FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the Quarterly Period Ended March 31, 2006

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

(817) 390-8200

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Yes þ          No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 — 312,670,959 shares as of May 1, 2006

 

 

D.R. HORTON, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Consolidated Balance Sheets — March 31, 2006 and September 30, 2005			3
		Consolidated Statements of Income — Three and Six Months Ended March 31, 2006 and 2005			4
		Consolidated Statements of Cash Flows — Six Months Ended March 31, 2006 and 2005			5
		Notes to Consolidated Financial Statements			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			39
ITEM 4.		Controls and Procedures			40
PART II.		OTHER INFORMATION
ITEM 4.		Submission of Matters to a Vote of Security Holders			41
ITEM 6.		Exhibits			42
SIGNATURES					44
Form of Non-Qualified Stock Option Agreement (Employee)
Form of Non-Qualified Stock Option Agreement (Director)
Statement of Computation of Ratio of Earnings to Fixed Charges
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES

		March 31,				September 30,
		2006				2005
		(In millions)
		(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents		$	206.3			$	1,111.6
Inventories:
Construction in progress and finished homes			4,422.0				3,105.9
Residential land and lots — developed and under development			6,123.9				5,174.3
Land held for development			130.7				6.2
Consolidated land inventory not owned			175.8				200.4
			10,852.4				8,486.8
Property and equipment (net)			115.2				107.2
Earnest money deposits and other assets			847.3				756.0
Goodwill			578.9				578.9
			12,600.1				11,040.5
Financial Services:
Cash and cash equivalents			71.9				38.2
Mortgage loans held for sale			717.2				1,358.7
Other assets			121.8				77.4
			910.9				1,474.3
Total assets		$	13,511.0			$	12,514.8
LIABILITIES
Homebuilding:
Accounts payable		$	818.1			$	820.7
Accrued expenses and other liabilities			1,025.4				1,196.9
Notes payable			4,848.7				3,660.1
			6,692.2				5,677.7
Financial Services:
Accounts payable and other liabilities			21.8				24.0
Notes payable to financial institutions			675.0				1,249.5
			696.8				1,273.5
			7,389.0				6,951.2
Minority interests			178.0				203.2
STOCKHOLDERS’ EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued			—				—
Common stock, $.01 par value, 1,000,000,000 shares authorized, 316,201,519 shares issued and 312,548,719 shares outstanding at March 31, 2006 and 315,591,668 shares issued and 312,938,868 shares outstanding at September 30, 2005			3.2				3.2
Additional capital			1,641.7				1,624.8
Retained earnings			4,394.8				3,791.3
Treasury stock, 3,652,800 shares at March 31, 2006 and 2,652,800 shares at September 30, 2005, at cost			(95.7	)			(58.9	)
			5,944.0				5,360.4
Total liabilities and stockholders’ equity		$	13,511.0			$	12,514.8

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
		(In millions, except per share data)
		(Unaudited)
Homebuilding:
Revenues:
Home sales		$	3,472.3			$	2,706.8			$	6,261.4			$	5,155.8
Land/lot sales			54.2				120.1				106.9				145.2
			3,526.5				2,826.9				6,368.3				5,301.0
Cost of sales:
Home sales			2,594.8				2,034.7				4,612.0				3,866.1
Land/lot sales			20.1				72.7				39.4				88.4
			2,614.9				2,107.4				4,651.4				3,954.5
Gross profit:
Home sales			877.5				672.1				1,649.4				1,289.7
Land/lot sales			34.1				47.4				67.5				56.8
			911.6				719.5				1,716.9				1,346.5
Selling, general and administrative expense			364.9				267.0				690.5				524.7
Interest expense			10.6				—				15.0				—
Other (income) expense			(5.6	)			(5.9	)			(10.5	)			(10.9	)
			541.7				458.4				1,021.9				832.7
Financial Services:
Revenues			71.1				49.8				132.4				95.8
General and administrative expense			49.4				33.9				96.8				66.6
Interest expense			7.8				2.6				15.9				5.0
Other (income)			(13.4	)			(6.3	)			(27.6	)			(13.0	)
			27.3				19.6				47.3				37.2
Income before income taxes			569.0				478.0				1,069.2				869.9
Provision for income taxes			216.2				184.0				406.3				334.9
Net income		$	352.8			$	294.0			$	662.9			$	535.0
Basic net income per common share		$	1.13			$	0.94			$	2.12			$	1.72
Net income per common share assuming dilution		$	1.11			$	0.92			$	2.09			$	1.68
Cash dividends declared per common share		$	0.10			$	0.0675			$	0.19			$	0.1275

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

		Six Months
		Ended March 31,
		2006				2005
		(In millions)
		(Unaudited)
OPERATING ACTIVITIES
Net income		$	662.9			$	535.0
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			26.4				26.8
Amortization of debt premiums, discounts and fees			2.3				2.1
Stock option compensation expense			4.9				—
Income tax benefit from stock option exercises			(5.1	)			—
Loss on redemption of 9.375% senior notes			10.6				—
Changes in operating assets and liabilities:
Increase in construction in progress and finished homes			(1,316.1	)			(706.0	)
Increase in residential land and lots — developed, under development and held for development			(1,038.8	)			(572.5	)
Increase in earnest money deposits and other assets			(114.1	)			(70.9	)
Decrease (increase) in mortgage loans held for sale			641.5				(24.9	)
(Decrease) increase in accounts payable and other liabilities			(190.2	)			96.3
NET CASH USED IN OPERATING ACTIVITIES			(1,315.7	)			(714.1	)
INVESTING ACTIVITIES
Net purchases of property and equipment			(35.1	)			(28.8	)
NET CASH USED IN INVESTING ACTIVITIES			(35.1	)			(28.8	)
FINANCING ACTIVITIES
Proceeds from notes payable			2,583.9				1,452.7
Repayment of notes payable			(2,020.0	)			(627.5	)
Purchase of treasury stock			(36.8	)			—
Proceeds from stock associated with certain employee benefit plans			6.4				12.7
Income tax benefit from exercise of stock options			5.1				—
Cash dividends paid			(59.4	)			(40.2	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			479.2				797.7
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(871.6	)			54.8
Cash and cash equivalents at beginning of period			1,149.8				518.0
Cash and cash equivalents at end of period		$	278.2			$	572.8
Supplemental disclosures of noncash activities:
Notes payable issued for inventory		$	35.3			$	17.8

See accompanying notes to consolidated financial statements.

D.R. HORTON, INC. AND SUBSIDIARIES

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its wholly-owned, majority-owned and controlled subsidiaries (which are referred to as the Company, unless the context otherwise requires), as well as certain variable interest entities required to be consolidated pursuant to Interpretation No. 46, as amended, issued by the Financial Accounting Standards Board (FASB). All significant intercompany accounts, transactions and balances have been eliminated in consolidation. The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and the instructions to Form 10-Q and Regulation S-X. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. These financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2005.

Seasonality - Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, the operating results for the three and six-month periods ended March 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2006.

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

Business - The Company is a national homebuilder that is engaged primarily in the construction and sale of single-family housing in 82 markets and 27 states in the United States at March 31, 2006. The Company designs, builds and sells single-family detached houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. To a lesser extent, the Company also builds and sells attached homes. Periodically, the Company sells land and lots it has developed or bought. The Company also provides title agency and mortgage brokerage services, principally to its homebuyers. The Company does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors.

NOTE B — SEGMENT INFORMATION

The Company’s reportable business segments consist of homebuilding and financial services. Homebuilding is the Company’s core business, generating 98% of consolidated revenues and 96% of consolidated income before income taxes during both six-month periods ended March 31, 2006 and 2005. The homebuilding reporting segment is comprised of the aggregate of the Company’s regional homebuilding operations and generates most of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

NOTE C — EARNINGS PER SHARE

Basic earnings per share for the three months and six months ended March 31, 2006 and 2005 is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

The following table sets forth the denominators used in the computation of basic and diluted earnings per share:

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
		(In millions)
Denominator for basic earnings per share— weighted average common shares			312.4				312.0				312.7				311.8
Effect of dilutive securities:
Employee stock options			4.3				6.0				4.4				5.8
Denominator for diluted earnings per share— adjusted weighted average common shares			316.7				318.0				317.1				317.6

Options to purchase 30,000 shares of common stock during the three and six months ended March 31, 2006 were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, their effect would be antidilutive. All options outstanding during the three and six months ended March 31, 2005 were included in the computation of diluted earnings per share.

NOTE D — CONSOLIDATED LAND INVENTORY NOT OWNED

In the ordinary course of its homebuilding business, the Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under such option purchase contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company’s discretion. Under the requirements of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended (FIN 46), certain of the Company’s option purchase contracts result in the creation of a variable interest in the entity holding the land parcel under option.

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

The consolidation of these variable interest entities and other inventory obligations added $175.8 million in land inventory not owned and minority interests related to entities not owned to the Company’s balance sheet at March 31, 2006. The Company’s obligations related to these land or lot option contracts are guaranteed by cash deposits totaling $21.8 million and performance letters of credit, promissory notes and surety bonds totaling $7.1 million. Creditors of these variable interest entities have no recourse against the Company.

At March 31, 2006, including the deposits with the variable interest entities above, the Company had deposits amounting to $315.3 million to purchase land and lots with a total remaining purchase price of $5.8 billion. For the variable interest entities which are unconsolidated because the Company is not subject to a majority of the risk of loss or entitled to receive a majority of the entities’ residual returns, the maximum exposure to loss is generally limited to the amounts of the Company’s option deposits, which totaled $212.2 million at March 31, 2006.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE E — NOTES PAYABLE

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

		March 31,				September 30,
		2006				2005
		(In millions)
Homebuilding:
Unsecured:
Revolving credit facility due 2010		$	1,350.0			$	—
7.5% senior notes due 2007			215.0				215.0
5% senior notes due 2009, net			199.7				199.6
8% senior notes due 2009, net			384.2				384.1
4.875% senior notes due 2010, net			248.8				248.7
9.75% senior subordinated notes due 2010, net.			149.3				149.3
7.875% senior notes due 2011, net			198.9				198.8
9.375% senior subordinated notes due 2011, net			—				199.8
10.5% senior subordinated notes due 2011, net.			149.8				150.2
8.5% senior notes due 2012, net			248.5				248.4
5.375% senior notes due 2012			300.0				300.0
6.875% senior notes due 2013			200.0				200.0
5.875% senior notes due 2013			100.0				100.0
6.125% senior notes due 2014, net			197.5				197.4
5.625% senior notes due 2014, net			248.2				248.1
5.25% senior notes due 2015, net			297.9				297.8
5.625% senior notes due 2016, net			297.6				297.5
Other secured			63.3				25.4
		$	4,848.7			$	3,660.1
Financial Services:
Mortgage warehouse facility due 2006		$	340.0			$	549.5
Commercial paper conduit facility due 2006			335.0				700.0
		$	675.0			$	1,249.5

The Company filed with the Securities and Exchange Commission a universal shelf registration statement registering $3.0 billion in debt and equity securities, which became effective in September 2005. At March 31, 2006, the capacity to issue new debt or equity securities remained at $3.0 billion. In April 2006, the Company’s senior note issuances, as described in Note N, reduced the capacity under the universal shelf registration statement to $2.25 billion.

Homebuilding:

In December 2005, the Company entered into a $2.15 billion unsecured revolving credit facility, which includes a $1.0 billion letter of credit sub-facility. The revolving credit facility has an uncommitted $750 million accordion feature which could be used to increase the facility to $2.9 billion. The new credit facility, which matures on December 16, 2010, replaced the Company’s previous $1.21 billion credit facility. The Company’s borrowing capacity under the new facility is reduced by the amount of letters of credit outstanding. At March 31, 2006, the Company’s borrowing capacity under the facility was $690.0 million. The facility is guaranteed by substantially all of the Company’s wholly-owned subsidiaries other than its financial services subsidiaries. Borrowings bear interest at rates based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company’s ratio of homebuilding debt to total capitalization and its senior unsecured debt rating. The interest rate applicable to the revolving credit facility at March 31, 2006 was 5.8% per annum. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

On March 15, 2006, the Company redeemed its 9.375% senior subordinated notes due 2011 at an aggregate redemption price of approximately $209.4 million, plus accrued interest. Concurrent with the redemption, the Company recorded interest expense of approximately $10.6 million, representing the call premium and the unamortized discount and fees related to the redeemed notes.

The revolving credit facility and, at March 31, 2006, the indentures for most of the senior and senior subordinated notes contain covenants which, taken together, limit cash dividends, certain investments, stock repurchases and other restricted payments, asset dispositions, and creation of liens, and require certain levels of leverage, interest coverage and tangible net worth. At March 31, 2006, under the most restrictive covenants, cash dividend payments for the remainder of fiscal 2006 were limited to $675.9 million, and a maximum of $1.7 billion was available for all restricted payments in the future.

Financial Services:

The Company’s mortgage subsidiary had a $300 million mortgage warehouse loan facility that matured April 7, 2006. During fiscal 2005, the Company obtained additional commitments of $150 million from its lenders through the facility’s accordion provision and additional temporary commitments of $225 million from its lenders through amendments to the credit agreement, resulting in total capacity of $675 million at September 30, 2005. Through amendments to the credit agreement in October and November 2005, the commitments under the facility were adjusted to $450 million, effective from October 28, 2005 through January 15, 2006. On January 16, 2006, the total capacity returned to $300 million. On January 30, 2006, through amendment to the credit agreement, the Company obtained additional commitments of $150 million from its lenders, resulting in total capacity of $450 million. On March 24, 2006, the agreement was further amended to bring the total capacity of the facility to $600 million through its maturity on April 7, 2006.

On April 7, 2006, the mortgage warehouse loan facility was amended and restated to extend its maturity date to April 6, 2007, and to increase the available capacity from $600 million to $670 million until May 1, 2006 and then to $540 million thereafter, subject to increases upon consent of the lenders to $750 million under the accordion feature of the credit agreement.

The mortgage warehouse facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. Borrowings bear daily interest at the 30-day LIBOR rate plus a fixed premium. The interest rate of the mortgage warehouse line payable at March 31, 2006 was 5.7% per annum.

The Company’s mortgage subsidiary also has a $500 million commercial paper conduit facility (the CP conduit facility), that expires on June 29, 2006. A temporary increase of $200 million was obtained through amendments to the credit agreement in September 2005, resulting in a total capacity of $700 million. The temporary increase was effective through October 14, 2005, when the capacity decreased to $600 million available through November 10, 2005. Beginning on November 11, 2005, the total capacity returned to $500 million. On March 24, 2006, the agreement was further amended to bring the total capacity of the facility to $650 million through its maturity on June 29, 2006.

The CP conduit facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of its homebuilding debt. The mortgage loans assigned to secure the CP conduit facility are used as collateral for asset backed commercial paper issued by multi-seller conduits in the commercial paper market. The interest rate of the CP conduit facility at March 31, 2006 was 5.3% per annum.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE F — HOMEBUILDING INTEREST

The Company capitalizes homebuilding interest costs to inventory during development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. The following table summarizes the Company’s homebuilding interest costs incurred, capitalized, charged to cost of sales and expensed directly during the three and six-month periods ended March 31, 2006 and 2005:

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
		(In millions)
Capitalized interest, beginning of period		$	226.0			$	168.3			$	200.6			$	152.7
Interest incurred — homebuilding			92.0				77.4				165.6				135.9
Interest expensed:
Directly — homebuilding			(10.6	)			—				(15.0	)			—
Amortized to cost of sales			(60.6	)			(56.0	)			(104.4	)			(98.9	)
Capitalized interest, end of period		$	246.8			$	189.7			$	246.8			$	189.7

NOTE G — WARRANTY

The Company typically provides its homebuyers a one-year comprehensive limited warranty for all parts and labor and a ten-year limited warranty for major construction defects. The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

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

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2006				2005				2006				2005
		(In millions)
Warranty liability, beginning of period		$	121.5			$	96.6			$	121.6			$	96.0
Warranties issued			18.3				14.4				33.0				27.3
Changes in liability for pre-existing warranties			(2.9	)			—				(6.0	)			(2.1	)
Settlements made			(12.2	)			(10.1	)			(23.9	)			(20.3	)
Warranty liability, end of period		$	124.7			$	100.9			$	124.7			$	100.9

NOTE H — MORTGAGE LOANS

Mortgage Loans - Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. Loans that have been closed but not committed to a third-party investor are matched with either forward sales of mortgage backed securities (FMBS) or Eurodollar Futures Contracts (EDFC) that are designated as fair value hedges. Hedged loans are either committed to third-party investors within three days of origination or pooled and committed in bulk to third-party investors typically within 30 days of origination. The notional amounts of the FMBS and the EDFC used to hedge mortgage loans held for sale can vary in relationship to the underlying loan amounts, depending on the typical movements in the value of each hedging instrument relative to the value of the underlying mortgage loans. As of March 31, 2006, the Company had $184.5 million in loans not committed to third-party investors which were hedged with $186.5 million of FMBS and EDFC.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

Loan Commitments - To meet the financing needs of its customers, the Company is party to interest rate lock commitments (IRLCs) which are extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria. In accordance with Statement of Financial Accounting Standards (SFAS) No. 133 and related Derivatives Implementation Group conclusions, the Company classifies and accounts for IRLCs as non-designated derivative instruments at fair value. The effectiveness of the fair value hedges is continuously monitored and any ineffectiveness, which for the three and six months ended March 31, 2006 and 2005 was not significant, is recognized in current earnings. At March 31, 2006, the Company’s IRLCs totaled $750.9 million.

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments, forward sales of mortgage-backed securities and the purchase of Eurodollar futures contracts. These instruments are considered non-designated derivatives and are accounted for at fair market value with gains and losses recorded in current earnings. As of March 31, 2006, the Company had approximately $206.5 million outstanding of FMBS and EDFC, and $548.0 million of best efforts whole loan delivery commitments related to its IRLCs.

NOTE I — STOCKHOLDERS’ EQUITY

During the three months ended March 31, 2006, the Board of Directors declared a quarterly cash dividend of $0.10 per common share, which was paid on February 10, 2006 to stockholders of record on January 27, 2006. A quarterly cash dividend of $0.0675 per common share was declared during the three months ended March 31, 2005.

In April 2006, the Board of Directors declared a quarterly cash dividend of $0.10 per common share, payable on May 19, 2006 to stockholders of record on May 5, 2006. A quarterly cash dividend of $0.09 per common share was declared in the comparable quarter of fiscal 2005.

At March 31, 2006, the Company had the capacity to issue new debt or equity securities amounting to $3.0 billion under its universal shelf registration statement. In April 2006, the Company’s senior note issuances, as described in Note N, reduced the capacity under the universal shelf registration statement to $2.25 billion. Also, at March 31, 2006, the Company had the capacity to issue approximately 22.5 million shares of common stock under its acquisition shelf registration statement, to effect, in whole or in part, possible future business acquisitions.

In November 2005, the Board of Directors authorized the repurchase of up to $500 million of the Company’s common stock, replacing the previous common stock repurchase authorization. During the six months ended March 31, 2006, the Company repurchased 1,000,000 shares of its common stock at a total cost of $36.8 million, all of which occurred during the three months ended December 31, 2005. As of March 31, 2006, the Company had $463.2 million remaining of the Board of Directors’ authorization for repurchases of common stock.

On January 26, 2006, the Company’s shareholders approved an amendment to the Company’s charter which increased the number of authorized shares of common stock to one billion shares.

NOTE J — STOCK-BASED COMPENSATION

On October 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share Based Payment,” which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. Prior to October 1, 2005, the Company accounted for stock option grants using the intrinsic value method in accordance with the Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and recognized no compensation expense for stock option grants since all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

SFAS No. 123(R) was adopted using the “modified prospective” method. Under this method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. In addition, compensation

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

expense must be recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period. The fair values of the options are calculated using a Black-Scholes option pricing model. Results of prior periods have not been restated. For the three months and six months ended March 31, 2006, the Company’s compensation expense related to stock option grants was $2.5 million and $4.9 million, respectively. At March 31, 2006, there was $56.5 million of total unrecognized compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 6.9 years. In addition, SFAS No. 123(R) requires the benefits of tax deductions in excess of recognized compensation expense to be reported in the Statement of Cash Flows as a financing cash flow rather than an operating cash flow as previously reported.

SFAS No. 123(R) requires disclosure of pro forma information for periods prior to the adoption. The following table sets forth the effect on net income and earnings per share as if SFAS No. 123(R) had been applied to the three and six-month periods ended March 31, 2005:

		Three Months Ended				Six Months Ended
		March 31, 2005				March 31, 2005
		(In millions, except per share data)
Net income as reported		$	294.0			$	535.0
Total stock-based employee compensation expense determined under fair value based method, net of tax			(1.9	)			(3.9	)
Pro forma net income		$	292.1			$	531.1
Reported basic earnings per share		$	0.94			$	1.72
Pro forma basic earnings per share		$	0.94			$	1.70
Reported diluted earnings per share		$	0.92			$	1.68
Pro forma diluted earnings per share		$	0.92			$	1.67

The Company Stock Incentive Plans provide for the granting of stock options to certain key employees of the Company to purchase shares of common stock. Options are granted at exercise prices which equal the market value of the Company’s common stock at the date of grant. Options generally expire 10 years after the dates on which they were granted. Options generally vest over periods of 5 to 9.75 years. The following table provides additional information related to the Company Stock Incentive Plans:

		Six Months Ended March 31, 2006
										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contract Life				Value
		Options				Price				(Years)				(In millions)
Stock Options
Outstanding at beginning of period			13,965,644			$	11.55				6.0
Granted			—				—
Exercised			(547,812	)			7.44
Canceled			(671,448	)			14.23
Outstanding at end of period			12,746,384			$	11.59				5.5			$	275.9
Exercisable at end of period			4,345,083			$	7.68				4.2			$	111.0

The total intrinsic value of options exercised during the six months ended March 31, 2006 and 2005 was $15.7 million and $22.4 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

A summary of the Company’s nonvested options as of and for the six-month period ended March 31, 2006 is as follows:

						Weighted
						Average
						Grant-Date
		Options				Fair Value
Nonvested at beginning of period			9,527,341			$	7.52
Granted			—				—
Vested			(457,858	)			3.26
Canceled			(668,182	)			8.02
Nonvested at end of period			8,401,301			$	7.71

On January 26, 2006, the Company’s shareholders approved the D.R. Horton, Inc. 2006 Stock Incentive Plan, which replaced the Company’s 1991 Stock Incentive Plan. The aggregate number of shares available under the 2006 Stock Incentive Plan includes the new authorization of 28.0 million shares, plus approximately 1.9 million shares that remained available for awards under the 1991 Stock Incentive Plan on that date. Total shares available for awards under the 2006 Stock Incentive Plan are subject to increase by subsequent specified terminations of awards under the 1991 Stock Incentive Plan that were outstanding on January 26, 2006. For awards other than options or stock appreciation rights, availability will be reduced at the rate of 1.75 shares for each share subject to the award. At March 31, 2006, there were a total of 30.4 million shares available for awards under the 2006 Stock Incentive Plan.

NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement changes the requirements for the accounting for and reporting of a change in accounting principle, and requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for the Company for accounting changes and corrections of errors made after October 1, 2006, the beginning of fiscal year 2007. The adoption of SFAS No. 154 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued Staff Position 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP 109-1). The American Jobs Creation Act, which was signed into law in October 2004, provides a tax deduction on qualified domestic production activities. When fully phased-in, the deduction will be up to 9% of the lesser of “qualified production activities income” or taxable income. Based on the guidance provided by FSP 109-1, this deduction should be accounted for as a special deduction under SFAS No. 109 and will reduce tax expense in the period or periods that the amounts are deductible on the tax return. The tax benefit resulting from the new deduction was effective beginning in the Company’s first quarter of fiscal 2006, and is reflected in the effective income tax rate of 38.0% for the three and six months ended March 31, 2006, reduced from 38.5% for the three and six months ended March 31, 2005. The Company is continuing to evaluate the impact of this law on its future financial statements and currently estimates the fiscal 2006 reduction in its federal income tax rate from fiscal 2005 will be in the range of 0.50% to 0.75% of taxable income.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE L — CONTINGENCIES AND COMMITMENTS

The Company has been named as defendant in various claims, complaints and other legal actions arising in the ordinary course of business, including warranty and construction defect claims on closed homes. The Company has established reserves for such contingencies, based on the expected costs of the self-insured portion of such claims. The Company’s estimates of such reserves are based on the facts and circumstances of individual pending claims and historical data and trends, including estimates of the costs of unreported claims related to past operations. These reserve estimates are subject to ongoing revision as the circumstances of individual pending claims and historical data and trends change. Adjustments to estimated reserves are recorded in the accounting period in which the change in estimate occurs.

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

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, 2006, the Company had cash deposits of $286.6 million, promissory notes of $15.6 million, and letters of credit and surety bonds of $13.1 million to purchase land and lots with a total remaining purchase price of $5.8 billion. Only $135.5 million of the $5.8 billion in land and lot option purchase contracts contain specific performance clauses which may require the Company to purchase the land or lots upon the land seller meeting certain obligations. The majority of land and lots under contract are expected to be purchased within three years.

Additionally, in the normal course of its business activities, the Company provides standby letters of credit and surety bonds, issued by third parties, to secure performance under various contracts. At March 31, 2006, outstanding standby letters of credit were $119.9 million and surety bonds were $2.1 billion.

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE M — SUMMARIZED FINANCIAL INFORMATION

All of the Company’s senior and senior subordinated notes and the $2.15 billion unsecured revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s direct and indirect subsidiaries (Guarantor Subsidiaries), other than financial services subsidiaries and certain other inconsequential subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

Certain balances in the following Consolidating Statement of Income and Consolidating Statement of Cash Flows for the three and six months ended March 31, 2005 have been revised to conform with the current presentation and the presentation in the Company’s consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2005. These revisions primarily consist of separate reporting of equity in income of subsidiaries and other income/expense in the Consolidating Statement of Income and the reclassification of equity in income of subsidiaries from cash flows from financing activities to cash flows from operating activities in the Consolidating Statement of Cash Flows. Such reclassifications on the Statement of Cash Flows resulted in a decrease in operating cash flows and an increase in financing cash flows for the D.R. Horton, Inc. column of $441.9 million for the six months ended March 31, 2005.

Consolidating Balance Sheet
March 31, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
ASSETS
Cash and cash equivalents		$	44.1			$	157.1			$	77.0			$	—			$	278.2
Investments in subsidiaries			3,030.2				—				—				(3,030.2	)			—
Inventories			2,728.4				7,928.2				195.8				—				10,852.4
Property and equipment (net)			37.7				59.2				18.3				—				115.2
Earnest money deposits and other assets			447.7				373.8				147.6				—				969.1
Mortgage loans held for sale			—				—				717.2				—				717.2
Goodwill			—				578.9				—				—				578.9
Intercompany receivables			5,196.6				—				—				(5,196.6	)			—
Total Assets		$	11,484.7			$	9,097.2			$	1,155.9			$	(8,226.8	)		$	13,511.0
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	704.5			$	1,095.9			$	64.9			$	—			$	1,865.3
Intercompany payables			—				5,132.6				64.0				(5,196.6	)			—
Notes payable			4,836.2				12.5				675.0				—				5,523.7
Total Liabilities			5,540.7				6,241.0				803.9				(5,196.6	)			7,389.0
Minority interests			—				—				178.0				—				178.0
Total Equity			5,944.0				2,856.2				174.0				(3,030.2	)			5,944.0
Total Liabilities & Equity		$	11,484.7			$	9,097.2			$	1,155.9			$	(8,226.8	)		$	13,511.0

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE M — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Balance Sheet
September 30, 2005

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
ASSETS
Cash and cash equivalents		$	726.6			$	381.0			$	42.2			$	—			$	1,149.8
Investments in subsidiaries			2,563.4				—				—				(2,563.4	)			—
Inventories			2,157.4				6,113.4				216.0				—				8,486.8
Property and equipment (net)			13.8				74.8				18.6				—				107.2
Earnest money deposits and other assets			364.3				369.6				99.5				—				833.4
Mortgage loans held for sale			—				—				1,358.7				—				1,358.7
Goodwill			—				578.9				—				—				578.9
Intercompany receivables			3,969.3				—				—				(3,969.3	)			—
Total Assets		$	9,794.8			$	7,517.7			$	1,735.0			$	(6,532.7	)		$	12,514.8
LIABILITIES & EQUITY
Accounts payable and other liabilities		$	782.4			$	1,194.2			$	65.0			$	—			$	2,041.6
Intercompany payables			—				3,893.3				76.0				(3,969.3	)			—
Notes payable			3,652.0				8.1				1,249.5				—				4,909.6
Total Liabilities			4,434.4				5,095.6				1,390.5				(3,969.3	)			6,951.2
Minority interests			—				—				203.2				—				203.2
Total Equity			5,360.4				2,422.1				141.3				(2,563.4	)			5,360.4
Total Liabilities & Equity		$	9,794.8			$	7,517.7			$	1,735.0			$	(6,532.7	)		$	12,514.8

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE M — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Three Months Ended March 31, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
Homebuilding:
Revenues:
Home sales		$	803.3			$	2,667.0			$	2.0			$	—			$	3,472.3
Land/lot sales			—				54.2				—				—				54.2
			803.3				2,721.2				2.0				—				3,526.5
Cost of sales:
Home sales			527.2				2,066.4				1.2				—				2,594.8
Land/lot sales			—				20.1				—				—				20.1
			527.2				2,086.5				1.2				—				2,614.9
Gross profit:
Home sales			276.1				600.6				0.8				—				877.5
Land/lot sales			—				34.1				—				—				34.1
			276.1				634.7				0.8				—				911.6
Selling, general and administrative expense			128.1				234.3				2.5				—				364.9
Equity in income of subsidiaries			(427.9	)			—				—				427.9				—
Interest expense			10.6				—				—				—				10.6
Other (income) expense			(3.7	)			(0.3	)			(1.6	)			—				(5.6	)
			569.0				400.7				(0.1	)			(427.9	)			541.7
Financial Services:
Revenues			—				—				71.1				—				71.1
General and administrative expense			—				—				49.4				—				49.4
Interest expense			—				—				7.8				—				7.8
Other (income)			—				—				(13.4	)			—				(13.4	)
			—				—				27.3				—				27.3
Income before income taxes			569.0				400.7				27.2				(427.9	)			569.0
Provision for income taxes			216.2				152.2				10.4				(162.6	)			216.2
Net income		$	352.8			$	248.5			$	16.8			$	(265.3	)		$	352.8

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE M — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Six Months Ended March 31, 2006

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
										(In millions)
Homebuilding:
Revenues:
Home sales		$	1,453.4			$	4,803.7			$	4.3			$	—			$	6,261.4
Land/lot sales			38.2				68.7				—				—				106.9
			1,491.6				4,872.4				4.3				—				6,368.3
Cost of sales:
Home sales			955.0				3,654.6				2.4				—				4,612.0
Land/lot sales			8.0				31.4				—				—				39.4
			963.0				3,686.0				2.4				—				4,651.4
Gross profit:
Home sales			498.4				1,149.1				1.9				—				1,649.4
Land/lot sales			30.2				37.3				—				—				67.5
			528.6				1,186.4				1.9				—				1,716.9
Selling, general and administrative expense			205.1				480.8				4.6				—				690.5
Equity in income of subsidiaries			(753.7	)			—				—				753.7				—
Interest expense			15.0				—				—				—				15.0
Other (income) expense			(7.0	)			(1.3	)			(2.2	)			—				(10.5	)
			1,069.2				706.9				(0.5	)			(753.7	)			1,021.9
Financial Services:
Revenues			—				—				132.4				—				132.4
General and administrative expense			—				—				96.8				—				96.8
Interest expense			—				—				15.9				—				15.9
Other (income)			—				—				(27.6	)			—				(27.6	)
			—				—				47.3				—				47.3
Income before income taxes			1,069.2				706.9				46.8				(753.7	)			1,069.2
Provision for income taxes			406.3				268.6				17.8				(286.4	)			406.3
Net income		$	662.9			$	438.3			$	29.0			$	(467.3	)		$	662.9

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2006

NOTE M — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Three Months Ended March 31, 2005

		D.R.				Guarantor				Non-Guarantor
		Horton, Inc.				Subsidiaries				Subsidiaries				Eliminations				Total
		(In millions)
Homebuilding:
Revenues:
Home sales		$	618.5			$	2,075.8			$	12.5			$	—			$	2,706.8
Land/lot sales			96.0				24.1				—				—				120.1
			714.5				2,099.9				12.5				—				2,826.9
Cost of sales:
Home sales			449.6				1,577.2				7.9				—				2,034.7
Land/lot sales			61.1				11.6				—				—				72.7
			510.7				1,588.8				7.9				—				2,107.4
Gross profit:
Home sales			168.9				498.6				4.6				—				672.1
Land/lot sales			34.9				12.5				—				—				47.4
			203.8				511.1				4.6				—				719.5
Selling, general and administrative expense			107.7				154.1				1.9				3.3				267.0
Equity in income of subsidiaries			(378.9	)			—				—				378.9				—
Other (income) expense			(3.0	)			(2.8	)			(0.1	)			—				(5.9	)
			478.0				359.8				2.8				(382.2	)			458.4
Financial Services:
Revenues			—				—				49.8				—				49.8
General and administrative expense			—				—				37.2				(3.3	)			33.9
Interest expense			—				—				2.6				—				2.6
Other (income)			—				—				(6.3	)			—				(6.3	)
			—				—				16.3				3.3				19.6
Income before income taxes			478.0				359.8				19.1				(378.9	)			478.0
Provision for income taxes			184.0				138.5				7.4				(145.9	)			184.0
Net income		$	294.0			$	221.3			$	11.7			$	(233.0	)		$	294.0