restrictions relate to limits on investments, cash dividends, stock repurchases and other restricted payments, incurrence of indebtedness, creation of liens and asset dispositions, and require maintenance of certain levels of leverage, tangible net worth and components of inventory. In addition, the indentures governing the senior notes impose restrictions on the creation of liens. At December 31, 2007, 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. At December 31, 2007, under the most restrictive covenants in effect, approximately $2.2 billion was available for all restricted payments; however, availability of this amount in future periods may be affected by future operating results and interest coverage levels.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

Financial Services:

     The Company’s mortgage subsidiary has a $540 million mortgage warehouse loan facility that matures March 28, 2008. Under the accordion provision of the credit agreement, the total capacity may be increased to $750 million upon obtaining additional commitments from lenders. The mortgage warehouse facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. The borrowing capacity under this facility is limited to the lesser of the unused portion of the facility or an amount determined under a borrowing base arrangement. Under the borrowing base limitation, the amount that may be drawn on the facility varies based upon the underlying product type of each eligible mortgage loan. Substantially all of the Company’s mortgage originations are eligible, with advance rates typically ranging from 95% to 98% of the unpaid principal balance of each mortgage loan. Borrowings bear daily interest at the 30-day LIBOR rate plus a fixed premium. The interest rate of the mortgage warehouse facility at December 31, 2007 was 5.4% per annum.

     The Company’s mortgage subsidiary also has a $600 million commercial paper conduit facility (the CP conduit facility), that matures June 27, 2009, subject to the annual renewal of the 364-day backup liquidity feature. The CP conduit facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. The mortgage loans assigned to secure the CP conduit facility are used as collateral for asset-backed commercial paper issued by multi-seller conduits in the commercial paper market.

     At December 31, 2007, the Company’s financial services subsidiaries were in compliance with all of the conditions and covenants of the mortgage warehouse loan facility and the CP conduit facility.

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 projects for which inventory impairments are recorded in accordance with SFAS No. 144. Historically, the Company’s inventory eligible for interest capitalization exceeded its debt levels. With the planned reduction in inventory spending, it is possible that the Company may not capitalize all future interest incurred, but may instead directly expense a portion to interest expense in the period incurred. As all interest incurred is ultimately expensed, this change would only serve to accelerate the expense recognition of a portion of the interest incurred. The following table summarizes the Company’s homebuilding interest costs incurred, capitalized, charged to cost of sales and written off during the three-month periods ended December 31, 2007 and 2006:

		Three Months Ended
		December 31,
		2007				2006
		(In millions)
Capitalized interest, beginning of period		$	338.7			$	288.9
Interest incurred			61.5				78.0
Interest amortized to cost of sales			(58.0	)			(53.0	)
Interest written off with inventory impairments			(14.7	)			(1.2	)
Capitalized interest, end of period		$	327.5			$	312.7

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. Changes

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

in the Company’s warranty liability during the three-month periods ended December 31, 2007 and 2006 were as follows:

		Three Months Ended
		December 31,
		2007				2006
		(In millions)
Warranty liability, beginning of period		$	116.0			$	130.4
Warranties issued			7.6				13.2
Changes in liability for pre-existing warranties			(5.6	)			(5.0	)
Settlements made			(11.3	)			(12.5	)
Warranty liability, end of period		$	106.7			$	126.1

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. 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 either committed to third-party investors within three days of origination or pooled and committed in bulk to third-party investors typically within 30 days of origination. Loans held for sale are generally carried at cost 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. Any gain or loss on the sale of loans is recognized at the time of sale. During the three months ended December 31, 2007 and 2006, the Company had net gains on sales of loans of $17.6 million and $36.0 million, respectively.

     Some of the loans sold by DHI Mortgage are sold with limited recourse provisions. Based on historical experience and current market conditions, the Company has estimated and recorded a total loss reserve for mortgage loans held in portfolio, mortgage loans held for sale, and expected losses related to loans sold with recourse of $27.8 million and $24.6 million at December 31, 2007 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 months ended December 31, 2007 and 2006 was not significant, is recognized in current earnings. As of December 31, 2007, the Company had $42.2 million in loans not committed to third-party investors and hedging instruments related to those loans totaling $135.6 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. At December 31, 2007, the Company’s IRLCs totaled $177.6 million.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

     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 December 31, 2007, the Company had approximately $66.0 million of best-efforts whole loan delivery commitments and $350.6 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 December 31, 2007, these potential mortgage loan originations totaled approximately $95.8 million and were hedged with FRAs of $24.1 million and economic interest rate hedges of $817.6 million in EDFC put options and $34.8 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. The gains and losses for the three months ended December 31, 2007 and 2006 were not significant.

NOTE H — INCOME TAXES

     In the three months ended December 31, 2007, the benefit from income taxes was $74.1 million, corresponding to the loss before income taxes in the period. In the three months ended December 31, 2006, the provision for income taxes was $67.2 million, corresponding to the income before income taxes in the period. The Company’s effective tax benefit rate for the three-month period ended December 31, 2007 was 36.5%, compared to an effective tax rate of 38.0% in the same period of 2006.

     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 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, 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. At December 31, 2007, the Company’s total accrued interest and penalties relating to uncertain tax positions was $1.6 million. During the three months ended December 31, 2007, interest and penalties totaled $0.5 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.

     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 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

     Primarily as a result of recording significant inventory impairment charges during fiscal 2007 and the first quarter of fiscal 2008, the balance of the deferred tax asset increased substantially, resulting in the net deferred tax asset of $940.0 million at December 31, 2007. The Company’s analysis of the need for a valuation allowance considered all available evidence. In the Company’s consideration of negative evidence, it recognizes that it incurred substantial losses in both the most recent fiscal year ended September 30, 2007 and the quarter ended December 31, 2007. These losses were largely attributable to the challenging current market conditions that caused impairment charges for both inventory and goodwill. In its consideration of positive evidence it placed considerable weight on the fact that it has substantial taxable income available to it in its carryback periods and a significant portion of the deferred tax asset is expected to be realized through loss carrybacks based on the disposal of the related properties before September 30, 2009. Further, the Company has a history of profitable operations and expects to be able to generate a sufficient amount of taxable income in future periods to realize the remaining deferred tax asset. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax asset at December 31, 2007 will be realized. If disposal of the related properties within the loss carryback period does not occur or if market conditions within the homebuilding industry worsen, it may affect the Company’s ability to fully realize the value of this asset, which may require a valuation adjustment resulting in additional income tax expense in the Company’s consolidated statement of operations, and such expense could be material.

NOTE I — EARNINGS (LOSS) PER SHARE

     The following table sets forth the numerators and denominators used in the computation of basic and diluted earnings (loss) per share for the three months ended December 31, 2007 and 2006. For the three months ended December 31, 2007, all outstanding stock options were excluded from the computation of the loss per share because they were antidilutive due to the net loss recorded during the period. For the three months ended December 31, 2006, options to purchase 2.8 million shares of common stock were excluded from the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, their effect would have been antidilutive.

		Three Months Ended
		December 31,
		2007				2006
		(In millions)
Numerator:
Net income (loss)		$	(128.8	)		$	109.7
Denominator:
Denominator for basic earnings (loss) per share— weighted average common shares			315.0				313.4
Effect of dilutive securities:
Employee stock options			—				2.2
Denominator for diluted earnings (loss) per share— adjusted weighted average common shares			315.0				315.6

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 December 31, 2007, 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 December 31, 2007.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

     During the three months ended December 31, 2007, the Board of Directors declared a quarterly cash dividend of $0.15 per common share, which was paid on November 16, 2007 to stockholders of record on November 5, 2007. In January 2008, the Board of Directors declared a quarterly cash dividend of $0.15 per common share, payable on February 20, 2008 to stockholders of record on February 12, 2008. Quarterly cash dividends of $0.15 per common share were declared in the comparable quarters of fiscal 2007.

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 seeks 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 alleges 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 seeks 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 this 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 associated liabilities 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 December 31, 2007, the Company had total deposits of $90.7 million, comprised of cash deposits of $79.9 million, promissory notes of $5.3 million, and letters of credit and surety bonds of $5.5 million, to purchase land and lots with a total remaining purchase price of $1.5 billion. Within the land and lot option purchase contracts in force at December 31, 2007, there were a limited number of contracts, representing only $59.7 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 $90.7 million were $28.6 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 $428.7 million. Consequently, the deposits relating to these contracts have been written off, resulting in a net deposit balance of $62.1 million at December 31, 2007. 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

     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, 2007, outstanding standby letters of credit were $81.1 million and surety bonds were $2.0 billion. The Company has additional capacity of $918.9 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. 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.

     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 November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB No. 109, which revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments,” specifically states that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB No. 109 are applicable to written loan commitments issued or modified beginning on January 1, 2008. The Company has adopted SAB No. 109 effective January 1, 2008, and does not expect it 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.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

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 three months ended December 31, 2007 and 2006. 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 82 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 banking 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, sells 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)
December 31, 2007

     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 December 31,
						Restated
		2007				2006
		(In millions)
Revenues
Homebuilding revenues:
Northeast		$	158.7			$	261.3
Midwest			158.9				296.4
Southeast			234.4				371.3
South Central			348.8				450.6
Southwest			402.1				440.6
California			259.1				699.3
West			145.6				282.0
Total homebuilding revenues		$	1,707.6			$	2,801.5
Financial services revenues		$	35.0			$	66.5
Consolidated revenues		$	1,742.6			$	2,868.0
Inventory Impairments
Northeast		$	19.1			$	0.5
Midwest			4.2				27.4
Southeast			21.8				—
South Central			10.1				—
Southwest			—				—
California			130.8				13.0
West			57.5				—
Total inventory impairments		$	243.5			$	40.9
Income (Loss) Before Income Taxes (1)
Homebuilding income (loss) before income taxes:
Northeast		$	(25.9	)		$	14.9
Midwest			0.5				(24.6	)
Southeast			(21.3	)			27.7
South Central			2.8				32.5
Southwest			36.9				47.2
California			(141.7	)			22.7
West			(61.1	)			29.4
Total homebuilding income (loss) before income taxes		$	(209.8	)		$	149.8
Financial services income before income taxes		$	6.9			$	27.1
Consolidated income (loss) before income taxes		$	(202.9	)		$	176.9

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

		December 31,				September 30,
		2007				2007
		(In millions)
Homebuilding Inventories (2):
Northeast		$	959.6			$	1,022.3
Midwest			756.6				801.3
Southeast			1,428.3				1,580.7
South Central			1,158.6				1,222.4
Southwest			1,011.1				1,136.7
California			1,454.8				1,661.7
West			1,426.9				1,519.9
Corporate and unallocated (3)			390.4				398.5
Total homebuilding inventory		$	8,586.3			$	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 December 31, 2007 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)
December 31, 2007

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 audited financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

Consolidating Balance Sheet
December 31, 2007

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
ASSETS
Cash and cash equivalents		$	62.0			$	24.0			$	43.1			$	—			$	129.1
Investments in subsidiaries			2,754.1				—				—				(2,754.1	)			—
Inventories			2,628.1				5,881.3				76.9				—				8,586.3
Property and equipment, net			29.1				52.7				18.1				—				99.9
Deferred income taxes			266.6				673.4				—				—				940.0
Earnest money deposits and other assets			79.8				144.9				86.1				(5.5	)			305.3
Mortgage loans held for sale			—				—				245.1				—				245.1
Goodwill			—				95.3				—				—				95.3
Intercompany receivables			3,593.5				—				—				(3,593.5	)			—
Total Assets		$	9,413.2			$	6,871.6			$	469.3			$	(6,353.1	)		$	10,401.0
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	381.5			$	761.7			$	86.9			$	(5.5	)		$	1,224.6
Intercompany payables			—				3,537.9				55.6				(3,593.5	)			—
Notes payable			3,617.6				0.7				105.9				—				3,724.2
Total Liabilities			3,999.1				4,300.3				248.4				(3,599.0	)			4,948.8
Minority interests			—				—				38.1				—				38.1
Total Equity			5,414.1				2,571.3				182.8				(2,754.1	)			5,414.1
Total Liabilities & Equity		$	9,413.2			$	6,871.6			$	469.3			$	(6,353.1	)		$	10,401.0

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

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)
December 31, 2007

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Three Months Ended December 31, 2007

		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			(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) expense			(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. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Three Months Ended December 31, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues		$	575.6			$	2,218.1			$	7.8			$	—			$	2,801.5
Cost of sales			441.8				1,910.9				4.8				—				2,357.5
Gross profit			133.8				307.2				3.0				—				444.0
Selling, general and administrative expense			111.0				181.7				2.6				—				295.3
Equity in income of subsidiaries			(153.2	)			—				—				153.2				—
Other (income) expense			(0.9	)			(0.9	)			0.7				—				(1.1	)
			176.9				126.4				(0.3	)			(153.2	)			149.8
Financial Services:
Revenues			—				—				66.5				—				66.5
General and administrative expense			—				—				45.0				—				45.0
Interest expense			—				—				9.7				—				9.7
Interest and other (income)			—				—				(15.3	)			—				(15.3	)
			—				—				27.1				—				27.1
Income before income taxes			176.9				126.4				26.8				(153.2	)			176.9
Provision for income taxes			67.2				48.0				10.2				(58.2	)			67.2
Net income		$	109.7			$	78.4			$	16.6			$	(95.0	)		$	109.7

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Cash Flows
Three Months Ended December 31, 2007

		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

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, 2007

NOTE N — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Cash Flows
Three Months Ended December 31, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities		$	16.2			$	(44.6	)		$	393.0			$	(69.1	)		$	295.5
INVESTING ACTIVITIES
Purchases of property and equipment			(4.1	)			(6.8	)			(0.3	)			—				(11.2	)
Net cash used in investing activities			(4.1	)			(6.8	)			(0.3	)			—				(11.2	)
FINANCING ACTIVITIES
Net change in notes payable			(251.4	)			—				(687.7	)			—				(939.1	)
Decrease in restricted cash			—				—				248.3				—				248.3
Net change in intercompany receivables/payables			207.1				(198.3	)			(8.8	)			—				—
Proceeds from stock associated with certain employee benefit plans			3.3				—				—				—				3.3
Income tax benefit from stock option exercises			2.4				—				—				—				2.4
Cash dividends paid			(47.0	)			—				—				—				(47.0	)
Net cash used in financing activities			(85.6	)			(198.3	)			(448.2	)			—				(732.1	)
Decrease in cash and cash equivalents			(73.5	)			(249.7	)			(55.5	)			(69.1	)			(447.8	)
Cash and cash equivalents at beginning of period			73.5				379.8				134.3				—				587.6
Cash and cash equivalents at end of period		$	—			$	130.1			$	78.8			$	(69.1	)		$	139.8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year ended September 30, 2007. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the “Forward-Looking Statements” section following this discussion.

BUSINESS

     We are the largest homebuilding company in the United States based on homes closed during the twelve months ended December 31, 2007. We construct and sell high quality homes through our operating divisions in 27 states and 82 metropolitan markets of the United States as of December 31, 2007, primarily under the name of D.R. Horton, America’s Builder. Our homebuilding operations primarily include the construction and sale of single-family homes with sales prices generally ranging from $90,000 to $900,000, with an average closing price of $245,400 during the three months ended December 31, 2007. Approximately 79% and 81% of home sales revenues were generated from the sale of single-family detached homes in the three months ended December 31, 2007 and 2006, respectively. The remainder of home sales revenues were generated from the sale of attached homes, such as town homes, duplexes, triplexes and condominiums (including some mid-rise buildings), which share common walls and roofs.

     Through our financial services operations, we provide mortgage banking and title agency services to homebuyers in many of our homebuilding markets. DHI Mortgage, our wholly-owned subsidiary, provides mortgage financing services principally to purchasers of homes we build. We generally do not seek to retain or service the mortgages we originate but, rather, seek to sell the mortgages and related servicing rights to investors. Our subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to the purchasers of our homes.

     We conduct our homebuilding operations in all of the geographic regions, states and markets listed below, and we conduct our mortgage and title operations in many of these markets. Our homebuilding operating segments are our homebuilding reportable regions and are comprised of the following markets:

State		Reporting Region/Market				State		Reporting Region/Market
		Northeast Region						South Central Region — (Continued)
Delaware		Central Delaware				Texas		Austin
		Delaware Shore						Dallas
Georgia		Savannah						Fort Worth
Maryland		Baltimore						Houston
		Suburban Washington, D.C.						Killeen/Temple
New Jersey		North New Jersey						Laredo
		South New Jersey						Rio Grande Valley
North Carolina		Brunswick County						San Antonio
		Charlotte						Waco
		Greensboro/Winston-Salem
		Raleigh/Durham						Southwest Region
Pennsylvania		Philadelphia				Arizona		Casa Grande
		Lancaster						Phoenix
South Carolina		Charleston						Tucson
		Columbia				New Mexico		Albuquerque
		Hilton Head						Las Cruces
		Myrtle Beach				Utah		Salt Lake City
Virginia		Northern Virginia
								California Region
		Midwest Region				California		Bay Area
Colorado		Colorado Springs						Central Valley
		Denver						Lancaster/Palmdale
		Fort Collins						Imperial Valley
Illinois		Chicago						Los Angeles County
Minnesota		Minneapolis/St. Paul						Orange County
Wisconsin		Kenosha						Riverside/San Bernardino
								Sacramento
		Southeast Region						San Diego County
Alabama		Birmingham						Ventura County
		Huntsville				Nevada		Reno
		Mobile
Florida		Daytona Beach						West Region
		Fort Myers/Naples				Hawaii		Hawaii
		Jacksonville						Kauai
		Melbourne						Maui
		Miami/West Palm Beach						Oahu
		Ocala				Idaho		Boise
		Orlando				Nevada		Las Vegas
		Pensacola						Laughlin
		Tampa				Oregon		Albany
Georgia		Atlanta						Bend
		Macon						Portland
						Washington		Bellingham
		South Central Region						Eastern Washington
Louisiana		Baton Rouge						Olympia
Mississippi		Mississippi Gulf Coast						Seattle/Tacoma
Oklahoma		Oklahoma City						Vancouver