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 March 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 incorporation or organization)		(I.R.S. Employer Identification No.)
301 Commerce Street, Suite 500, Fort Worth, Texas		76102
(Address of principal executive offices)		(Zip Code)

(817) 390-8200

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Yes þ     No o

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

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

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

Common stock, $.01 par value – 314,106,236 shares as of April 27, 2007

 

 

D.R. HORTON, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Consolidated Balance Sheets at March 31, 2007 and September 30, 2006			3
		Consolidated Statements of Income for the Three and Six Months Ended March 31, 2007 and 2006			4
		Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2007 and 2006			5
		Notes to Consolidated Financial Statements			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			45
ITEM 4.		Controls and Procedures			46
PART II.		OTHER INFORMATION
ITEM 4.		Submission of Matters to a Vote of Security Holders			47
ITEM 5.		Other Information			47
ITEM 6.		Exhibits			48
SIGNATURE					49
Second Amendment to Revolving Credit Agreement
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

		March 31,				September 30,
		2007				2006
		(In millions)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	68.2			$	457.8
Inventories:
Construction in progress and finished homes			4,182.7				4,322.8
Residential land and lots — developed and under development			6,725.3				6,737.0
Land held for development			204.3				182.9
Consolidated land inventory not owned			96.9				100.4
			11,209.2				11,343.1
Property and equipment, net			125.1				131.4
Earnest money deposits and other assets			760.8				816.4
Goodwill			578.9				578.9
			12,742.2				13,327.6
Financial Services:
Cash and cash equivalents			150.4				129.8
Restricted cash			—				248.3
Mortgage loans held for sale			568.6				1,022.9
Other assets			49.3				92.1
			768.3				1,493.1
Total assets		$	13,510.5			$	14,820.7
LIABILITIES
Homebuilding:
Accounts payable		$	777.5			$	982.3
Accrued expenses and other liabilities			960.5				1,143.0
Notes payable			4,592.4				4,886.9
			6,330.4				7,012.2
Financial Services:
Accounts payable and other liabilities			29.2				58.8
Notes payable to financial institutions			508.1				1,191.7
			537.3				1,250.5
			6,867.7				8,262.7
Minority interests			103.3				105.1
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, 317,745,581 shares issued and 314,092,781 shares outstanding at March 31, 2007 and 316,899,545 shares issued and 313,246,745 shares outstanding at September 30, 2006			3.2				3.2
Additional capital			1,677.7				1,658.4
Retained earnings			4,954.3				4,887.0
Treasury stock, 3,652,800 shares at March 31, 2007 and September 30, 2006, at cost			(95.7	)			(95.7	)
			6,539.5				6,452.9
Total liabilities and stockholders’ equity		$	13,510.5			$	14,820.7

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
						(In millions, except per share data)
						(Unaudited)
Homebuilding:
Revenues:
Home sales		$	2,521.5			$	3,472.3			$	5,282.6			$	6,261.4
Land/lot sales			94.7				54.2				135.1				106.9
			2,616.2				3,526.5				5,417.7				6,368.3
Cost of sales:
Home sales			2,074.4				2,587.7				4,321.3				4,601.1
Land/lot sales			89.1				20.1				122.1				39.4
Inventory impairments and land option cost write-offs			81.2				7.1				158.8				10.9
			2,244.7				2,614.9				4,602.2				4,651.4
Gross profit:
Home sales			447.1				884.6				961.3				1,660.3
Land/lot sales			5.6				34.1				13.0				67.5
Inventory impairments and land option cost write-offs			(81.2	)			(7.1	)			(158.8	)			(10.9	)
			371.5				911.6				815.5				1,716.9
Selling, general and administrative expense			296.0				364.9				591.3				690.5
Loss on early retirement of debt			—				10.6				—				15.0
Other (income)			(0.6	)			(5.6	)			(1.7	)			(10.5	)
			76.1				541.7				225.9				1,021.9
Financial Services:
Revenues			41.9				71.1				108.4				132.4
General and administrative expense			38.4				49.4				83.4				96.8
Interest expense			6.8				7.8				16.4				15.9
Other (income)			(10.6	)			(13.4	)			(25.9	)			(27.6	)
			7.3				27.3				34.5				47.3
Income before income taxes			83.4				569.0				260.4				1,069.2
Provision for income taxes			31.7				216.2				99.0				406.3
Net income		$	51.7			$	352.8			$	161.4			$	662.9
Basic net income per common share		$	0.16			$	1.13			$	0.51			$	2.12
Net income per common share assuming dilution		$	0.16			$	1.11			$	0.51			$	2.09
Cash dividends declared per common share		$	0.15			$	0.10			$	0.30			$	0.19

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Six Months
		Ended March 31,
		2007				2006
		(In millions)
		(Unaudited)
OPERATING ACTIVITIES
Net income		$	161.4			$	662.9
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			32.0				26.4
Amortization of debt discounts and fees			3.4				2.3
Stock option compensation expense			6.1				4.9
Income tax benefit from stock option exercises			(4.6	)			(5.1	)
Loss on redemption of 9.375% senior notes			—				10.6
Inventory impairments and land option cost write-offs			158.8				10.9
Changes in operating assets and liabilities:
Decrease (increase) in construction in progress and finished homes			127.3				(1,316.1	)
Increase in residential land and lots – developed, under development, and held for development			(131.5	)			(1,047.7	)
Decrease (increase) in earnest money deposits and other assets			75.8				(116.1	)
Decrease in mortgage loans held for sale			454.3				641.5
Decrease in accounts payable, accrued expenses and other liabilities			(409.2	)			(190.2	)
Net Cash Provided By (Used In) Operating Activities			473.8				(1,315.7	)
INVESTING ACTIVITIES
Purchases of property and equipment			(24.3	)			(35.1	)
Cash Used In Investing Activities			(24.3	)			(35.1	)
FINANCING ACTIVITIES
Proceeds from notes payable			1,660.0				2,583.9
Repayment of notes payable			(2,645.0	)			(2,020.0	)
Decrease in restricted cash			248.3				—
Purchase of treasury stock			—				(36.8	)
Proceeds from stock associated with certain employee benefit plans			7.7				6.4
Income tax benefit from stock option exercises			4.6				5.1
Cash dividends paid			(94.1	)			(59.4	)
Net Cash (Used In) Provided By Financing Activities			(818.5	)			479.2
DECREASE IN CASH AND CASH EQUIVALENTS			(369.0	)			(871.6	)
Cash and cash equivalents at beginning of period			587.6				1,149.8
Cash and cash equivalents at end of period		$	218.6			$	278.2
Supplemental disclosures of noncash activities:
Notes payable issued for inventory		$	—			$	35.3

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2007

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) 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, 2006. 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 and six-month periods ended March 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2007.

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 85 markets and 27 states in the United States at March 31, 2007. The Company designs, builds and sells single-family detached houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. To a lesser extent, the Company also builds and sells attached homes, 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.

Inventories and Cost of Sales

     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 amounts, 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 estimates of revenues, costs, and other factors. 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’s determination of fair value is primarily based on discounting the

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 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, valuation adjustments are recorded on finished homes when events or circumstances indicate that the carrying values are greater than the fair value less costs to sell these homes.

     During the three months ended March 31, 2007, several communities under development that demonstrated potential impairment indicators were evaluated for potential impairment. It was determined that projects with a carrying value of $255.5 million, the majority of which were in California, were impaired. Consequently, an impairment charge of $67.3 million was recorded to reduce the carrying value of the impaired projects to their estimated fair value. For the six-month period ended March 31, 2007, impairment charges totaled $108.2 million. If conditions in the homebuilding industry or specific markets in which the Company operates worsen in the future, the Company may be required to evaluate additional projects for potential impairment which may result in additional impairment charges, and such charges could be significant.

     From time to time, the Company writes off earnest money deposits and pre-acquisition costs related to land and lot option contracts which it no longer plans to pursue. During the three-month periods ended March 31, 2007 and 2006, the Company wrote off $13.9 million and $6.7 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts. During the six-month periods ended March 31, 2007 and 2006, the Company wrote off $50.6 million and $10.5 million of such deposits and costs, respectively.

NOTE B — EARNINGS PER SHARE

     Basic earnings per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding during the period.

     The following table sets forth the denominators used in the computation of basic and diluted earnings per share for the three and six months ended March 31, 2007 and 2006:

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
						(In millions)
Denominator for basic earnings per share— weighted average common shares			313.9				312.4				313.7				312.7
Effect of dilutive securities:
Employee stock options			2.2				4.3				2.1				4.4
Denominator for diluted earnings per share— adjusted weighted average common shares			316.1				316.7				315.8				317.1

     For the three and six months ended March 31, 2007, options to purchase 2.7 million shares of common stock at various prices were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, their effect would have been antidilutive. For the three and six months ended March 31, 2006, options to purchase 30,000 shares of common stock at $36.92 were not included in the computation of diluted earnings per share because their effect would have been antidilutive.

NOTE C – CONSOLIDATED LAND INVENTORY NOT OWNED

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

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

Company’s option purchase contracts result in the creation of a variable interest in the entity holding the land parcel under option.

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

     The consolidation of these variable interest entities and other inventory obligations added $96.9 million in land inventory not owned and minority interests related to entities not owned to the Company’s balance sheet at March 31, 2007. The Company’s obligations related to these land or lot option contracts are guaranteed by cash deposits totaling $15.1 million and performance letters of credit, promissory notes and surety bonds totaling $0.8 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, which totaled $98.2 million at March 31, 2007.

NOTE D – NOTES PAYABLE

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

		March 31,				September 30,
		2007				2006
		(In millions)
Homebuilding:
Unsecured:
Revolving credit facility		$	500.0			$	800.0
7.5% senior notes due 2007			215.0				215.0
5% senior notes due 2009, net			199.8				199.7
8% senior notes due 2009, net			384.5				384.3
4.875% senior notes due 2010, net			249.1				249.0
9.75% senior subordinated notes due 2010, net			149.5				149.4
7.875% senior notes due 2011, net			199.1				199.0
6% senior notes due 2011, net			249.5				249.4
8.5% senior notes due 2012, net			248.7				248.6
5.375% senior notes due 2012			300.0				300.0
6.875% senior notes due 2013			200.0				200.0
5.875% senior notes due 2013			100.0				100.0
6.125% senior notes due 2014, net			197.8				197.7
5.625% senior notes due 2014, net			248.3				248.3
5.25% senior notes due 2015, net			298.0				297.9
5.625% senior notes due 2016, net			297.8				297.7
6.5% senior notes due 2016, net			499.0				499.0
Secured and other			56.3				51.9
		$	4,592.4			$	4,886.9
Financial Services:
Mortgage warehouse facility		$	138.1			$	371.7
Commercial paper conduit facility			370.0				820.0
		$	508.1			$	1,191.7

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 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:

     In November 2006, the Company increased the size of its $2.15 billion unsecured revolving credit facility, which includes a $1.0 billion letter of credit sub-facility, to $2.5 billion and extended its maturity by one year to December 16, 2011. The revolving credit facility has an uncommitted $400 million accordion provision which could be used to increase the facility to $2.9 billion. The Company’s borrowing capacity under this facility is reduced by the amount of letters of credit outstanding. At March 31, 2007, the Company’s borrowing capacity under the facility was $1.9 billion. 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 bank debt at March 31, 2007 was 6.1% per annum. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees.

     In November 2006, the Board of Directors authorized the repurchase of up to $500 million of the Company’s outstanding debt securities, replacing the previous debt securities repurchase authorization of $200 million, and extending its term to November 30, 2007. All of the $500 million authorization was remaining at March 31, 2007.

     In March 2007, the Company called for redemption its 8.5% senior notes due 2012. The notes were redeemed on April 15, 2007 at an aggregate price of approximately $260.6 million, plus accrued interest. Concurrent with the redemption, the Company recorded a loss related to the early retirement of debt of approximately $12.1 million in April 2007, representing the call premium and the unamortized discount and fees related to the redeemed notes.

     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, interest coverage and tangible net worth. In addition, the indentures governing the senior notes impose restrictions on the creation of liens.

     At March 31, 2007, under the most restrictive covenants in effect, cash dividend payments for the remainder of fiscal 2007 are limited to $489.4 million, and approximately $3.2 billion was available for all restricted payments in the future.

Financial Services:

     The Company’s mortgage subsidiary has a $540 million mortgage warehouse loan facility, which was renewed on March 30, 2007 to extend its maturity from April 6, 2007 to March 28, 2008. Under the accordion provision of the credit agreement, the total capacity may be increased to $750 million upon consent of the 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 drawn on the facility may not exceed 98% of all eligible mortgage loans held for sale and made available to the lenders to secure any borrowings under the facility. Borrowings bear daily interest at the 30-day LIBOR rate plus a fixed premium. The interest rate of the mortgage warehouse line payable at March 31, 2007 was 6.1% per annum.

     The Company’s mortgage subsidiary also has an $800 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. This credit facility, which previously had a capacity of $1.2 billion, was amended in December 2006 to reduce the capacity to $800 million, adjusting its size to seasonal volume levels. The CP conduit facility is secured by certain

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

mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. Additionally, at September 30, 2006, borrowings under the CP conduit facility were secured by cash arising from borrowings under the facility made prior to the assignment of mortgage loans held for sale as collateral. At March 31, 2007, there were no borrowings under the facility prior to the assignment of mortgage loans held for sale, and therefore, no cash was restricted under this facility. The mortgage loans assigned to secure the CP conduit facility are used as collateral for asset-backed commercial paper issued by multi-seller conduits in the commercial paper market. The interest rate of the CP conduit line payable at March 31, 2007 was 5.6% per annum.

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. The following table summarizes the Company’s homebuilding interest costs incurred (which does not include losses on early retirement of debt), capitalized and charged to cost of sales during the three and six-month periods ended March 31, 2007 and 2006:

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
						(In millions)
Capitalized interest, beginning of period		$	312.7			$	226.0			$	288.9			$	200.6
Interest incurred			78.4				81.4				156.5				150.6
Interest amortized to cost of sales			(56.4	)			(60.6	)			(110.7	)			(104.4	)
Capitalized interest, end of period		$	334.7			$	246.8			$	334.7			$	246.8

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.

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

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2007				2006				2007				2006
						(In millions)
Warranty liability, beginning of period		$	126.1			$	121.5			$	130.4			$	121.6
Warranties issued			12.0				18.3				25.2				33.0
Changes in liability for pre-existing warranties			(3.5	)			(2.9	)			(8.6	)			(6.0	)
Settlements made			(13.8	)			(12.2	)			(26.2	)			(23.9	)
Warranty liability, end of period		$	120.8			$	124.7			$	120.8			$	124.7

NOTE G – MORTGAGE LOANS

     Mortgage Loans - Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. Loans that have been closed but not committed to a third-party investor are matched primarily with either forward sales of mortgage-backed securities (FMBS) or Eurodollar Futures Contracts (EDFC) that are designated as fair value hedges. Hedged loans are either committed to third-party investors within three days of origination or pooled and committed in bulk to third-party investors typically within 30 days of origination. The notional amounts of the FMBS and the EDFC used to hedge mortgage loans held for sale can vary in relationship to the underlying loan amounts, depending on the typical movements in the value of each hedging instrument relative to the value of the underlying mortgage loans. The effectiveness of the fair value hedges is continuously monitored

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

and any ineffectiveness, which for the three and six months ended March 31, 2007 and 2006 was not significant, is recognized in current earnings. As of March 31, 2007, the Company had $70.6 million in loans not committed to third-party investors which were hedged with $117.8 million of FMBS, EDFC and put options on both EDFC and mortgage-backed securities (MBS).

     Mortgage loans held for sale are stated at the lower of aggregate cost or fair market value. Some of the loans sold by DHI Mortgage are sold with limited recourse provisions and may be required to be repurchased under certain conditions including if certain specified payment(s), generally initial payment(s), are not made by the borrowers. The Company records loss allowances for loans held in portfolio and loans held for sale, and reserves for losses related to loans sold with recourse, utilizing estimates based on historical experience and current market conditions. The Company has recorded total loss allowances and reserves for loans held in portfolio, loans held for sale and loans sold with recourse of $31.2 million and $15.6 million at March 31, 2007 and September 30, 2006, respectively.

     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 March 31, 2007, the Company’s IRLCs totaled $285.7 million.

     The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments, FMBS and the purchase of EDFC. These instruments are considered non-designated derivatives and are accounted for at fair value with gains and losses recognized in current earnings. As of March 31, 2007, the Company had approximately $77.8 million of best-efforts whole loan delivery commitments and $272.0 million outstanding of FMBS, EDFC and put options on both EDFC and MBS related to its uncommitted IRLCs.

     In an effort to stimulate home sales by potentially offering homebuyers a below market interest rate on their home financing, the Company began a program during the third quarter of fiscal 2006 which protects it from future increases in interest rates related to potential mortgage originations. To accomplish this, the Company purchases forward rate agreements (FRAs) and economic interest rate hedges in the form of FMBS and put options on both EDFC and MBS. Additionally, during the second quarter of fiscal 2007, in response to heightened volatility in the secondary mortgage markets, the Company entered into FRAs to secure the delivery and sale of certain potential non-traditional mortgage originations, characterized by high combined loan-to-value ratios in combination with less required documentation. These FRAs generally related to loan commitments for borrowers with sales contracts in the Company’s homebuilding backlog. At March 31, 2007, these potential mortgage loan originations totaled approximately $132.5 million. The notional amount of the FRAs was $105.7 million, while the remaining $26.8 million in mortgage loan commitments was hedged with economic interest rate hedges of $398.8 million in EDFC put options and $6.4 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 and six months ended March 31, 2007 were not significant.

NOTE H – STOCKHOLDERS’ EQUITY

     During the three months ended March 31, 2007, the Board of Directors declared a quarterly cash dividend of $0.15 per common share, which was paid on February 9, 2007 to stockholders of record on January 26, 2007. A quarterly cash dividend of $0.10 per common share was declared during the three months ended March 31, 2006.

     In April 2007, the Board of Directors declared a quarterly cash dividend of $0.15 per common share, payable on May 18, 2007 to stockholders of record on May 4, 2007. A quarterly cash dividend of $0.10 per common share was declared in the comparable quarter of fiscal 2006.

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

     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 March 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 2006, the Board of Directors authorized the repurchase of up to $463.2 million of the Company’s common stock, representing the remaining amount of the previous common stock repurchase authorization of $500 million, and extended its term to November 30, 2007. All of the $463.2 million authorization was remaining at March 31, 2007.

NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS

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

NOTE J – 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. The Company has established reserves for such contingencies, based on the expected costs of the self-insured portion of such claims. The Company’s estimates of such reserves are based on the facts and circumstances of individual pending claims and historical data and trends, including estimates of the costs of unreported claims related to past operations. These reserve estimates are subject to ongoing revision as the circumstances of individual pending claims and historical data and trends change. Adjustments to estimated reserves are recorded in the accounting period in which the change in estimate occurs.

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

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

     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 March 31, 2007, the Company had total deposits of $163.8 million, comprised of cash deposits of $148.5 million, promissory notes of $7.8 million, and letters of credit and surety bonds of $7.5 million to purchase land and lots with a total remaining purchase price of $2.6 billion. Included in the total deposits were $26.8 million of deposits related to land 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 $609 million. Consequently, the deposits relating to these contracts have been written off, resulting in a net deposit balance of $137.0 million at March 31, 2007. Only $39.7 million of the $2.6 billion in land and lot option purchase contracts contain specific performance clauses which may require the Company to purchase the land or lots upon the land seller meeting certain obligations. The majority of land and lots under contract are expected to be purchased within three years, to the extent the Company chooses to 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 March 31, 2007, outstanding standby letters of credit were $124.8 million and surety bonds were $2.4 billion. The Company has additional capacity of $884.8 million for standby letters of credit under its revolving credit facility.

NOTE K – REPORTABLE 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 homebuilding operating regions have historically been aggregated into a single reportable homebuilding segment. During the fourth quarter of fiscal 2006, the Company reassessed the aggregation of its operating segments, and as a result, restated its disclosure to include six separate reportable homebuilding segments and one financial services segment. Two of the homebuilding operating regions were aggregated into one reporting segment based on their economic similarities. Under this revised presentation, the Company’s reportable homebuilding segments and the states in which they have homebuilding operations are as follows:

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

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

     The Company’s homebuilding operations generated 98% of consolidated revenues during the six months ended March 31, 2007 and 2006, and 87% and 96% of consolidated income before income taxes during the six-month periods ended March 31, 2007 and 2006, respectively. 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 85 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.

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

     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.

     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, 2006.

		Three Months Ended								Six Months Ended
		March 31,								March 31,
						Restated								Restated
		2007				2006				2007				2006
		(In millions)
Revenues
Homebuilding revenues:
Northeast		$	419.3			$	517.3			$	815.2			$	918.5
Southeast			343.1				531.6				714.4				925.2
South Central			478.4				536.2				929.0				933.3
Southwest			617.0				666.2				1,219.4				1,239.3
California			498.7				912.8				1,198.0				1,639.8
West			259.7				362.4				541.7				712.2
Total homebuilding revenues		$	2,616.2			$	3,526.5			$	5,417.7			$	6,368.3
Financial services revenues		$	41.9			$	71.1			$	108.4			$	132.4
Consolidated revenues		$	2,658.1			$	3,597.6			$	5,526.1			$	6,500.7
Inventory Impairments
Northeast		$	8.8			$	—			$	9.5			$	—
Southeast			2.4				—				2.4				—
South Central			0.3				—				0.3				—
Southwest			—				—				27.1				—
California			55.8				0.4				68.9				0.4
West			—				—				—				—
Total inventory impairments		$	67.3			$	0.4			$	108.2			$	0.4
Income Before Income Taxes (1)
Homebuilding income before income taxes:
Northeast		$	4.8			$	48.3			$	28.8			$	80.3
Southeast			18.9				116.9				46.6				194.9
South Central			30.7				37.9				63.2				64.8
Southwest			36.4				113.0				49.9				223.5
California			(36.0	)			141.8				(13.3	)			265.7
West			21.3				83.8				50.7				192.7
Total homebuilding income before income taxes		$	76.1			$	541.7			$	225.9			$	1,021.9
Financial services income before income taxes		$	7.3			$	27.3			$	34.5			$	47.3
Consolidated income before income taxes		$	83.4			$	569.0			$	260.4			$	1,069.2

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

		March 31,				September 30,
		2007				2006
		(In millions)
Homebuilding Inventories (2):
Northeast		$	1,646.2			$	1,698.3
Southeast			1,947.5				1,808.4
South Central			1,423.1				1,405.3
Southwest			1,712.8				1,883.5
California			2,302.7				2,535.7
West			1,788.5				1,684.8
Corporate and unallocated (3)			388.4				327.1
Total homebuilding inventory		$	11,209.2			$	11,343.1

     In accordance with SFAS No. 142, the Company has allocated its goodwill to its reporting segments as of March 31, 2007 and September 30, 2006 as follows: Northeast $74.4 million, Southeast $11.5 million, South Central $15.9 million, Southwest $102.4 million, California $300.3 million and West $74.4 million.

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

NOTE L — SUMMARIZED FINANCIAL INFORMATION

     All of the Company’s senior and senior subordinated notes and the $2.5 billion unsecured revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s direct and indirect subsidiaries (collectively, Guarantor Subsidiaries), other than financial services subsidiaries and certain other inconsequential subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

Consolidating Balance Sheet
March 31, 2007

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
ASSETS
Cash and cash equivalents		$	—			$	94.6			$	154.8			$	(30.8	)		$	218.6
Investments in subsidiaries			3,560.5				—				—				(3,560.5	)			—
Inventories			3,398.0				7,678.1				133.1				—				11,209.2
Property and equipment, net			38.5				69.3				17.3				—				125.1
Earnest money deposits and other assets			471.0				257.5				84.8				(3.2	)			810.1
Mortgage loans held for sale			—				—				568.6				—				568.6
Goodwill			—				578.9				—				—				578.9
Intercompany receivables			4,294.8				—				—				(4,294.8	)			—
Total Assets		$	11,762.8			$	8,678.4			$	958.6			$	(7,889.3	)		$	13,510.5
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	636.8			$	1,063.3			$	101.1			$	(34.0	)		$	1,767.2
Intercompany payables			—				4,255.3				39.5				(4,294.8	)			—
Notes payable			4,586.5				5.9				508.1				—				5,100.5
Total Liabilities			5,223.3				5,324.5				648.7				(4,328.8	)			6,867.7
Minority interests			—				—				103.3				—				103.3
Total Equity			6,539.5				3,353.9				206.6				(3,560.5	)			6,539.5
Total Liabilities & Equity		$	11,762.8			$	8,678.4			$	958.6			$	(7,889.3	)		$	13,510.5

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

NOTE L — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Balance Sheet
September 30, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
ASSETS
Cash and cash equivalents		$	73.5			$	379.8			$	134.3			$	—			$	587.6
Restricted cash			—				—				248.3				—				248.3
Investments in subsidiaries			3,428.5				—				—				(3,428.5	)			—
Inventories			3,249.8				7,964.1				129.2				—				11,343.1
Property and equipment, net			40.5				73.2				17.7				—				131.4
Earnest money deposits and other assets			500.1				299.0				122.9				(13.5	)			908.5
Mortgage loans held for sale			—				—				1,022.9				—				1,022.9
Goodwill			—				578.9				—				—				578.9
Intercompany receivables			4,814.7				—				—				(4,814.7	)			—
Total Assets		$	12,107.1			$	9,295.0			$	1,675.3			$	(8,256.7	)		$	14,820.7
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	776.3			$	1,288.6			$	132.7			$	(13.5	)		$	2,184.1
Intercompany payables			—				4,748.5				66.2				(4,814.7	)			—
Notes payable			4,877.9				9.0				1,191.7				—				6,078.6
Total Liabilities			5,654.2				6,046.1				1,390.6				(4,828.2	)			8,262.7
Minority interests			—				—				105.1				—				105.1
Total Equity			6,452.9				3,248.9				179.6				(3,428.5	)			6,452.9
Total Liabilities & Equity		$	12,107.1			$	9,295.0			$	1,675.3			$	(8,256.7	)		$	14,820.7

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

NOTE L — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Three Months Ended March 31, 2007

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
Homebuilding:
Revenues		$	520.5			$	2,091.5			$	4.2			$	—			$	2,616.2
Cost of sales			382.7				1,859.0				3.0				—				2,244.7
Gross profit			137.8				232.5				1.2				—				371.5
Selling, general and administrative expense			105.0				189.2				1.8				—				296.0
Equity in income of subsidiaries			(50.7	)			—				—				50.7				—
Other (income) expense			0.1				(0.6	)			(0.1	)			—				(0.6	)
			83.4				43.9				(0.5	)			(50.7	)			76.1
Financial services:
Revenues			—				—				41.9				—				41.9
General and administrative expense			—				—				38.4				—				38.4
Interest expense			—				—				6.8				—				6.8
Other (income)			—				—				(10.6	)			—				(10.6	)
			—				—				7.3				—				7.3
Income before income taxes			83.4				43.9				6.8				(50.7	)			83.4
Provision for income taxes			31.7				16.7				2.6				(19.3	)			31.7
Net income		$	51.7			$	27.2			$	4.2			$	(31.4	)		$	51.7

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

NOTE L — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Six Months Ended March 31, 2007

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
Homebuilding:
Revenues		$	1,096.1			$	4,309.6			$	12.0			$	—			$	5,417.7
Cost of sales			824.4				3,770.0				7.8				—				4,602.2
Gross profit			271.7				539.6				4.2				—				815.5
Selling, general and administrative expense			216.0				370.9				4.4				—				591.3
Equity in income of subsidiaries			(203.9	)			—				—				203.9				—
Other (income) expense			(0.8	)			(1.5	)			0.6				—				(1.7	)
			260.4				170.2				(0.8	)			(203.9	)			225.9
Financial services:
Revenues			—				—				108.4				—				108.4
General and administrative expense			—				—				83.4				—				83.4
Interest expense			—				—				16.4				—				16.4
Other (income)			—				—				(25.9	)			—				(25.9	)
			—				—				34.5				—				34.5
Income before income taxes			260.4				170.2				33.7				(203.9	)			260.4
Provision for income taxes			99.0				64.7				12.8				(77.5	)			99.0
Net income		$	161.4			$	105.5			$	20.9			$	(126.4	)		$	161.4

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

NOTE L — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Three Months Ended March 31, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
Homebuilding:
Revenues		$	803.3			$	2,721.2			$	2.0			$	—			$	3,526.5
Cost of sales			527.2				2,086.5				1.2				—				2,614.9
Gross profit			276.1				634.7				0.8				—				911.6
Selling, general and administrative expense			128.1				234.3				2.5				—				364.9
Equity in income of subsidiaries			(427.9	)			—				—				427.9				—
Loss on early retirement of debt			10.6				—				—				—				10.6
Other (income)			(3.7	)			(0.3	)			(1.6	)			—				(5.6	)
			569.0				400.7				(0.1	)			(427.9	)			541.7
Financial services:
Revenues			—				—				71.1				—				71.1
General and administrative expense			—				—				49.4				—				49.4
Interest expense			—				—				7.8				—				7.8
Other (income)			—				—				(13.4	)			—				(13.4	)
			—				—				27.3				—				27.3
Income before income taxes			569.0				400.7				27.2				(427.9	)			569.0
Provision for income taxes			216.2				152.2				10.4				(162.6	)			216.2
Net income		$	352.8			$	248.5			$	16.8			$	(265.3	)		$	352.8