DHI 10-Q Quarterly Report March 31, 2010

HORTON D R INC /DE/

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10-Q 1 d72645e10vq.htm FORM 10-Q e10vq

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, 2010


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

For the Transition Period From To

Commission file number 1-14122

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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

Yes o No þ

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

Common stock, $.01 par value — 318,194,902 shares as of April 27, 2010

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, 2010 (unaudited) and September 30, 2009 (unaudited)		3
Consolidated Statements of Operations for the three and six months ended March 31, 2010 and 2009 (unaudited)		4
Consolidated Statements of Cash Flows for the six months ended March 31, 2010 and 2009 (unaudited)		5
Notes to Consolidated Financial Statements (unaudited)		6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		58
ITEM 4. Controls and Procedures		59

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		60
ITEM 1A. Risk Factors		60
ITEM 4. Submission of Matters to a Vote of Security Holders		61
ITEM 6. Exhibits		62

SIGNATURE		63
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31,			September 30,
	2010			2009
				(Adjusted-Note A)
	(In millions)
	(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents	$	1,612.8		$	1,922.8
Marketable securities, available-for-sale		198.7			—
Restricted cash		50.3			55.2
Inventories:
Construction in progress and finished homes		1,636.7			1,446.6
Residential land and lots — developed and under development		1,554.8			1,643.3
Land held for development		564.9			562.5
Land inventory not owned		7.1			14.3

		3,763.5			3,666.7
Income taxes receivable		29.4			293.1
Deferred income taxes, net of valuation allowance of $894.1 million and $1,073.9 million at March 31, 2010 and September 30, 2009, respectively		—			—
Property and equipment, net		57.1			57.8
Other assets		414.3			433.0
Goodwill		15.9			15.9

		6,142.0			6,444.5

Financial Services:
Cash and cash equivalents		26.8			34.5
Mortgage loans held for sale		237.1			220.8
Other assets		53.4			57.0

		317.3			312.3

Total assets	$	6,459.3		$	6,756.8


LIABILITIES
Homebuilding:
Accounts payable	$	232.4		$	216.8
Accrued expenses and other liabilities		949.4			932.0
Notes payable		2,551.8			3,076.6

		3,733.6			4,225.4

Financial Services:
Accounts payable and other liabilities		54.1			62.1
Mortgage repurchase facility		77.7			68.7

		131.8			130.8

Total liabilities		3,865.4			4,356.2

Commitments and contingencies (Note L)

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, 321,841,286 shares issued and 318,186,053 shares outstanding at March 31, 2010 and 321,136,119 shares issued and 317,480,886 shares outstanding at September 30, 2009		3.2			3.2
Additional paid-in capital		1,884.4			1,871.1
Retained earnings		792.8			613.2
Treasury stock, 3,655,233 shares at March 31, 2010 and September 30, 2009, at cost		(95.7	)		(95.7	)
Accumulated other comprehensive loss		(0.2	)		—

Total stockholders’ equity		2,584.5			2,391.8
Noncontrolling interests		9.4			8.8

Total equity		2,593.9			2,400.6

Total liabilities and equity	$	6,459.3		$	6,756.8

See accompanying notes to consolidated financial statements.

-3-

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(In millions, except per share data)
	(Unaudited)
Homebuilding:
Revenues:
Home sales	$	894.8		$	770.7		$	2,003.0		$	1,656.4
Land/lot sales		2.0			4.6			2.7			19.2

		896.8			775.3			2,005.7			1,675.6

Cost of sales:
Home sales		733.7			667.9			1,652.5			1,416.4
Land/lot sales		1.5			4.3			2.1			16.0
Inventory impairments and land option cost write-offs		2.4			48.1			3.6			104.4

		737.6			720.3			1,658.2			1,536.8

Gross profit:
Home sales		161.1			102.8			350.5			240.0
Land/lot sales		0.5			0.3			0.6			3.2
Inventory impairments and land option cost write-offs		(2.4	)		(48.1	)		(3.6	)		(104.4	)

		159.2			55.0			347.5			138.8

Selling, general and administrative expense		128.7			126.9			257.1			253.9
Interest expense		22.7			23.1			49.6			48.7
Gain on early retirement of debt, net		—			(2.2	)		(1.6	)		(8.4	)
Other (income)		(3.3	)		(2.2	)		(4.8	)		(6.4	)

		11.1			(90.6	)		47.2			(149.0	)

Financial Services:
Revenues, net of recourse and reinsurance expense		16.7			2.7			39.9			20.4
General and administrative expense		17.4			17.2			36.0			40.4
Interest expense		0.2			0.3			0.7			1.0
Interest and other (income)		(1.9	)		(2.4	)		(4.4	)		(5.7	)

		1.0			(12.4	)		7.6			(15.3	)

Income (loss) before income taxes		12.1			(103.0	)		54.8			(164.3	)
Provision for (benefit from) income taxes		0.7			5.6			(148.6	)		6.8

Net income (loss)	$	11.4		$	(108.6	)	$	203.4		$	(171.1	)


Basic net income (loss) per common share	$	0.04		$	(0.34	)	$	0.64		$	(0.54	)

Net income (loss) per common share assuming dilution	$	0.04		$	(0.34	)	$	0.61		$	(0.54	)

Cash dividends declared per common share	$	0.0375		$	0.0375		$	0.075		$	0.075

See accompanying notes to consolidated financial statements.

-4-

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	March 31,
	2010			2009
	(In millions)
	(Unaudited)
OPERATING ACTIVITIES
Net income (loss)	$	203.4		$	(171.1	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		8.7			14.7
Amortization of discounts and fees		14.1			3.6
Stock option compensation expense		6.5			6.4
Income tax benefit from stock option exercises		(2.9	)		(0.2	)
Gain on early retirement of debt, net		(1.6	)		(8.4	)
Inventory impairments and land option cost write-offs		3.6			104.4
Changes in operating assets and liabilities:
(Increase) decrease in construction in progress and finished homes		(191.1	)		176.6
Decrease in residential land and lots – developed, under development, and held for development		83.1			199.6
Decrease in other assets		21.0			40.7
Decrease in income taxes receivable		263.7			621.7
(Increase) decrease in mortgage loans held for sale		(16.3	)		164.5
Increase (decrease) in accounts payable, accrued expenses and other liabilities		35.6			(174.6	)


Net cash provided by operating activities		427.8			977.9


INVESTING ACTIVITIES
Purchases of property and equipment		(7.7	)		(4.5	)
Purchases of marketable securities, available-for-sale		(199.1	)		—
Decrease in restricted cash		4.9			0.7


Net cash used in investing activities		(201.9	)		(3.8	)


FINANCING ACTIVITIES
Net proceeds from mortgage repurchase facility		8.9			—
Repayment of notes payable		(535.6	)		(823.9	)
Proceeds from stock associated with certain employee benefit plans		4.0			1.3
Income tax benefit from stock option exercises		2.9			0.2
Cash dividends paid		(23.8	)		(23.8	)


Net cash used in financing activities		(543.6	)		(846.2	)


(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(317.7	)		127.9
Cash and cash equivalents at beginning of period		1,957.3			1,387.3

Cash and cash equivalents at end of period	$	1,639.6		$	1,515.2

See accompanying notes to consolidated financial statements.

-5-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2010

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 of which the Company is determined to be the primary beneficiary. 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, loss reserves and deferred tax asset valuation allowance discussed below) considered necessary for a fair presentation have been included. These financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes for the fiscal year ended September 30, 2009 included in the Company’s current report on Form 8-K dated February 8, 2010, which updated the Company’s annual report on Form 10-K.

Reclassifications/Revisions

Certain reclassifications have been made in the prior year’s financial statements to conform to classifications used in the current year. In accordance with the authoritative guidance issued by the Financial Accounting Standards Board (FASB) for noncontrolling interests which was adopted at the beginning of fiscal 2010, the balance sheet at September 30, 2009 has been revised to present minority interests (now referred to as noncontrolling interests) as a component of equity rather than as a liability. The balance sheet at September 30, 2009 has also been revised to reflect the change in accounting for convertible debt as described below under “Adoption of New Accounting Principle.” Additionally, the statement of cash flows for the six months ended March 31, 2009 has been revised to reflect the reclassification of homebuilding restricted cash from other assets to restricted cash and the reclassification of insurance receivables from a component of accrued expenses and other liabilities to other assets.

Comprehensive Income (Loss)

The following table provides a reconciliation of net income (loss) reported in the consolidated statements of operations to comprehensive income (loss) for the three and six-month periods ended March 31, 2010 and 2009.


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
				(In millions)
Net income (loss)	$	11.4		$	(108.6	)	$	203.4		$	(171.1	)
Other comprehensive loss:
Unrealized loss related to available-for-sale securities (see Note B)		(0.2	)		—			(0.2	)		—

Comprehensive income (loss)	$	11.2		$	(108.6	)	$	203.2		$	(171.1	)

-6-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2010

Adoption of New Accounting Principle

As described in the Company’s current report on Form 8-K dated February 8, 2010 and its quarterly report on Form 10-Q for the period ended December 31, 2009, on October 1, 2009, the Company adopted and applied retrospectively the FASB’s authoritative guidance for accounting for debt with conversion options. Early adoption of this authoritative guidance was not permitted. As a result, the prior year consolidated financial statements have been retrospectively adjusted for the effects of this change in accounting for the Company’s 2% convertible senior notes issued in May 2009.

Seasonality

Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and six-month periods ended March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010.

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 71 markets and 26 states in the United States at March 31, 2010. The Company designs, builds and sells single-family detached homes on lots it developed and on finished lots purchased ready for home construction. To a lesser extent, the Company also builds and sells attached homes, such as town homes, duplexes, triplexes and condominiums (including some mid-rise buildings), which share common walls and roofs. Periodically, the Company sells land and lots. The Company also provides title agency and mortgage financing services, principally to its homebuyers. The Company generally does not retain or service the mortgages that it originates but, rather, seeks to sell the mortgages and related servicing rights to third-party purchasers.

NOTE B – MARKETABLE SECURITIES

During the three months ended March 31, 2010, the Company began to invest a portion of its cash on hand by purchasing marketable securities with maturities in excess of three months. To be considered for investment, securities must meet certain minimum requirements as to their credit ratings, time to maturity and other risk-related criteria as prescribed by the Company’s investment policies. The primary objective of these investments is the preservation of capital, with the secondary objectives of attaining higher yields than the Company earns on its cash and cash equivalents, and maintaining a high degree of liquidity.

The Company’s investment portfolio at March 31, 2010 included U.S. Treasury securities, government agency securities, foreign government securities, corporate debt securities, and certificates of deposit. These investments are held in the custody of a single financial institution. The Company considers its investment portfolio to be available-for-sale. Accordingly, these investments are recorded at fair value. At the end of a reporting period, unrealized gains and losses on these investments, net of tax, are recorded directly to accumulated other comprehensive income (loss) on the consolidated balance sheet. The effect of these investments on other comprehensive income (loss) for the three and six months ended March 31, 2010 and 2009 is presented in Note A. There were no sales of securities from inception of the program through March 31, 2010, and therefore, there were no realized gains or losses related to these investments during the period.

-7-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

The amortized cost, unrealized gains and losses and fair values of available-for-sale investments as of March 31, 2010, were as follows:


			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Fair Value
			(In millions)
Type of security:
U.S. Treasury securities	$	3.5	$	—	$	—		$	3.5
Obligations of U.S. government agencies		76.7		—		(0.1	)		76.6
Corporate debt securities issued under the FDIC Temporary Liquidity Guarantee Program		76.1		—		(0.1	)		76.0
Domestic corporate debt securities		26.5		—		—			26.5
Foreign government securities		11.1		—		—			11.1

Total debt securities		193.9		—		(0.2	)		193.7
Certificates of deposit		5.0		—		—			5.0

Total marketable securities, available-for-sale	$	198.9	$	—	$	(0.2	)	$	198.7

Of the $198.7 million in marketable securities, $189.2 million mature in the next twelve months and $9.5 million mature in one to two years.

NOTE C – INVENTORY IMPAIRMENTS AND LAND OPTION COST WRITE-OFFS

At March 31, 2010, when the Company performed its quarterly inventory impairment analysis, the assumptions utilized reflected the stabilizing conditions experienced in many of its markets as indicated by the improvements in the Company’s operating results for the three and six months ended March 31, 2010, as well as the Company’s expectation of continued challenging conditions in the homebuilding industry and in its markets. The impairment evaluation indicated communities with a combined carrying value of $533.8 million as of March 31, 2010 had indicators of potential impairment and these communities were evaluated for impairment. The analysis of the large majority of these communities assumed that sales prices in future periods will be equal to or lower than current sales order prices in each community, or in comparable communities, in order to generate an acceptable absorption rate. For a minority of communities that the Company does not intend to develop or operate in current market conditions, slight increases over current sales prices were assumed. While it is difficult to determine a timeframe for a given community in the current market conditions, the remaining lives of these communities were estimated to be in a range from six months to in excess of ten years. In performing this analysis, the Company utilized a range of discount rates for communities of 14% to 20%, which is consistent with the rates used in fiscal 2009. Through this evaluation process, it was determined that communities with a carrying value of $8.5 million as of March 31, 2010 were impaired. As a result, during the three months ended March 31, 2010, impairment charges of $2.3 million were recorded to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $45.0 million in the same period of the prior year. During the six months ended March 31, 2010 and 2009, impairment charges totaled $4.1 million and $100.1 million, respectively. In the three months ended March 31, 2010, approximately 81% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 19% of the charges were recorded to construction in progress and finished homes inventory, compared to 75% and 25%, respectively, in the same period of 2009. In the six months ended March 31, 2010, approximately 74% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 26% of the charges were recorded to construction in progress and finished homes inventory, compared to 68% and 32%, respectively, in the same period of 2009.

-8-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

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

At March 31, 2010, the Company had $6.0 million of land held for sale, consisting of land held for development and land under development that has met the criteria of land held for sale.

During the three-month periods ended March 31, 2010 and 2009, the Company wrote off $0.1 million and $3.1 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts which are not expected to be acquired. During the six-month periods ended March 31, 2010 and 2009, the Company recovered $0.5 million and wrote off $4.3 million, respectively, of such deposits and costs.

NOTE D – 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 these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company’s discretion.

Certain option purchase contracts result in the creation of a variable interest in the entity holding the land parcel under option. The Company evaluates those land and lot option purchase contracts with variable interest entities to determine whether the Company is the primary beneficiary based upon analysis of the variability of the expected gains and losses of the entity. The expected gains and losses are primarily determined by the amount of deposit required by the contract, the time period or term of the contract, and by analyzing the volatility in home sales prices as well as development and entitlement risk in each specific market. Based on this evaluation, if the Company is the primary beneficiary of an entity with which the Company has entered into a land or lot option purchase contract, the variable interest entity is consolidated.

The consolidation of variable interest entities added $7.1 million in land inventory not owned and noncontrolling interests related to entities not owned to the Company’s consolidated balance sheet at March 31, 2010. The Company’s obligations related to these land or lot option contracts are guaranteed by deposits, including cash, promissory notes and surety bonds, totaling $0.7 million as of March 31, 2010. 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 March 31, 2010, the amount of option deposits related to these contracts totaled $5.0 million and is included in homebuilding other assets on the Company’s consolidated balance sheet.

-9-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE E – NOTES PAYABLE

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


	March 31,		September 30,
	2010		2009
	(In millions)
Homebuilding:
Unsecured:
4.875% senior notes due 2010, net	$	—	$	130.8
9.75% senior notes due 2010		58.4		70.5
9.75% senior subordinated notes due 2010, net		11.3		15.3
6% senior notes due 2011, net		204.4		212.8
7.875% senior notes due 2011, net		154.4		163.3
5.375% senior notes due 2012		180.7		242.1
6.875% senior notes due 2013		199.5		199.5
5.875% senior notes due 2013		—		96.0
6.125% senior notes due 2014, net		192.5		198.5
2% convertible senior notes due 2014, net (1)		379.7		368.0
5.625% senior notes due 2014, net		195.2		248.8
5.25% senior notes due 2015, net		268.4		298.6
5.625% senior notes due 2016, net		232.7		298.3
6.5% senior notes due 2016, net		437.1		497.0
Other secured		37.5		37.1

	$	2,551.8	$	3,076.6


Financial Services:
Mortgage repurchase facility, maturing 2011	$	77.7	$	68.7


(1)		The balance of the 2% convertible senior notes at September 30, 2009 has been retrospectively adjusted for the change in accounting for convertible debt as described in Note A.

Homebuilding:

In November 2009, the Board of Directors authorized the early repurchase of up to $500 million of the Company’s debt securities, effective December 1, 2009. At March 31, 2010, following the transactions described below, $154.0 million of the authorization was remaining. In April 2010, the Board of Directors increased the debt repurchase authorization to $500 million, effective from April 29, 2010 to November 30, 2010.

On January 15, 2010, the Company repaid the remaining $130.9 million principal amount of its 4.875% senior notes which were due on that date. On February 24, 2010, the Company redeemed the remaining $95.0 million principal amount of its 5.875% senior notes due 2013. Additionally, the Company repurchased $139.4 million principal amount of its senior notes primarily through unsolicited transactions during the three months ended March 31, 2010.

-10-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

Following is a summary of the redemption and repurchase activity for the six months ended March 31, 2010:


	Principal
	Amount
	(In millions)
Maturities / Early Redemptions:
4.875% senior notes redeemed upon maturity in January 2010	$	130.9
5.875% senior notes due 2013 redeemed in February 2010		95.0
Repurchases:
9.75% senior notes due 2010		12.1
9.75% senior subordinated notes due 2010		4.0
6% senior notes due 2011		8.5
7.875% senior notes due 2011		9.0
5.375% senior notes due 2012		61.4
5.875% senior notes due 2013		1.0
6.125% senior notes due 2014		6.2
5.625% senior notes due 2014		53.9
5.25% senior notes due 2015		30.4
5.625% senior notes due 2016		66.1
6.5% senior notes due 2016		60.0

	$	538.5

These senior notes were redeemed or repurchased for an aggregate purchase price of $535.2 million, plus accrued interest, resulting in a net gain on early retirement of debt of $1.6 million for the six months ended March 31, 2010. The gain is net of unamortized discounts and fees written off, including a loss of $2.0 million for the call premium and write-off of unamortized fees related to the early redemption of the 5.875% senior notes due 2013.

In April 2010, through an unsolicited transaction, the Company repurchased $6.5 million principal amount of its 9.75% senior notes due 2010 for an aggregate purchase price of $6.7 million, plus accrued interest.

The indentures governing the Company’s senior notes and senior subordinated notes impose restrictions on the creation of secured debt and liens. At March 31, 2010, the Company was in compliance with all of the limitations and restrictions that form a part of the public debt obligations.

Financial Services:

The Company’s mortgage subsidiary, DHI Mortgage, entered into a mortgage sale and repurchase agreement (the “mortgage repurchase facility”) on March 28, 2008. The mortgage repurchase facility, which is accounted for as a secured financing, provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds by the counterparties, thereby becoming purchased loans. DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase facility. In March 2010, through an amendment to the repurchase agreement, the capacity of the facility was increased from $100 million to $150 million, with a provision allowing an increase in the capacity to $175 million during the last five business days of a fiscal quarter and the first seven business days of the following fiscal quarter. Additionally, the amendment extended the maturity date of the facility to March 4, 2011.

-11-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

As of March 31, 2010, $225.2 million of mortgage loans held for sale were pledged under the repurchase arrangement. These mortgage loans had a collateral value of $209.3 million. DHI Mortgage has the option to fund a portion of its repurchase obligations in advance. As a result of advance paydowns totaling $131.6 million, DHI Mortgage had an obligation of $77.7 million outstanding under the mortgage repurchase facility at March 31, 2010 at a 3.8% interest rate.

The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and its minimum required liquidity. At March 31, 2010, the mortgage subsidiary was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

NOTE F – HOMEBUILDING INTEREST

The Company capitalizes homebuilding interest costs to inventory during active development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. Additionally, the Company writes off a portion of the capitalized interest related to communities for which inventory impairments are recorded. The Company’s inventory under active development and construction was lower than its debt level at March 31, 2010 and 2009. Therefore, a portion of the interest incurred was expensed directly to interest expense as reflected below.

The following table summarizes the Company’s homebuilding interest costs incurred, capitalized, expensed as interest expense, charged to cost of sales and written off during the three and six-month periods ended March 31, 2010 and 2009:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
				(In millions)
Capitalized interest, beginning of period (1)	$	119.9		$	157.8		$	128.8		$	160.6
Interest incurred		45.8			50.3			95.6			106.9
Interest expensed:
Directly to interest expense		(22.7	)		(23.1	)		(49.6	)		(48.7	)
Amortized to cost of sales		(25.7	)		(27.6	)		(57.4	)		(58.7	)
Written off with inventory impairments		(0.1	)		(1.6	)		(0.2	)		(4.3	)

Capitalized interest, end of period	$	117.2		$	155.8		$	117.2		$	155.8


(1)		The beginning balance of capitalized interest for the six-month period ended March 31, 2010 has been retrospectively adjusted for the change in accounting for convertible debt as described in Note A.

NOTE G – MORTGAGE LOANS

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

-12-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

Mortgage Loans Held for Sale

Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. Newly originated loans that have been closed but not committed to third-party purchasers are hedged to mitigate the risk of changes in their fair value. Hedged loans are committed to third-party purchasers typically within three days after origination. At March 31, 2010, mortgage loans held for sale had an aggregate fair value of $237.1 million and an aggregate outstanding principal balance of $234.6 million. During the three months ended March 31, 2010, the Company had a net gain on sales of loans of $7.3 million, compared to a net loss on sales of loans of $3.9 million in the same period of 2009. During the six months ended March 31, 2010 and 2009, the Company had net gains on sales of loans of $19.0 million and $3.4 million, respectively, which includes the effect of recording recourse expense, as discussed below in “Other Mortgage Loans,” of $8.6 million and $19.7 million, respectively.

The notional amounts of the hedging instruments used to hedge mortgage loans held for sale vary in relationship to the underlying loan amounts, depending on the movements in the value of each hedging instrument relative to the value of the underlying mortgage loans. The fair value change related to the hedging instruments generally offsets the fair value change in the mortgage loans held for sale, which for the three and six months ended March 31, 2010 and 2009 was not significant, and is recognized in current earnings. As of March 31, 2010, the Company had $131.4 million in mortgage loans held for sale not committed to third-party purchasers and the notional amounts of the hedging instruments related to those loans totaled $130.5 million.

Other Mortgage Loans

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

Based on historical performance and current housing and credit market conditions, the Company has recorded reserves for estimated losses on other mortgage loans, real estate owned, future loan repurchase obligations due to the limited recourse provisions and losses for mortgage reinsurance activities, all of which are recorded as reductions of financial services revenue. These reserves totaled $43.2 million and $43.6 million at March 31, 2010 and September 30, 2009, respectively, and comprise the reserves that follow. Other mortgage loans, subject to nonrecurring fair value measurement, totaled $48.6 million and $50.2 million at March 31, 2010 and September 30, 2009, respectively, and had corresponding loss reserves of $11.2 million and $13.1 million, respectively. The Company has established loss reserves for real estate owned of $2.7 million and $2.6 million at March 31, 2010 and September 30, 2009, respectively. The Company’s other mortgage loans and real estate owned are included in financial services other assets in the accompanying consolidated balance sheets. Additional loss reserves at March 31, 2010 and September 30, 2009 included liabilities of $29.3 million and $27.9 million, respectively, for expected losses on future loan repurchase obligations due to the limited recourse provisions.

A subsidiary of the Company reinsured a portion of private mortgage insurance written on loans originated by DHI Mortgage in prior years. At March 31, 2010 and September 30, 2009, reserves for expected future losses under the reinsurance program totaled $14.1 million and $18.7 million, respectively. The mortgage repurchase and reinsurance loss reserves are included in financial services accounts payable and other liabilities in the accompanying consolidated balance sheets. It is possible that future losses may exceed the amount of reserves and, if so, additional charges will be required.

-13-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

Loan Commitments

The Company is party to interest rate lock commitments (IRLCs) which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria. At March 31, 2010, IRLCs totaled $255.8 million which are accounted for as derivative instruments recorded at fair value.

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments. These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in current earnings. As of March 31, 2010, the Company had approximately $22.4 million of best-efforts whole loan delivery commitments and $207.3 million of hedging instruments related to IRLCs not yet committed to purchasers.

At March 31, 2010, the Company had $10.3 million in MBS which were acquired as part of a program to potentially offer homebuyers a below market interest rate on their home financing. These hedging instruments and the related commitments are accounted for at fair value with gains and losses recognized in current earnings. These gains and losses for the three and six months ended March 31, 2010 and 2009 were not material.

NOTE H – FAIR VALUE MEASUREMENTS

The Company adopted the FASB’s authoritative guidance for fair value measurements of financial and non-financial instruments on October 1, 2008 and 2009, respectively. The guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as the exchange (exit) price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This standard establishes a three-level hierarchy for fair value measurements based upon the inputs to the valuation of an asset or liability. Observable inputs are those which can be easily seen by market participants while unobservable inputs are generally developed internally, utilizing management’s estimates and assumptions.

	•		Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.

	•		Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.

	•		Level 3 – Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

When available, the Company uses quoted market prices in active markets to determine fair value. The Company considers the principal market and nonperformance risk associated with the Company’s counterparties when determining the fair value measurements, if applicable. Fair value measurements are used for the Company’s marketable securities, mortgage loans held for sale, IRLCs and other derivative instruments on a recurring basis, and are used for inventories and other mortgage loans on a non-recurring basis, when events and circumstances indicate that the carrying value may not be recoverable.

-14-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

The Company’s marketable securities consist of U.S. Treasury securities, government agency securities, corporate debt securities, foreign government securities, and certificates of deposit. The fair value of U.S. Treasury securities is based on quoted prices for identical assets and therefore, they have been classified as a Level 1 valuation. Obligations of government agencies, corporate debt securities, foreign government securities and certificates of deposit are valued using quoted market prices of recent transactions or quoted market prices of transactions in very similar securities and therefore, are classified as Level 2 valuations.

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

The hedging instruments utilized by the Company to manage its interest rate risk and hedge the changes in the fair value of mortgage loans held for sale are publicly traded derivatives with fair value measurements based on quoted market prices. Exchange-traded derivatives are considered Level 1 valuations because quoted prices for identical assets are used for fair value measurements. Over-the-counter derivatives, such as MBS, are classified as Level 2 valuations because quoted prices for similar assets are used for fair value measurements. The Company mitigates exposure to nonperformance risk associated with over-the-counter derivatives by limiting the number of counterparties and actively monitoring their financial strength and creditworthiness while requiring them to be well-known institutions with credit ratings equal to or better than AA- or equivalent. Further, the Company’s derivative contracts typically have short-term durations with maturities from one to four months. Accordingly, the Company’s risk of nonperformance relative to its derivative positions is also not significant. Nonperformance risk associated with exchange-traded derivatives is considered minimal as these items are traded on the Chicago Mercantile Exchange. After consideration of nonperformance risk, no additional adjustments have been made to the fair value measurement of hedging instruments.

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

Inventory held and used is reported at the lower of carrying value or fair value on a nonrecurring basis. The factors considered in determining fair values of the Company’s communities are described in the discussion of the Company’s inventory impairment analysis (see Note C), and are classified as Level 3 valuations. Inventory held and used measured at fair value represents those communities for which the Company has recorded impairments during the current period.

Other mortgage loans are measured at the lower of carrying value or fair value on a nonrecurring basis and include performing and nonperforming mortgage loans. The fair values of other mortgage loans are determined based on the Company’s assessment of the value of the underlying collateral and are classified as Level 3 valuations.

-15-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

The following table summarizes the Company’s assets and liabilities at March 31, 2010 measured at fair value on a recurring basis:


		Fair Value at March 31, 2010
	Balance Sheet Location	Level 1		Level 2			Total
		(In millions)
Homebuilding:
Marketable securities, available-for-sale	Marketable securities	$	3.5	$	195.2		$	198.7
Financial Services:
Mortgage loans held for sale (a)	Mortgage loans held for sale	$	—	$	237.1		$	237.1
Derivatives not designated as hedging instruments (b):
Interest rate lock commitments	Other liabilities	$	—	$	(0.7	)	$	(0.7	)
Forward sales of MBS	Other assets	$	—	$	0.7		$	0.7
Best-efforts commitments	Other assets	$	—	$	0.5		$	0.5


(a)		Mortgage loans held for sale are reflected at full fair value. Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in financial services interest and other income.

(b)		Fair value measurements of these derivatives represent changes in fair value since inception. These changes are reflected in the balance sheet and included in financial services revenues on the consolidated statement of operations.

The following table summarizes the Company’s assets at March 31, 2010 measured at fair value on a non-recurring basis:


		Fair Value at
	Balance Sheet	March 31, 2010
	Location	Level 3
		(In millions)
Homebuilding:
Inventory held and used (a)	Inventories	$	6.2
Financial Services:
Other mortgage loans (a)	Other assets	$	37.4


(a)		The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the current quarter.

The carrying amounts of cash and cash equivalents approximate their fair values due to their short-term nature. For senior, convertible senior and senior subordinated notes, the Company determines fair value based on quoted market prices. The aggregate fair value of these notes at March 31, 2010 and September 30, 2009 was $2,743.0 million and $3,187.6 million, respectively, compared to carrying values of $2,514.3 million and $3,039.5 million, respectively. The aggregate fair value of the Company’s senior notes includes fair values for the 2% convertible senior notes of $589.4 million and $568.6 million at March 31, 2010 and September 30, 2009, respectively, compared to their carrying values of $379.7 million and $368.0 million, respectively. For other secured notes and balances due under the mortgage repurchase facility, the fair values approximate their carrying amounts due to their short maturity or floating interest rate terms, as applicable.

-16-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE I — INCOME TAXES

The Company’s provision for and benefit from income taxes for the three and six months ended March 31, 2010 were $0.7 million and $148.6 million, respectively, compared to provisions for income taxes of $5.6 million and $6.8 million in the comparable periods of the prior year. The benefit from income taxes for the six months ended March 31, 2010 consists of a benefit of $198.8 million from a change in federal tax law which expanded the number of years the Company can carry back net operating losses, offset by a provision for income taxes of $1.6 million for state income taxes and an increase for unrecognized tax benefits of $48.6 million. The Company does not have meaningful effective tax rates for the six-month period ended March 31, 2010 and the comparable period of the prior year because of losses from operations before taxes in the prior year, the impact of valuation allowances on its net deferred tax assets and the change in tax law in the current year.

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into law and amended Section 172 of the Internal Revenue Code. This tax law change allows a net operating loss realized in one of the Company’s fiscal 2008, 2009 or 2010 years to be carried back up to five years (previously limited to a two-year carryback). The Company has elected to carry back its fiscal 2009 net operating loss. This resulted in a benefit from income taxes of $198.8 million during the six-month period ended March 31, 2010.

The Company had income taxes receivable of $29.4 million and $293.1 million at March 31, 2010 and September 30, 2009, respectively. During the six months ended March 31, 2010, the Company received income tax refunds totaling $465.4 million which resulted from tax losses generated in fiscal 2008 and 2009. Of this total, $352.4 million was received in the three months ended March 31, 2010. The income taxes receivable at March 31, 2010 relates to additional federal and state income tax refunds the Company expects to receive.

At March 31, 2010 and September 30, 2009, the Company had net deferred income tax assets of $894.1 million and $1,073.9 million, respectively, offset by valuation allowances of $894.1 million and $1,073.9 million, respectively. Tax benefits for state net operating loss carryforwards of $81.4 million that expire (beginning at various times depending on the tax jurisdiction) from fiscal 2013 to fiscal 2029 are included in the amounts. The Company assesses, on a quarterly basis, the realizability of its deferred tax assets and records a valuation allowance sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position. Changes in existing tax laws also affect actual tax results and the valuation of deferred tax assets over time.

The total amount of unrecognized tax benefits (which includes interest, penalties, and the tax benefit relating to the deductibility of interest and state income taxes) was $72.6 million and $24.0 million as of March 31, 2010 and September 30, 2009, respectively. The increase resulted from the Company’s election to carryback its fiscal 2009 net operating loss to fiscal 2004 and 2005, thereby fully utilizing the net operating loss which existed at September 30, 2009. It is reasonably possible that, within the next 12 months, the amount of unrecognized tax benefits may decrease as much as $49.7 million as a result of a ruling request filed by the Company with the Internal Revenue Service (IRS) concerning capitalization of inventory costs. If the IRS rules favorably on the ruling request, the Company’s unrecognized tax benefits would be reduced, resulting in a benefit from income taxes in the consolidated statement of operations. The Company classifies interest and penalties on income taxes as income tax expense.

The Company is subject to federal income tax and to income tax in multiple states. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2004 through 2010. The Company is currently being audited by various states.

-17-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE J — 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 and six months ended March 31, 2010 and 2009. For the three and six months ended March 31, 2010, options to purchase 9.7 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. For the three and six months ended March 31, 2009, 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.


	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2010		2009			2010		2009
			(In millions)
Numerator:
Net income (loss)	$	11.4	$	(108.6	)	$	203.4	$	(171.1	)
Effect of dilutive securities:
Interest expense and amortization of issuance costs associated with convertible senior notes		—		—			14.8		—

Numerator for diluted earnings (loss) per share after assumed conversions	$	11.4	$	(108.6	)	$	218.2	$	(171.1	)


Denominator:
Denominator for basic earnings (loss) per share— weighted average common shares		318.1		316.8			317.9		316.7
Effect of dilutive securities:
Employee stock options		0.9		—			0.5		—
Convertible senior notes		—		—			38.3		—

Denominator for diluted earnings (loss) per share— adjusted weighted average common shares		319.0		316.8			356.7		316.7

NOTE K — STOCKHOLDERS’ EQUITY

The Company has an automatically effective universal shelf registration statement filed with the SEC in September 2009, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

In November 2009, the Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock. The authorization is effective from December 1, 2009 to November 30, 2010. All of the $100 million authorization was remaining at March 31, 2010.

During the three months ended March 31, 2010, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, which was paid on February 25, 2010 to stockholders of record on February 16, 2010. In April 2010, the Board of Directors approved a quarterly cash dividend of $0.0375 per common share, payable on May 24, 2010 to stockholders of record on May 14, 2010. Quarterly cash dividends of $0.0375 per common share were declared in the comparable quarters of fiscal 2009.

In January 2010, the Company’s stockholders did not approve its Section 382 rights agreement; therefore, the rights agreement will expire by its terms on August 19, 2010 unless earlier terminated by the Board of Directors.

-18-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE L — COMMITMENTS AND CONTINGENCIES

Warranty Claims

The Company typically provides its homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems, and a one-year limited warranty on other construction components. 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.

At March 31, 2010, the Company had liabilities of $4.1 million for the remaining repair costs of homes in its South Florida and Louisiana markets constructed during 2005 through 2007 which contain or are suspected to contain allegedly defective drywall manufactured in China (Chinese Drywall) that may be responsible for accelerated corrosion of certain metals in the home. The Company first learned of this potential issue during fiscal 2009 through customer inquiries. The Company has identified approximately 90 homes which contain or are suspected to contain Chinese Drywall through a review of the supply channel for its homes constructed in these markets and of the warranty claims received in these markets as well as testing of specific homes. Through March 31, 2010, the Company has spent approximately $3.2 million to remediate these homes. The Company is continuing its investigation to determine if there are additional homes with the Chinese Drywall in these markets, which if found, would likely require the Company to further increase its warranty reserve for this matter in the future. The remaining costs accrued to complete this remediation are based on the Company’s estimate of future repair costs. If the actual costs to remediate the homes differ from the estimated costs, it may require the Company to revise its warranty estimate.

Through investigation of its supply channels in other markets, the Company has not identified any homes suspected of containing the Chinese Drywall outside of its Florida and Louisiana markets. As of March 31, 2010, the Company has been named as a defendant in several lawsuits in Louisiana and Florida pertaining to Chinese Drywall. As these actions are still in their early stages, the Company is unable to express an opinion as to the amount of damages, if any. While the Company will seek reimbursement for these remediation costs from various sources, it has not recorded a receivable for potential recoveries as of March 31, 2010 given the early stage of this matter.

Changes in the Company’s warranty liability during the three and six-month periods ended March 31, 2010 and 2009 were as follows:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
				(In millions)
Warranty liability, beginning of period	$	54.4		$	73.4		$	59.6		$	83.4
Warranties issued		4.1			3.7			9.2			7.9
Changes in liability for pre-existing warranties		(2.8	)		(4.5	)		(7.2	)		(11.5	)
Settlements made		(6.1	)		(5.6	)		(12.0	)		(12.8	)

Warranty liability, end of period	$	49.6		$	67.0		$	49.6		$	67.0

Insurance and Legal Claims

The Company has been named as defendant in various claims, complaints and other legal actions including construction defect claims on closed homes and other claims and lawsuits incurred in the ordinary course of business, including employment matters, personal injury claims, land development issues, contract disputes and claims related to its mortgage activities. The Company has established reserves for these contingencies, based on the expected costs of the 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 construction defect claims incurred but not yet reported. These reserve estimates are subject to ongoing revision as the circumstances of individual pending claims and historical

-19-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

data and trends change. Adjustments to estimated reserves are recorded in the accounting period in which the change in estimate occurs. The Company’s liabilities for these items were $546.9 million and $534.0 million at March 31, 2010 and September 30, 2009, respectively, and are included in homebuilding accrued expenses and other liabilities in the consolidated balance sheets. Related to the contingencies for construction defect claims and estimates of construction defect claims incurred but not yet reported, and other legal claims and lawsuits incurred in the ordinary course of business, the Company estimates and records insurance receivables for these matters under applicable insurance policies when recovery is probable. Additionally, the Company may have the ability to recover a portion of its legal expenses from its subcontractors when the Company has been named as an additional insured on their insurance policies. Estimates of the Company’s insurance receivables related to these matters totaled $242.5 million and $234.6 million at March 31, 2010 and September 30, 2009, respectively, and are included in homebuilding other assets in the consolidated balance sheets. Expenses related to these items were approximately $21.3 million and $18.5 million in the six months ended March 31, 2010 and 2009, respectively.

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. To the extent the liability arising from the ultimate resolution of any matter exceeds management’s estimates reflected in the recorded reserves relating to these matters, the Company would incur additional charges that could be significant.

Land and Lot Option Purchase Contracts

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, 2010, the Company had total deposits of $8.7 million, consisting of cash deposits of $7.0 million, promissory notes of $1.4 million, and letters of credit and surety bonds of $0.3 million, to purchase land and lots with a total remaining purchase price of $742.2 million. Within the land and lot option purchase contracts at March 31, 2010, there were a limited number of contracts subject to specific performance clauses which may require the Company to purchase the land or lots upon the land sellers meeting their obligations. The remaining purchase price of these specific performance contracts is not material. 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.

Other Commitments

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, 2010, outstanding standby letters of credit were $47.6 million, all of which were cash collateralized, and surety bonds were $955.3 million. The Company has secured letter of credit agreements with three banks that require it to deposit cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the issuing banks. At March 31, 2010 and September 30, 2009, the amount of cash restricted for this purpose totaled $48.6 million and $53.3 million, respectively, and is included in homebuilding restricted cash on the Company’s consolidated balance sheets.

-20-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE M — OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES

The Company’s homebuilding other assets were as follows:


	March 31,		September 30,
	2010		2009
	(In millions)
Insurance receivables	$	242.5	$	234.6
Accounts and notes receivable		24.4		50.7
Prepaid assets (1)		24.5		39.0
Other assets		122.9		108.7

	$	414.3	$	433.0


(1)		The balance of prepaid assets at September 30, 2009 has been retrospectively adjusted for the change in accounting for convertible debt as described in Note A.

The Company’s homebuilding accrued expenses and other liabilities were as follows:


	March 31,		September 30,
	2010		2009
	(In millions)
Construction defect and other litigation liabilities	$	546.9	$	534.0
Employee compensation and related liabilities		95.7		98.5
Warranty liability		49.6		59.6
Accrued interest		46.8		53.5
Federal and state income tax liabilities		74.0		24.0
Other liabilities		136.4		162.4

	$	949.4	$	932.0

NOTE N — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB revised the authoritative guidance for accounting for transfers of financial assets, which requires enhanced disclosures regarding transfers of financial assets, including securitization transactions, and continuing exposure to the related risks. The guidance eliminates the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. The guidance is effective for the Company beginning October 1, 2010. The Company is currently evaluating the impact of adopting this guidance; however, it is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2009, the FASB revised the authoritative guidance for consolidating variable interest entities, which changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The guidance is effective for the Company beginning October 1, 2010. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. This guidance was effective for the Company in the current quarter, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, which is related to disclosure only, will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

-21-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE O — SEGMENT INFORMATION

The Company’s 31 homebuilding operating divisions and its financial services operation are its operating segments. The homebuilding operating segments are aggregated into six reporting segments and the financial services operating segment is its own reporting segment. The Company’s reportable homebuilding segments are: East, Midwest, Southeast, South Central, Southwest and West. These reporting segments have homebuilding operations located in the following states:


East:		Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia

Midwest:		Colorado, Illinois, Minnesota and Wisconsin

Southeast:		Alabama, Florida and Georgia

South Central:		Louisiana, Oklahoma and Texas

Southwest:		Arizona and New Mexico

West:		California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington

Homebuilding is the Company’s core business, generating 98% of consolidated revenues during the six months ended March 31, 2010 and 2009. The Company’s homebuilding segments are primarily engaged in the acquisition and development of land and the construction and sale of residential homes on the land, in 26 states and 71 markets in the United States. The homebuilding segments generate most of their revenues from the sale of completed homes, with a lesser amount from the sale of land and lots.

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

-22-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

The accounting policies of the reporting segments are described throughout Note A included in the Company’s current report on Form 8-K dated February 8, 2010, which updated the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2009.


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
				(In millions)
Revenues
Homebuilding revenues:
East	$	103.9		$	81.0		$	231.2		$	156.9
Midwest		71.2			61.7			159.9			133.4
Southeast		145.5			120.6			327.8			267.7
South Central		282.7			221.9			640.5			476.9
Southwest		72.5			82.7			167.8			220.3
West		221.0			207.4			478.5			420.4

Total homebuilding revenues	$	896.8		$	775.3		$	2,005.7		$	1,675.6

Financial services revenues		16.7			2.7			39.9			20.4


Consolidated revenues	$	913.5		$	778.0		$	2,045.6		$	1,696.0


Inventory Impairments
East	$	2.0		$	1.4		$	2.0		$	5.6
Midwest		—			9.3			—			13.1
Southeast		0.3			2.2			1.6			6.0
South Central		—			2.3			0.2			2.2
Southwest		—			5.8			0.3			7.8
West		—			24.0			—			65.4

Total inventory impairments	$	2.3		$	45.0		$	4.1		$	100.1


Income (Loss) Before Income Taxes (1)
Homebuilding income (loss) before income taxes:
East	$	(4.3	)	$	(5.8	)	$	(2.3	)	$	(16.7	)
Midwest		(4.4	)		(21.2	)		(4.8	)		(32.8	)
Southeast		(2.8	)		(12.4	)		(1.8	)		(17.5	)
South Central		16.2			1.3			41.6			13.1
Southwest		0.3			(12.2	)		5.0			(9.2	)
West		6.1			(40.3	)		9.5			(85.9	)

Total homebuilding income (loss) before income taxes	$	11.1		$	(90.6	)	$	47.2		$	(149.0	)

Financial services income (loss) before income taxes		1.0			(12.4	)		7.6			(15.3	)


Consolidated income (loss) before income taxes	$	12.1		$	(103.0	)	$	54.8		$	(164.3	)

-23-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010


	March 31,		September 30,
	2010		2009
	(In millions)
Homebuilding Inventories (2)
East	$	543.1	$	535.4
Midwest		355.6		371.1
Southeast		704.9		656.6
South Central		890.8		852.8
Southwest		255.0		255.7
West		876.9		842.5
Corporate and unallocated (3)(4)		137.2		152.6

Total homebuilding inventory	$	3,763.5	$	3,666.7


(1)		Expenses maintained at the corporate level are allocated to each segment based on the segment’s average inventory. These expenses consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating the Company’s corporate office.

(2)		Homebuilding inventories are the only assets included in the measure of segment assets used by the Company’s chief operating decision maker, its CEO.

(3)		Corporate and unallocated consists primarily of capitalized interest and property taxes.

(4)		Homebuilding inventories at September 30, 2009 have been retrospectively adjusted for the change in accounting for convertible debt as described in Note A.

-24-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION

All of the Company’s senior, convertible senior and senior subordinated notes 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 insignificant subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

Consolidating Balance Sheet
March 31, 2010


	D.R.		Guarantor		Non-Guarantor
	Horton, Inc.		Subsidiaries		Subsidiaries		Eliminations			Total
					(In millions)
ASSETS
Cash and cash equivalents	$	1,558.8	$	52.6	$	28.2	$	—		$	1,639.6
Marketable securities		198.7		—		—		—			198.7
Restricted cash		49.7		0.6		—		—			50.3
Investments in subsidiaries		1,254.9		—		—		(1,254.9	)		—
Inventories		1,164.0		2,573.2		26.3		—			3,763.5
Income taxes receivable		29.4		—		—		—			29.4
Property and equipment, net		17.5		20.2		19.4		—			57.1
Other assets		91.2		284.0		92.5		—			467.7
Mortgage loans held for sale		—		—		237.1		—			237.1
Goodwill		—		15.9		—		—			15.9
Intercompany receivables		1,130.2		—		—		(1,130.2	)		—

Total Assets	$	5,494.4	$	2,946.5	$	403.5	$	(2,385.1	)	$	6,459.3


LIABILITIES & EQUITY
Accounts payable and other liabilities	$	359.8	$	747.5	$	128.6	$	—		$	1,235.9
Intercompany payables		—		1,094.0		36.2		(1,130.2	)		—
Notes payable		2,550.1		1.7		77.7		—			2,629.5

Total Liabilities		2,909.9		1,843.2		242.5		(1,130.2	)		3,865.4

Total stockholders’ equity		2,584.5		1,103.3		151.6		(1,254.9	)		2,584.5
Noncontrolling interests		—		—		9.4		—			9.4

Total Equity		2,584.5		1,103.3		161.0		(1,254.9	)		2,593.9

Total Liabilities & Equity	$	5,494.4	$	2,946.5	$	403.5	$	(2,385.1	)	$	6,459.3

-25-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
March 31, 2010

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Balance Sheet
September 30, 2009


	D.R.		Guarantor		Non-Guarantor
	Horton, Inc.		Subsidiaries		Subsidiaries		Eliminations			Total
	(In millions)
ASSETS
Cash and cash equivalents	$	1,871.2	$	48.3	$	37.8	$	—		$	1,957.3
Restricted cash		54.5		0.7		—		—			55.2
Investments in subsidiaries		1,033.7		—		—		(1,033.7	)		—
Inventories		1,118.2		2,521.7		26.8		—			3,666.7
Income taxes receivable		293.1		—		—		—			293.1
Property and equipment, net		18.1		19.7		20.0		—			57.8
Other assets		116.6		275.3		98.1		—			490.0
Mortgage loans held for sale		—		—		220.8		—			220.8
Goodwill		—		15.9		—		—			15.9
Intercompany receivables		1,280.0		—		—		(1,280.0	)		—

Total Assets	$	5,785.4	$	2,881.6	$	403.5	$	(2,313.7	)	$	6,756.8


LIABILITIES & EQUITY
Accounts payable and other liabilities	$	318.1	$	747.1	$	145.7	$	—		$	1,210.9
Intercompany payables		—		1,243.9		36.1		(1,280.0	)		—
Notes payable		3,075.5		1.1		68.7		—			3,145.3

Total Liabilities		3,393.6		1,992.1		250.5		(1,280.0	)		4,356.2

Total stockholders’ equity		2,391.8		889.5		144.2		(1,033.7	)		2,391.8
Noncontrolling interests		—		—		8.8		—			8.8

Total Equity		2,391.8		889.5		153.0		(1,033.7	)		2,400.6

Total Liabilities & Equity	$	5,785.4	$	2,881.6	$	403.5	$	(2,313.7	)	$	6,756.8

-26-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Three Months Ended March 31, 2010


	D.R.			Guarantor			Non-Guarantor
	Horton, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
	(In millions)
Homebuilding:
Revenues	$	218.8		$	676.2		$	1.8		$	—		$	896.8
Cost of sales		173.3			563.3			1.0			—			737.6

Gross profit		45.5			112.9			0.8			—			159.2
Selling, general and administrative expense		54.2			74.5			—			—			128.7
Equity in (income) of subsidiaries		(42.5	)		—			—			42.5			—
Interest expense		22.7			—			—			—			22.7
Other (income)		(1.0	)		(1.4	)		(0.9	)		—			(3.3	)

		12.1			39.8			1.7			(42.5	)		11.1


Financial Services:
Revenues		—			—			16.7			—			16.7
General and administrative expense		—			—			17.4			—			17.4
Interest expense		—			—			0.2			—			0.2
Interest and other (income)		—			—			(1.9	)		—			(1.9	)

		—			—			1.0			—			1.0

Income before income taxes		12.1			39.8			2.7			(42.5	)		12.1
Provision for income taxes		0.7			0.5			—			(0.5	)		0.7

Net income	$	11.4		$	39.3		$	2.7		$	(42.0	)	$	11.4

-27-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Six Months Ended March 31, 2010


	D.R.			Guarantor			Non-Guarantor
	Horton, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
							(In millions)
Homebuilding:
Revenues	$	490.4		$	1,512.0		$	3.3		$	—		$	2,005.7
Cost of sales		393.3			1,263.8			1.1			—			1,658.2

Gross profit		97.1			248.2			2.2			—			347.5
Selling, general and administrative expense		105.4			147.1			4.6			—			257.1
Equity in (income) of subsidiaries		(108.7	)		—			—			108.7			—
Interest expense		49.6			—			—			—			49.6
Gain on early retirement of debt, net		(1.6	)		—			—			—			(1.6	)
Other (income)		(2.4	)		(0.5	)		(1.9	)		—			(4.8	)

		54.8			101.6			(0.5	)		(108.7	)		47.2


Financial Services:
Revenues		—			—			39.9			—			39.9
General and administrative expense		—			—			36.0			—			36.0
Interest expense		—			—			0.7			—			0.7
Interest and other (income)		—			—			(4.4	)		—			(4.4	)

		—			—			7.6			—			7.6

Income before income taxes		54.8			101.6			7.1			(108.7	)		54.8
Benefit from income taxes		(148.6	)		(111.9	)		(3.0	)		114.9			(148.6	)

Net income	$	203.4		$	213.5		$	10.1		$	(223.6	)	$	203.4

-28-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Three Months Ended March 31, 2009


	D.R.			Guarantor			Non-Guarantor
	Horton, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
							(In millions)
Homebuilding:
Revenues	$	189.9		$	581.7		$	3.7		$	—		$	775.3
Cost of sales		167.8			549.3			3.2			—			720.3

Gross profit		22.1			32.4			0.5			—			55.0
Selling, general and administrative expense		57.3			68.2			1.4			—			126.9
Equity in loss of subsidiaries		47.7			—			—			(47.7	)		—
Interest expense		23.1			—			—			—			23.1
Gain on early retirement of debt, net		(2.2	)		—			—			—			(2.2	)
Other (income)		(0.8	)		(0.7	)		(0.7	)		—			(2.2	)

		(103.0	)		(35.1	)		(0.2	)		47.7			(90.6	)


Financial Services:
Revenues		—			—			2.7			—			2.7
General and administrative expense		—			—			17.2			—			17.2
Interest expense		—			—			0.3			—			0.3
Interest and other (income)		—			—			(2.4	)		—			(2.4	)

		—			—			(12.4	)		—			(12.4	)

Loss before income taxes		(103.0	)		(35.1	)		(12.6	)		47.7			(103.0	)
Provision for income taxes		5.6			4.2			0.1			(4.3	)		5.6

Net loss	$	(108.6	)	$	(39.3	)	$	(12.7	)	$	52.0		$	(108.6	)

-29-

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Operations
Six Months Ended March 31, 2009


	D.R.			Guarantor			Non-Guarantor
	Horton, Inc.			Subsidiaries			Subsidiaries			Eliminations			Total
							(In millions)
Homebuilding:
Revenues	$	370.2		$	1,296.1		$	9.3		$	—		$	1,675.6
Cost of sales		353.0			1,175.2			8.6			—			1,536.8

Gross profit		17.2			120.9			0.7			—			138.8
Selling, general and administrative expense		102.1			149.0			2.8			—			253.9
Equity in loss of subsidiaries		43.4			—			—			(43.4	)		—
Interest expense		48.7			—			—			—			48.7
Gain on early retirement of debt, net		(8.4	)		—			—			—			(8.4	)
Other (income) expense		(4.3	)		0.3			(2.4	)		—			(6.4	)

		(164.3	)		(28.4	)		0.3			43.4			(149.0	)


Financial Services:
Revenues		—			—			20.4			—			20.4
General and administrative expense		—			—			40.4			—			40.4
Interest expense		—			—			1.0			—			1.0
Interest and other (income)		—			—			(5.7	)		—			(5.7	)

		—			—			(15.3	)		—			(15.3	)

Loss before income taxes		(164.3	)		(28.4	)		(15.0	)		43.4			(164.3	)
Provision for income taxes		6.8			5.2			0.1			(5.3	)		6.8

Net loss	$	(171.1	)	$	(33.6	)	$	(15.1	)	$	48.7		$	(171.1	)

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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Cash Flows
Six Months Ended March 31, 2010


	D.R.			Guarantor			Non-Guarantor
	Horton, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
							(In millions)
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities	$	285.9		$	157.7		$	(15.8	)	$	—	$	427.8

INVESTING ACTIVITIES
Purchases of property and equipment		(3.6	)		(3.7	)		(0.4	)		—		(7.7	)
Purchases of marketable securities, available-for-sale		(199.1	)		—			—			—		(199.1	)
Decrease in restricted cash		4.8			0.1			—			—		4.9

Net cash used in investing activities		(197.9	)		(3.6	)		(0.4	)		—		(201.9	)

FINANCING ACTIVITIES
Net change in notes payable		(535.7	)		—			9.0			—		(526.7	)
Net change in intercompany receivables/payables		152.2			(149.8	)		(2.4	)		—		—
Proceeds from stock associated with certain employee benefit plans		4.0			—			—			—		4.0
Income tax benefit from stock option exercises		2.9			—			—			—		2.9
Cash dividends paid		(23.8	)		—			—			—		(23.8	)

Net cash (used in) provided by financing activities		(400.4	)		(149.8	)		6.6			—		(543.6	)

(Decrease) increase in cash and cash equivalents		(312.4	)		4.3			(9.6	)		—		(317.7	)
Cash and cash equivalents at beginning of period		1,871.2			48.3			37.8			—		1,957.3

Cash and cash equivalents at end of period	$	1,558.8		$	52.6		$	28.2		$	—	$	1,639.6

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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2010

NOTE P — SUPPLEMENTAL GUARANTOR INFORMATION — (Continued)

Consolidating Statement of Cash Flows
Six Months Ended March 31, 2009


	D.R.			Guarantor			Non-Guarantor
	Horton, Inc.			Subsidiaries			Subsidiaries			Eliminations		Total
							(In millions)
OPERATING ACTIVITIES
Net cash provided by operating activities	$	597.7		$	201.0		$	179.2		$	—	$	977.9

INVESTING ACTIVITIES
Purchases of property and equipment		(2.5	)		(2.0	)		—			—		(4.5	)
Decrease in restricted cash		0.4			0.3			—			—		0.7

Net cash used in investing activities		(2.1	)		(1.7	)		—			—		(3.8	)

FINANCING ACTIVITIES
Net change in notes payable		(664.8	)		—			(159.1	)		—		(823.9	)
Net change in intercompany receivables/payables		281.5			(259.7	)		(21.8	)		—		—
Proceeds from stock associated with certain employee benefit plans		1.3			—			—			—		1.3
Income tax benefit from stock option exercises		0.2			—			—			—		0.2
Cash dividends paid		(23.8	)		—			—			—		(23.8	)

Net cash used in financing activities		(405.6	)		(259.7	)		(180.9	)		—		(846.2	)

Increase (decrease) in cash and cash equivalents		190.0			(60.4	)		(1.7	)		—		127.9
Cash and cash equivalents at beginning of period		1,261.5			90.1			35.7			—		1,387.3

Cash and cash equivalents at end of period	$	1,451.5		$	29.7		$	34.0		$	—	$	1,515.2

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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 current report on Form 8-K dated February 8, 2010, which updated our annual report on Form 10-K for the fiscal year ended September 30, 2009. 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 one of the largest homebuilding companies in the United States, constructing and selling single-family housing through our operating divisions in 26 states and 71 markets as of March 31, 2010, 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 $700,000, with an average closing price of $204,600 during the six months ended March 31, 2010. Approximately 84% and 82% of home sales revenues were generated from the sale of single-family detached homes in the six months ended March 31, 2010 and 2009, 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 financing and title agency services to homebuyers in many of our homebuilding markets. DHI Mortgage, our wholly-owned subsidiary, provides mortgage financing services principally to the purchasers of homes we build. We generally do not retain or service the mortgages we originate but, rather, seek to sell the mortgages and related servicing rights to third-party purchasers. DHI Mortgage originates loans in accordance with purchaser guidelines and historically has sold substantially all of its mortgage production within 30 days of origination. 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.

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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 divisions are aggregated into six reporting segments, which comprise the markets below. Our financial statements contain additional information regarding segment performance.


State	Reporting Region/Market	State	Reporting Region/Market

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

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OVERVIEW

During the slowdown in the homebuilding industry that began in 2006, the factors hurting demand for new homes have been pervasive across the United States. These factors have been persistent and include high inventory levels of available homes, elevated sales order cancellation rates, low sales absorption rates and overall weak consumer confidence. The effects of these factors have been magnified by reduced availability of credit in the mortgage markets and high levels of home foreclosures. High levels of foreclosures not only contribute to additional inventory available for sale, but also reduce appraisal valuations for new homes, potentially resulting in lower sales prices. The overall economy remains weak, with a high level of unemployment, substantially reduced consumer spending and low levels of consumer confidence. The turmoil in the housing market has resulted in substantial price reductions in our homes during the course of the slowdown.

Although we expect generally challenging conditions will persist for some time, recently there has been an indication of some stabilization of housing market conditions. The factors supporting the improved conditions include increased levels of affordability resulting from lower home sales prices, recent declines in the number of new homes available for sale, a low mortgage interest rate environment and the federal government’s monetary and fiscal policies and programs, including the homebuyer federal tax credit, which have encouraged home ownership and home purchases. These stabilizing housing market conditions benefited our strategy of starting construction on more unsold homes to continue our focus of providing affordable housing to the first-time and move-up homebuyer through existing and new communities. These factors and actions led to an improvement in our results over the prior year.

During the three and six-month periods ended March 31, 2010, our net sales orders were 55% and 51% higher than the comparable periods in the prior year. As a percentage of home sales revenues, gross profit from home sales increased 470 and 300 basis points, to 18.0% and 17.5%, respectively, from the comparable periods in the prior year. Pre-tax income for the three and six months ended March 31, 2010 was $12.1 million and $54.8 million, respectively, compared to pre-tax losses of $103.0 million and $164.3 million, respectively, in the comparable periods of the prior year.

Our results for the remainder of the fiscal year will be dependent on the levels of sales we achieve in the remainder of the spring and summer selling seasons and the level of gross profit on those home sales. Future sales and gross profit could be severely impacted by prolonged weakness in the economy and continued high levels of unemployment, the scheduled expiration of the homebuyer federal tax credit, a significant increase in mortgage interest rates or further tightening of mortgage lending standards.

We remain cautious regarding our outlook for the homebuilding industry. Although the improvements in our operating performance and recent signs of stabilization of certain market conditions have been encouraging, the timing of a sustainable recovery remains unclear. Due to the uncertainty surrounding market conditions, we have continued to evaluate our homebuilding and financial services assets for recoverability. Excluding cash and marketable securities, our assets whose recoverability is most impacted by market conditions include inventory; earnest money deposits and pre-acquisition costs related to land and lot option contracts; tax assets, both on amounts reflected as deferred and as a receivable; and owned mortgage loans. These assets collectively represent 90% of our total non-cash assets at March 31, 2010. Our evaluations reflected our expectation of continued challenges in the homebuilding industry, while also considering the improvements we achieved in our operating results during the three and six months ended March 31, 2010. Based on our evaluations, during the three months ended March 31, 2010, we recorded inventory impairment charges of $2.3 million and recorded additional reserves for losses of $5.7 million associated with mortgage loans held in portfolio and the limited recourse provisions on previously sold mortgage loans. The declines in inventory impairment charges and write-offs of earnest money deposits and pre-acquisition costs from prior years reflect the improvement in gross profit from home closings experienced during the three-month period ended March 31, 2010. We will evaluate whether further impairment charges, valuation adjustments or write-offs are necessary on these assets in the coming quarters. Additional discussion of these evaluations and charges is presented below.

STRATEGY

We believe the long-term fundamentals which support housing demand, namely population growth and household formation, remain positive. In the near term, however, it is not possible to predict if current homebuilding industry conditions will continue to stabilize or if they will deteriorate from these levels. During the downturn we

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have increased our cash balances by generating substantial cash flow from operations, primarily through reductions in inventory and mortgage loans held for sale, the receipt of tax refunds and by accessing the capital markets. While we will continue to conservatively manage our business, our increased liquidity provides us with flexibility in determining the appropriate operating strategy for each of our communities and markets to strike the best balance between cash flow generation and potential profit. With this flexibility, we are committed to continuing the following initiatives related to our operating strategy in the current homebuilding business environment:

	•		Maintaining a strong cash balance and overall liquidity position.

	•		Managing the sales prices and level of sales incentives on our homes as necessary to optimize the balance of sales volumes, returns and cash flows.

	•		Entering into new finished lot option contracts to purchase finished lots in an attempt to increase sales volumes and profitability.

	•		Renegotiating existing finished lot option contracts to reduce our lot costs and better match the scheduled purchases with new home demand in the community.

	•		Limiting land development spending or suspending development in communities that require substantial investments of time or capital resources.

	•		Managing our inventory of homes under construction by starting construction on unsold homes to take advantage of market opportunities, while monitoring the aging of unsold homes and aggressively marketing unsold, completed homes in inventory.

	•		Decreasing the cost of goods purchased from both vendors and subcontractors.

	•		Modifying product offerings to provide more affordable homes.

	•		Controlling our SG&A infrastructure to match production levels.

These initiatives allowed us to generate significant cash flows from operations during the downturn and achieve improved operating results during the three and six months ended March 31, 2010. Although we cannot provide any assurances that these initiatives will be successful in the future, we expect that our operating strategy will allow us to continue to maintain a strong balance sheet and liquidity position in fiscal 2010.

KEY RESULTS

Key financial results as of and for the three months ended March 31, 2010, as compared to the same period of 2009, were as follows:

Homebuilding Operations:

	•		Homebuilding revenues increased 16% to $896.8 million.

	•		Homes closed increased 19% to 4,260 homes and the average selling price of those homes decreased 2% to $210,000.

	•		Net sales orders increased 55% to 6,438 homes.

	•		Sales order backlog increased 36% to $1.3 billion.

	•		Home sales gross margins increased 470 basis points to 18.0%.

	•		Inventory impairments and land option cost write-offs were $2.4 million, compared to $48.1 million.

	•		Homebuilding SG&A expenses increased 1% to $128.7 million, but decreased as a percentage of homebuilding revenues by 200 basis points to 14.4%.

	•		Homebuilding pre-tax income was $11.1 million, compared to a pre-tax loss of $90.6 million.

	•		Homes in inventory increased by 3,600 to 13,900.

	•		Owned lots declined by 6,500 to 88,500.

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	•		Homebuilding debt decreased by $315.8 million to $2.6 billion.

	•		Net homebuilding debt to total capital decreased 1,200 basis points to 22.2%, and gross homebuilding debt to total capital decreased 230 basis points to 49.6%.

	•		Homebuilding cash and marketable securities totaled $1.8 billion, compared to $1.5 billion.

Financial Services Operations:

	•		Total financial services revenues, net of recourse and reinsurance expenses, increased to $16.7 million from $2.7 million.

	•		Financial services pre-tax income was $1.0 million, compared to a pre-tax loss of $12.4 million.

	•		Financial services debt increased by $33.3 million to $77.7 million.

Consolidated Results:

	•		Diluted earnings per share was $0.04, compared to net loss per share of $0.34.

	•		Net income was $11.4 million, compared to net loss of $108.6 million.

	•		Total equity decreased 3% to $2.59 billion, from $2.66 billion.

	•		Net cash provided by operations was $207.8 million, compared to $160.9 million.

Key financial results for the six months ended March 31, 2010, as compared to the same period of 2009, were as follows:

Homebuilding Operations:

	•		Homebuilding revenues increased 20% to $2.0 billion.

	•		Homes closed increased 28% to 9,789 homes while the average selling price of those homes decreased 5% to $204,600.

	•		Net sales orders increased 51% to 10,475 homes.

	•		Home sales gross margins increased 300 basis points to 17.5%.

	•		Inventory impairments and land option cost write-offs were $3.6 million, compared to $104.4 million.

	•		Homebuilding SG&A expenses increased 1% to $257.1 million, but decreased as a percentage of homebuilding revenues by 240 basis points to 12.8%.

	•		Homebuilding pre-tax income was $47.2 million, compared to a pre-tax loss of $149.0 million.

Financial Services Operations:

	•		Total financial services revenues, net of recourse and reinsurance expenses, increased to $39.9 million from $20.4 million.

	•		Financial services pre-tax income was $7.6 million, compared to a pre-tax loss of $15.3 million.

Consolidated Results:

	•		Diluted earnings per share was $0.61, compared to net loss per share of $0.54.

	•		Net income was $203.4 million, compared to net loss of $171.1 million.

	•		Net cash provided by operations was $427.8 million, compared to $977.9 million.

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RESULTS OF OPERATIONS — HOMEBUILDING

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three and six months ended March 31, 2010 and 2009.


	Net Sales Orders (1)
	Three Months Ended March 31,
	Net Homes Sold							Value (In millions)							Average Selling Price
	2010		2009		% Change			2010		2009		% Change			2010		2009		% Change
East		673		289		133	%	$	155.8	$	67.3		132	%	$	231,500	$	232,900		(1	)%
Midwest		336		300		12	%		96.2		79.7		21	%		286,300		265,700		8	%
Southeast		1,300		716		82	%		239.4		130.6		83	%		184,200		182,400		1	%
South Central		2,515		1,488		69	%		436.1		256.8		70	%		173,400		172,600		—	%
Southwest		620		520		19	%		106.8		87.2		22	%		172,300		167,700		3	%
West		994		847		17	%		283.3		222.9		27	%		285,000		263,200		8	%

		6,438		4,160		55	%	$	1,317.6	$	844.5		56	%	$	204,700	$	203,000		1	%


	Six Months Ended March 31,
	Net Homes Sold							Value (In millions)							Average Selling Price
	2010		2009		% Change			2010		2009		% Change			2010		2009		% Change
East		1,070		542		97	%	$	253.0	$	123.6		105	%	$	236,400	$	228,000		4	%
Midwest		571		465		23	%		161.9		124.5		30	%		283,500		267,700		6	%
Southeast		2,115		1,301		63	%		393.0		233.6		68	%		185,800		179,600		3	%
South Central		3,987		2,474		61	%		691.7		430.0		61	%		173,500		173,800		—	%
Southwest		1,049		872		20	%		182.4		146.4		25	%		173,900		167,900		4	%
West		1,683		1,283		31	%		485.7		353.9		37	%		288,600		275,800		5	%

		10,475		6,937		51	%	$	2,167.7	$	1,412.0		54	%	$	206,900	$	203,500		2	%


	Sales Order Cancellations
	Three Months Ended March 31,
	Cancelled Sales Orders				Value (In millions)				Cancellation Rate (2)
	2010		2009		2010		2009		2010			2009
East		128		138	$	29.4	$	32.5		16	%		32	%
Midwest		67		53		18.1		14.2		17	%		15	%
Southeast		325		307		57.3		59.4		20	%		30	%
South Central		737		812		123.0		136.5		23	%		35	%
Southwest		227		212		38.5		39.1		27	%		29	%
West		191		279		54.5		82.3		16	%		25	%

		1,675		1,801	$	320.8	$	364.0		21	%		30	%


	Six Months Ended March 31,
	Cancelled Sales Orders				Value (In millions)				Cancellation Rate (2)
	2010		2009		2010		2009		2010			2009
East		247		247	$	57.5	$	61.1		19	%		31	%
Midwest		119		136		33.7		37.5		17	%		23	%
Southeast		600		606		103.7		118.9		22	%		32	%
South Central		1,343		1,484		221.9		249.0		25	%		37	%
Southwest		397		439		66.7		85.1		27	%		33	%
West		368		572		106.0		176.7		18	%		31	%

		3,074		3,484	$	589.5	$	728.3		23	%		33	%


(1)		Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.

(2)		Cancellation rate represents the number of cancelled sales orders divided by gross sales orders.

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Net Sales Orders

The value of net sales orders increased 56%, to $1,317.6 million (6,438 homes) for the three months ended March 31, 2010, from $844.5 million (4,160 homes) for the same period of 2009. The value of net sales orders increased 54%, to $2,167.7 million (10,475 homes) for the six months ended March 31, 2010, from $1,412.0 million (6,937 homes) for the same period of 2009. The number of net sales orders increased 55% and 51% for the three and six-month periods ended March 31, 2010, respectively. These results reflect significant improvement over the prior year and suggest the severe declines in our net sales orders experienced in recent years may be moderating. These results were impacted by increased levels of affordability resulting from lower home sales prices, recent declines in the number of new homes available for sale, a low mortgage interest rate environment, and the federal government’s monetary and fiscal policies and programs, including the homebuyer federal tax credit, which may have served to accelerate sales demand. The largest percentage increases in net sales orders during the three and six-month periods occurred in our East, Southeast and South Central regions resulting from new communities in the Carolinas, Florida and Texas, as well as lower cancellation rates achieved in all regions. Our sales volumes for the remainder of fiscal 2010 will depend on the strength of the overall economy, primarily employment levels, the impact of changes in federal government programs and policies on the homebuilding industry and our ability to successfully implement our operating strategies in each of our markets.

In comparing the three and six-month periods ended March 31, 2010 to the same periods of 2009, the value of net sales orders increased significantly in all of our market regions. These increases were due to a significant increase in the number of homes sold in all regions, and to a lesser extent, small increases in the average selling price of those homes in most regions.

The average price of our net sales orders in the three months ended March 31, 2010 was $204,700, an increase of 1% from the $203,000 average in the comparable period of 2009. The average price of our net sales orders in the six months ended March 31, 2010 was $206,900, an increase of 2% from the $203,500 average in the comparable period of 2009. We expect volatility in prices of our net sales orders for the remainder of fiscal 2010. We will continue our efforts to offer affordable product offerings to our target customer base and will seek to adjust our product mix, geographic mix and pricing within our homebuilding markets to meet market conditions.

Our sales order cancellation rates (cancelled sales orders divided by gross sales orders for the period) during the three and six months ended March 31, 2010 were 21% and 23%, respectively, compared to 30% and 33% during the same periods of 2009. While this represents a substantial improvement from the comparable prior year periods, our ability to keep our cancellation rates near historical levels depends largely on the strength of the overall economy, as well as the impact of changes in federal government programs and policies on the homebuilding industry and our ability to successfully implement operating strategies in each of our markets. We anticipate that cancellation rates will continue to fluctuate significantly until there is a sustained recovery in market conditions.


	Sales Order Backlog
	As of March 31,
	Homes in Backlog							Value (In millions)							Average Selling Price
	2010		2009		% Change			2010		2009		% Change			2010		2009		% Change
East		651		368		77	%	$	148.5	$	84.9		75	%	$	228,100	$	230,700		(1	)%
Midwest		370		324		14	%		107.2		86.4		24	%		289,700		266,700		9	%
Southeast		1,273		743		71	%		246.2		142.3		73	%		193,400		191,500		1	%
South Central		2,565		1,771		45	%		449.3		313.8		43	%		175,200		177,200		(1	)%
Southwest		620		570		9	%		105.9		99.3		7	%		170,800		174,200		(2	)%
West		835		805		4	%		249.8		236.3		6	%		299,200		293,500		2	%

		6,314		4,581		38	%	$	1,306.9	$	963.0		36	%	$	207,000	$	210,200		(2	)%

Sales Order Backlog

Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations, which during the recent housing downturn have been substantial.

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	Homes Closed and Home Sales Revenue
	Three Months Ended March 31,
	Homes Closed							Value (In millions)							Average Selling Price
	2010		2009		% Change			2010		2009		% Change			2010		2009		% Change
East		422		342		23	%	$	103.9	$	81.1		28	%	$	246,200	$	237,100		4	%
Midwest		249		210		19	%		71.1		57.9		23	%		285,500		275,700		4	%
Southeast		791		625		27	%		144.0		120.6		19	%		182,000		193,000		(6	)%
South Central		1,637		1,278		28	%		282.3		221.9		27	%		172,400		173,600		(1	)%
Southwest		395		422		(6	)%		72.5		82.2		(12	)%		183,500		194,800		(6	)%
West		766		708		8	%		221.0		207.0		7	%		288,500		292,400		(1	)%

		4,260		3,585		19	%	$	894.8	$	770.7		16	%	$	210,000	$	215,000		(2	)%


	Six Months Ended March 31,
	Homes Closed							Value (In millions)							Average Selling Price
	2010		2009		% Change			2010		2009		% Change			2010		2009		% Change
East		978		661		48	%	$	231.1	$	156.8		47	%	$	236,300	$	237,200		—	%
Midwest		590		469		26	%		159.7		129.7		23	%		270,700		276,500		(2	)%
Southeast		1,811		1,341		35	%		325.9		257.0		27	%		180,000		191,600		(6	)%
South Central		3,750		2,702		39	%		640.0		475.6		35	%		170,700		176,000		(3	)%
Southwest		955		1,114		(14	)%		167.8		217.7		(23	)%		175,700		195,400		(10	)%
West		1,705		1,366		25	%		478.5		419.6		14	%		280,600		307,200		(9	)%

		9,789		7,653		28	%	$	2,003.0	$	1,656.4		21	%	$	204,600	$	216,400		(5	)%

Home Sales Revenue

Revenues from home sales increased 16%, to $894.8 million (4,260 homes closed) for the three months ended March 31, 2010, from $770.7 million (3,585 homes closed) for the comparable period of 2009. Revenues from home sales increased 21%, to $2,003.0 million (9,789 homes closed) for the six months ended March 31, 2010, from $1,656.4 million (7,653 homes closed) for the comparable period of 2009. The average selling price of homes closed during the three months ended March 31, 2010 was $210,000, down 2% from the $215,000 average for the same period of 2009. The average selling price of homes closed during the six months ended March 31, 2010 was $204,600, down 5% from the $216,400 average for the same period of 2009. During the three and six months ended March 31, 2010, home sales revenues increased in five of our six market regions, resulting from increases in the number of homes closed.

The number of homes closed in the three and six months ended March 31, 2010 increased 19% and 28%, respectively, due to significant increases in five of our six market regions. The increase in home closings reflects the recent stabilization of certain market conditions and the impact of the first-time homebuyer’s federal tax credit which helped to stimulate demand for home closings during our first and second quarters. Unlike the other regions, the Southwest region had a decline in homes closed due to continued weak demand in the Phoenix market along with prior year efforts in that market to reduce completed homes inventory. As conditions change in the housing markets in which we operate, our ongoing level of net sales orders will determine the number of home closings and amount of revenue we will generate.

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Homebuilding Operating Margin Analysis


	Percentages of Related Revenues
	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Gross profit — Home sales		18.0	%		13.3	%		17.5	%		14.5	%
Gross profit — Land/lot sales		25.0	%		6.5	%		22.2	%		16.7	%
Effect of inventory impairments and land option cost write-offs on total homebuilding gross profit		(0.3	)%		(6.2	)%		(0.2	)%		(6.2	)%
Gross profit — Total homebuilding		17.8	%		7.1	%		17.3	%		8.3	%
Selling, general and administrative expense		14.4	%		16.4	%		12.8	%		15.2	%
Interest expense		2.5	%		3.0	%		2.5	%		2.9	%
(Gain) on early retirement of debt, net		—	%		(0.3	)%		(0.1	)%		(0.5	)%
Other (income)		(0.4	)%		(0.3	)%		(0.2	)%		(0.4	)%
Income (loss) before income taxes		1.2	%		(11.7	)%		2.4	%		(8.9	)%

Home Sales Gross Profit

Gross profit from home sales increased by 57%, to $161.1 million for the three months ended March 31, 2010, from $102.8 million for the comparable period of 2009. As a percentage of home sales revenues, gross profit from home sales increased 470 basis points, to 18.0%. Approximately 460 basis points of the increase in the home sales gross profit percentage was a result of the average cost of our homes declining by more than our average selling prices, caused largely by a reduction in our construction costs on homes closed during the current quarter. The reduction in construction costs primarily results from changes in product design, as well as cost reductions obtained from our suppliers and sub-contractors in prior periods. In addition, the increase in home sales gross profit is partially due to our efforts over the past eighteen months to acquire lot positions in new communities and construct and close houses from these new projects. Homes closed on these recently acquired finished lots are yielding higher gross profits than those on land and lots acquired in prior years. Approximately 80 basis points of the increase was due to a decrease in the amortization of capitalized interest and property taxes as a percentage of homes sales revenues resulting from reductions in our interest and property taxes incurred and capitalized over the past year and more closings occurring on acquired finished lots, rather than internally developed lots. These increases were partially offset by a decrease of 70 basis points due to the change in estimated costs of warranty and construction defect claims as a percentage of home sales revenue.

Gross profit from home sales increased by 46%, to $350.5 million for the six months ended March 31, 2010, from $240.0 million for the comparable period of 2009. As a percentage of home sales revenues, gross profit from home sales increased 300 basis points, to 17.5%. Generally, the factors impacting gross margin for the six-month period ended March 31, 2010 were similar to those discussed for the three-month period. Specifically, the improvement in our cost of homes as compared to average selling price contributed 280 basis points to the increase and the decrease in the amortization of capitalized interest and property taxes contributed 80 basis points. These increases were partially offset by a decrease of 60 basis points due to the change in estimated costs of warranty and construction defect claims as a percentage of home sales revenue.

Future changes in gross profit percentages are impacted by the use of sales incentives and price adjustments to generate an adequate volume of home closings and are uncertain in the current housing market.

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Land Sales Revenue and Gross Profit

Land sales revenues decreased 57% to $2.0 million for the three months ended March 31, 2010, and 86% to $2.7 million for the six months ended March 31, 2010, from $4.6 million and $19.2 million, respectively, in the comparable periods of 2009. Of the $19.2 million of revenues in the first half of fiscal 2009, $10.2 million related to land sale transactions in the fourth quarter of fiscal 2008 for which recognition of the revenue had been deferred due to the terms of the sale. The gross profit percentage from land sales increased to 25.0% for the three months ended March 31, 2010, from 6.5% in the comparable period of the prior year, and to 22.2% for the six months ended March 31, 2010 from 16.7% in the prior year. The fluctuations in revenues and gross profit percentages from land sales are a function of how we manage our inventory levels in various markets. We generally purchase land and lots with the intent to build and sell homes on them; however, we occasionally purchase land that includes commercially zoned parcels which we typically sell to commercial developers, and we also sell residential lots or land parcels to manage our land and lot supply. Land and lot sales occur at unpredictable intervals and varying degrees of profitability. Therefore, the revenues and gross profit from land sales fluctuate from period to period. As of March 31, 2010, we had $6.0 million of land held for sale which we expect to sell in the next twelve months.


			Inventory Impairments and Land Option Cost Write-offs
	Three Months Ended March 31,
	2010								2009
			Land Option
	Inventory		Cost Write-offs						Inventory		Land Option
	Impairments		(Recoveries)			Total			Impairments		Cost Write-offs			Total
						(In millions)
East	$	2.0	$	(0.4	)	$	1.6		$	1.4	$	—		$	1.4
Midwest		—		—			—			9.3		—			9.3
Southeast		0.3		0.1			0.4			2.2		0.1			2.3
South Central		—		0.2			0.2			2.3		—			2.3
Southwest		—		—			—			5.8		3.0			8.8
West		—		0.2			0.2			24.0		—			24.0

	$	2.3	$	0.1		$	2.4		$	45.0	$	3.1		$	48.1


	Six Months Ended March 31,
	2010								2009
			Land Option								Land Option
	Inventory		Cost Write-offs						Inventory		Cost Write-offs
	Impairments		(Recoveries)			Total			Impairments		(Recoveries)			Total
						(In millions)
East	$	2.0	$	(0.4	)	$	1.6		$	5.6	$	(0.1	)	$	5.5
Midwest		—		—			—			13.1		—			13.1
Southeast		1.6		—			1.6			6.0		—			6.0
South Central		0.2		0.2			0.4			2.2		1.8			4.0
Southwest		0.3		—			0.3			7.8		3.1			10.9
West		—		(0.3	)		(0.3	)		65.4		(0.5	)		64.9

	$	4.1	$	(0.5	)	$	3.6		$	100.1	$	4.3		$	104.4

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	Carrying Values of Potentially Impaired and Impaired Communities
	at March 31, 2010
			Inventory with				Analysis of Communities with Impairment Charges
			Impairment Indicators				Recorded at March 31, 2010
									Inventory
	Total								Carrying Value
	Number of		Number of		Carrying		Number of		Prior to
	Communities (1)		Communities (1)		Value		Communities (1)		Impairment		Fair Value
					(Values in millions)
East		164		16	$	76.1		1	$	6.7	$	4.7
Midwest		57		12		152.4		—		—		—
Southeast		248		16		57.6		1		1.8		1.5
South Central		300		17		49.7		—		—		—
Southwest		99		14		49.2		—		—		—
West		170		19		148.8		—		—		—

		1,038		94	$	533.8		2	$	8.5	$	6.2


			Carrying Values of Potentially Impaired and Impaired Communities
	at September 30, 2009
			Inventory with				Analysis of Communities with Impairment Charges
			Impairment Indicators				Recorded at September 30, 2009
									Inventory
	Total								Carrying Value
	Number of		Number of		Carrying		Number of		Prior to
	Communities (1)		Communities (1)		Value		Communities (1)		Impairment		Fair Value
					(Values in millions)
East		129		17	$	157.8		4	$	85.1	$	45.9
Midwest		50		19		143.0		7		47.8		32.8
Southeast		205		27		97.5		15		40.9		29.8
South Central		279		31		106.2		4		17.7		14.2
Southwest		84		21		104.3		8		53.0		36.2
West		152		46		354.3		20		176.8		87.5

		899		161	$	963.1		58	$	421.3	$	246.4


(1)		A community may consist of land held for development, residential land and lots developed and under development, and construction in progress and finished homes. A particular community often includes inventory in more than one category. Further, a community may contain multiple parcels with varying product types (e.g. entry level and move-up single family detached, as well as attached product types). Some communities have no homes under construction, finished homes, or current home sales efforts or activity.

Inventory Impairments and Land Option Cost Write-offs

At March 31, 2010, the assumptions utilized in our quarterly impairment evaluation reflected the stabilizing conditions experienced in many of our markets as indicated by the improvements in our operating results for the three months ended March 31, 2010, as well as our expectation of continued challenging conditions in the homebuilding industry and in our markets. Our gross profit from home sales during the second quarter of fiscal 2010 improved by 550 basis points and 490 basis points compared to the fourth quarter and full year of fiscal 2009, respectively, which were periods in which significant impairment charges were recorded. Additionally, during the current year three and six-month periods, our net sales orders increased 55% and 51%, respectively, from the same periods a year ago. These improvements in performance directly impacted the level of our impairment charges during the three months ended March 31, 2010. As we continue to analyze the strength of the economy (measured largely in terms of job growth), the homebuilding industry, and our operating performance during fiscal 2010, which may be negatively impacted by the scheduled expiration of the federal homebuyer tax credit, the level of impairments in future quarters may increase.

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Our impairment evaluation indicated communities with a combined carrying value of $533.8 million as of March 31, 2010, had indicators of potential impairment and these communities were evaluated for impairment. The analysis of the large majority of these communities assumed that sales prices in future periods will be equal to or lower than current sales order prices in each community, or in comparable communities, in order to generate an acceptable absorption rate. For a minority of communities that we do not intend to develop or operate in current market conditions, slight increases over current sales prices were assumed. While it is difficult to determine a timeframe for a given community in the current market conditions, we estimated the remaining lives of these communities to range from six months to in excess of ten years. In performing this analysis, we utilized a range of discount rates for communities of 14% to 20%, which is consistent with the rates used in fiscal 2009. Through this evaluation process, we determined that communities with a carrying value of $8.5 million as of March 31, 2010, were impaired. As a result, during the three months ended March 31, 2010, we recorded impairment charges of $2.3 million to reduce the carrying value of the impaired communities to their estimated fair value, as compared to $45.0 million in the same period of the prior year. In the three months ended March 31, 2010, approximately 81% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 19% of the charges were recorded to construction in progress and finished homes inventory, compared to 75% and 25%, respectively, in the same period of 2009. In the six months ended March 31, 2010, approximately 74% of the impairment charges were recorded to residential land and lots and land held for development, and approximately 26% of the charges were recorded to construction in progress and finished homes inventory, compared to 68% and 32%, respectively, in the same period of 2009.

Of the remaining $525.3 million carrying value of communities with impairment indicators which were determined not to be impaired at March 31, 2010, the largest concentrations were in Illinois (23%), California (17%), Florida (10%), Texas (9%), Arizona (9%) and Hawaii (8%). It is possible that our estimate of undiscounted cash flows from these communities may change and could result in a future need to record impairment charges to adjust the carrying value of these assets to their estimated fair value. There are several factors which could lead to changes in the estimates of undiscounted future cash flows for a given community. The most significant of these include pricing and incentive levels actually realized by the community, the rate at which the homes are sold and the costs incurred to construct the homes. The pricing and incentive levels are often inter-related with sales pace within a community such that a price reduction can be expected to increase the sales pace. Further, both of these factors are heavily influenced by the competitive pressures facing a given community from both new homes and existing homes, which may result from foreclosures. If conditions in the broader economy, homebuilding industry or specific markets in which we operate worsen, which could be triggered by withdrawal of government support, and as we re-evaluate specific community pricing and incentives, construction and development plans, and our overall land sale strategies, we may be required to evaluate additional communities or re-evaluate previously impaired communities for potential impairment. These evaluations may result in additional impairment charges.

During the three-month periods ended March 31, 2010 and 2009, we wrote off $0.1 million and $3.1 million, respectively, of earnest money deposits and pre-acquisition costs related to land option contracts which are not expected to be acquired. During the six-month periods ended March 31, 2010 and 2009, we recovered $0.5 million and wrote off $4.3 million, respectively, of such deposits and costs. At March 31, 2010, outstanding earnest money deposits and pre-acquisition costs associated with our portfolio of land and lot option purchase contracts totaled $8.7 million and $7.1 million, respectively.

In the three and six-month periods ended March 31, 2010, inventory impairment charges and write-offs of earnest money deposits and pre-acquisition costs reduced total homebuilding gross profit as a percentage of homebuilding revenues by approximately 30 basis points and 20 basis points, respectively, compared to 620 basis points in the same periods of 2009.

Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased by 1% to $128.7 million in the three months ended March 31, 2010, and 1% to $257.1 million in the six months ended March 31, 2010, from the comparable periods of 2009. As a percentage of homebuilding revenues, SG&A expense decreased 200 basis points, to 14.4% and 240 basis points, to 12.8% in the three and six-month periods ended March 31, 2010, respectively, from 16.4% and 15.2% in the comparable periods of 2009. The largest component of our homebuilding SG&A expense is employee compensation and related costs, which represented 55% and 56% of SG&A costs in the three and six-month periods ended March 31, 2010, respectively, and 55% in the comparable periods of fiscal 2009. These costs increased by 1%, to $70.3 million in the three months ended March 31, 2010 and decreased by less than 1%, to $142.7 million in

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the six months ended March 31, 2010, from the comparable periods of 2009. Our homebuilding operations employed approximately 2,500 and 2,350 employees at March 31, 2010 and 2009, respectively.

Our homebuilding SG&A expense as a percentage of revenues can vary significantly between quarters, depending largely on the fluctuations in quarterly revenue levels. We continue to adjust our SG&A infrastructure to support our expected closings volume; however, we cannot make assurances that our actions will permit us to maintain or improve upon the current SG&A expense as a percentage of revenues. It has become more difficult to reduce SG&A expense as the size of our operations has decreased. If revenues decrease and we are unable to sufficiently adjust our SG&A, future SG&A expense as a percentage of revenues will increase.

Interest Incurred

We capitalize homebuilding interest costs to inventory during active development and construction. Due to the decrease in the size of our operations, our inventory under active development and construction has been lower than our debt level; therefore, a portion of our interest incurred must be expensed. We expensed $22.7 million and $49.6 million of interest incurred during the three and six-month periods ended March 31, 2010, compared to $23.1 million and $48.7 million in the same periods of 2009.

Interest amortized to cost of sales, excluding interest written off with inventory impairment charges, was 3.5% of total home and land/lot cost of sales in both the three and six-month periods ended March 31, 2010, compared to 4.1% in the same periods of 2009. Interest incurred is related to the average level of our homebuilding debt outstanding during the period. Comparing the three and six months ended March 31, 2010 with the same periods of 2009, interest incurred related to homebuilding debt decreased 9% to $45.8 million, and 11% to $95.6 million due to decreases of 12% in our average homebuilding debt in both periods.

Gain on Early Retirement of Debt

During the six months ended March 31, 2010, in addition to repaying maturing senior notes, we repurchased a total of $312.6 million principal amount of various issues of our senior notes prior to their maturity. These notes were repurchased primarily through unsolicited transactions for an aggregate purchase price of $307.5 million, plus accrued interest. We recognized a gain of $3.6 million related to these repurchases, which represents the difference between the principal amount of the notes and the aggregate purchase price, less any unamortized discounts and fees. Partially offsetting this gain was a loss of $2.0 million for the call premium and write-off of unamortized fees related to the early redemption of the 5.875% senior notes due 2013, resulting in a net gain of $1.6 million.

During the six months ended March 31, 2009, in addition to repaying maturing senior notes, we repurchased a total of $220.5 million principal amount of various issues of our senior notes prior to their maturity. These notes were repurchased primarily through unsolicited transactions for an aggregate purchase price of $211.6 million, plus accrued interest. We recognized a gain of $8.4 million related to these repurchases, which represents the difference between the principal amount of the notes and the aggregate purchase price, less any unamortized discounts and fees. During the three months ended March 31, 2009, we recognized a net gain of $2.2 million related to senior note repurchases.

Other Income

Other income, net of other expenses, associated with homebuilding activities was $3.3 million and $4.8 million in the three and six months ended March 31, 2010, respectively, compared to $2.2 million and $6.4 million in the same periods of 2009. The largest component of other income in all four periods was interest income.

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Homebuilding Results by Reporting Region


	Three Months Ended March 31,
	2010								2009
			Homebuilding									Homebuilding
			Income (Loss)			% of						Income (Loss)			% of
	Homebuilding		Before			Region				Homebuilding		Before			Region
	Revenues		Income Taxes (1)			Revenues				Revenues		Income Taxes (1)			Revenues
						(In millions)
East	$	103.9	$	(4.3	)		(4.1)	%		$	81.0	$	(5.8	)		(7.2	)%
Midwest		71.2		(4.4	)		(6.2	)%			61.7		(21.2	)		(34.4	)%
Southeast		145.5		(2.8	)		(1.9	)%			120.6		(12.4	)		(10.3	)%
South Central		282.7		16.2			5.7	%			221.9		1.3			0.6	%
Southwest		72.5		0.3			0.4	%			82.7		(12.2	)		(14.8	)%
West		221.0		6.1			2.8	%			207.4		(40.3	)		(19.4	)%

	$	896.8	$	11.1			1.2	%		$	775.3	$	(90.6	)		(11.7	)%


	Six Months Ended March 31,
	2010								2009
			Homebuilding								Homebuilding
			Income (Loss)			% of					Income (Loss)			% of
	Homebuilding		Before			Region			Homebuilding		Before			Region
	Revenues		Income Taxes (1)			Revenues			Revenues		Income Taxes (1)			Revenues
						(In millions)
East	$	231.2	$	(2.3	)		(1.0	)%	$	156.9	$	(16.7	)		(10.6	)%
Midwest		159.9		(4.8	)		(3.0	)%		133.4		(32.8	)		(24.6	)%
Southeast		327.8		(1.8	)		(0.5	)%		267.7		(17.5	)		(6.5	)%
South Central		640.5		41.6			6.5	%		476.9		13.1			2.7	%
Southwest		167.8		5.0			3.0	%		220.3		(9.2	)		(4.2	)%
West		478.5		9.5			2.0	%		420.4		(85.9	)		(20.4	)%

	$	2,005.7	$	47.2			2.4	%	$	1,675.6	$	(149.0	)		(8.9	)%


(1)		Expenses maintained at the corporate level are allocated to each segment based on the segment’s average inventory. These expenses consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating our corporate office.

East Region — Homebuilding revenues increased 28% and 47% in the three and six months ended March 31, 2010, respectively, from the comparable periods of 2009, primarily due to increases in the number of homes closed, with the largest increases occurring in our New Jersey and Carolina markets. The region reported losses before income taxes of $4.3 million and $2.3 million in the three and six months ended March 31, 2010, compared to losses of $5.8 million and $16.7 million for the same periods of 2009. The results were due in part to inventory impairment charges and earnest money and pre-acquisition cost write-offs totaling $1.6 million in both the three and six months ended March 31, 2010, and $1.4 million and $5.5 million, respectively, in the comparable periods of 2009. The region’s gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased 50 basis points and 210 basis points in the three and six months ended March 31, 2010, respectively, compared to the same periods of 2009. These increases were a result of a slight increase in the average selling prices of our homes during the three-month period combined with a reduction in the construction costs of these homes. In the current year three and six-month periods, the reduction in the region’s SG&A as a percentage of homebuilding revenues contributed 180 basis points and 450 basis points, respectively, to the region’s improvement in losses before income taxes as a percentage of homebuilding revenues, as our additional closing volume helped leverage these SG&A expenses.

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Midwest Region — Homebuilding revenues increased 15% and 20% in the three and six months ended March 31, 2010, respectively, from the comparable periods of 2009, primarily due to increases in the number of homes closed, with the largest increase occurring in our Denver market. The region reported losses before income taxes of $4.4 million and $4.8 million in the three and six months ended March 31, 2010, respectively, compared to losses of $21.2 million and $32.8 million for the same periods of 2009. The losses in 2009 were due in part to inventory impairment charges totaling $9.3 million and $13.1 million in the three and six months ended March 31, 2009, respectively. The region’s home sales gross profit percentage increased 760 basis points and 730 basis points in the three and six months ended March 31, 2010, respectively, compared to the same periods of 2009. The increases were a result of higher margins in all of our markets, lead by the Chicago market, as well as lower warranty costs on previously closed homes in our Denver market and the effects of prior inventory impairments on homes closed during the current year periods. In the current year three and six-month periods, the reduction in the region’s SG&A as a percentage of homebuilding revenues contributed 440 basis points and 420 basis points, respectively, to the region’s improvement in losses before income taxes as a percentage of homebuilding revenues.

Southeast Region — Homebuilding revenues increased 21% and 22% in the three and six months ended March 31, 2010, respectively, from the comparable periods of 2009, primarily due to increases in the number of homes closed, with the largest increases occurring in our Central Florida and Atlanta markets. The region reported losses before income taxes of $2.8 million and $1.8 million in the three and six months ended March 31, 2010, respectively, compared to losses of $12.4 million and $17.5 million for the same periods of 2009. The results were due in part to inventory impairment charges and earnest money and pre-acquisition cost write-offs totaling $0.4 million and $1.6 million in the three and six months ended March 31, 2010, respectively, and $2.3 million and $6.0 million in the comparable periods of 2009. The region’s home sales gross profit percentage increased 480 basis points and 330 basis points in the three and six months ended March 31, 2010, respectively, compared to the same periods of 2009. The increases were a result of higher margins on homes closed in the majority of our markets, led by the South Florida market. The increases in homes sales gross profit percentage were a result of construction costs declining at a faster rate than the decline in average selling price on homes closed during the three and six months ended March 31, 2010. In addition, the increase in home sales gross profit is partially due to our efforts over the past eighteen months to acquire lot positions in new communities and construct and close houses from these new projects. Homes closed on these recently acquired finished lots are yielding higher gross profits than those on land and lots acquired in prior years. In the current year three and six-month periods, the reduction in the region’s SG&A as a percentage of homebuilding revenues contributed 180 basis points and 120 basis points, respectively, to the region’s improvement in losses before income taxes as a percentage of homebuilding revenues.

South Central Region — Homebuilding revenues increased 27% and 34% in the three and six months ended March 31, 2010, respectively, from the comparable period of 2009, primarily due to increases in the number of homes closed, with the largest increases occurring in our Austin and Dallas/Fort Worth markets. The region reported income before income taxes of $16.2 million and $41.6 million in the three and six months ended March 31, 2010, respectively, compared to $1.3 million and $13.1 million for the same periods of 2009. The improvement was due in large part to the increase in revenue, combined with the region’s home sales gross profit percentage increasing 430 basis points and 290 basis points in the three and six months ended March 31, 2010, respectively, compared to the same periods of 2009 due to higher margins on homes closed in the majority of our markets. These higher margins were primarily attributable to reductions in construction costs of our homes. Additionally, a decrease in inventory impairment charges and earnest money and pre-acquisition cost write-offs, which were $0.2 million and $0.4 million in the three and six months ended March 31, 2010, respectively, compared to $2.3 million and $4.0 million in the same periods of 2009, contributed to the region’s increase in income before income taxes.

Southwest Region — Homebuilding revenues decreased 12% and 24% in the three and six months ended March 31, 2010, respectively, from the comparable periods of 2009, due to decreases in the number of homes closed and in the average selling price of those homes. The decreases in revenues and homes closed were due to continuing weakness in the Phoenix market. The region reported income before income taxes of $0.3 million and $5.0 million in the three and six months ended March 31, 2010, respectively, compared to losses of $12.2 million and $9.2 million for the same periods of 2009. The losses in 2009 were due in large part to inventory impairment charges and earnest money and pre-acquisition cost write-offs totaling $8.8 million and $10.9 million in the three and six months ended March 31, 2009, respectively. The region’s home sales gross profit percentage increased 260 basis points and 210 basis points in the three and six months ended March 31, 2010, respectively, compared to the same periods of 2009. The increases were a result of the average cost of our homes declining by more than the average selling prices. The primary cause of the cost decline was a reduction in construction costs of our homes on homes closed during the three and six months ended March 31, 2010, with a lesser impact coming from the effects of prior inventory

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impairments on homes closed during the current year periods. In addition, the increase in home sales gross profit is partially due to our recent efforts to acquire lot positions in new communities and construct and close houses from these projects.

West Region — Homebuilding revenues increased 7% and 14% in the three and six months ended March 31, 2010, respectively, from the comparable periods of 2009, due to increases in the number of homes closed which were partially offset by decreases in the average selling price of those homes. The largest increases in homes closed occurred in our Seattle and Southern California markets. The region reported income before income taxes of $6.1 million and $9.5 million in the three and six months ended March 31, 2010, respectively, compared to losses of $40.3 million and $85.9 million for the same periods of 2009. The losses in 2009 were due in large part to inventory impairment charges and earnest money and pre-acquisition cost write-offs totaling $24.0 million and $64.9 million in the three and six months ended March 31, 2009, respectively. The region’s home sales gross profit percentage increased 660 basis points and 240 basis points in the three and six months ended March 31, 2010, respectively, compared to the same periods of 2009. The increases were a result of higher margins on homes closed in the majority of our markets driven in large part by reductions in construction costs of our homes. In the current year three and six-month periods, the reduction in the region’s SG&A as a percentage of homebuilding revenues contributed 340 basis points and 440 basis points, respectively, to the region’s improvement in income before income taxes as a percentage of homebuilding revenues as a result of absolute reductions in SG&A expenses, as well as the additional revenue providing more leverage against these costs.

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LAND AND LOT POSITION AND HOMES IN INVENTORY

The following is a summary of our land and lot position and homes in inventory at March 31, 2010 and September 30, 2009:


	As of March 31, 2010								As of September 30, 2009
			Lots								Lots
			Controlled								Controlled
			Under Lot		Total						Under Lot		Total
			Option and		Land/Lots		Homes				Option and		Land/Lots		Homes
	Land/Lots		Similar		Owned and		in		Land/Lots		Similar		Owned and		in
	Owned		Contracts (1)		Controlled		Inventory		Owned		Contracts (1)		Controlled		Inventory
East		10,500		3,500		14,000		1,600		11,000		2,000		13,000		1,400
Midwest		6,000		500		6,500		900		6,500		500		7,000		800
Southeast		22,500		7,000		29,500		3,000		21,000		5,000		26,000		2,200
South Central		21,500		8,000		29,500		5,000		22,500		9,000		31,500		4,400
Southwest		6,000		1,000		7,000		1,300		6,000		1,000		7,000		1,100
West		22,000		2,000		24,000		2,100		22,500		2,000		24,500		1,700

		88,500		22,000		110,500		13,900		89,500		19,500		109,000		11,600

	80%		20%		100%				82%		18%		100%


(1)		Excludes approximately 6,500 and 7,000 lots at March 31, 2010 and September 30, 2009, representing lots controlled under lot option contracts for which we do not expect to exercise our option to purchase the land or lots, and have reserved the deposits related to these contracts but the underlying contract has not yet been terminated.

At March 31, 2010, we owned or controlled approximately 110,500 lots, compared to approximately 109,000 lots at September 30, 2009. Of the 110,500 total lots, we controlled approximately 22,000 lots (20%), with a total remaining purchase price of approximately $742.2 million, through land and lot option purchase contracts with a total of $8.7 million in earnest money deposits. At March 31, 2010, approximately 21,000 of our owned lots were finished.

We had a total of approximately 13,900 homes in inventory, including approximately 1,200 model homes at March 31, 2010, compared to approximately 11,600 homes in inventory, including approximately 1,100 model homes at September 30, 2009. Of our total homes in inventory, approximately 7,300 and 5,800 were unsold at March 31, 2010 and September 30, 2009, respectively. At March 31, 2010, approximately 2,900 of our unsold homes were completed, of which approximately 600 homes had been completed for more than six months. At September 30, 2009, approximately 2,200 of our unsold homes were completed, of which approximately 800 homes had been completed for more than six months.

Our current strategy is to take advantage of market opportunities by entering into new finished lot option contracts to purchase finished lots in selected communities in an attempt to increase sales volumes and profitability. We plan to continue to manage our inventory of homes under construction by starting construction on unsold homes in certain markets, while monitoring the aging of unsold homes and aggressively marketing our unsold, completed homes in inventory.

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RESULTS OF OPERATIONS — FINANCIAL SERVICES

The following tables set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the three and six-month periods ended March 31, 2010 and 2009:


	Three Months Ended March 31,							Six Months Ended March 31,
	2010		2009		% Change			2010		2009		% Change
Number of first-lien loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers		2,602		2,463		6	%		5,987		5,095		18	%
Number of homes closed by D.R. Horton		4,260		3,585		19	%		9,789		7,653		28	%
DHI Mortgage capture rate		61%		69%					61%		67%

Number of total loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers		2,611		2,485		5	%		6,025		5,143		17	%
Total number of loans originated or brokered by DHI Mortgage		2,825		3,251		(13	)%		6,603		6,244		6	%
Captive business percentage		92%		76%					91%		82%

Loans sold by DHI Mortgage to third parties		2,483		3,363		(26	)%		6,466		7,006		(8	)%


	Three Months Ended March 31,									Six Months Ended March 31,
	2010			2009			% Change			2010			2009			% Change
							(In millions)
Loan origination fees	$	3.6		$	3.8			(5	)%	$	8.2		$	9.8			(16	)%
Sale of servicing rights and gains from sale of mortgages		13.0			12.2			7	%		27.6			23.1			19	%
Recourse expense		(5.7	)		(16.1	)		(65	)%		(8.6	)		(19.7	)		(56	)%

Sale of servicing rights and gains from sale of mortgages, net		7.3			(3.9	)		287	%		19.0			3.4			459	%
Other revenues		1.3			1.8			(28	)%		3.3			4.4			(25	)%
Reinsurance expense		—			(3.1	)		(100	)%		(0.8	)		(5.7	)		(86	)%

Other revenues, net		1.3			(1.3	)		200	%		2.5			(1.3	)		292	%

Total mortgage operations revenues		12.2			(1.4	)		971	%		29.7			11.9			150	%
Title policy premiums, net		4.5			4.1			10	%		10.2			8.5			20	%

Total revenues		16.7			2.7			519	%		39.9			20.4			96	%
General and administrative expense		17.4			17.2			1	%		36.0			40.4			(11	)%
Interest expense		0.2			0.3			(33	)%		0.7			1.0			(30	)%
Interest and other (income)		(1.9	)		(2.4	)		(21	)%		(4.4	)		(5.7	)		(23	)%

Income (loss) before income taxes	$	1.0		$	(12.4	)		108	%	$	7.6		$	(15.3	)		150	%

Financial Services Operating Margin Analysis


	Percentages of Financial Services Revenues (1)
	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Recourse and reinsurance expense		25.4	%		87.7	%		19.1	%		55.5	%
General and administrative expense		77.7	%		78.5	%		73.0	%		88.2	%
Interest expense		0.9	%		1.4	%		1.4	%		2.2	%
Interest and other (income)		(8.5	)%		(11.0	)%		(8.9	)%		(12.4	)%
Income (loss) before income taxes		4.5	%		(56.6	)%		15.4	%		(33.4	)%


(1)		Excludes the effects of recourse and reinsurance charges on financial services revenues

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Mortgage Loan Activity

In the three and six-month periods ended March 31, 2010, total first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased by 6% and 18%, respectively. The percentage increases in loans originated was lower than the percentage increases in the number of homes closed by our homebuilding operations during the same periods due to decreases in our mortgage capture rate (the percentage of total home closings by our homebuilding operations for which DHI Mortgage handled the homebuyers’ financing).

Home closings from our homebuilding operations constituted 92% and 91% of DHI Mortgage loan originations in the three and six-month periods ended March 31, 2010, respectively, compared to 76% and 82% in the comparable periods of 2009. These consistently high rates reflect DHI Mortgage’s continued focus on supporting the captive business provided by our homebuilding operations. The relatively lower captive percentages in the prior year periods were reflective of increased refinancing activity as existing homeowners took advantage of the decline in mortgage interest rates.

The number of loans sold to third-party purchasers decreased by 26% and 8% in the three and six months ended March 31, 2010, respectively, from the comparable periods of 2009. Loans are typically sold within 30 days of origination. Fluctuations in the volume of loans sold for a given period may not correspond to the change in loan origination volume because of the timing of loan sales, which for any quarter generally represents the loans originated in the last month of the prior quarter plus the first two months of the current quarter. Virtually all of the mortgage loans originated during the six months ended March 31, 2010 and mortgage loans held for sale on March 31, 2010 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or Government National Mortgage Association (GNMA).

Financial Services Revenues and Expenses

Loan origination fees decreased 5% and 16%, to $3.6 million and $8.2 million in the three and six months ended March 31, 2010, from $3.8 million and $9.8 million in the comparable periods of 2009. The decrease in loan origination fees during the six-month period relates to the adoption of the FASB’s authoritative guidance for fair value measurements of certain financial instruments on October 1, 2008. The authoritative guidance required net origination costs and fees associated with mortgage loans to be recognized at origination and no longer deferred until the time of sale. Therefore, during the three months ended December 31, 2008, we recognized $2.4 million of loan origination fees and $5.0 million of general and administrative (G&A) costs related to prior period loan originations. Revenues from the sale of servicing rights and gains from sale of mortgages increased 7% and 19%, to $13.0 million and $27.6 million in the three and six months ended March 31, 2010, from $12.2 million and $23.1 million in the comparable periods of 2009. Although the volume of loans sold decreased in the three and six-month periods ended March 31, 2010 compared to the prior year periods, revenues from the sale of servicing rights and gains from sale of mortgages increased due to the fair value adjustments on our written loan commitments and an increase in pricing on our loan sales from the prior year period. Charges related to recourse obligations were $5.7 million and $8.6 million in the three and six-month periods ended March 31, 2010, respectively, compared to $16.1 million and $19.7 million in the same periods of 2009. The calculation of our required repurchase loss reserve is based upon an analysis of repurchase requests received, our actual repurchases and losses through the disposition of such loans, discussions with our mortgage purchasers and analysis of the mortgages we originated. While we believe that we have adequately reserved for losses on known and projected repurchase requests, if actual repurchases or if the losses incurred resolving those repurchases exceed our expectations, additional recourse expense may be incurred. Also, a subsidiary of ours reinsured a portion of private mortgage insurance written on loans originated by DHI Mortgage in prior years. Charges to increase reserves for expected losses on the reinsured loans were $0 and $0.8 million in the three and six-month periods ended March 31, 2010, compared to $3.1 million and $5.7 million in the same periods of 2009.

G&A expense associated with financial services increased 1% and decreased 11%, to $17.4 million and $36.0 million in the three and six months ended March 31, 2010, respectively, from the comparable periods of 2009. The largest component of our financial services G&A expense is employee compensation and related costs, which represented 78% and 77% of G&A costs in the three and six-month periods of fiscal 2010, respectively, compared to 72% and 75% in the same periods of fiscal 2009. These costs increased 10%, to $13.6 million and decreased 8%, to $27.9 million in the three and six months ended March 31, 2010, respectively, compared to the respective prior year periods. The increase in the current quarter was due to the increase in financial services employees to 650 at March 31, 2010, from 550 at March 31, 2009. The decrease in the six-month period was due to the $5.0 million of

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compensation expense related to prior period loan originations recognized during the three months ended December 31, 2008 as a result of the adoption of the FASB’s authoritative guidance for fair value measurements of certain financial instruments. The decrease was partially offset by the increase in financial services employees.

As a percentage of financial services revenues, excluding the effects of recourse and reinsurance expense, G&A expense in the three and six-month periods ended March 31, 2010 decreased to 77.7% and 73.0%, respectively, from 78.5% and 88.2% in the comparable periods of 2009. The decrease in the six-month period was primarily due to the recognition of $5.0 million of G&A costs related to prior period loan originations during the three months ended December 31, 2008 as a result of the adoption of the FASB’s authoritative guidance for fair value measurements of certain financial instruments. Fluctuations in financial services G&A expense as a percentage of revenues can be expected to occur as some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.

RESULTS OF OPERATIONS — CONSOLIDATED

Income (Loss) before Income Taxes

Income before income taxes for the three months ended March 31, 2010 was $12.1 million, compared to a loss before income taxes of $103.0 million for the same period of 2009. Income before income taxes for the six months ended March 31, 2010 was $54.8 million, compared to a loss before income taxes of $164.3 million for the same period of 2009. The difference in our operating results for the three and six months ended March 31, 2010 compared to a year ago is primarily due to the higher volume of homes closed which resulted in higher revenues, a higher gross profit from home sales revenues and lower inventory impairment charges.

Income Taxes

The provision for and benefit from income taxes for the three and six months ended March 31, 2010 was $0.7 million and $148.6 million, respectively, compared to a provision for income taxes of $5.6 million and $6.8 million in the comparable periods of the prior year. The benefit from income taxes for the six months ended March 31, 2010 consists of a benefit of $198.8 million from a change in federal tax law which expanded the number of years we can carry back net operating losses, offset by a provision for income taxes of $1.6 million for state income taxes and an increase for unrecognized tax benefits of $48.6 million. We do not have meaningful effective tax rates for the six-month period ended March 31, 2010 and the comparable period of the prior year because of losses from operations before taxes in the prior year, the impact of valuation allowances on our net deferred tax assets and the change in tax law in the current year.

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into law and amended Section 172 of the Internal Revenue Code. This tax law change allows a net operating loss realized in one of our fiscal 2008, 2009 or 2010 years to be carried back up to five years (previously limited to a two-year carryback). We have elected to carry back our fiscal 2009 net operating loss. This resulted in a benefit from income taxes of $198.8 million during the six-month period ended March 31, 2010.

We had income taxes receivable of $29.4 million and $293.1 million at March 31, 2010 and September 30, 2009, respectively. During the six months ended March 31, 2010, we received income tax refunds totaling $465.4 million which resulted from tax losses generated in fiscal 2008 and 2009. Of this total, $352.4 million was received in the three months ended March 31, 2010. The income taxes receivable at March 31, 2010 relate to additional federal and state income tax refunds we expect to receive.

At March 31, 2010 and September 30, 2009, we had net deferred income tax assets of $894.1 million and $1,073.9 million, respectively, offset by valuation allowances of $894.1 million and $1,073.9 million, respectively. Tax benefits for state net operating loss carryforwards of $81.4 million that expire (beginning at various times depending on the tax jurisdiction) from fiscal 2013 to fiscal 2029 are included in the amounts. We assess, on a quarterly basis, the realizability of our deferred tax assets and record a valuation allowance sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized. The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws also affect actual tax results and the valuation of deferred tax assets over time.

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The total amount of unrecognized tax benefits (which includes interest, penalties, and the tax benefit relating to the deductibility of interest and state income taxes) was $72.6 million and $24.0 million as of March 31, 2010 and September 30, 2009, respectively. The increase resulted from our election to carryback our fiscal 2009 net operating loss to fiscal 2004 and 2005, thereby fully utilizing the net operating loss which existed at September 30, 2009. It is reasonably possible that, within the next 12 months, the amount of unrecognized tax benefits may decrease as much as $49.7 million as a result of a ruling request filed by us with the Internal Revenue Service (IRS) concerning capitalization of inventory costs. If the IRS rules favorably on the ruling request, our unrecognized tax benefits would be reduced, resulting in a benefit from income taxes in our consolidated statement of operations. We classify interest and penalties on income taxes as income tax expense.

We are subject to federal income tax and to income tax in multiple states. The statute of limitations for our major tax jurisdictions remains open for examination for fiscal years 2004 through 2010. We are currently being audited by various states.

CAPITAL RESOURCES AND LIQUIDITY

We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our bank credit facilities and the issuance of new debt securities. In light of the challenging homebuilding market conditions experienced over the past few years, we have been operating with a primary focus to generate cash flows through reductions in assets and tax refunds. The generation of cash flow has allowed us to increase our liquidity and strengthen our balance sheet and has placed us in a position to be able to invest in market opportunities as they arise. We do not expect to generate as much cash from asset reductions in fiscal 2010 as we have in the past three fiscal years. Depending upon future homebuilding market conditions and our expectations for these conditions, we may use a portion of our cash balances to increase our assets. We intend to maintain adequate liquidity and balance sheet strength, and we will continue to evaluate opportunities to access the capital markets as they become available.

At March 31, 2010, our ratio of net homebuilding debt to total capital was 22.2%, compared to 34.2% at March 31, 2009 and 32.5% at September 30, 2009. Net homebuilding debt to total capital consists of homebuilding notes payable net of cash and marketable securities divided by total capital net of cash and marketable securities (homebuilding notes payable net of cash and marketable securities plus stockholders’ equity). The decrease in our ratio of net homebuilding debt to total capital at March 31, 2010 as compared to the ratio a year earlier was primarily due to our higher cash and marketable securities balances at March 31, 2010, as well as our lower debt balance, which resulted from redemptions and repurchases of senior notes, and to a lesser extent, the issuance of our convertible senior notes in May 2009. As compared to the ratio at September 30, 2009, the decrease in our ratio was primarily due to our lower debt balance at March 31, 2010, collection of income tax receivables and net income for the period. Our ratio of net homebuilding debt to total capital remains well within our target operating range of below 45%. We believe that our strong balance sheet and liquidity position will allow us to be flexible in reacting to changing market conditions. However, future period-end net homebuilding debt to total capital ratios may be higher than the 22.2% ratio achieved at March 31, 2010.

We believe that the ratio of net homebuilding debt to total capital is useful in understanding the leverage employed in our homebuilding operations and comparing us with other homebuilders. We exclude the debt of our financial services business because it is separately capitalized and its obligation under its repurchase agreement is substantially collateralized and not guaranteed by our parent company or any of our homebuilding entities. Because of its capital function, we include homebuilding cash and marketable securities as a reduction of our homebuilding debt and total capital. For comparison to our ratios of net homebuilding debt to capital above, at March 31, 2010 and 2009, and at September 30, 2009, our ratios of homebuilding debt to total capital, without netting cash and marketable securities balances, were 49.6%, 51.9% and 56.2%, respectively.

We believe that we will be able to fund our working capital needs for our homebuilding and financial services operations, as well as our debt obligations, through existing cash resources and the cash flows we currently expect to generate in the near term, our mortgage repurchase facility and, for the longer term, the issuance of new debt or equity securities through the public capital markets as market conditions may permit.

Homebuilding Capital Resources

Cash and Cash Equivalents — At March 31, 2010, we had available homebuilding cash and cash equivalents of $1.6 billion.

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Marketable Securities — At March 31, 2010, we had marketable securities of $198.7 million. Our marketable securities consist of U.S. Treasury securities, government agency securities, foreign government securities, corporate debt securities, and certificates of deposit.

Secured Letter of Credit Agreements — Concurrent with the termination of our revolving credit facility in May 2009, we entered into secured letter of credit agreements with the three banks that had issued letters of credit under the facility. The effect of these agreements was to remove the outstanding letters of credit from the facility, which required us to deposit cash, in an amount approximating the balance of letters of credit outstanding, as collateral with the issuing banks. At March 31, 2010 and September 30, 2009, the amount of cash restricted for this purpose totaled $48.6 million and $53.3 million, respectively, and is included in homebuilding restricted cash on our consolidated balance sheets.

Public Unsecured Debt — The indentures governing our senior notes and senior subordinated notes impose restrictions on the creation of secured debt and liens. At March 31, 2010, we were in compliance with all of the limitations and restrictions that form a part of the public debt obligations.

Shelf Registration Statements — We have an automatically effective universal shelf registration statement filed with the SEC in September 2009, registering debt and equity securities which we may issue from time to time in amounts to be determined.

Financial Services Capital Resources

Cash and Cash Equivalents — At March 31, 2010, the amount of financial services cash and cash equivalents was $26.8 million.

Mortgage Repurchase Facility — Our mortgage subsidiary entered into a mortgage sale and repurchase agreement (the “mortgage repurchase facility”) on March 28, 2008. The mortgage repurchase facility, which is accounted for as a secured financing, provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparty against the transfer of funds by the counterparty, thereby becoming purchased loans. DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 120 days in accordance with the terms of the mortgage repurchase facility. On March 4, 2010, through an amendment to the repurchase agreement, the capacity of the facility was increased from $100 million to $150 million, with a provision allowing an increase in the capacity to $175 million during the last five business days of a fiscal quarter and the first seven business days of the following fiscal quarter. Additionally, the amendment extended the maturity date of the facility to March 4, 2011.

The mortgage repurchase facility is not guaranteed by either D.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and its minimum required liquidity. These covenants are measured and reported monthly. At March 31, 2010, our mortgage subsidiary was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

In the past, we have been able to renew or extend our mortgage credit facilities on satisfactory terms prior to their maturities, and obtain temporary additional commitments through amendments to the credit agreements during periods of higher than normal volumes of mortgages held for sale. The liquidity of our financial services business depends upon its continued ability to renew and extend the mortgage repurchase facility or to obtain other additional financing in sufficient capacities.

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Operating Cash Flow Activities

For the six months ended March 31, 2010, net cash provided by our operating activities was $427.8 million compared to $977.9 million during the comparable period of the prior year. During the six-month period ended March 31, 2010, a significant portion of the net cash provided by our operating activities was due to federal income tax refunds. Also, contributing to operating cash flows was the profit we generated during the current period. The net cash provided by our operating activities during the past three fiscal years has resulted in substantial liquidity and allows the flexibility to determine the appropriate operating strategy for each of our communities and to take advantage of opportunities in the market. While we have substantially slowed our purchases of undeveloped land and our development spending on land we own, we are purchasing or contracting to purchase finished lots in many markets in an attempt to improve sales and home closing volumes and return to sustainable profitability. In line with our operating tactics, we used cash in our operations to increase our number of homes under construction. During this effort, we plan to continue to manage our inventories by monitoring the aging of unsold homes and aggressively marketing our unsold, completed homes in inventory. As we work towards these goals, we expect to generate less cash flow from asset reductions than we have over the past three fiscal years. Depending upon future homebuilding market conditions and our expectations for these conditions, we may use a portion of our cash balances to increase our inventories.

Investing Cash Flow Activities

For the six months ended March 31, 2010, net cash used in our investing activities was $201.9 million. Of this amount, $199.1 million was used to purchase marketable securities during the current quarter. Additionally, we used $7.7 million to invest in purchases of property and equipment, primarily model home furniture and office equipment. These purchases are not significant relative to our total assets or cash flows, and have declined in recent years due to the decrease in the size of our operations. Changes in restricted cash are primarily due to fluctuations in the balance of our outstanding letters of credit, which are cash collateralized under the terms of our secured letter of credit agreements.

Financing Cash Flow Activities

During the last two years, the majority of our short-term financing needs have been funded with cash generated from operations and borrowings available under our financial services credit facility. Long-term financing needs of our homebuilding operations have generally been funded with the issuance of new senior unsecured debt securities through the public capital markets. During the six months ended March 31, 2010, we repaid, through maturities, redemptions and repurchases, a total of $538.5 million principal amount of various issues of senior notes for an aggregate purchase price of $535.2 million, plus accrued interest. During the six months ended March 31, 2009, we repaid, through redemptions and repurchases, a total of $673.4 million principal amount of various issues of senior notes for an aggregate purchase price of $664.6 million, plus accrued interest. Our homebuilding senior, convertible senior and senior subordinated notes are guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries and certain insignificant subsidiaries.

During the three months ended March 31, 2010, our Board of Directors approved a quarterly cash dividend of $0.0375 per common share, which was paid on February 25, 2010 to stockholders of record on February 16, 2010. In April 2010, our Board of Directors approved a quarterly cash dividend of $0.0375 per common share, payable on May 24, 2010 to stockholders of record on May 14, 2010. Quarterly cash dividends of $0.0375 per common share were declared in the comparable quarters of fiscal 2009. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, our financial condition and general business conditions.

Changes in Capital Structure

On October 1, 2009, we adopted and applied retrospectively the FASB’s authoritative guidance for accounting for debt with conversion options, which specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Early adoption of this authoritative guidance was not permitted. As a result, the prior year consolidated financial statements have been retrospectively adjusted for the effects of this change in accounting for our 2% convertible senior notes issued in May 2009. We recorded the debt component of the convertible senior notes at its fair value on the date of issuance of the notes, assuming no conversion features.

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The remaining value of the equity component of the convertible senior notes was recorded as a reduction in the carrying value of the notes and an increase in additional paid-in capital. The reduction in the carrying value of the notes and the fees related to the notes will be amortized as interest incurred and expensed or capitalized to inventory over the remaining life of the notes. The additional interest expense recognized in fiscal 2009 due to the restatement was $4.5 million, which increased our diluted net loss per share for the year ended September 30, 2009 by $0.01.

In November 2009, our Board of Directors authorized the repurchase of up to $100 million of our common stock and the repurchase of up to $500 million of debt securities. The authorizations are effective from December 1, 2009 to November 30, 2010. Repurchases of senior notes through March 31, 2010 reduced the debt repurchase authorization to $154.0 million. In April 2010, our Board of Directors increased the debt repurchase authorization to $500 million, effective from April 29, 2010 to November 30, 2010.

On January 15, 2010, we repaid the remaining $130.9 million principal amount of our 4.875% senior notes which were due on that date. On February 24, 2010, we redeemed the remaining $95.0 million principal amount of our 5.875% senior notes due 2013. During the six months ended March 31, 2010, primarily through unsolicited transactions, we repurchased a total of $312.6 million principal amount of various issues of senior notes for an aggregate purchase price of $307.5 million, plus accrued interest. These repayments of public unsecured debt were made from our cash balance on hand.

In January 2010, our stockholders did not approve our Section 382 rights agreement; therefore, it will expire by its terms on August 19, 2010 unless earlier terminated by our Board of Directors.

In fiscal 2009, our primary non-operating uses of our available capital were the repayment of debt, dividend payments and the cash collateralization of our outstanding letters of credit. As was the case in the current quarter, we expect the repayment of debt to remain a significant priority for the use of our available cash in fiscal 2010. We continue to evaluate our alternatives for future non-operating sources and uses of our available capital, including the amounts of debt repayments, dividend payments and the level of our cash balances, based on market conditions and other circumstances, and within the constraints of our balance sheet leverage targets and our liquidity targets.

CONTRACTUAL CASH OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS

Our primary contractual cash obligations for our homebuilding and financial services segments are payments under our debt agreements and lease payments under operating leases. Purchase obligations of our homebuilding segment represent specific performance requirements under lot option purchase agreements that may require us to purchase land contingent upon the land seller meeting certain obligations. We expect to fund our contractual obligations in the ordinary course of business through a combination of our existing cash resources, cash flows generated from operations, renewed or amended mortgage repurchase facilities and, if needed or believed advantageous, the issuance of new debt or equity securities through the public capital markets as market conditions may permit.

At March 31, 2010, our homebuilding operations had outstanding letters of credit of $47.6 million, all of which were cash collateralized, and surety bonds of $955.3 million, issued by third parties, to secure performance under various contracts. We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees.

Our mortgage subsidiary enters into various commitments related to the lending activities of our mortgage operations. Further discussion of these commitments is provided in Item 3 “Quantitative and Qualitative Disclosures About Market Risk” under Part I of this quarterly report on Form 10-Q.

In the ordinary course of business, we enter into land and lot option purchase contracts to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with limited capital investment and substantially reduce the risks associated with land ownership and development. Within the land and lot option purchase contracts at March 31, 2010, there were a limited number of contracts subject to specific performance clauses which may require us to purchase the land or lots upon the land sellers meeting their obligations. The remaining purchase price of these specific performance contracts is not material. Also, we

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consolidated certain variable interest entities for which we are deemed to be the primary beneficiary, with assets of $7.1 million related to some of our outstanding land and lot option purchase contracts. Creditors, if any, of these variable interest entities have no recourse against us. Further discussion of our land option contracts is provided in the “Land and Lot Position and Homes in Inventory” section included herein.

CRITICAL ACCOUNTING POLICIES

As disclosed in our current report on Form 8-K dated February 8, 2010, which updated our annual report on Form 10-K for the fiscal year ended September 30, 2009, our most critical accounting policies relate to revenue recognition, inventories and cost of sales, land and lot option purchase contracts, goodwill, warranty and insurance claim costs, income taxes and stock-based compensation. Since September 30, 2009, there have been no significant changes to those critical accounting policies and estimates.

SEASONALITY

We have typically experienced seasonal variations in our quarterly operating results and capital requirements. Prior to the current downturn in the homebuilding industry, we generally had more homes under construction, closed more homes and had greater revenues and operating income in the third and fourth quarters of our fiscal year. This seasonal activity increased our working capital requirements for our homebuilding operations during the third and fourth fiscal quarters and increased our funding requirements for the mortgages we originated in our financial services segment at the end of these quarters. As a result of seasonal activity, our quarterly results of operations and our financial position at the end of a particular fiscal quarter are not necessarily representative of the balance of our fiscal year.

In contrast to our typical seasonal results, the weakness in homebuilding market conditions during the past three years has mitigated our historical seasonal variations. Also, in fiscal 2010 we expect the scheduled expiration of the homebuyer federal tax credit to impact our construction activities and home sales and closing volumes and timing. Specifically, in fiscal 2010, we expect our closings volumes and profitability to be highest in our first and third fiscal quarters. Although we may experience our typical historical seasonal pattern in the future, given the current market conditions and the impact of changes in federal government programs and policies on the homebuilding industry, we can make no assurances as to when or whether this pattern will recur.

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this report, as well as in other materials we have filed or will file with the Securities and Exchange Commission, statements made by us in periodic press releases and oral statements we make to analysts, stockholders and the press in the course of presentations about us, may be construed as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs as well as assumptions made by, and information currently available to, management. These forward-looking statements typically include the words “anticipate,” “believe,” “consider,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “objective,” “plan,” “predict,” “projection,” “seek,” “strategy,” “target” or other words of similar meaning. Any or all of the forward-looking statements included in this report and in any other of our reports or public statements may not approximate actual experience, and the expectations derived from them may not be realized, due to risks, uncertainties and other factors. As a result, actual results may differ materially from the expectations or results we discuss in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to:

	•		the continuing downturn in the homebuilding industry, including further deterioration in industry or broader economic conditions;

	•		the continuing constriction of the credit markets, which could limit our ability to access capital and increase our costs of capital;

	•		the reduction in availability of mortgage financing, increases in mortgage interest rates and the effects of expiring government programs, such as the homebuyer federal tax credit scheduled to end in our third quarter of fiscal 2010;

	•		the limited success of our strategies in responding to adverse conditions in the industry;

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	•		a return of an inflationary environment;

	•		changes in general economic, real estate and other business conditions;

	•		the risks associated with our inventory ownership position in changing market conditions;

	•		supply risks for land, materials and labor;

	•		changes in the costs of owning a home;

	•		the effects of governmental regulations and environmental matters on our homebuilding operations;

	•		the effects of governmental regulation on our financial services operations;

	•		the uncertainties inherent in home warranty and construction defect claims matters;

	•		our substantial debt and our ability to comply with related debt covenants, restrictions and limitations;

	•		competitive conditions within our industry;

	•		our ability to effect any future growth strategies successfully;

	•		our ability to realize our deferred tax asset; and

	•		the utilization of our tax losses could be substantially limited if we experienced an ownership change as defined in the Internal Revenue Code.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Additional information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained in Item 1A. “Risk Factors” under Part II of this report, our current report on Form 8-K dated February 8, 2010, and our annual report on Form 10-K for the fiscal year ended September 30, 2009, which were filed with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk on our long-term debt. We monitor our exposure to changes in interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect our future earnings and cash flows. We generally do not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on our cash flows related to our fixed-rate debt until such time as we are required to refinance, repurchase or repay such debt.

We are exposed to interest rate risk associated with our mortgage loan origination services. We manage interest rate risk through the use of forward sales of mortgage-backed securities (MBS), Eurodollar Futures Contracts (EDFC) and put options on MBS and EDFC. Use of the term “hedging instruments” in the following discussion refers to these securities collectively, or in any combination. We do not enter into or hold derivatives for trading or speculative purposes.

Interest rate lock commitments (IRLCs) are extended to borrowers who have applied for loan funding and who meet defined credit and underwriting criteria. Typically, the IRLCs have a duration of less than six months. Some IRLCs are committed immediately to a specific purchaser through the use of best-efforts whole loan delivery commitments, while other IRLCs are funded prior to being committed to third-party purchasers. The hedging instruments related to IRLCs are classified and accounted for as derivative instruments in an economic hedge, with gains and losses recognized in current earnings. Hedging instruments related to funded, uncommitted loans are accounted for at fair value, with changes recognized in current earnings, along with changes in the fair value of the funded, uncommitted loans. The fair value change related to the hedging instruments generally offsets the fair value change in the uncommitted loans and the fair value change, which for the three and six months ended March 31, 2010 and 2009 was not significant, is recognized in current earnings. At March 31, 2010, hedging instruments used to mitigate interest rate risk related to uncommitted mortgage loans held for sale and uncommitted IRLCs totaled $337.8 million. Uncommitted IRLCs, the duration of which are generally less than six months, totaled

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approximately $233.4 million, and uncommitted mortgage loans held for sale totaled approximately $131.4 million at March 31, 2010.

At March 31, 2010, we had $10.3 million in MBS which were acquired as part of a program to potentially offer homebuyers a below market interest rate on their home financing. These hedging instruments and the related commitments are accounted for at fair value with gains and losses recognized in current earnings. These gains and losses for the three and six months ended March 31, 2010 and 2009 were not material.

The following table sets forth principal cash flows by scheduled maturity, weighted average interest rates and estimated fair value of our debt obligations as of March 31, 2010. The interest rate for our variable rate debt represents the interest rate on our mortgage repurchase facility. Because the mortgage repurchase facility is effectively secured by certain mortgage loans held for sale which are typically sold within 60 days, its outstanding balance is included as a variable rate maturity in the most current period presented.


	Six Months																								Fair value
	Ending																								at
	September 30,			Fiscal Year Ending September 30,																					March 31,
	2010			2011			2012			2013			2014			2015			Thereafter			Total			2010
	($ amounts in millions)
Debt:
Fixed rate	$	93.5		$	359.1		$	194.5		$	199.5		$	889.8		$	269.6		$	671.6		$	2,677.6		$	2,780.6
Average interest rate		9.5	%		7.0	%		5.4	%		7.0	%		7.9	%		5.4	%		6.3	%		6.9	%
Variable rate	$	77.7		$	—		$	—		$	—		$	—		$	—		$	—		$	77.7		$	77.7
Average interest rate		3.8	%		—			—			—			—			—			—			3.8	%

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in the reports the Company files, furnishes, submits or otherwise provides the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in reports filed by the Company under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and CFO, in such a manner as to allow timely decisions regarding the required disclosure.

There have been no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in lawsuits and other contingencies in the ordinary course of business. While the outcome of such contingencies cannot be predicted with certainty, we believe that the liabilities arising from these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds our estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

On March 24, 2008, a putative class action, James Wilson, et al. v. D.R. Horton, Inc., et al., was filed by five customers of Western Pacific Housing, Inc., one of our wholly-owned subsidiaries, against us, Western Pacific Housing, Inc., and our affiliated mortgage company subsidiary, in the United States District Court for the Southern District of California. The complaint sought certification of a class alleged to include persons who, within the four years preceding the filing of the suit, purchased a home from us, or any of our subsidiaries, and obtained a mortgage for such purchase from our affiliated mortgage company subsidiary. The complaint alleged that we violated Section 1 of the Sherman Antitrust Act and Sections 16720, 17200 and 17500 of the California Business and Professions Code by effectively requiring our homebuyers to apply for a loan through our affiliated mortgage company. In June 2009 the complaint was amended to limit the putative class to California customers only and the claims asserted were limited to alleged violations of the California Business and Professions Code. The complaint alleged that the homebuyers were either deceived about loan costs charged by our affiliated mortgage company or coerced into using our affiliated mortgage company, or both, and that discounts and incentives offered by us or our subsidiaries to buyers who obtained financing from our affiliated mortgage company were illusory. The action sought treble damages in an unspecified amount and injunctive relief. We believed the claims alleged in this action were without merit. In January 2010, the plaintiffs agreed to dismiss their lawsuit in exchange for a waiver of costs. On April 8, 2010, the lawsuit was dismissed with prejudice by the court.

ITEM 1A. RISK FACTORS

In addition to the risk factors previously identified in our annual report on Form 10-K for the year ended September 30, 2009, we are updating the following risk factor related to the utilization of our tax losses as affected by our stockholders’ non-approval of the Section 382 rights agreement.

The utilization of our tax losses could be substantially limited if we experienced an ownership change as defined in the Internal Revenue Code.

We will likely experience tax net operating losses through fiscal 2010 and have potential unrealized built-in losses. To the extent these losses are not carried back to prior periods, they have the potential to reduce future income tax obligations if we realize taxable income in the future. However, Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change to utilize its net operating loss carryforwards and certain built-in losses recognized in years after the ownership change. Under the rules, such an ownership change is generally any change in ownership of more than 50% of its stock within a rolling three-year period, as calculated in accordance with the rules. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning directly or indirectly 5% or more of the stock of the company and any change in ownership arising from new issuances of stock by the company.

If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, our ability to use any of our net operating loss carryforwards, tax credit carryforwards or net unrealized built-in losses at the time of ownership change would be subject to the limitations of Section 382 on their use against future taxable income. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a portion of our built-in losses, any net operating loss carryforwards or tax credit carryforwards could expire before we would be able to use them. This could adversely affect our financial position, results of operations and cash flow.

We believe that we have not experienced such an ownership change as of March 31, 2010; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% stockholders and the conversion of our outstanding convertible senior notes, over which we have no control, and new issuances of stock by us, should we choose to do so. In August 2009, our Board of Directors adopted a Section

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382 rights agreement as a measure intended to deter such an ownership change while in effect in order to preserve these tax attributes. The Section 382 rights agreement, however, may not prevent an ownership change. While the Section 382 rights agreement is in effect, it could discourage or prevent a merger, tender offer, proxy contest or accumulations of substantial blocks of shares for which some stockholders might receive a premium above market value. It could also adversely affect the liquidity of the market for our shares. In January 2010, our stockholders did not approve our Section 382 rights agreement when it was submitted to them at our annual meeting of stockholders; therefore, it will expire by its terms on August 19, 2010 unless earlier terminated by our Board of Directors.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) At the Company’s Annual Meeting of Stockholders held on January 28, 2010 (the “Annual Meeting”), the stockholders re-elected each of the seven members of the Board of Directors of the Company to serve until the Company’s next annual meeting of stockholders and until their respective successors are elected and qualified. The names of the seven directors, the number of votes cast for, the number of votes withheld and the number of broker non-votes were as follows:


Name	Votes For		Votes Withheld		Broker Non-Votes
Donald R. Horton		237,856,831		16,479,730		25,488,726
Bradley S. Anderson		229,979,354		24,357,207		25,488,726
Michael R. Buchanan		237,163,849		17,172,711		25,488,726
Michael W. Hewatt		237,707,800		16,628,761		25,488,726
Bob G. Scott		237,684,441		16,652,120		25,488,726
Donald J. Tomnitz		244,392,396		9,944,165		25,488,726
Bill W. Wheat		227,823,843		26,512,717		25,488,726

(b) At the Annual Meeting, the stockholders did not approve the Section 382 Rights Agreement previously adopted by the Board of Directors. The number of votes cast for and against the proposal and the number of abstentions were as follows:


Votes For	Votes Against	Abstained

112,344,230	167,088,423	392,633

(c) At the Annual Meeting, the stockholders ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm. The number of votes cast for and against the proposal and the number of abstentions were as follows:


Votes For	Votes Against	Abstained

278,192,884	1,048,754	234,749

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ITEM 6. EXHIBITS

(a)

Exhibits.

	3.1		Certificate of Amendment of the Amended and Restated Certificate of Incorporation, as amended, of the Company dated January 31, 2006, and the Amended and Restated Certificate of Incorporation, as amended, of the Company dated March 18, 1992. (1)

	3.2		Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of the Company. (2)

	3.3		Amended and Restated Bylaws of the Company. (3)

	10.1		Third Amendment to Master Repurchase Agreement, dated March 4, 2010, by and between DHI Mortgage Company, Ltd. and U.S. Bank National Association, as Administrative Agent, Syndication Agent and a buyer. (4)

	12.1		Statement of Computation of Ratio of Earnings to Fixed Charges. (*)

	31.1		Certificate of Chief Executive Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. (*)

	31.2		Certificate of Chief Financial Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. (*)

	32.1		Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company’s Chief Executive Officer. (*)

	32.2		Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company’s Chief Financial Officer. (*)


*		Filed herewith.

(1)		Incorporated by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2005, filed with the SEC on February 2, 2006.

(2)		Incorporated herein by reference from Exhibit 3.1 to the Company’s Report on Form 8-A filed with the SEC on August 20, 2009.

(3)		Incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K dated July 30, 2009, filed with the SEC on August 5, 2009.

(4)		Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 4, 2010, filed with the SEC on March 5, 2010.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	D.R. HORTON, INC.
Date: April 30, 2010	By:	/s/ Bill W. Wheat
		Bill W. Wheat, on behalf of D.R. Horton, Inc.,
		as Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

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TABLE OF CONTENTS

Part I. Financial Informationprint Item 1. Financial Statementsprint Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II. Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 4. Submission Of Matters To A Vote Of Security Holdersprint Item 6. Exhibitsprint

Exhibits

EX-12.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2

Customer name	Ticker
Apartment Investment and Management Company	AIV
The Hanover Insurance Group, Inc.	THG
Huntington Bancshares Incorporated	HBAN
Mercury General Corporation	MCY
W. R. Berkley Corporation	WRB

Supplier name	Ticker
Omega Flex, Inc.	OFLX
The Home Depot, Inc.	HD
Deere & Company	DE
Caterpillar Inc.	CAT
3M Company	MMM
Illinois Tool Works Inc.	ITW
Trane Technologies plc	TT
Dow Inc.	DOW

DHI 10-Q Quarter ended March 31, 2010

Exhibits