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

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

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

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.

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.

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.

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	)

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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.

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

     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

     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.

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.

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.

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

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.

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

     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.

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.

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	)

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

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

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

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