##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2008 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO Commission File Number: 1-6776 CENTEX CORPORATION (Exact name of registrant as specified in its charter)
 Nevada
    
    75-0778259(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 2728 N. Harwood, Dallas, Texas 75201
(Address of principal executive offices) (Zip Code) (214) 981-5000
(Registrants telephone number, including area code) 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, a non-accelerated
filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): þ Large accelerated filer
    
    o  Accelerated filer
    
    o Non-accelerated filer (Do not check if a smaller reporting company)
    
    o Smaller reporting company
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the close of business on July 22, 2008: 123,572,889 shares of common stock, par value $ .25 per
share.




---



##### 



Centex Corporation and Subsidiaries Form 10-Q Table of Contents June 30, 2008 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Statements of Consolidated Operations
    
    
    1Consolidated Balance Sheets with Consolidating Details
    
    
    2Statements of Consolidated Cash Flows with Consolidating Details
    
    
    4Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    50PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    51Item 1A. Risk Factors
    
    
    51Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 6. Exhibits
    
    
    54Signatures
    
    
    56Computation of Ratio of Earnings to Fixed ChargesCertification of the CEO Pursuant to Rules 13a-14 and 15d-14Certification of the CFO Pursuant to Rules 13a-14 and 15d-14Certification of the CEO Pursuant to Section 1350Certification of the CFO Pursuant to Section 1350
  i




---



##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements Centex Corporation and Subsidiaries 
 Statements of Consolidated Operations
   For the Three Months Ended June 30,2008
    
    
    2007RevenuesHome Building
    
    $
    1,049,699
    
    
    $
    1,803,820Financial Services
    
    
    76,423
    
    
    
    97,9661,126,122
    
    
    
    1,901,786Costs and ExpensesHome Building
    
    
    1,164,603
    
    
    
    1,955,546Financial Services
    
    
    70,356
    
    
    
    82,997Other
    
    
    (806
    )
    
    
    Corporate General and Administrative
    
    
    58,639
    
    
    
    44,981Interest Expense
    
    
    6,180
    
    
    
    1,298,972
    
    
    
    2,083,524Loss from Unconsolidated Entities
    
    
    (20,297
    )
    
    
    (25,353
    )Interest and Other Income
    
    
    10,400
    
    
    
    10,226Loss from Continuing OperationsBefore Income Taxes
    
    
    (182,747
    )
    
    
    (196,865
    )Income Tax Benefit
    
    
    (13,635
    )
    
    
    (64,784
    )Loss from Continuing Operations
    
    
    (169,112
    )
    
    
    (132,081
    )Earnings from Discontinued Operations, net of Tax
Provision of $20,231 and $2,549
    
    
    19,013
    
    
    
    4,122Net Loss
    
    $
    (150,099
    )
    
    $
    (127,959
    )Basic and Diluted Loss Per ShareContinuing Operations
    
    $
    (1.36
    )
    
    $
    (1.08
    )Discontinued Operations
    
    
    0.15
    
    
    
    0.03$
    (1.21
    )
    
    $
    (1.05
    )Average Shares OutstandingBasic and Diluted
    
    
    124,231,358
    
    
    
    121,469,951Cash Dividends Per Share
    
    $
    0.04
    
    
    $
    0.04
 See Notes to Consolidated Financial Statements. 1




---



##### Table of Contents



Centex Corporation and Subsidiaries 
 Consolidated Balance Sheets with Consolidating Details
 
 Centex Corporation and SubsidiariesJune 30, 2008
    
    
    March 31, 2008AssetsCash and Cash Equivalents
    
    $
    1,235,383
    
    
    $
    586,810Restricted Cash
    
    
    50,161
    
    
    
    51,440Receivables -Mortgage Loans, net
    
    
    563,376
    
    
    
    515,880Trade and Other, including Notes of $19,925 and $17,388
    
    
    220,462
    
    
    
    823,861Inventories -Housing Projects
    
    
    4,206,532
    
    
    
    4,628,860Land Held for Development and Sale
    
    
    652,784
    
    
    
    558,756Land Held Under Option Agreements Not Owned
    
    
    142,723
    
    
    
    147,792Other
    
    
    16,185
    
    
    
    27,023Investments -Joint Ventures
    
    
    218,633
    
    
    
    206,822Unconsolidated Subsidiaries
    
    
    
    
    
    
    Property and Equipment, net
    
    
    69,071
    
    
    
    77,931Other Assets -Deferred Income Taxes, net
    
    
    142,838
    
    
    
    191,246Goodwill
    
    
    51,622
    
    
    
    51,622Deferred Charges and Other, net
    
    
    158,401
    
    
    
    172,300Assets of Discontinued Operations
    
    
    
    
    
    
    96,989$
    7,728,171
    
    
    $
    8,137,332Liabilities and Stockholders EquityAccounts Payable
    
    $
    134,533
    
    
    $
    259,170Accrued Liabilities
    
    
    1,734,227
    
    
    
    1,805,519Senior Notes and Other Debt
    
    
    3,253,541
    
    
    
    3,325,167Financial Services Mortgage Warehouse Facilities
    
    
    400,440
    
    
    
    337,053Payable to Affiliates
    
    
    
    
    
    
    Liabilities of Discontinued Operations
    
    
    
    
    
    
    34,001Commitments and ContingenciesMinority Interests
    
    
    61,776
    
    
    
    77,761Stockholders Equity -Preferred Stock, Authorized 5,000,000 Shares, None
Issued
    
    
    
    
    
    
    Common Stock, $.25 Par Value; Authorized 300,000,000
Shares; Outstanding 123,559,525 and 123,278,881 Shares
    
    
    31,766
    
    
    
    31,763Capital in Excess of Par Value
    
    
    80,190
    
    
    
    95,088Retained Earnings
    
    
    2,210,593
    
    
    
    2,365,634Treasury Stock, at Cost; 3,504,179 and 3,774,643 Shares
    
    
    (178,895
    )
    
    
    (193,824
    )Total Stockholders Equity
    
    
    2,143,654
    
    
    
    2,298,661$
    7,728,171
    
    
    $
    8,137,332
 See Notes to Consolidated Financial Statements. 2




---



##### Table of Contents



Centex Corporation and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited) Centex*
    
    
    Financial ServicesJune 30, 2008
    
    
    March 31, 2008
    
    
    June 30, 2008
    
    
    March 31, 2008$
    1,229,462
    
    
    $
    562,766
    
    
    $
    5,921
    
    
    $
    24,04427,459
    
    
    
    28,562
    
    
    
    22,702
    
    
    
    22,878
    
    
    
    
    
    
    
    563,376
    
    
    
    515,880197,428
    
    
    
    800,275
    
    
    
    23,034
    
    
    
    23,5864,206,532
    
    
    
    4,628,860
    
    
    
    
    
    
    
    652,784
    
    
    
    558,756
    
    
    
    
    
    
    
    142,723
    
    
    
    147,792
    
    
    
    
    
    
    
    5,910
    
    
    
    16,173
    
    
    
    10,275
    
    
    
    10,850218,633
    
    
    
    206,822
    
    
    
    
    
    
    
    252,419
    
    
    
    292,647
    
    
    
    
    
    
    
    57,612
    
    
    
    65,298
    
    
    
    11,459
    
    
    
    12,63383,448
    
    
    
    119,590
    
    
    
    59,390
    
    
    
    71,65642,670
    
    
    
    42,670
    
    
    
    8,952
    
    
    
    8,952137,403
    
    
    
    145,719
    
    
    
    20,998
    
    
    
    26,581
    
    
    
    96,989
    
    
    
    
    
    
    
    $
    7,254,483
    
    
    $
    7,712,919
    
    
    $
    726,107
    
    
    $
    717,060$
    127,019
    
    
    $
    250,096
    
    
    $
    7,514
    
    
    $
    9,0741,668,953
    
    
    
    1,727,684
    
    
    
    65,274
    
    
    
    77,8353,253,541
    
    
    
    3,325,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400,440
    
    
    
    337,053
    
    
    
    
    
    
    
    10,965
    
    
    
    43,463
    
    
    
    34,001
    
    
    
    
    
    
    
    61,316
    
    
    
    77,310
    
    
    
    460
    
    
    
    451
    
    
    
   
    
    
    
    
    
    
    
    31,766
    
    
    
    31,763
    
    
    
    1
    
    
    
    180,190
    
    
    
    95,088
    
    
    
    478,467
    
    
    
    478,4672,210,593
    
    
    
    2,365,634
    
    
    
    (237,014
    )
    
    
    (229,284
    )(178,895
    )
    
    
    (193,824
    )
    
    
    
    
    
    
    2,143,654
    
    
    
    2,298,661
    
    
    
    241,454
    
    
    
    249,184$
    7,254,483
    
    
    $
    7,712,919
    
    
    $
    726,107
    
    
    $
    717,060
   *
    
    In the supplemental data presented above, Centex represents the consolidation of all
subsidiaries other than those included in Financial Services. Transactions between Centex
and Financial Services have been eliminated from the Centex Corporation and Subsidiaries
balance sheets. 3




---



##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited) Centex Corporation and SubsidiariesFor the Three Months Ended June 30,2008
    
    
    2007Cash Flows  Operating ActivitiesNet Earnings (Loss)
    
    $
    (150,099
    )
    
    $
    (127,959
    )AdjustmentsDepreciation and Amortization
    
    
    11,586
    
    
    
    14,846Stock-based Compensation
    
    
    6,587
    
    
    
    13,201Provision for Losses on Mortgage Loans and Real Estate Owned
    
    
    2,713
    
    
    
    2,969Impairments and Write-off of Assets
    
    
    60,216
    
    
    
    165,462Deferred Income Tax Provision (Benefit)
    
    
    36,419
    
    
    
    (67,696
    )Loss of Joint Ventures and Unconsolidated Subsidiaries
    
    
    20,297
    
    
    
    25,353Distributions of Earnings of Joint Ventures and
Unconsolidated Subsidiaries
    
    
    8,151
    
    
    
    1,669Gain on Sale of Assets
    
    
    (39,244
    )
    
    
    (5,463
    )Changes in Assets and Liabilities, Excluding Effect of AcquisitionsDecrease (Increase) in Restricted Cash
    
    
    1,279
    
    
    
    (1,707
    )Decrease in Trade Receivables, Notes and Other
    
    
    606,204
    
    
    
    54,746(Increase) Decrease in Mortgage Loans Held for Sale
    
    
    (69,078
    )
    
    
    173,306Decrease (Increase) in Housing Projects and Land Held for Development and
Sale
    
    
    255,817
    
    
    
    (236,003
    )Decrease (Increase) in Other Inventories
    
    
    8,767
    
    
    
    (1,335
    )Decrease in Accounts Payable and Accrued Liabilities
    
    
    (204,791
    )
    
    
    (391,393
    )Decrease (Increase) in Other Assets, net
    
    
    3,500
    
    
    
    5,464(Decrease) Increase in Payable to Affiliates
    
    
    
    
    
    
    Other
    
    
    (431
    )
    
    
    (226
    )557,893
    
    
    
    (374,766
    )Cash Flows  Investing Activities(Issuance of) Payments received on Notes Receivable
    
    
    (1,350
    )
    
    
    826Decrease in Construction Loans
    
    
    16,403
    
    
    
    17,641Investment in and Advances to Joint Ventures
    
    
    (40,528
    )
    
    
    (46,343
    )Distributions of Capital from Joint Ventures
    
    
    396
    
    
    
    27,154Decrease (Increase) in Investment in and Advances to Unconsolidated Subsidiaries
    
    
    
    
    
    
    Purchases of Property and Equipment, net
    
    
    (1,352
    )
    
    
    (2,498
    )Proceeds (Settlements) from Dispositions
    
    
    136,923
    
    
    
    (15,937
    )Other
    
    
    
    
    
    
    (3,563
    )110,492
    
    
    
    (22,720
    )Cash Flows  Financing ActivitiesDecrease in Restricted Cash
    
    
    
    
    
    
    1,219Increase (Decrease) in Short-term Debt, net
    
    
    59,337
    
    
    
    (206,793
    )CentexIssuance of Long-term Debt
    
    
    
    
    
    
    53Repayment of Long-term Debt
    
    
    (67,682
    )
    
    
    (55,488
    )Proceeds
from Stock Option Exercises, net of Tax Effects from Stock-Based Awards
    
    
    (6,545
    )
    
    
    14,062Purchases of Common Stock, net
    
    
    (8
    )
    
    
    (252
    )Dividends Paid
    
    
    (4,942
    )
    
    
    (4,825
    )(19,840
    )
    
    
    (252,024
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    648,545
    
    
    
    (649,510
    )Cash and Cash Equivalents at Beginning of Period(1)
    
    
    586,838
    
    
    
    882,754Cash and Cash Equivalents at End of Period(2)
    
    $
    1,235,383
    
    
    $
    233,244
 See Notes to Consolidated Financial Statements.   (1)
    
    Amount includes cash and cash equivalents of discontinued operations of $28 as of March 31,
2008 and $220 as of March 31, 2007.(2)
    
    Amount includes cash and cash equivalents of discontinued operations of $0 as of June 30,
2008 and $50 as of June 30, 2007. 4




---



##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited) Centex *
    
    
    Financial ServicesFor the Three Months Ended June 30,
    
    
    For the Three Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007$
    (150,099
    )
    
    $
    (127,959
    )
    
    $
    570
    
    
    $
    9,25510,317
    
    
    
    13,220
    
    
    
    1,269
    
    
    
    1,6266,587
    
    
    
    13,201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,713
    
    
    
    2,96960,216
    
    
    
    165,462
    
    
    
    
    
    
    
    24,153
    
    
    
    (68,731
    )
    
    
    12,266
    
    
    
    1,03519,727
    
    
    
    16,098
    
    
    
    
    
    
    
    16,451
    
    
    
    16,669
    
    
    
    
    
    
    
    (39,244
    )
    
    
    (5,463
    )
    
    
    
    
    
    
    1,103
    
    
    
    (2,669
    )
    
    
    176
    
    
    
    962605,652
    
    
    
    50,150
    
    
    
    552
    
    
    
    4,596
    
    
    
    
    
    
    
    (69,078
    )
    
    
    173,306255,817
    
    
    
    (236,003
    )
    
    
    
    
    
    
    5,726
    
    
    
    115
    
    
    
    3,041
    
    
    
    (1,450
    )(190,670
    )
    
    
    (373,730
    )
    
    
    (14,121
    )
    
    
    (17,663
    )(2,083
    )
    
    
    6,387
    
    
    
    5,583
    
    
    
    (923
    )
    
    
    
    
    
    
    
    (32,498
    )
    
    
    21,728(440
    )
    
    
    (140
    )
    
    
    9
    
    
    
    (86
    )623,213
    
    
    
    (533,393
    )
    
    
    (89,518
    )
    
    
    195,355(1,350
    )
    
    
    826
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,403
    
    
    
    17,641(40,528
    )
    
    
    (46,343
    )
    
    
    
    
    
    
    396
    
    
    
    27,154
    
    
    
    
    
    
    
    32,498
    
    
    
    (21,728
    )
    
    
    
    
    
    
    (1,257
    )
    
    
    (2,379
    )
    
    
    (95
    )
    
    
    (119
    )136,923
    
    
    
    (15,937
    )
    
    
    
    
    
    
    
    
    
    
    (3,563
    )
    
    
    
    
    
    
    126,682
    
    
    
    (61,970
    )
    
    
    16,308
    
    
    
    17,522
    
    
    
    
    
    
    
    
    
    
    
    1,219(4,050
    )
    
    
    (307
    )
    
    
    63,387
    
    
    
    (206,486
    )
    
    
    
    53
    
    
    
    
    
    
    
    (67,682
    )
    
    
    (55,488
    )
    
    
    
    
    
    
    (6,545
    )
    
    
    14,062
    
    
    
    
    
    
    
    (8
    )
    
    
    (252
    )
    
    
    
    
    
    
    (4,942
    )
    
    
    (4,825
    )
    
    
    (8,300
    )
    
    
    (15,000
    )(83,227
    )
    
    
    (46,757
    )
    
    
    55,087
    
    
    
    (220,267
    )666,668
    
    
    
    (642,120
    )
    
    
    (18,123
    )
    
    
    (7,390
    )562,794
    
    
    
    870,688
    
    
    
    24,044
    
    
    
    12,066$
    1,229,462
    
    
    $
    228,568
    
    
    $
    5,921
    
    
    $
    4,676
   *
    
    In the supplemental data presented above, Centex represents the consolidation of all
subsidiaries other than those included in Financial Services. Transactions between Centex and
Financial Services have been eliminated from the Centex Corporation and Subsidiaries statements of
consolidated cash flows. 5




---



##### Table of Contents



Centex Corporation and Subsidiaries 
 Notes to Consolidated Financial Statements
 June 30, 2008
   (A)     SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated interim financial statements include the accounts of Centex Corporation and
all subsidiaries and other entities in which Centex Corporation has a controlling interest (the
Company). Also, included in the consolidated financial statements are certain variable interest
entities, as discussed in Note (D), Inventories. All significant intercompany balances and
transactions have been eliminated. The unaudited statements have been prepared in conformity with
accounting principles generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in financial statements prepared in
conformity with accounting principles generally accepted in the United States have been condensed
or omitted. Balance sheet and cash flow data is presented in the following categories:  
    Centex Corporation and Subsidiaries.This represents the consolidation of Centex,
Financial Services and all of their consolidated subsidiaries, related companies and
certain variable interest entities. The effects of transactions among related
companies within the consolidated group have been eliminated.
    Centex.This information is presented as supplemental information and represents the
consolidation of all subsidiaries and certain variable interest entities other than
those included in Financial Services, which are presented on an equity basis of
accounting.
    Financial Services.This information is presented as supplemental information and
represents Centex Financial Services, its subsidiaries and related companies. In the opinion of the Companys management, all adjustments (consisting of normal, recurring
adjustments) necessary to present fairly the information in the consolidated financial statements
of the Company have been included. The results of operations for such interim periods are not
necessarily indicative of results for the full year. The Company suggests that these consolidated
financial statements be read in conjunction with the consolidated financial statements and the
notes to consolidated financial statements included in the Companys latest Annual Report on Form
10-K. Certain operations have been classified as discontinued. For additional information, refer to
Note (L), Discontinued Operations. Associated results of operations and financial position are
separately reported for all periods presented. Information in these Notes to Consolidated
Financial Statements, unless otherwise noted, does not include the accounts of discontinued
operations. 6




---



##### Table of Contents



Interest Expense Interest expense relating to the Financial Services segment is included in Financial Services
costs and expenses. Home Building capitalizes interest incurred as a component of housing
projects inventory cost. Capitalized interest is included in Home Buildings costs and expenses
as related housing inventories are sold or otherwise charged to costs and expenses. For the Three MonthsEnded June 30,2008
    
    
    2007Total Interest Incurred
    
    $
    61,752
    
    
    $
    82,351Less  Interest Capitalized
    
    
    (51,269
    )
    
    
    (61,863
    )Financial Services Interest Expense
    
    
    (4,303
    )
    
    
    (20,488
    )Interest Expense, net
    
    $
    6,180
    
    
    $
    Capitalized Interest Charged to Home
Buildings Costs and Expenses
    
    $
    25,535
    
    
    $
    43,066
 Income Taxes The Company accounts for income taxes on the deferral method whereby deferred tax assets and
liabilities are provided for the tax effect of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. In accordance with the
provisions set forth by the Financial Accounting Standards Board (FASB) under Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS 109), the
Company assesses, on a quarterly basis, the realizability of its deferred tax assets. A valuation
allowance must be established when, based upon the evaluation of all available evidence, it is more
likely than not that all or a portion of the deferred tax assets will not be realized. Realization
of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of
future taxable income, tax planning strategies and reversals of existing taxable temporary
differences. For additional information regarding the Companys valuation allowance, please refer
to Note (J), Income Taxes. On April 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). The cumulative effect
of the adoption of FIN 48 was recorded as a $208.3 million reduction to beginning retained earnings
in the first quarter of fiscal year 2008. Please refer to Note (J), Income Taxes, for additional
information relating to FIN 48. In accordance with the provisions of FIN 48, the Company recognizes in its financial
statements the impact of a tax position if a tax returns position or future tax position is more
likely than not to prevail (defined as a likelihood of more than fifty percent of being sustained
upon audit, based on the technical merits of the tax position). Tax positions that meet the more
likely than not threshold are measured (using a probability weighted approach) at the largest
amount of tax benefit that has a greater than fifty percent likelihood of being realized upon
settlement. The Companys estimated liability for unrecognized tax benefits is periodically assessed for
adequacy and may be affected by changing interpretations of laws, rulings by tax authorities,
certain changes and/or developments with respect to audits, and expiration of the statute of
limitations. The outcome for a particular audit cannot be determined with certainty prior to the
conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits
ultimately realized may differ from the Companys estimates. As each audit is concluded,
adjustments, if any, are appropriately recorded in the Companys financial statements.
Additionally, in future periods, changes in facts, circumstances, and new information may require
the Company to adjust the recognition and measurement estimates with regard to individual tax
positions. Changes in recognition and measurement estimates are recognized in the period in which
the changes occur. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in
the financial statements as a component of the income tax provision. The Companys liability for
accrued interest and penalties, net of unrecognized tax benefits, is reflected as a component of
accrued liabilities. 7




---



##### Table of Contents



Stock-Based Employee Compensation Arrangements The Company accounts for its stock-based compensation arrangements in accordance with the
provisions of SFAS No. 123(R) entitled Share-Based Payment (SFAS 123R). The following
information represents the Companys grants of stock-based compensation to employees and directors
during the three months ended June 30, 2008 and the year ended March 31, 2008: Number ofShares
    
    Fair ValuePeriod of Grant
    
    Grant Type
    
    Granted
    
    of GrantFor the year ended March 31, 2008
    
    Stock Options
    
    
    646.6
    
    
    $
    10,116.9Stock Units
    
    
    283.3
    
    
    $
    11,901.2Restricted Stock
    
    
    160.1
    
    
    $
    5,035.0For the three months ended June 30, 2008

    Stock Options
    
    
    1,628.2
    
    
    $
    12,879.2Stock Units
    
    
    363.6
    
    
    $
    8,028.3
 The Company recognizes compensation expense of a stock-based award over the vesting period
based on the fair value of the award on the grant date, net of forfeitures. The fair value of
stock units and restricted stock are based on the fair market value of the Companys stock on the
date of grant, while the fair value of stock options granted is calculated under the Black-Scholes
option-pricing model. In addition to the stock-based awards in the above table, the Company issued to officers and
employees during the first quarter of fiscal years 2009 and 2008 long-term performance awards that
vest after three years. These awards will be settled in cash and adjusted based on the Companys
performance relative to its peers in total shareholder return (fiscal year 2009 awards) and in
earnings per share growth and return on equity (fiscal year 2008 awards), as well as changes in the
Companys stock price between the date of grant and the end of the performance period. Those
awards granted during the first quarter of fiscal year 2009 had an initial aggregate value of $28.3
million and were adjusted to an aggregate value of $20.8 million as of June 30, 2008. Those awards
granted during the first quarter of fiscal year 2008 were adjusted to an aggregate value of $4.8
million as of June 30, 2008. In accordance with the provisions of SFAS 123(R), these awards are
accounted for as liability awards for which compensation expense will be recognized over the
vesting period with a corresponding increase in accrued liabilities. Statements of Consolidated Cash Flows  Supplemental Disclosures In accordance with the provisions of SFAS No. 95, Statement of Cash Flows, the Statements of
Consolidated Cash Flows have not been restated for discontinued operations. For further
information on the sale of the Companys home services operations and the Companys construction
services operations (Construction Services), see Note (L), Discontinued Operations.
Accordingly, all of the Companys home services operations and Construction Services cash flows
prior to disposal are included with the Centex cash flows. The following table provides supplemental disclosures related to the Statements of
Consolidated Cash Flows: For the Three MonthsEnded June 30,2008
    
    
    2007Cash Paid for Interest (1)
    
    $
    59,293
    
    
    $
    78,869Net Cash Paid (Refund) for Taxes
    
    $
    (625,105
    )
    
    $
    177,445
   (1)
    
    Amounts include capitalized interest. As explained in Note (D), Inventories, pursuant to the provisions of FASB Interpretation No.
46, Consolidation of Variable Interest Entities, as revised (FIN 46), as of June 30, 2008 and
March 31, 2008, the Company consolidated $62.8 million and $75.3 million, respectively, of land as
inventory under the caption land held under option agreements not owned. The Company also
recorded $44.8 million and $38.1 million as of June 30, 2008 and March 31, 2008, respectively, of
lot option agreements for which the Companys deposits exceeded certain thresholds. In addition to the items noted above, the Companys adoption of FIN 48, effective April 1,
2007, was treated as a non-cash item in the Statements of Consolidated Cash Flows. The adoption of
FIN 48 resulted in a $116.0 million 8




---



##### Table of Contents



increase to deferred income taxes, a $329.2 million increase in accrued liabilities and a $213.2
million reduction in stockholders equity in the first quarter of fiscal year 2008. Transfers of
mortgage loans between categories have been treated as non-cash items. Recent Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), that
serves to define fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. The Company adopted
SFAS 157 effective April 1, 2008. For additional information, refer to Note (H), Fair Values of
Financial Instruments. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2
which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). Examples of items to which this FSP applies
include, but are not limited to, reporting units measured at fair value in the first step of a
goodwill impairment test and long-lived assets (asset groups) measured at fair value for an
impairment assessment (i.e., inventory impairment assessments). This FSP defers the effective date
for nonfinancial assets and nonfinancial liabilities of SFAS 157 for the Company to April 1, 2009.
The Company is currently evaluating the impact, if any, of SFAS 157 related to nonfinancial assets
and nonfinancial liabilities on the Companys results of operations or financial position. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). Under the provisions of SFAS 159, companies may elect to
measure specified financial instruments, warranty and insurance contracts at fair value on a
contract-by-contract basis, with changes in fair value recognized in earnings. The election,
called the fair value option, enables companies to reduce the volatility in reported earnings
caused by measuring related assets and liabilities differently, and it is simpler than using the
complex hedge-accounting requirements in FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, to achieve similar results. The Company adopted SFAS 159
effective April 1, 2008. For additional information, refer to Note (H), Fair Values of Financial
Instruments. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51 (SFAS 160). Under the provisions of SFAS 160,
a noncontrolling interest in a subsidiary, or minority interest, must be classified as equity and
the amount of consolidated net income specifically attributable to the minority interest must be
clearly identified in the statement of consolidated operations. SFAS 160 also requires consistency
in the manner of reporting changes in the parents ownership interest and requires fair value
measurement of any noncontrolling interest retained in a deconsolidation. SFAS 160 will be
effective for the Company as of April 1, 2009. The Company does not expect the adoption of
SFAS 160 to have a material impact on its financial statements. Reclassifications Certain prior year balances have been reclassified to be consistent with the June 30, 2008
presentation, including reclassifications of discontinued operations. 9




---



##### Table of Contents



(B)     STOCKHOLDERS EQUITY A summary of changes in stockholders equity is presented below: Capital in
    
    
    
    
    
    
    TreasuryCommon Stock
    
    
    Excess of
    
    
    Retained
    
    
    Stock,Shares
    
    
    Amount
    
    
    Par Value
    
    
    Earnings
    
    
    at Cost
    
    
    TotalBalance, March 31, 2008
    
    
    123,279
    
    
    $
    31,763
    
    
    $
    95,088
    
    
    $
    2,365,634
    
    
    $
    (193,824
    )
    
    $
    2,298,661Issuance of Restricted Stock
and Stock Units
    
    
    271
    
    
    
    
    
    
    
    (20,039
    )
    
    
    
    
    
    
    14,937
    
    
    
    (5,102
    )Stock Compensation
    
    
    
    
    
    
    
    
    
    
    6,587
    
    
    
    
    
    
    
    
    
    
    
    6,587Exercise of Stock Options
Including Tax Effects from
Stock-Based Awards
    
    
    8
    
    
    
    2
    
    
    
    (1,482
    )
    
    
    
    
    
    
    
    
    
    
    (1,480
    )Cash Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,942
    )
    
    
    
    
    
    
    (4,942
    )Purchase of Common
Stock for Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Other Stock Transactions
    
    
    2
    
    
    
    1
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    37Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,099
    )
    
    
    
    
    
    
    (150,099
    )Balance, June 30, 2008
    
    
    123,560
    
    
    $
    31,766
    
    
    $
    80,190
    
    
    $
    2,210,593
    
    
    $
    (178,895
    )
    
    $
    2,143,654
 (C)     MORTGAGE LOANS RECEIVABLE AND REAL ESTATE OWNED Mortgage loans receivable consist of mortgage loans held for sale and other mortgage loans,
net of their related allowances. Mortgage loans held for sale represent mortgage loans originated
by Financial Services, which will be sold to third parties. Other mortgage loans include
performing and nonperforming construction loans and other nonperforming mortgage loans. Real
estate owned is foreclosed property that once served as the underlying collateral for a mortgage
loan receivable. Real estate owned is reflected as a component of other inventory in the
Consolidated Balance Sheets. Mortgage loans receivable and real estate owned consist of the
following: As ofJune 30, 2008
    
    
    March 31, 2008Gross
    
    
    Allowance
    
    
    Net
    
    
    Gross
    
    
    Allowance
    
    
    NetMortgage Loans Held for Sale
    
    $
    453,187
    
    
    $
    (1,741
    )
    
    $
    451,446
    
    
    $
    388,385
    
    
    $
    (4,092
    )
    
    $
    384,293Other Mortgage Loans
    
    
    247,299
    
    
    
    (135,369
    )
    
    
    111,930
    
    
    
    283,191
    
    
    
    (151,604
    )
    
    
    131,587Mortgage Loans Receivable
    
    $
    700,486
    
    
    $
    (137,110
    )
    
    $
    563,376
    
    
    $
    671,576
    
    
    $
    (155,696
    )
    
    $
    515,880Real Estate Owned
    
    $
    22,174
    
    
    $
    (11,899
    )
    
    $
    10,275
    
    
    $
    23,635
    
    
    $
    (12,785
    )
    
    $
    10,850
 Changes in the allowance for losses on mortgage loans receivable and real estate owned for the
three months ended June 30, 2008 and the year ended March 31, 2008 were as follows: June 30, 2008
    
    
    March 31, 2008 (1)Balance at Beginning of Period
    
    $
    168,481
    
    
    $
    17,576Provision for Losses
    
    
    2,713
    
    
    
    176,109Charge-offs/Write-offs
    
    
    (22,185
    )
    
    
    (25,204
    )Balance at End of Period
    
    $
    149,009
    
    
    $
    168,481
   (1)
    
    For the three months ended June 30, 2007, provision for losses and
charge-offs/write-offs were $2,969 and $(2,062), respectively. As of June 30, 2008, Financial Services is committed, under existing construction loan
agreements, to fund an additional $15.4 million. During the year ended March 31, 2008, Financial
Services ceased originating new construction loans; however, it intends to fulfill its existing
funding commitments. 10




---



##### Table of Contents



The Company has established a liability for anticipated losses associated with mortgage loans
originated and sold. Please refer to Note (G),Commitments and Contingencies, for information on
this reserve at June 30, 2008 and March 31, 2008. (D)     INVENTORIES Housing Projects A summary of housing projects is provided below: As ofJune 30, 2008
    
    
    March 31, 2008Direct Construction
    
    $
    1,574,194
    
    
    $
    1,746,016Land Under Development
    
    
    2,632,338
    
    
    
    2,882,844Housing Projects
    
    $
    4,206,532
    
    
    $
    4,628,860
 For the three months ended June 30, 2008 and 2007, the Company recorded $50.1 million and
$142.6 million, respectively, in land-related impairments due to challenging market conditions. Land Held Under Option Agreements Not Owned and Land Held for Development and Sale The Company enters into land option purchase agreements. Under the option agreements, the
Company pays a stated deposit or issues a letter of credit in consideration for the right to
purchase land at a future time, usually at predetermined prices. These options generally do not
contain performance requirements from the Company nor obligate the Company to purchase the land,
and expire on various dates. At June 30, 2008, the Company had 99 land option agreements. In accordance with the provisions of FIN 46, the Company is the primary beneficiary of certain
option agreements to purchase land, for which the remaining purchase price of land was $62.8
million and $75.3 million as of June 30, 2008 and March 31, 2008, respectively. Land consolidated
under FIN 46 is recorded under the caption land held under option agreements not owned, with a
corresponding increase to minority interests. At June 30, 2008, 12 land option agreements were
consolidated pursuant to FIN 46. In addition to land options recorded pursuant to FIN 46, the Company determined that 10 land
option agreements represent financing arrangements pursuant to the provisions of SFAS 49, Product
Financing Arrangements (SFAS 49). As a result, the Company recorded $44.8 million and $38.1
million as of June 30, 2008 and March 31, 2008, respectively, of land, which represents the
remaining purchase price of the land. Land consolidated pursuant to SFAS 49 is recorded under the
caption land held under option agreements not owned, with a corresponding increase to accrued
liabilities. A summary of the Companys deposits for land options and the total purchase price of such
options is provided below: As ofJune 30, 2008
    
    
    March 31, 2008Cash Deposits included in:Land Held for Development and Sale
    
    $
    18,058
    
    
    $
    20,711Land Held Under Option Agreements Not Owned
    
    
    30,391
    
    
    
    33,230Total Cash Deposits in Inventory
    
    
    48,449
    
    
    
    53,941Letters of Credit
    
    
    1,006
    
    
    
    943Total Invested through Deposits or
Secured with Letters of Credit
    
    $
    49,455
    
    
    $
    54,884Total Purchase Price of Land Option Agreements
    
    $
    854,090
    
    
    $
    1,131,976
 In addition to deposits, the Company capitalizes pre-acquisition development costs related to
land held under option agreements. As of June 30, 2008 and March 31, 2008, pre-acquisition
development costs classified as land 11




---



##### Table of Contents



held under option agreements not owned were $4.7 million and $1.1 million, respectively, and
classified as land held for development and sale were $9.0 million and $10.8 million,
respectively. Included in land held for development and sale is owned land that is not currently
anticipated to be developed for more than two years and land that the Company plans to sell in its
current condition within one year, which amounted to $625.7 million and $527.2 million as of
June 30, 2008 and March 31, 2008, respectively. The Company writes off deposits and pre-acquisition costs when it determines that it is
probable the property will not be acquired. Write-offs of land deposits and pre-acquisition costs
amounted to $10.1 million for the three months ended June 30, 2008 and $22.9 million for the three
months ended June 30, 2007. (E)     GOODWILL A summary of goodwill by segment for the three months ended June 30, 2008 is presented below: As ofJune 30, 2008
    
    
    March 31, 2008Home BuildingEast
    
    $
    27,386
    
    
    $
    27,386Southeast
    
    
    4,958
    
    
    
    4,958Central
    
    
    1,700
    
    
    
    1,700Texas
    
    
    6,221
    
    
    
    6,221Northwest
    
    
    2,405
    
    
    
    2,405Southwest
    
    
    
    
    
    
    Other homebuilding
    
    
    
    
    
    
    Total Home Building
    
    
    42,670
    
    
    
    42,670Financial Services
    
    
    8,952
    
    
    
    8,952Total
    
    $
    51,622
    
    
    $
    51,622
 (F)     INDEBTEDNESS A summary of the Companys debt, net of unamortized discounts as applicable, is presented
below: As ofJune 30, 2008
    
    
    March 31, 2008Centex:Senior Notes (unsecured):Senior Notes due August 2008 at 4.875%
    
    $
    150,000
    
    
    $
    150,000Senior Notes due September 2009 at 5.8%
    
    
    210,920
    
    
    
    225,000Senior Notes due November 2010 at 4.55%
    
    
    300,000
    
    
    
    300,000Senior Notes due February 2011 at 7.875%
    
    
    392,493
    
    
    
    399,992Senior Notes due January 2012 at 7.5%
    
    
    324,227
    
    
    
    349,198Senior Notes due August 2012 at 5.45%
    
    
    295,000
    
    
    
    315,000Senior Notes due October 2013 at 5.125%
    
    
    300,000
    
    
    
    300,000Senior Notes due May 2014 at 5.7%
    
    
    350,000
    
    
    
    350,000Senior Notes due June 2015 at 5.25%
    
    
    450,000
    
    
    
    450,000Senior Notes due May 2016 at 6.5%
    
    
    480,000
    
    
    
    480,000Land Acquisition Notes and Other due through 2018 (1)
    
    
    901
    
    
    
    5,977Total Senior Notes and Other
    
    
    3,253,541
    
    
    
    3,325,167Financial Services (secured):Mortgage Warehouse Facilities (2)
    
    
    400,440
    
    
    
    337,053Total Debt
    
    $
    3,653,981
    
    
    $
    3,662,220
   (1)
    
    Weighted average interest rates of 10.0% and 6.45% at June 30, 2008 and
March 31, 2008, respectively.(2)
    
    Weighted average interest rates of 3.64% and 3.63% at June 30, 2008 and
March 31, 2008, respectively. 12




---



##### Table of Contents



The weighted-average interest rates for the Companys debt during the three months ended
June 30, 2008 and 2007 were: For the Three Months Ended June 30,2008
    
    2007Centex:Senior Notes
    
    
    6.01
    %
    
    
    5.91
    %Land Acquisition Notes and Other
    
    
    7.97
    %
    
    
    6.64
    %Medium-term Note Programs
    
    
    
    
    
    
    5.68
    %Financial Services:Mortgage Warehouse Facilities
    
    
    4.81
    %
    
    
    5.86
    %Harwood Street Funding I, LLC Variable-Rate
Subordinated Extendable Certificates
    
    
    
    
    
    
    7.42
    %
 Maturities of the Companys senior notes and other are as follows: For the FiscalYears EndingMarch 31,2009
    
    $
    150,0692010
    
    
    211,0212011
    
    
    692,6052012
    
    
    324,3512013
    
    
    295,136Thereafter
    
    
    1,580,359$
    3,253,541
 The Company is required to maintain compliance with certain financial covenants in the
Companys multi-bank revolving credit facility. Material covenants include a maximum leverage
ratio, a minimum tangible net worth and a borrowing base limitation on the availability of
borrowings. The Companys credit facility also includes an interest coverage ratio. This ratio is
a determinant of the maximum leverage ratio covenant and certain of the credit facilitys pricing
provisions. In addition, Financial Services committed mortgage warehouse credit facilities
contain various affirmative and negative covenants that are generally customary for facilities of
this type. At June 30, 2008, the Company was in compliance with its financial covenants. Credit Facilities The Companys existing credit facilities and available borrowing capacity as of June 30, 2008
are summarized below: Existing Credit
    
    
    AvailableFacilities
    
    
    CapacityCentexMulti-Bank Revolving Credit FacilityRevolving Credit
    
    $
    750,000
    
    
    $
    631,598Letters of Credit
    
    
    600,000
    
    
    
    206,8191,350,000
    
    
    
    838,417Financial ServicesSecured Credit Facilities
    
    
    530,000
    
    
    
    129,560$
    1,880,000
    
    
    $
    967,977
 The Company maintains a $1.35 billion unsecured, committed credit facility, maturing in
July 2010, that provides funding for general corporate purposes and letters of credit up to a sub
limit of $600 million. The multi-bank credit facility includes a borrowing base limitation when
the Company does not have an investment grade senior unsecured debt rating from at least two of the
following rating agencies: Standard & Poors (S&P), Moodys 13




---



##### Table of Contents



Investors Service (Moodys) and Fitch Ratings (Fitch). The Company currently does not
have investment grade ratings and is therefore subject to the borrowing base limitation. The
Companys long-term debt ratings are currently BB, Ba2 and BB+ from S&P, Moodys and Fitch,
respectively. Given the uncertainty of current market conditions, the Company anticipates
operating under the borrowing base limitation for the foreseeable future. Under the borrowing base
limitation, the sum of the net senior debt (as defined in the credit agreement), any amounts drawn
on the revolving credit facility and outstanding financial letters of credit may not exceed an
amount calculated based on applying certain percentages to various categories of unencumbered
homebuilding inventory and other assets. The Company had no amounts drawn on the revolving credit
facility at June 30, 2008 or at any time during the three months then ended. As of June 30, 2008,
the Company had $393.2 million of outstanding letters of credit under its facility, including
$163.1 million of financial letters of credit. Financial letters of credit are generally issued as
a form of financial or payment guaranty. Available capacity amounts for the revolving credit
facility shown above reflect the borrowing base limitation, but they are further subject to certain
limitations by features in the Companys credit facility commonly referred to as anti-cash hoarding
provisions. Funding of Mortgage Loans CTX Mortgage Company, LLC historically funded its origination of mortgage loans through the
sale of such mortgage loans to Harwood Street Funding I, LLC (HSF-I) and, to a lesser extent,
through borrowings under more traditional committed mortgage warehouse credit facilities and
mortgage loan sale agreements. As a result of the significant disruptions in the mortgage and
asset-backed commercial paper markets, beginning in the second quarter of fiscal year 2008, HSF-I
was unable to finance the purchase of mortgage loans from CTX Mortgage Company, LLC. In November
2007, HSF-I and the related swap arrangements were terminated and all outstanding obligations were
redeemed. CTX Mortgage Company, LLC is currently funding its mortgage originations primarily through
borrowings under two committed mortgage warehouse credit facilities with commitments of $375
million and $150 million. Borrowings under the warehouse facilities constitute short-term debt of
Financial Services. The warehouse facilities generally allow CTX Mortgage Company, LLC to sell to
the banks, on a revolving basis, mortgage loans up to an aggregate specified amount.
Simultaneously, the banks have entered into an agreement to transfer such mortgage loans back to
CTX Mortgage Company, LLC on a specified date or on the Companys demand for subsequent sale by CTX
Mortgage Company, LLC to third parties. Mortgage loans eligible for sale by CTX Mortgage Company,
LLC under the warehouse facilities are conforming loans, FHA/VA eligible loans, and jumbo loans
meeting conforming underwriting guidelines except as to the size of the loan. Under the $375
million committed mortgage warehouse credit facility, the bank has the option to convert the
facility to an amortizing loan based on the ultimate sale of the underlying collateral and not to
purchase any additional mortgage loans under the warehouse facility if the Companys long-term
unsecured debt ratings fall below BB by S&P and Fitch or below Ba2 by Moodys. This warehouse
facility was amended in July 2008. Please refer to Note (M), Subsequent Events, for additional
information. CTX Mortgage Company, LLC bears the credit risk associated with loans originated until such
loans are sold to third parties. In connection with the loans it originates and sells to third
parties, CTX Mortgage Company, LLC makes representations and warranties to the effect that each
mortgage loan sold satisfies the criteria of the sale agreement. CTX Mortgage Company, LLC may be
required to repurchase mortgage loans sold to third parties if such mortgage loans are determined
to breach the representations and warranties of CTX Mortgage Company, LLC, as seller. CTX Mortgage
Company, LLC establishes a loan origination reserve for its estimated losses for these obligations. CTX Mortgage Company, LLC and its related companies sold $1.61 billion and $2.35 billion of
mortgage loans to investors during the three months ended June 30, 2008 and 2007, respectively.
CTX Mortgage Company, LLC and its related companies recognized gains on sales of mortgage loans and
related derivative activity of $30.3 million and $38.6 million during the three months ended
June 30, 2008 and 2007, respectively. (G)     COMMITMENTS AND CONTINGENCIES Joint Ventures The Company conducts a portion of its land acquisition, development and other activities
through its participation in joint ventures in which the Company holds less than a majority
interest. These land-related activities typically require substantial capital, and partnering with
other homebuilders or developers and, to a lesser extent, financial partners, allows Home Building
to share the risks and rewards of ownership and to provide broader strategic advantages. 14




---



##### Table of Contents



A summary of the Companys Home Building joint ventures is presented below: As of June 30, 2008
    
    As of March 31, 2008Centexs
    
    
    
    
    
    
    
    
    
    
    CentexsNumber
    
    
    
    
    
    
    Share
    
    
    Number
    
    
    
    
    
    
    Shareof JVs (1)
    
    
    Investments
    
    
    of Debt
    
    
    of JVs (1)
    
    
    Investments
    
    
    of DebtUnleveraged Joint Ventures
    
    
    26
    
    
    $
    163,894
    
    
    $
    
    
    
    
    29
    
    
    $
    70,043
    
    
    $
    Joint Ventures with Debt:
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    13Limited Maintenance
Guarantee (2) (3) (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,311
    
    
    
    27,500Repayment Guarantee (2) (5)
    
    
    
    
    
    
    3,296
    
    
    
    14,249
    
    
    
    
    
    
    
    3,154
    
    
    
    13,692Completion Guarantee (4)
    
    
    
    
    
    
    44,446
    
    
    
    127,434
    
    
    
    
    
    
    
    78,274
    
    
    
    133,935No Recourse or Guarantee
    
    
    
    
    
    
    6,997
    
    
    
    24,000
    
    
    
    
    
    
    
    12,040
    
    
    
    24,00037
    
    
    $
    218,633
    
    
    $
    165,683
    
    
    
    42
    
    
    $
    206,822
    
    
    $
    199,127
   (1)
    
    The number of joint ventures includes unconsolidated Home Building joint ventures for which
the Company has an investment balance as of the end of the period and/or current fiscal year
activity. The Company was the managing member of 22 and 23 of the active joint ventures as of
June 30, 2008 and March 31, 2008, respectively. The number of joint ventures includes 12 and
17 joint ventures as of June 30, 2008 and March 31, 2008, respectively, for which
substantially all of the joint ventures activities are complete.(2)
    
    Centexs share of debt represents the Companys maximum exposure related to the joint
ventures debt at each respective date.(3)
    
    The Company guaranteed that certain of the joint ventures would maintain a specified loan to
value ratio. For certain joint ventures, the Company contributed additional capital in order
to maintain loan to value requirements.(4)
    
    Certain joint venture agreements require the Company to guarantee the completion of a project
or phase if the joint venture does not perform the required land development. A portion of
these completion guarantees are joint and several with the Companys partners.(5)
    
    The Company has guaranteed repayment of a portion of certain joint venture debt limited to
its ownership percentage of the joint venture or a percentage thereof. Total joint venture debt outstanding as of June 30, 2008 and March 31, 2008 was $350.5 million
and $423.2 million, respectively. Debt agreements for joint ventures vary by lender in terms of
structure and level of recourse. For certain of the joint ventures, the Company is also liable on
a contingent basis, through other guarantees, letters of credit or other arrangements, with respect
to a portion of the construction debt. Additionally, the Company has agreed to indemnify the
construction lender for certain environmental liabilities in the case of most joint ventures, and
most guarantee arrangements provide that the Company is liable for its proportionate share of the
outstanding debt if the joint venture files for voluntary bankruptcy. To date, the Company has not
been requested to perform under the environmental liabilities or voluntary bankruptcy guarantees
for any of its joint ventures. Three of the Companys joint ventures are in default of their joint venture debt agreements as
of June 30, 2008. In addition, the Company expects four other joint ventures to be in default of
their joint venture debt agreements subsequent to June 30, 2008. The Companys share of the total
debt of these joint ventures that are either in default, or expected to be in default, is $87.0
million and is included in the table above. The Company is in discussions with the joint venture
partners and lenders with respect to each joint venture. For all of the Companys joint ventures,
recourse under debt agreements is limited to either the underlying collateral or completion
obligations of the joint venture partners. A summary of the estimated maturities of the Companys share of joint ventures debt is
provided below. The Company has estimated the debt maturities with the assumption that all
payments are first applied to pay down the outstanding debt balances as of June 30, 2008. For the Fiscal Years EndedMarch 31,2009
    
    $
    112,7842010
    
    
    14,5082011
    
    
    13,6912012
    
    
    24,700$
    165,683
 15




---



##### Table of Contents



Letters of Credit and Surety Bonds In the normal course of business, the Company issues letters of credit and surety bonds: (1)
pursuant to certain performance related obligations, (2) as security for certain land option
purchase agreements of Home Building, and (3) under various insurance programs. The Company also
previously issued surety bonds, which are reflected as discontinued operations in the table below,
pursuant to construction obligations of Construction Services prior to the sale of this segment on
March 30, 2007. No event has occurred that has led the Company to believe that these letters of
credit or bonds will be drawn upon. A summary of the Companys outstanding letters of credit and surety bonds as of June 30, 2008
and March 31, 2008 is presented below (dollars in millions): As of June 30, 2008
    
    
    As of March 31, 2008Letters of Credit
    
    
    Surety Bonds
    
    
    Letters of Credit
    
    
    Surety BondsHome Building
    
    $
    156.1
    
    
    $
    1,343.0
    (1)
    
    $
    168.6
    
    
    $
    1,527.9Financial Services
    
    
    35.7
    
    
    
    11.9
    
    
    
    35.7
    
    
    
    12.3Other
    
    
    167.1
    
    
    
    0.2
    
    
    
    167.0
    
    
    
    0.2Discontinued
Operations
(2)
    
    
    35.2
    
    
    
    2,559.2
    
    
    
    35.3
    
    
    
    3,093.9$
    394.1
    
    
    $
    3,914.3
    
    
    $
    406.6
    
    
    $
    4,634.3
   (1)
    
    The Company estimates that $559.1 million of work remains to be performed on these projects
as of June 30, 2008.(2)
    
    After the sale of Construction Services, the Company remains responsible to a surety for
certain surety bond obligations relating to Construction Services projects commenced prior to
March 30, 2007. These surety bonds have a total face amount of $2.56 billion at June 30,
2008, although the risk of liability with respect to these surety bonds declines as the
relevant construction projects are performed. At June 30, 2008, the Company estimates that
$435.6 million of work remains to be performed on these projects. In connection with certain
of these surety bond obligations, the Company has provided a $100 million letter of credit to
such surety which is included in Other above. The purchaser of Construction Services has
agreed to indemnify the Company against losses relating to such surety bond obligations,
including amounts drawn under any such letter of credit. The Company has purchased for its
benefit an additional back-up indemnity provided by a financial institution with an A (S&P)
and A2 (Moodys) credit rating. The obligation of such financial institution under the back-up
indemnity is $644.8 million as of June 30, 2008, which declines to $400 million over time and
terminates in 2016. Community Development and Other Special District Obligations A Community Development District or similar development authority (CDD) is a unit of local
government created under various state statutes that utilizes bond financing to finance the
construction or acquisition of infrastructure assets of a development. A portion of the liability
associated with the bonds including principal and interest is assigned to each parcel of land
within the development. This debt is typically paid by subsequent special assessments levied by
the CDD on the landowners. In accordance with EITF 91-10, Accounting for Special Assessments and
Tax Increment Financing, the Company records a liability for future assessments, which are fixed
or determinable for a fixed or determinable period. In addition and in accordance with SFAS No. 5,
Accounting for Contingencies, the Company evaluates whether it is contingently liable for any of
the debt related to the bond issuance. This is typically the case where bonds issued by the CDD
have maturity dates of ten years or less that will be paid by the Company as the developer and
current landowner and not by future homeowners. At June 30, 2008 and March 31, 2008, the Company
had recorded $349.0 million and $351.9 million, respectively, in accrued liabilities for
outstanding CDD obligations. Warranties and Guarantees In the normal course of its business, the Company issues certain warranties and guarantees or
makes certain representations related to its home sales, land sales and mortgage loan originations.
The Company believes that it has established the necessary accruals for these warranties,
guarantees and representations. See further discussion of the Companys warranty liability below. Home Building offers a ten-year limited warranty for most homes constructed and sold. The
warranty covers defects in materials or workmanship in the first two years of the customers
ownership of the home and certain designated components or structural elements of the home in the
third through tenth years. Home Building estimates the costs that may be incurred under its
warranty program for which it will be responsible and records a liability at the time each home is
closed. Factors that affect Home Buildings warranty liability include the number of homes closed, 16




---



##### Table of Contents



historical and anticipated rates of warranty claims, and cost per claim. Home Building
periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as
necessary. Changes in Home Buildings contractual warranty liability are as follows for the three months
ended June 30, 2008 and the year ended March 31, 2008: June 30, 2008
    
    
    March 31, 2008 (1)Balance at Beginning of Period
    
    $
    29,155
    
    
    $
    44,293Warranties Issued
    
    
    3,918
    
    
    
    27,858Settlements Made
    
    
    (4,517
    )
    
    
    (40,915
    )Changes in Liability of Pre-Existing
Warranties, Including Expirations
    
    
    (3,419
    )
    
    
    (2,081
    )Balance at End of Period
    
    $
    25,137
    
    
    $
    29,155
   (1)
    
    For the three months ended June 30, 2007, warranties issued, settlements made
and changes in liability of pre-existing warranties were $9,032, $(11,449) and $(608),
respectively. Financial Services has established a liability for anticipated losses associated with mortgage
loans originated. Changes in Financial Services liability are as follows for the three months
ended June 30, 2008 and the year ended March 31, 2008: June 30, 2008
    
    
    March 31, 2008 (1)Balance at Beginning of Period
    
    $
    13,903
    
    
    $
    16,863Provision for Losses
    
    
    309
    
    
    
    1,676Settlements
    
    
    (810
    )
    
    
    (9,251
    )Changes in Pre-Existing Reserves
    
    
    2,619
    
    
    
    4,615Balance at End of Period
    
    $
    16,021
    
    
    $
    13,903
   (1)
    
    For the three months ended June 30, 2007, provisions for losses, settlements
and changes in pre-existing reserves were $448, $(935) and $135, respectively. Insurance Accruals The Company has certain self-insured retentions and deductible limits under its workers
compensation, automobile and general liability insurance policies. The Company establishes
reserves for its self-insured retentions and deductible limits based on an analysis of historical
claims and an estimate of claims incurred but not yet reported. Projection of losses concerning
these liabilities is subject to a high degree of variability due to factors such as claim
settlement patterns, litigation trends and legal interpretations, among others. On an annual
basis, the Company engages actuaries to assist in the evaluation and development of claim rates and
required reserves for self insurance including reserves related to construction defects and general
liability claims. The Company periodically assesses the adequacy of its insurance accruals and
adjusts the amounts as necessary. Although the Company considers the insurance accruals reflected in its Consolidated Balance
Sheets to be adequate, there can be no assurance that this accrual will prove to be sufficient over
time to cover ultimate losses. Expenses associated with insurance claims up to the Companys
deductible limits for the three months ended June 30, 2008 were $8.0 million and $47.0 million for
fiscal year 2008. As of June 30, 2008 and March 31, 2008, accrued insurance included in accrued
liabilities in the accompanying Consolidated Balance Sheets was $233.5 million and $221.0 million,
respectively, and consisted primarily of general liability retentions associated with construction
defects. Forward Trade and Interest Rate Lock Commitments Forward trade commitments represent contracts with investors for delayed delivery of mortgage
loans for which the Company agrees to make delivery at a specified future date at a specified
price. The Company utilizes such delayed delivery contracts to hedge market risk based upon the
number of commitments issued to borrowers that are expected to close. At June 30, 2008, the
Company had $219.7 million of commitments to deliver mortgages to investors against interest rate
lock commitments. These forward trade commitments are recorded on the balance sheet in other
assets or accrued liabilities. In addition, at June 30, 2008, the Company had commitments to
deliver 17




---



##### Table of Contents



approximately $292.8 million of mortgage loan inventory to investors. These forward trade
commitments are recorded on the balance sheet together with the mortgage loan receivables they
hedge. Interest rate lock commitments (IRLCs) represent individual borrower agreements that commit
the Company to lend at a specified price for a specified period as long as there is no violation of
any condition established in the commitment contract. IRLCs are recorded on the balance sheet in
other assets or accrued liabilities. At June 30, 2008, the Company had loan commitments to
prospective borrowers of $242.3 million. For additional information on forward trade commitments and interest rate lock commitments,
please refer to Note (H), Fair Values of Financial Instruments, and Note (K), Derivatives and
Hedging. Litigation and Related Matters In the normal course of its business, the Company is named as a defendant in certain suits
filed in various state and federal courts, including construction defect claims, contract disputes
and employee-related matters. Management believes that none of the litigation matters in which the
Company is involved, including those described below, would have a material adverse effect on the
consolidated financial condition or operations of the Company. Beginning in January 2003, the United States Department of Justice (the Justice Department),
acting on behalf of the United States Environmental Protection Agency (EPA), has asserted that
certain of Home Buildings neighborhoods violated regulatory requirements applicable to storm water
discharges, and that injunctive relief and civil penalties may be warranted. Although Home
Building disputes the Justice Departments assertions, to settle the matter, in May 2008, Home
Building signed a consent decree with the EPA and various states with respect to the Companys
prior and future storm water pollution prevention practices at all of Home Buildings sites. The
Justice Department filed suit on June 11, 2008, in Federal Court in accordance with the accepted
practice in matters of this nature, at which time it submitted the proposed consent decree for
approval by the Court. The Court entered the consent decree on July 30, 2008. Under the consent
decree, Home Building will pay a civil penalty of $1.5 million, and agrees to implement certain
management, record keeping and reporting practices related to controlling storm water discharges at
all of Home Buildings sites. (H)     FAIR VALUES OF FINANCIAL INSTRUMENTS The Company adopted SFAS 157 on April 1, 2008 for its financial instruments measured at fair
value. SFAS 157 establishes a fair value hierarchy that requires the Company to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. The
fair value hierarchy can be summarized as follows:  
    Level 1   Quoted prices in active markets for identical assets or liabilities.
    Level 2  Inputs other than quoted prices included within Level 1 that are observable
either directly or indirectly through corroboration with market data.
    Level 3  Unobservable inputs that reflect the Companys own estimates about the
assumptions market participants would use in pricing the asset or liability. Mortgage loans held for sale and forward trade commitments are valued based upon quoted market
prices for similar instruments. The servicing asset is valued based upon servicing sales
contracts entered into with third parties. Interest rate lock commitments are valued at quoted
market prices, plus the related service release premium, multiplied by a projected customer close
ratio. The service release premium is based upon the Companys servicing sales contracts, and the
projected customer close ratio is based upon the Companys historical customer fall-out rate. 18




---



##### Table of Contents



The following table presents for each hierarchy level the Companys financial instruments
measured at fair value on a recurring basis at June 30, 2008: Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsMortgage Loans Held for Sale
    
    $
    
    
    
    $
    446,665
    
    
    $
    
    
    
    $
    446,665Forward Trade Commitments
(Mortgage Loans Held for Sale)
    
    
    
    
    
    
    4,781
    
    
    
    
    
    
    
    4,781Servicing Asset
    
    
    
    
    
    
    3,505
    
    
    
    
    
    
    
    3,505Interest Rate Lock Commitments
    
    
    
    
    
    
    
    
    
    
    5,781
    
    
    
    5,781Total
    
    $
    
    
    
    $
    454,951
    
    
    $
    5,781
    
    
    $
    460,732LiabilitiesForward Trade Commitments
(Interest Rate Lock Commitments)
    
    $
    
    
    
    $
    1,879
    
    
    $
    
    
    
    $
    1,879
 As of June 30, 2008, the aggregate fair value exceeded the unpaid principle balance of
mortgage loans held for sale by $0.7 million, and accordingly, this amount has been recognized as a
gain in current earnings within Financial Services revenues.  Interest income on mortgage loans
held for sale is calculated based upon the stated interest rate of each loan and is included in
Financial Services revenues. The following table summarizes changes in Level 3 financial instruments measured at fair value
on a recurring basis for the three months ended June 30, 2008: Interest RateLockCommitmentsBalance at beginning of period
    
    $
    9,271Purchases, issuances, and settlements
    
    
    (3,485
    )Loss included in earnings due to change in valuation of
items held
    
    
    (5
    )Fair value at June 30, 2008
    
    $
    5,781
 Other mortgage loans are measured at fair value on a nonrecurring basis and include performing
and nonperforming construction loans and other nonperforming mortgage loans. Other mortgage loans
are reported at face value less an allowance. The allowance for loans we expect to convert to
permanent loans that will be held for sale is based on the estimated market value of the loans.
The allowance for construction loans and other nonperforming mortgage loans that we expect to
eventually default is based on the underlying collateral value. The following table presents for each hierarchy level the Companys financial instruments
measured at fair value on a nonrecurring basis at June 30, 2008: Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsOther Mortgage Loans
    
    $
    
    
    
    $
    
    
    
    $
    111,930
    
    
    $
    111,930
 The Company adopted SFAS 159 on a prospective basis for mortgage loans held for sale,
effective April 1, 2008.  In accordance with the provisions of SFAS 159, mortgage loans held for
sale originated subsequent to April 1, 2008 are measured at fair value.  The adoption of SFAS 159
for mortgage loans held for sale improves consistency of mortgage loan valuation between the date
the borrower locks the interest rate on the pending mortgage loan and the date of the mortgage loan
sale. 19




---



##### Table of Contents



(I)     BUSINESS SEGMENTS As of June 30, 2008, the Company operated in two principal lines of business: Home Building
and Financial Services. These lines of business operate in the United States, and their markets
are nationwide. Revenues from any one customer are not significant to the Company. The Companys Home Building line of business consists of the following reporting segments that
have operations located in the following states: East:Georgia (Savannah only), Maryland, New Jersey, North Carolina, South Carolina and VirginiaSoutheast:Florida, Georgia (Atlanta only) and TennesseeCentral:Colorado, Indiana, Illinois, Michigan, Minnesota and MissouriTexas:New Mexico and TexasNorthwest:Hawaii, Nevada (except Las Vegas), Northern California, Oregon and WashingtonSouthwest:Arizona, Southern California and Nevada (Las Vegas only)Other homebuilding(1)   (1)
    
    Other homebuilding includes certain resort/second home projects in Florida that
the Company plans to build-out and liquidate, and holding companies. In addition,
Other homebuilding includes amounts consolidated under the caption land held under
option agreements not owned and capitalized interest for all regions. During the first quarter of fiscal year 2009, the Company reclassified its Colorado operations
to the Central reporting segment from the Northwest reporting segment and its New Mexico operations
to the Texas reporting segment from the Southwest reporting segment. The reclassifications reflect
how the Company currently manages its business and were not material to the results of operations
of the respective reporting segments. All prior period amounts have been reclassified to conform
to current period presentation. The Companys mortgage lending, title agency services and insurance products represent one
reporting segment, Financial Services. In fiscal year 2007, the Company completed the sale of Construction Services. In April 2008,
the Company completed the sale of its home services operations. For additional information
regarding the sale of these businesses, refer to Note (L), Discontinued Operations. All prior
year segment information has been revised to conform to the current year presentation. Home Building Home Buildings operations currently involve the construction and sale of detached and
attached single-family homes. During the three months ended June 30, 2008, approximately 80% of
the homes closed were single-family, detached homes. Included in Home Buildings loss from
unconsolidated entities for the three months ended June 30, 2008 and 2007 is the Companys share of
joint ventures impairments totaling $19.7 million and $27.1 million, respectively. Financial Services Financial Services originates loans for homes sold by the Company and its subsidiaries, which
are referred to as Builder Loans. Financial Services also originates loans for homes built by
others, as well as the refinancing of existing mortgages, which are referred to as Retail Loans.
As a result of the significant disruptions in the mortgage markets and the related reductions in
the mortgage market liquidity, the Company has begun to focus its mortgage operations on Builder
Loans to support Home Building. Financial Services operations consist primarily of mortgage
lending, title agency services and the sale of title insurance and other insurance products.
Retail Loans represented approximately 64.3% and 62.1% of total mortgage originations during the
three months ended June 30, 2008 and 2007, respectively. After June 30, 2008, the Company decided
to wind down its Retail Loan operations. For additional information refer to Note (M), Subsequent
Events. The future reduction in Retail Loans may have a negative impact on Financial Services
operating results. Financial Services revenues include interest income of $6.5 million and $26.0 million for the
three months ended June 30, 2008 and 2007, respectively. Financial Services cost of sales is
comprised of interest expense related to debt issued to fund its home financing activities. Other The Companys Other segment consists of corporate general and administrative expense,
including Home Building corporate-related general and administrative expense and interest income. 20




---



##### Table of Contents



The following are components of the Other segments loss from continuing operations before
income tax: For the Three Months Ended June 30,2008
    
    
    2007Corporate General and Administrative Expense
    
    $
    (58,639
    )
    
    $
    (44,981
    )Interest Expense
    
    
    (6,180
    )
    
    
    Interest and Other Income
    
    
    7,108
    
    
    
    4,926$
    (57,711
    )
    
    $
    (40,055
    )
 A summary of the Companys segments is as follows: For the Three Months Ended June 30, 2008EarningsEarnings
    
    
    (Loss) from(Loss)
    
    
    Continuingfrom
    
    
    OperationsUnconsolidated
    
    
    Before
    
    
    Land-related
    
    
    Land-relatedRevenues
    
    
    Entities
    
    
    Income Tax
    
    
    Impairments
    
    
    Write-offsHome BuildingEast
    
    $
    183,131
    
    
    $
    206
    
    
    $
    (21,788
    )
    
    $
    3,670
    
    
    $
    5,232Southeast
    
    
    136,242
    
    
    
    (20,188
    )
    
    
    (65,460
    )
    
    
    31,204
    
    
    
    (49
    )Central
    
    
    131,973
    
    
    
    (129
    )
    
    
    (20,392
    )
    
    
    8,465
    
    
    
    2,008Texas
    
    
    177,341
    
    
    
    
    
    
    
    7,976
    
    
    
    
    
    
    
    8Northwest
    
    
    253,780
    
    
    
    274
    
    
    
    (2,645
    )
    
    
    3,086
    
    
    
    1,873Southwest
    
    
    152,938
    
    
    
    (460
    )
    
    
    (28,449
    )
    
    
    3,690
    
    
    
    1,029Other homebuilding
    
    
    14,294
    
    
    
    
    
    
    
    (345
    )
    
    
    
    
    
    
    Total Home Building
    
    
    1,049,699
    
    
    
    (20,297
    )
    
    
    (131,103
    )
    
    
    50,115
    
    
    
    10,101Financial Services
    
    
    76,423
    
    
    
    
    
    
    
    6,067
    
    
    
    
    
    
    
     Other
    
    
    
    
    
    
    
    
    
    
    (57,711
    )
    
    
    
    
    
    
     Total
    
    $
    1,126,122
    
    
    $
    (20,297
    )
    
    $
    (182,747
    )
    
    $
    50,115
    
    
    $
    10,101
 For the Three Months Ended June 30, 2007EarningsEarnings
    
    
    (Loss) from(Loss)
    
    
    Continuingfrom
    
    
    OperationsUnconsolidated
    
    
    Before
    
    
    Land-related
    
    
    Land-relatedRevenues
    
    
    Entities
    
    
    Income Tax
    
    
    Impairments
    
    
    Write-offsHome BuildingEast
    
    $
    360,776
    
    
    $
    (518
    )
    
    $
    18,052
    
    
    $
    
    
    
    $
    7,372Southeast
    
    
    213,857
    
    
    
    (70
    )
    
    
    (13,017
    )
    
    
    7,415
    
    
    
    3,044Central
    
    
    202,028
    
    
    
    277
    
    
    
    (9,092
    )
    
    
    4,283
    
    
    
    1,510Texas
    
    
    263,540
    
    
    
    
    
    
    
    15,214
    
    
    
    
    
    
    
    335Northwest
    
    
    378,566
    
    
    
    (24,900
    )
    
    
    (29,358
    )
    
    
    18,296
    
    
    
    3,499Southwest
    
    
    342,397
    
    
    
    (142
    )
    
    
    (116,676
    )
    
    
    81,403
    
    
    
    6,934Other homebuilding
    
    
    42,656
    
    
    
    
    
    
    
    (36,902
    )
    
    
    31,195
    
    
    
    176Total Home Building
    
    
    1,803,820
    
    
    
    (25,353
    )
    
    
    (171,779
    )
    
    
    142,592
    
    
    
    22,870Financial Services
    
    
    97,966
    
    
    
    
    
    
    
    14,969
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    (40,055
    )
    
    
    
    
    
    
    Total
    
    $
    1,901,786
    
    
    $
    (25,353
    )
    
    $
    (196,865
    )
    
    $
    142,592
    
    
    $
    22,870
 21




---



##### Table of Contents



As ofJune 30, 2008
    
    
    March 31, 2008Inventory
    
    
    Total Assets
    
    
    Inventory
    
    
    Total AssetsHome BuildingEast
    
    $
    1,140,628
    
    
    $
    1,352,724
    
    
    $
    1,152,818
    
    
    $
    1,331,720Southeast
    
    
    1,211,544
    
    
    
    1,279,168
    
    
    
    1,263,337
    
    
    
    1,360,690Central
    
    
    341,967
    
    
    
    370,180
    
    
    
    387,251
    
    
    
    416,632Texas
    
    
    606,337
    
    
    
    618,829
    
    
    
    608,609
    
    
    
    622,032Northwest
    
    
    719,204
    
    
    
    781,164
    
    
    
    850,181
    
    
    
    918,821Southwest
    
    
    674,564
    
    
    
    726,791
    
    
    
    760,582
    
    
    
    831,544Other homebuilding
    
    
    313,705
    
    
    
    1,114,805
    
    
    
    328,803
    
    
    
    1,128,285Total Home Building
    
    
    5,007,949
    
    
    
    6,243,661
    
    
    
    5,351,581
    
    
    
    6,609,724Financial Services
    
    
    10,275
    
    
    
    726,107
    
    
    
    10,850
    
    
    
    717,060Other (1)
    
    
    
    
    
    
    758,403
    
    
    
    
    
    
    
    713,559Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,989Total
    
    $
    5,018,224
    
    
    $
    7,728,171
    
    
    $
    5,362,431
    
    
    $
    8,137,332
   (1)
    
    The Companys Other segment includes cash, income taxes receivable and substantially all of
the Companys deferred income tax asset valuation allowance. (J)     INCOME TAXES The Company recognized an income tax benefit of $13.6 million and $64.8 million for the three
months ended June 30, 2008 and 2007, respectively, and the Companys effective tax rate for such
periods was 7.5% and 32.9%, respectively. The difference in the Companys tax rate primarily
results from the change in the deferred tax asset valuation allowance. As of June 30, 2008 and March 31, 2008, the Company had a federal income tax receivable of
$63.3 million and $648.5 million, respectively, primarily relating to net operating loss carryback
refund claims. During the three months ended June 30, 2008, the Company received federal tax
refunds of $620.8 million. The Companys net deferred tax assets before the valuation allowance
remained constant at $1.02 billion as of June 30, 2008 and March 31, 2008. The Company had a
$123.5 million deferred tax asset resulting from tax credits and state net operating loss
carryforwards at June 30, 2008. If unused, the various state tax net operating loss and credit
carryforwards will expire (beginning at various times depending on the tax jurisdiction) in the
years 2013 through 2029. In accordance with the provisions of SFAS 109, the Company assesses, on a quarterly basis, the
realizability of its deferred tax assets. A valuation allowance must be established when, based
upon the evaluation of all available evidence, it is more likely than not that all or a portion of
the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon
taxable income in prior carryback years, estimates of future taxable income, tax planning
strategies and reversals of existing taxable temporary differences. SFAS 109 provides that forming
a conclusion that a valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years or losses expected in early future years. Based on the Companys assessment, including the implementation of certain tax planning
strategies, the realization of approximately $879 million of the Companys deferred tax assets is
dependent upon future taxable income. Based on the Companys consideration of the current
homebuilding industry conditions and the related uncertainty in projections of future taxable
income, the Company increased its valuation allowance by $49 million during the three months ended
June 30, 2008. The valuation allowance was $879 million and $830 million as of June 30, 2008 and
March 31, 2008, respectively. The valuation allowance may be increased or decreased as conditions change or if the Company
is unable to implement certain tax planning strategies. The Companys future realization of its
deferred tax assets ultimately depends on the existence of sufficient taxable income in the
carryforward periods (both federal and state). Changes in existing laws could affect the valuation
of deferred tax assets for future periods. On April 1, 2007, the Company adopted FIN 48. The total amount of gross unrecognized tax
benefits as of June 30, 2008 and March 31, 2008 was $353.1 million (which excludes interest,
penalties, and the tax benefit relating to the deductibility of interest and state income tax). 22




---



##### Table of Contents



It is reasonably possible that, within the next 12 months, total unrecognized tax benefits may
decrease as a result of the potential resolution with the IRS of issues stemming from fiscal years
2001 through 2004 federal income tax returns, in addition to the resolution of various state income
tax audits and/or appeals. However, the change that could occur within the next 12 months cannot
be estimated at this time. The Company files numerous income tax returns in both U.S. federal and state jurisdictions.
The federal statute of limitations has expired for the Companys federal tax returns filed for tax
years through March 31, 2000. In July 2007, the Company received a Revenue Agents Report from the
IRS relating to the ongoing audit of the Companys federal income tax returns for fiscal years 2001
through 2004. The Company believes that its tax return positions are supported and will vigorously
dispute the proposed adjustments. In fiscal year 2008, the IRS commenced an examination of the
Companys federal tax returns for fiscal years 2005 and 2006. Certain of the Companys state
income tax returns are under audit and are at various stages of the audit process. The total amount of unrecognized tax benefits that, if recognized, would affect the Companys
effective tax rate was $272.3 million as of June 30, 2008 and March 31, 2008. For the three months
ended June 30, 2008, the Company accrued $7.3 million of gross accrued interest and penalties. As
of June 30, 2008, gross accrued interest and penalties were $160.9 million. The Companys
liability for unrecognized tax benefits combined with accrued interest and penalties is reflected
as a component of accrued liabilities. (K)     DERIVATIVES AND HEDGING The Company is exposed to the risk of interest rate fluctuations on its debt and other
obligations. Financial Services enters into mandatory forward trade commitments to manage the
interest rate risk related to its portfolio of mortgage loans held for sale and IRLCs. These
forward trade commitments are treated as derivative instruments and their initial fair value is
recorded on the balance sheet in other assets or accrued liabilities. Subsequent changes in the
fair value of these forward trade commitments are recorded as an adjustment to earnings. The net
change in the estimated fair value of forward trade commitments treated as derivatives resulted in
a gain of $6.2 million for the three months ended June 30, 2008 compared to a loss of $0.9 million
for the three months ended June 30, 2007. Prior to April 1, 2008, the forward trade commitments used to hedge the interest rate risk
related to Financial Services portfolio of mortgage loans held for sale were designated as fair
value hedges. Changes in the fair value of these forward trade commitments and the mortgage loans,
for which the hedge relationship was deemed effective, were recorded as an adjustment to earnings.
To the extent the hedge was effective, gains or losses in the value of the hedged loans due to
interest rate movement were offset by an equal and opposite gain or loss in the value of the
forward trade commitment with no impact to earnings. To the extent the hedge contained some
ineffectiveness, the ineffectiveness was recognized immediately in earnings. For the three months
ended June 30, 2007, the amount of hedge ineffectiveness included in earnings was a loss of $0.7
million. Due in part to the adoption of SFAS 159 as it relates to the fair value measurement of
mortgage loans held for sale discussed in Note (H), Fair Values of Financial Instruments,
beginning April 1, 2008, the Company no longer accounts for these forward trade commitments as fair
value hedges. Financial Services enters into IRLCs with its customers under which Financial Services agrees
to make mortgage loans at agreed upon rates within a period of time, generally from one to 30 days,
if certain conditions are met. Initially, the IRLCs are treated as derivative instruments and
their fair value is recorded on the balance sheet in other assets or accrued liabilities. The fair
value of these loan commitment derivatives includes future cash flows related to the associated
servicing of the loan, but does not include the value of any internally-developed intangible
assets. Subsequent changes in the fair value of the IRLCs are recorded as an adjustment to
earnings. The net change in the estimated fair value of IRLCs resulted in a loss of $3.5 million
for the three months ended June 30, 2008, compared to a gain of $1.4 million for the three months
ended June 30, 2007. From time to time, the Company may enter into other forms of derivatives to hedge changes in
market values of certain assets and liabilities. The notional value of such derivatives was $79.0
million at June 30, 2008. (L)     DISCONTINUED OPERATIONS On March 30, 2007, the Company completed the sale of Construction Services to unrelated third
parties and received $344.8 million in cash, net of related expenses. The Company will also
receive an aggregate of $60.0 million in cash to be paid in annual installments of $4.0 million
over a 15-year period after the closing date (the Additional Payments). The Additional Payments
will be made in connection with an election with respect to the tax treatment of the transaction
pursuant to Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the Internal 23




---



##### Table of Contents



Revenue Code). If the Internal Revenue Code is amended so that the purchaser is no longer
entitled to the benefits of the Section 338(h)(10) election, the amount of the Additional Payments
will be subject to change to ensure that any subsequent payments to be made by the purchaser do not
exceed 50% of the tax benefits to be realized by it thereafter as a result of such election. The
Additional Payments are an unsecured receivable from the purchaser that was not recorded in
connection with the sale of Construction Services. As the Additional Payments are received in
future periods, the amounts will be reflected in the Statements of Consolidated Operations. On April 3, 2008, the Company completed the sale of its home services operations to an
unrelated third party and received $134.6 million in cash, which is subject to post-closing
adjustments. A summary of the Companys calculation of the related gain on sale is below: For the Three Months EndedJune 30, 2008Sales and Related Proceeds, net of
Related Expenses
    
    $
    124,320Assets Sold
    
    
    (85,076
    )Pre-tax Gain on Sale
    
    
    39,244Income Tax Expense
    
    
    (20,231
    )Net Gain on Sale
    
    $
    19,013
 Prior to their sale, Construction Services was a separate reporting segment and the Companys
home services operations were included in the Other segment. Construction Services and the
Companys home services operations were reclassified to discontinued operations in March 2007 and
March 2008, respectively. All prior period information for these operations has been reclassified
to discontinued operations. Earnings from discontinued operations include the financial information for entities included
in discontinued operations, the gains (losses) on the sale of such entities, intercompany
eliminations between entities in discontinued operations and entities in continuing operations, and
certain general and administrative expenses incurred in the sale of such entities. The following
table provides summary information for amounts included in discontinued operations: For the Three Months EndedJune 30,2008(1)
    
    
    2007 (2)Revenues
    
    $
    
    
    
    $
    34,703Costs and Expenses
    
    
    
    
    
    
    (33,495
    )Earnings (Loss) Before Income Taxes
    
    
    
    
    
    
    1,208Provision (Benefit) for Income Taxes
    
    
    
    
    
    
    462Gain on Sale, net of Tax
    
    
    19,013
    
    
    
    3,376$
    19,013
    
    
    $
    4,122
   (1)
    
    Includes the Companys home services operations only.(2)
    
    Includes the Companys home services operations and Construction Services. (M)     SUBSEQUENT EVENTS During July 2008, the Company made a decision to wind down its Retail Loan operations. The
wind-down will be executed on an orderly basis over the next several months. Financial Services,
which currently operates approximately 80 retail branches, is expected to substantially complete
the exit of its retail activity by the end of January 2009. The Company estimates pre-tax charges of approximately $20 to $30 million, which will be
recognized primarily in the second and third quarters of fiscal year 2009, related to severance and
contract termination costs and non-cash asset impairments in connection with the closure of its
retail branches. The total estimated charges are subject to change, and the Company is working to
minimize such costs. During July 2008, CTX Mortgage Company, LLC executed an amendment to its committed mortgage
warehouse credit facility to lower the commitment to $325 million from $375 million and extend the
maturity of the facility by 60 days to October 31, 2008. 24




---



##### Table of Contents



Item 2.     Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to help the reader gain a better understanding of our
financial condition and our results of operations. It is provided as a supplement to, and should
be read in conjunction with, our financial statements and accompanying notes. Executive Summary Our results of operations for the three months ended June 30, 2008 were materially affected by
continuing adverse market conditions impacting our homebuilding and mortgage lending operations.
These adverse market conditions began in fiscal year 2006, and we are unable to predict whether the
market will deteriorate further or improve. Any further deterioration in market conditions is
likely to have a material adverse effect on our business, financial condition and results of
operations. A summary of our results of operations by line of business is as follows (dollars in
thousands): For the Three Months Ended June 30,2008
    
    
    2007
    
    
    ChangeRevenuesHome Building
    
    $
    1,049,699
    
    
    $
    1,803,820
    
    
    
    (41.8
    %)Financial Services
    
    
    76,423
    
    
    
    97,966
    
    
    
    (22.0
    %)Total
    
    $
    1,126,122
    
    
    $
    1,901,786
    
    
    
    (40.8
    %)Earnings (Loss) from Continuing Operations
Before Income TaxesHome Building
    
    $
    (131,103
    )
    
    $
    (171,779
    )
    
    
    (23.7
    %)Financial Services
    
    
    6,067
    
    
    
    14,969
    
    
    
    (59.5
    %)Other
    
    
    (57,711
    )
    
    
    (40,055
    )
    
    
    44.1
    %Total
    
    $
    (182,747
    )
    
    $
    (196,865
    )
    
    
    (7.2
    %)
 Revenues for the three months ended June 30, 2008 were $1.13 billion, which represents a 40.8%
decrease compared to the three months ended June 30, 2007. Loss from continuing operations before
income taxes for the three months ended June 30, 2008 decreased to $182.7 million. Beginning in fiscal year 2006, many U.S. housing markets began to experience a significant
downturn, which directly affected, and continues to adversely affect, our business, financial
condition and results of operations. We believe the principal factors that have caused this
downturn include each of the following, the impact of which varies based upon geographic market,
product segment and the time since commencement of the downturn:  
    decreased affordability of housing in selected markets as a result of significant
price appreciation in the years preceding the downturn and tightened credit standards
for homebuyers,
    declining homebuyer demand due to lower consumer confidence in the consumer real
estate market and an inability of many homebuyers to sell their existing homes,
    increased inventory of new and existing homes for sale, including the impact of
increases in residential foreclosures,
    reduced availability and increased cost of mortgage financing due to the significant
mortgage market disruptions, and
    pricing pressures resulting from a variety of factors, including the decision of
homebuilders to offer significant discounts and sales incentives to liquidate unsold
inventories in order to generate cash, and the need for home prices to fall within
mortgage qualification limits. Over the past several quarters, the market conditions have been adversely impacted by negative
overall economic conditions, including slower employment growth and substantial increases in energy
and related costs. The inventory of new and existing homes for sale remains high as homebuilders
have continued to build homes and attempt to liquidate unsold inventory and as existing homes have
become available for sale as a result of an increased volume of residential foreclosures. The
decline in homebuyer demand can be attributed to, in part, concerns of prospective homebuyers that
prices will continue to decline and, in fact, homebuilders and other home sellers have reduced
prices in most markets. In addition, many prospective homebuyers have been unable to sell their
existing homes. Moreover, during fiscal year 2008, the mortgage markets experienced significant
disruptions, which led to an unprecedented combination of reduced investor demand for mortgage
loans and mortgage-backed securities, tightened
credit requirements for homebuyers and increased credit risk premiums. As a result,
prospective borrowers 25




---



##### Table of Contents



experienced more difficulty or greater expense in obtaining loans, or were
subject to increased credit score or down payment requirements, which further reduced the demand
for homes and mortgage loans during the quarter. These market conditions materially and adversely impacted Home Buildings operating results
for the three months ended June 30, 2008 as evidenced by the following:  
    a $754.1 million decrease in homebuilding revenues, net of discounts,
    $50.1 million in land-related impairments,
    $19.7 million in our share of joint ventures impairments, and
    $10.1 million in write-offs of land deposits and pre-acquisition costs. During the quarter, we assessed our neighborhoods and land for possible land-related
impairments. The market conditions during the quarter adversely impacted anticipated future
selling prices, sales rates and other assumptions included in our impairment evaluations, and we
recorded land-related impairments totaling $50.1 million. During the three months ended June 30,
2008, 36 land-related impairments were recorded. At June 30, 2008, the remaining carrying value of
neighborhoods and land investments for which an impairment was recorded in the quarter ended
June 30, 2008 was $77.7 million. If market conditions worsen, or if any of our assumptions are
adjusted negatively in future periods, we may have additional land-related impairments, which could
be significant. Our homebuilding operations also experienced a significant decline in operating margin when
compared to the same period of the prior year primarily attributable to lower home prices and
increases in discounts and sales incentives, including increases in seller-paid financing and
closing costs to help stimulate sales and close homes. In addition, customer cancellation rates
remain elevated when compared to historical levels. Customer discounts increased to 10.5% of
housing revenues for the three months ended June 30, 2008, up from 8.8% in the same period of the
prior year. As a percentage of revenues, closing and financing costs have increased from 3.2% to
3.5% for the three months ended June 30, 2008. Sales commissions, as a percentage of revenues,
have decreased from 4.8% to 4.7% for the three months ended June 30, 2008. Financial Services operating earnings for the three months ended June 30, 2008 were $6.1
million as compared to $15.0 million for the three months ended June 30, 2007. For the three
months ended June 30, 2008, mortgage loan origination volume decreased 38.9%. This change is
primarily attributable to the adverse conditions in the mortgage markets and the decline in
homebuyer demand described above. Continued adverse market conditions and further declines in
homebuyer demand could have a negative impact on Financial Services future operating results.
During July 2008, we made the decision to wind down the origination by Financial Services of
mortgage loans for homes built by others as well as the refinancing of existing mortgages, which we
refer to as Retail Loans. The wind-down will be executed in an orderly basis over the next several
months. Financial Services, which currently operates approximately 80 retail branches, is expected
to substantially complete the exit of its retail activity by the end of January 2009. We estimate
pre-tax charges of approximately $20 to $30 million, which will be recognized primarily in the
second and third quarters of fiscal year 2009, related to severance and contract termination costs
and non-cash asset impairments in connection with the closure of our retail branches. The total
estimated charges are subject to change, and we are working to minimize such costs. The future
reduction in Retail Loans may have a negative impact on Financial Services operating results. We anticipate that our business and results of operations will continue to be affected by the
difficult industry conditions for some time. In general, we believe that our existing sources of
funding, including available cash on hand, cash flow from operations and our committed credit
facilities are adequate to meet our currently anticipated operating needs, capital expenditures and
debt service requirements for at least the next twelve months. However, we are actively evaluating
every internal opportunity to bolster our capital position, including evaluating our quarterly
dividend, although no decisions have been made at this time. Further deterioration in market
conditions, including lower demand or prices for our homes or further disruptions of the mortgage
markets, would likely result in declines in sales of our homes, accumulation of unsold inventory
and margin deterioration, as well as potential additional land-related impairments and write-offs
of deposits and pre-acquisition costs. These or other developments could reduce cash flow, cause
us to incur additional losses, or cause us not to be in compliance with financial or other
covenants, requiring that we seek amendments or waivers to our credit facilities to ensure
continued availability of committed debt financing. On July 30, 2008, the President of the United States signed into law broad legislation that
included a provision that provides a tax credit of up to $7,500 for any first-time homebuyer who
purchases a home between April 9, 2008 and July 1, 2009. Unlike other conventional tax credits,
the taxpayer will be required to pay back the government over a 15-year period or when the home is
sold. In addition to the tax-credit provision, the law is
designed to spare an estimated 400,000 homeowners from foreclosure and bolster Federal
National Mortgage 26




---



##### Table of Contents



Association, or FNMA, and Federal Home Loan Mortgage Corporation, or FHLMC. One
of the provisions that will no longer be available to homebuyers is the seller funded down payment
assistance program for FHA-insured loans. We believe the fundamentals that support homebuyer demand in the long term remain solid and
the current market conditions will moderate over time; however, we cannot predict the duration of
the current market conditions. We continue to adjust our operations in response to market
conditions by reducing our unsold inventory, reducing our land position, and lowering our costs.
Our unsold inventory decreased from 4,815 units as of June 30, 2007 to 1,356 units as of June 30,
2008. Since June 30, 2007, our land position decreased by 69,397 lots or 46.0%. Further, Home
Buildings selling, general and administrative expenses decreased from $298.6 million for the three
months ended June 30, 2007 to $166.2 million for the same period of the current year. We are also
working to reduce the costs of constructing our homes, although in many cases cost savings will not
be realized until future periods. During the three months ended June 30, 2008, we generated $557.9 million in cash flows from
operating activities, which was primarily provided by federal income tax refunds resulting from the
carryback of the fiscal year 2008 net operating loss to prior years. In addition, our homebuilding
operations were cash flow positive, which was more than offset by cash used in Financial Services
operating activities. HOME BUILDING The following summarizes the results of our Home Building operations (dollars in thousands
except per unit data): For the Three Months Ended June 30,2008
    
    2007Change

    
    
    
    
    
    ChangeRevenues  Housing
    
    $
    1,032,191
    
    
    
    (41.8
    %)
    
    $
    1,774,738
    
    
    
    (30.7
    %)Revenues  Land Sales and Other
    
    
    17,508
    
    
    
    (39.8
    %)
    
    
    29,082
    
    
    
    (66.9
    %)Cost of Sales  Housing
    
    
    (910,126
    )
    
    
    (38.6
    %)
    
    
    (1,481,351
    )
    
    
    (20.6
    %)Cost of Sales  Land Sales and Other
    
    
    (88,262
    )
    
    
    (49.7
    %)
    
    
    (175,567
    )
    
    
    67.6
    %Selling, General and Administrative Expenses
    
    
    (166,215
    )
    
    
    (44.3
    %)
    
    
    (298,628
    )
    
    
    (20.9
    %)Loss from Unconsolidated Entities (1)
    
    
    (20,297
    )
    
    
    (19.9
    %)
    
    
    (25,353
    )
    
    
    (560.5
    %)Other Income
    
    
    4,098
    
    
    
    (22.7
    %)
    
    
    5,300
    
    
    
    2.7
    %Operating Loss(2)
    
    $
    (131,103
    )
    
    
    (23.7
    %)
    
    $
    (171,779
    )
    
    
    (155.1
    %)Operating Loss as a Percentage of
Revenues:Housing Operations (3)
    
    
    (4.3
    %)
    
    
    (4.0
    )
    
    
    (0.3
    %)
    
    
    (12.7
    )Total Homebuilding Operations
    
    
    (12.5
    %)
    
    
    (3.0
    )
    
    
    (9.5
    %)
    
    
    (21.3
    )
   (1)
    
    Loss from Unconsolidated Entities include our share of joint ventures impairments.(2)
    
    Operating loss represents Home Building reporting segments earnings exclusive of certain
homebuilding corporate general and administrative expenses.(3)
    
    Operating loss from housing operations is a non-GAAP financial measure, which we believe is
useful to investors as it allows them to separate housing operations from activities related
to land holdings, options to acquire land and related land valuation adjustments. Management
uses this non-GAAP financial measure to aid in evaluating the performance of its ongoing
housing projects. Operating earnings from housing operations is equal to Housing Revenues
less Housing Cost of Sales and Selling, General and Administrative Expenses, all of which are
set forth in the table above. 27




---



##### Table of Contents



Home Building business consists of the following reporting segments that have operations
located in the following states: East:Georgia (Savannah only), Maryland, New Jersey, North Carolina, South Carolina and VirginiaSoutheast:Florida, Georgia (Atlanta only) and TennesseeCentral:Colorado, Indiana, Illinois, Michigan, Minnesota and MissouriTexas:New Mexico and TexasNorthwest:Hawaii, Nevada (except Las Vegas), Northern California, Oregon and WashingtonSouthwest:Arizona, Southern California and Nevada (Las Vegas only)Other homebuilding(1)   (1)
    
    Other homebuilding includes certain resort/second home projects in Florida that
we plan to build-out and liquidate, and holding companies. In addition, Other
homebuilding includes amounts consolidated under the caption land held under option
agreements not owned and capitalized interest for all regions. The following table summarizes units closed and average revenue per unit: For the Three Months Ended June 30,2008
    
    2007Change

    
    
    
    
    
    ChangeUnits ClosedEast
    
    
    644
    
    
    
    (42.4
    %)
    
    
    1,119
    
    
    
    (32.3
    %)Southeast
    
    
    498
    
    
    
    (30.4
    %)
    
    
    716
    
    
    
    (40.0
    %)Central
    
    
    607
    
    
    
    (35.4
    %)
    
    
    940
    
    
    
    (35.8
    %)Texas
    
    
    1,007
    
    
    
    (33.8
    %)
    
    
    1,521
    
    
    
    (10.1
    %)Northwest
    
    
    621
    
    
    
    (32.1
    %)
    
    
    915
    
    
    
    (3.3
    %)Southwest
    
    
    526
    
    
    
    (32.0
    %)
    
    
    774
    
    
    
    (34.3
    %)Other homebuilding
    
    
    36
    
    
    
    (67.3
    %)
    
    
    110
    
    
    
    (42.7
    %)3,939
    
    
    
    (35.4
    %)
    
    
    6,095
    
    
    
    (26.7
    %)Average Revenue Per UnitEast
    
    $
    279,894
    
    
    
    (11.7
    %)
    
    $
    317,134
    
    
    
    (3.6
    %)Southeast
    
    $
    261,394
    
    
    
    (10.1
    %)
    
    $
    290,675
    
    
    
    (6.5
    %)Central
    
    $
    216,713
    
    
    
    1.9
    %
    
    $
    212,744
    
    
    
    (3.9
    %)Texas
    
    $
    174,839
    
    
    
    1.8
    %
    
    $
    171,728
    
    
    
    4.5
    %Northwest
    
    $
    408,663
    
    
    
    (0.4
    %)
    
    $
    410,491
    
    
    
    (15.1
    %)Southwest
    
    $
    282,120
    
    
    
    (35.6
    %)
    
    $
    438,145
    
    
    
    (2.6
    %)Other homebuilding
    
    $
    332,833
    
    
    
    2.1
    %
    
    $
    325,836
    
    
    
    8.7
    %Total Home Building
    
    $
    262,044
    
    
    
    (10.0
    %)
    
    $
    291,179
    
    
    
    (5.5
    %)
 Revenues Housing revenues significantly decreased for the three months ended June 30, 2008 as compared
to June 30, 2007 due to decreases in units closed and average revenue per unit. For the three
months ended June 30, 2008, average revenue per unit (which is net of customer discounts) decreased
primarily as a result of lower prices experienced in many of our markets and increases in
discounts. Customer discounts increased to 10.5% of housing revenues for the three months ended
June 30, 2008, up from 8.8% for the three months ended June 30, 2007. For the three months ended
June 30, 2008, our closings declined when compared to the same period in the prior year as a result
of decreases in sales orders caused principally by the challenging market conditions described
above. Revenues from land sales and other decreased 39.8% to $17.5 million for the three months ended
June 30, 2008 as compared to the same period in the prior year. The timing and amount of land
sales vary from period to period based on a number of factors, including, but not limited to, our
desire to sell parcels of land in particular geographic areas that include locations where we may
choose not to build any further, the demand for land in areas that we are offering or considering
to offer land for sale, and the prevailing prices for the types of parcels of land that we may seek
to sell. 28




---



##### Table of Contents



Changes in average operating neighborhoods and closings per average neighborhood are outlined
in the table below: For the Three Months Ended June 30,2008
    
    2007Change
    
    
    
    
    
    ChangeAverage Operating Neighborhoods (1)
    
    
    568
    
    
    
    (16.0
    %)
    
    
    676
    
    
    
    1.0
    %Closings Per Average Neighborhood
    
    
    6.9
    
    
    
    (23.3
    %)
    
    
    9.0
    
    
    
    (27.4
    %)
   (1)
    
    We define a neighborhood as an individual active selling location targeted to a
specific buyer segment with greater than ten homes remaining to be sold. Our neighborhood count as of June 30, 2007 was 666 neighborhoods, and it has steadily
decreased to a neighborhood count of 543 as of June 30, 2008. The drop in neighborhood count is
primarily the result of our decision to build-out and not reinvest in certain markets, our decision
to sell certain properties that did not meet our strategic initiatives and our decision to curtail
development spending, which delays the opening of new neighborhoods. Operating Margins Homebuilding operating margins (consisting of operating earnings or loss as a percentage of
revenues) declined to (12.5%) for the three months ended June 30, 2008 as compared to (9.5%) for
the three months ended June 30, 2007. The decrease in homebuilding operating margins as compared
to the prior year was primarily attributable to decreases in average revenue per unit and in units
closed, which were not offset by commensurate reductions in direct housing costs. Land-related
impairments for the three months ended June 30, 2008 were $50.1 million. The $20.3 million in
losses from unconsolidated entities for the three months ended June 30, 2008 includes $19.7 million
of our share of joint ventures impairments and losses. We regularly assess our land holdings, including our lot options, taking into consideration
changing market conditions and other factors. In connection with our quarterly neighborhood
assessments, during the quarter ended June 30, 2008, we reviewed approximately 850 housing projects
and land investments for potential land-related impairments. Approximately 780 of these housing
projects are owned land positions that are either designated as active neighborhoods, are under
development but are not considered active neighborhoods, are currently held for sale or will be
developed in future periods. The remaining 70 housing projects represent controlled land positions
approved for purchase. Land-related impairments during the quarter ended June 30, 2008 represented
36 neighborhoods and land investments. Also, during the three months ended June 30, 2008, we determined it was probable we would not
exercise certain lot option contracts, which resulted in writing off deposits and pre-acquisition
costs for 21 option contracts, resulting in a remaining balance of 99 outstanding option contracts
at June 30, 2008. The following table summarizes Home Buildings land-related impairments and write-offs of
deposits and pre-acquisition costs, excluding our share of joint ventures impairments (dollars in
thousands): For the Three Months Ended June 30,2008
    
    2007Land-related
    
    
    Land-related
    
    
    Land-related
    
    
    Land-relatedImpairments
    
    
    Write-offs
    
    
    Impairments
    
    
    Write-offsEast
    
    $
    3,670
    
    
    $
    5,232
    
    
    $
    
    
    
    $
    7,372Southeast
    
    
    31,204
    
    
    
    (49
    )
    
    
    7,415
    
    
    
    3,044Central
    
    
    8,465
    
    
    
    2,008
    
    
    
    4,283
    
    
    
    1,510Texas
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    335Northwest
    
    
    3,086
    
    
    
    1,873
    
    
    
    18,296
    
    
    
    3,499Southwest
    
    
    3,690
    
    
    
    1,029
    
    
    
    81,403
    
    
    
    6,934Other homebuilding
    
    
    
    
    
    
    
    
    
    
    31,195
    
    
    
    176$
    50,115
    
    
    $
    10,101
    
    
    $
    142,592
    
    
    $
    22,870
 We assess the recoverability of our investment in land holdings on a quarterly basis.
Continued deterioration in demand and market conditions could result in significant additional
impairments and a decision to not exercise additional lot option contracts, which would result in
additional write-offs. In addition, we could incur additional losses and impairments related to
our joint ventures. Please refer to Inventory Valuation in the Critical Accounting Estimates and
to Note (D), Inventories, of the Notes to Consolidated Financial Statements for additional
details on our land holdings. 29




---



##### Table of Contents



Home Buildings selling, general and administrative expenses decreased $132.4 million for the
three months ended June 30, 2008 when compared to the three months ended June 30, 2007. As a
percentage of revenues, selling, general and administrative expenses decreased from 16.6% for the
three months ended June 30, 2007 to 15.8% for the three months ended June 30, 2008. The largest
decrease in selling, general and administrative expenses for the three months ended June 30, 2008
occurred in compensation and benefit costs as a result of reductions in personnel. The number of
Home Building employees, excluding sales personnel, was approximately 3,100 and 4,200 as of
June 30, 2008 and 2007, respectively. We are focused on ensuring we size our organization in
response to current market conditions. The following table summarizes Home Buildings selling,
general and administrative expenses, or SG&A (dollars in thousands): For the Three Months Ended June 30,2008
    
    2007Change

    
    
    
    
    
    ChangeCompensation and Benefits
    
    $
    73,447
    
    
    
    (40.1
    %)
    
    $
    122,602
    
    
    
    (31.3
    %)Sales Commissions
    
    
    49,461
    
    
    
    (42.5
    %)
    
    
    86,056
    
    
    
    (15.0
    %)Advertising and Marketing
    
    
    15,957
    
    
    
    (62.0
    %)
    
    
    41,939
    
    
    
    (11.8
    %)Other
    
    
    27,350
    
    
    
    (43.1
    %)
    
    
    48,031
    
    
    
    (4.0
    %)Selling, General and Administrative Expenses
    
    $
    166,215
    
    
    
    (44.3
    %)
    
    $
    298,628
    
    
    
    (20.9
    %)SG&A as a Percentage of Revenues
    
    
    15.8
    %
    
    
    (0.8
    )
    
    
    16.6
    %
    
    
    2.4
 Sales Orders, Average Cancellation Rates, Backlog Units and Land Holdings For each unit in backlog, we have received a signed customer contract and a customer deposit,
which is refundable under certain circumstances. The backlog units included in the table below are
net of cancellations. Cancellations occur for a variety of reasons, including a customers
inability to obtain financing, customer relocations or other customer financial hardships. The
following tables summarize sales orders, average cancellation rates and backlog units: For the Three Months Ended June 30,2008
    
    2007Change
    
    
    
    
    
    ChangeSales Orders (in Units)East
    
    
    1,016
    
    
    
    (20.7
    %)
    
    
    1,282
    
    
    
    (17.2
    %)Southeast
    
    
    579
    
    
    
    (22.1
    %)
    
    
    743
    
    
    
    (26.9
    %)Central
    
    
    499
    
    
    
    (54.3
    %)
    
    
    1,091
    
    
    
    (24.0
    %)Texas
    
    
    1,251
    
    
    
    (20.3
    %)
    
    
    1,570
    
    
    
    (22.0
    %)Northwest
    
    
    515
    
    
    
    (35.3
    %)
    
    
    796
    
    
    
    (21.9
    %)Southwest
    
    
    322
    
    
    
    (66.5
    %)
    
    
    962
    
    
    
    (16.4
    %)Other homebuilding
    
    
    33
    
    
    
    10.0
    %
    
    
    30
    
    
    
    (55.2
    %)4,215
    
    
    
    (34.9
    %)
    
    
    6,474
    
    
    
    (21.5
    %)Sales Per Average Neighborhood
    
    
    7.4
    
    
    
    (22.9
    %)
    
    
    9.6
    
    
    
    (22.0
    %)
 For the Three Months Ended June 30,2008
    
    2007Change
    
    
    
    
    
    ChangeAverage Cancellation RatesEast
    
    
    17.9
    %
    
    
    (5.4
    )
    
    
    23.3
    %
    
    
    (0.3
    )Southeast
    
    
    25.5
    %
    
    
    (5.0
    )
    
    
    30.5
    %
    
    
    (4.6
    )Central
    
    
    34.0
    %
    
    
    3.8
    
    
    
    30.2
    %
    
    
    (0.7
    )Texas
    
    
    33.2
    %
    
    
    0.9
    
    
    
    32.3
    %
    
    
    3.4Northwest
    
    
    32.9
    %
    
    
    (2.9
    )
    
    
    35.8
    %
    
    
    1.3Southwest
    
    
    43.1
    %
    
    
    8.6
    
    
    
    34.5
    %
    
    
    (10.7
    )Other homebuilding
    
    
    5.7
    %
    
    
    (56.3
    )
    
    
    62.0
    %
    
    
    34.0Total Home Building
    
    
    29.9
    %
    
    
    (1.3
    )
    
    
    31.2
    %
    
    
    (1.5
    )
 30




---



##### Table of Contents



As ofJune 30, 2008
    
    March 31, 2008Change
    
    
    
    
    
    ChangeBacklog UnitsEast
    
    
    1,662
    
    
    
    28.8
    %
    
    
    1,290
    
    
    
    (30.2
    %)Southeast
    
    
    1,417
    
    
    
    6.1
    %
    
    
    1,336
    
    
    
    (12.0
    %)Central
    
    
    1,008
    
    
    
    (9.7
    %)
    
    
    1,116
    
    
    
    (36.0
    %)Texas
    
    
    2,121
    
    
    
    13.0
    %
    
    
    1,877
    
    
    
    (7.1
    %)Northwest
    
    
    1,144
    
    
    
    (8.5
    %)
    
    
    1,250
    
    
    
    (30.7
    %)Southwest
    
    
    670
    
    
    
    (23.3
    %)
    
    
    874
    
    
    
    (41.8
    %)Other homebuilding
    
    
    
    
    
    
    (100.0
    %)
    
    
    3
    
    
    
    (98.6
    %)8,022
    
    
    
    3.6
    %
    
    
    7,746
    
    
    
    (27.3
    %)
 For the three months ended June 30, 2008, sales orders declined in all of the regions in which
we do business when compared to the three months ended June 30, 2007 except for the Other
homebuilding segment. We expect that the decreases in sales orders will have a negative impact on
our closings in the near term. As previously discussed, some of the factors we believe are contributing to the decrease in
sales orders are a continued decline in homebuyer demand due to lower consumer confidence in the
consumer real estate market, as well as the inability of some
prospective buyers to qualify for loans to purchase our homes or to sell their existing homes and increases in the number of homes
available for sale as a result of foreclosures. The decline in homebuyer demand has also been
caused by the tightened homebuyer credit requirements. These factors are evidenced by a 40.7% drop
in customer traffic and cancellation rates that are much higher than our long-term average
cancellation rates ranging from 18% to 26%. In light of the continuing adverse market conditions, our strategy is to focus on selling
homes, reducing inventories, reducing costs, generating cash and simplifying our business through
process improvement initiatives. We curtailed speculative housing starts so that we could reduce
our speculative inventory and facilitate our transition to an operating model more focused on
constructing homes from a sold backlog. Total speculative inventory decreased 22.7% to 1,356 units, excluding models, at June 30, 2008
compared to 1,754 units at March 31, 2008. We have also continued to take actions to reduce our
land position. The following table summarizes our land position: As ofJune 30, 2008
    
    March 31, 2008Lots


    
   Lots


    
    
    
    
    
    Lots
    
    LotsOwned
    
    Controlled
    
    Total Lots
    
    Owned
    
    Controlled
    
    Total LotsEast
    
    
    14,346
    
    
    
    5,577
    
    
    
    19,923
    
    
    
    15,417
    
    
    
    7,043
    
    
    
    22,460Southeast
    
    
    20,462
    
    
    
    2,470
    
    
    
    22,932
    
    
    
    21,187
    
    
    
    2,442
    
    
    
    23,629Central
    
    
    5,449
    
    
    
    1,375
    
    
    
    6,824
    
    
    
    5,835
    
    
    
    1,948
    
    
    
    7,783Texas
    
    
    13,620
    
    
    
    3,309
    
    
    
    16,929
    
    
    
    14,523
    
    
    
    3,467
    
    
    
    17,990Northwest
    
    
    5,059
    
    
    
    1,149
    
    
    
    6,208
    
    
    
    5,215
    
    
    
    2,217
    
    
    
    7,432Southwest
    
    
    6,506
    
    
    
    670
    
    
    
    7,176
    
    
    
    6,953
    
    
    
    1,030
    
    
    
    7,983Other homebuilding
    
    
    1,324
    
    
    
    
    
    
    
    1,324
    
    
    
    1,092
    
    
    
    
    
    
    
    1,09266,766
    
    
    
    14,550
    
    
    
    81,316
    
    
    
    70,222
    
    
    
    18,147
    
    
    
    88,369Change
    
    
    (4.9
    %)
    
    
    (19.8
    %)
    
    
    (8.0
    %)
    
    
    (28.6
    %)
    
    
    (70.6
    %)
    
    
    (44.8
    %)
 Capitalized costs related to lots owned are included in land under development and land held
for development and sale. Lot counts related to completed homes or homes under construction are
excluded from the totals above. The dollar amounts related to these lot counts are classified as
direct construction, a component of housing projects, in our Consolidated Balance Sheets. The
direct construction lot counts as of June 30, 2008 and March 31, 2008 were 7,349 and 7,324,
respectively, including 1,132 and 1,323, respectively, of lots for model homes completed or under
construction. We decreased our total land position when compared to March 31, 2008 with the most pronounced
declines occurring in lots controlled. The decrease in our land position for the three months
ended June 30, 2008 is a result of 31




---



##### Table of Contents



our decision to curtail land purchases and exit certain lot option arrangements. Based on current
market conditions, we believe we are oversupplied in total lots in certain markets and will
continue to seek opportunities to reduce our land position. These steps may include one or more
sales of land. As compared to June 30, 2007, our total land position has decreased by 69,397 lots
or 46.0%. Included in our total land position are 2,629 and 3,429 lots controlled through joint
venture arrangements as of June 30, 2008 and March 31, 2008, respectively. The percentage
decreases in our total land position reflected in the table above for March 31, 2008 are as
compared to March 31, 2007. These decreases included, but were not limited to, significant land
sales that occurred in the fourth quarter of fiscal year 2008. Regional Discussion Changes in revenues and operating earnings (loss) for our homebuilding reporting segments are
outlined in the table below (dollars in thousands): For the Three Months Ended June 30,2008
    
    
    2007Change

    
    
    
    
    
    ChangeRevenuesEast
    
    $
    183,131
    
    
    
    (49.2
    %)
    
    $
    360,776
    
    
    
    (33.7
    %)Southeast
    
    
    136,242
    
    
    
    (36.3
    %)
    
    
    213,857
    
    
    
    (46.2
    %)Central
    
    
    131,973
    
    
    
    (34.7
    %)
    
    
    202,028
    
    
    
    (38.0
    %)Texas
    
    
    177,341
    
    
    
    (32.7
    %)
    
    
    263,540
    
    
    
    (8.9
    %)Northwest
    
    
    253,780
    
    
    
    (33.0
    %)
    
    
    378,566
    
    
    
    (19.3
    %)Southwest
    
    
    152,938
    
    
    
    (55.3
    %)
    
    
    342,397
    
    
    
    (37.4
    %)Other homebuilding
    
    
    14,294
    
    
    
    (66.5
    %)
    
    
    42,656
    
    
    
    (44.2
    %)$
    1,049,699
    
    
    
    (41.8
    %)
    
    $
    1,803,820
    
    
    
    (31.9
    %)Operating Earnings (Loss)East
    
    $
    (21,788
    )
    
    
    (220.7
    %)
    
    $
    18,052
    
    
    
    (78.2
    %)Southeast
    
    
    (65,460
    )
    
    
    402.9
    %
    
    
    (13,017
    )
    
    
    (121.5
    %)Central
    
    
    (20,392
    )
    
    
    124.3
    %
    
    
    (9,092
    )
    
    
    (215.4
    %)Texas
    
    
    7,976
    
    
    
    (47.6
    %)
    
    
    15,214
    
    
    
    (41.7
    %)Northwest
    
    
    (2,645
    )
    
    
    (91.0
    %)
    
    
    (29,358
    )
    
    
    (139.1
    %)Southwest
    
    
    (28,449
    )
    
    
    (75.6
    %)
    
    
    (116,676
    )
    
    
    (375.1
    %)Other homebuilding
    
    
    (345
    )
    
    
    (99.1
    %)
    
    
    (36,902
    )
    
    
    (318.5
    %)$
    (131,103
    )
    
    
    (23.7
    %)
    
    $
    (171,779
    )
    
    
    (155.1
    %)
 East Revenues decreased 49.2% for the three months ended June 30, 2008 primarily due to significant
decreases in revenues in the North Carolina markets and the Hilton Head market. Also, these same
markets were primarily the reason for the 42.4% decrease in units closed when compared to the three
months ended June 30, 2007. Average revenue per unit decreased 11.7% when compared to the same
period in the prior year, with decreases of 10% or more occurring in seven of the nine markets.
Discounts as a percentage of housing revenues increased to 13.2% for the three months ended
June 30, 2008, as all markets in the East region experienced an increase in discounts, except for
the New Jersey market. Sales orders decreased 20.7% when compared to the three months ended
June 30, 2007 primarily due to decreases in customer traffic and neighborhood counts. Cancellation
rates improved slightly from 23.3% to 17.9% for the three months ended June 30, 2008 as compared to
the same period in the prior year. Operating earnings decreased $39.8 million to a loss of $21.8 million for the three months
ended June 30, 2008 as compared to the three months ended June 30, 2007, with most of the decrease
occurring in the Charlotte and Raleigh Durham markets. The Charleston and Myrtle Beach markets
were the only markets within the region to experience operating earnings for the three months ended
June 30, 2008. The decrease in operating earnings is primarily the result of a decrease in units
closed and in average revenue per unit, which was not offset by commensurate reductions in direct
housing costs. Southeast For the three months ended June 30, 2008, units closed decreased 30.4% when compared to the
three months ended June 30, 2007 and was the primary contributor to the 36.3% decrease in revenues.
All markets in the Southeast 32




---



##### Table of Contents



region experienced decreases in revenues and units closed with the
exception of the Atlanta market. Average revenue per unit decreased 10.1% when compared to the
same period in the prior year primarily due to significant decreases experienced in the North
Florida, Orlando and Naples markets. Although cancellation rates improved from 30.5% to 25.5% for
the three months ended June 30, 2008, sales orders decreased 22.1%. The decrease in sales orders
is primarily attributable to a 23.1% decrease in customer traffic. Operating losses for the Southeast region increased from $13.0 million for the three months
ended June 30, 2007 to $65.5 million for the three months ended June 30, 2008. The Atlanta market
was the only market in the Southeast region that reported operating earnings for the three months
ended June 30, 2008. A substantial portion of the operating loss for three months ended
June 30, 2008 is attributed to the Orlando and Southeast Florida markets, which also recorded
the majority of the land-related impairments and our share of joint ventures impairments in the
region. Central Revenues for the three months ended June 30, 2008 decreased 34.7% primarily due to a 35.4%
decrease in units closed as compared to the three months ended June 30, 2007. Significant
decreases in the number of units closed occurred in the Detroit and Illinois markets.
Additionally, in December 2007, we sold substantially all of our on-your-lot operations, which
contributed to the decrease in the number of units closed. Average revenue per unit increased 1.9%
primarily due to a reduction in sales of lower priced homes by our on-your-lot operations. Five of
the seven markets in the Central region experienced decreases in average revenue per unit. Sales
orders decreased 54.3% as the region experienced a 50.4% decrease in customer traffic. All markets
in the Central region experienced substantial decreases in sales orders. The majority of the Central regions operating loss of $20.4 million for the three months
ended June 30, 2008 is related to decreases in average revenue per unit and units closed. The
largest operating loss in the Central region was incurred by the Detroit market, which also
recorded the majority of the regions land-related impairments for the three months ended June 30,
2008. Texas Revenues for the Texas region for the three months ended June 30, 2008 decreased 32.7%
compared to the three months ended June 30, 2007. The decrease in revenues was primarily due to a
33.8% decrease in units closed, which was slightly offset by a 1.8% increase in average revenue per
unit. All markets within the Texas region experienced significant decreases in units closed. The
largest dollar decrease in revenues occurred in the Dallas/Ft. Worth market, which also experienced
the largest decrease in the number of units closed. Sales orders decreased 20.3% primarily due to
a 22.3% decrease in customer traffic. The Central Texas market was the only market within the
Texas region to experience an increase in sales orders during the three months ended June 30, 2008. Operating earnings for the three months ended June 30, 2008 were $8.0 million, a $7.2 million
decrease when compared to the same period in the prior year. The Texas region was the only region
to recognize operating earnings. The Houston market was the only market within the Texas region to
incur an operating loss for the three months ended June 30, 2008. The decrease in operating
earnings is primarily the result of a decrease in units closed, which was not offset by
commensurate reductions in selling, general and administrative expenses. To date, the Texas region
has been less affected by the challenging market conditions experienced in other regions, which we
believe results from the moderate growth rates and price appreciation realized in this region in
periods prior to the downturn. In addition, the Texas region has been the least impacted by
land-related impairments and write-offs of deposits and pre-acquisition costs. Northwest Revenues for the three months ended June 30, 2008 decreased 33.0% as compared to the three
months ended June 30, 2007, which was primarily due to a 32.1% decrease in units closed. All
markets in the Northwest region experienced decreases in revenues with the exception of the Hawaii
and Reno markets. The Hawaii market was the only market within the region to experience increases
in both average revenue per unit and units closed. Sales orders for the three months ended
June 30, 2008 decreased 35.3%, primarily due to a 50.3% decrease in customer traffic and a decrease
in active neighborhoods. The Northwest region experienced an operating loss of $2.6 million for the three months ended
June 30, 2008 as compared to an operating loss of $29.4 million in the same period of the prior
year. The $26.7 million improvement 33




---



##### Table of Contents



in operating losses is due to the reduction in land-related
impairments and reductions in selling, general and administrative expenses that outpaced reductions
in revenues. Three of the seven markets within the region generated operating earnings in the
current quarter. Southwest The substantial decrease in the Southwest regions revenues for the three months ended
June 30, 2008 was primarily due to a 35.6% decrease in average revenue per unit and a 32.0%
decrease in units closed when compared to the same period in the prior year. The Southwest region
experienced the largest decrease in average revenue per unit of all of our regions. The largest
decrease in the number of units closed was experienced in the Inland Empire market. Sales orders
decreased 66.5% when compared to the three months ended June 30, 2007, which was primarily due to a
58.1% decrease in customer traffic. Substantial decreases in the number of units sold occurred in
the Inland Empire, Las Vegas and Phoenix markets. Cancellation rates in the Southwest region
increased from 34.5% to 43.1% for the three months ended June 30, 2008, which was the largest
increase and highest cancellation rate of all of our regions. The Southwest region experienced operating losses of $28.4 million and $116.7 million for the
three months ended June 30, 2008 and 2007, respectively. The improvement in operating losses can
be attributed to a reduction in land-related impairments when compared to the same period of the
prior year. The majority of the Southwest regions operating loss occurred in the Los Angeles
market. Significant reductions in selling, general and administrative expenses were not enough to
overcome the 55.3% decrease in revenues, which was the primary contributor to the operating loss
during the three months ended June 30, 2008. Other homebuilding Other homebuilding is primarily comprised of certain operating segments that are not part of
our long-term strategy.   The projects in these operating segments will be built out and
liquidated. Certain homebuilding ancillary businesses and certain income and expenses that are not
allocated to our operating segments are reported in this segment. The Other homebuilding region experienced an operating loss of $0.3 million for the three
months ended June 30, 2008 as compared to a loss of $36.9 million in the same period in the prior
year. This improvement in operating earnings was primarily the result of $31.2 million in
land-related impairments incurred in the three months ended June 30, 2007, compared to no
land-related impairments recorded in the current period. The improvement in operating earnings was
also the result of reductions in selling, general and administrative expenses. FINANCIAL SERVICES The Financial Services segment is primarily engaged in the residential mortgage lending
business, as well as other financial services that are in large part related to the residential
mortgage market. Its operations include mortgage lending and other related services for purchasers
of homes sold by our homebuilding operations and third parties, refinancing of existing mortgages,
title agency services and the sale of title insurance and other insurance products, including
property and casualty. As a result of the significant disruptions in the mortgage markets and the related reductions
in the mortgage market liquidity, we have begun to focus our mortgage operations primarily on
originating loans for homes we sell, which we refer to as Builder Loans. Retail Loans represented
approximately 64.3% and 62.1% of total mortgage originations during the three months ended June 30,
2008 and 2007, respectively. The future reduction in Retail Loans resulting from our focus on
Builder Loans may have a negative impact on Financial Services operating results. Financial Services revenues and operating earnings are derived primarily from the sale of
mortgage loans, together with all related servicing rights, broker fees, title and other various
insurance coverages, interest income and other fees. Loan origination fees and other revenues
derived from the origination of mortgage loans, which we refer to in the aggregate as loan
origination fees, are recognized in Financial Services revenues as earned and loan origination
costs are recognized in Financial Services expenses as incurred. Prior to the adoption of SFAS 159
on a prospective basis on April 1, 2008, net loan origination fees were deferred and recognized as
an adjustment to Financial Services revenues when the related loan was sold to a third-party
purchaser. In accordance with SAB 109, or SEC Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value Through Earnings, we recognize the fair value of mortgage
servicing rights as revenue at the time we enter into an Interest Rate Lock Commitment, or IRLC.
Subsequent changes in the fair value of IRLCs are recorded as an adjustment to revenue. Prior to
January 1, 34




---



##### Table of Contents



2008, the effective date of SAB 109, the fair value of mortgage servicing rights was not
recognized as revenue until the related loan was sold. Interest revenues on mortgage loans
receivable are recognized using the interest (actuarial) method. Other revenues, including fees
for title insurance, mortgage broker and other services performed in connection with mortgage
lending activities, are recognized as earned. In the normal course of our activities, we carry inventories of loans pending sale to
third-party investors and earn an interest margin, which we define as the difference between
interest revenue on mortgage loans and interest expense on debt used to fund the mortgage loans. Generally, our business strategy is to originate and sell loans rather than hold them, which
reduces our capital investment and related risks. Following unprecedented disruptions to the
mortgage markets during the second quarter of fiscal year 2008, CTX Mortgage Company, LLC
discontinued sales of mortgage loans to Harwood Street Funding I, LLC, which we refer to as HSF-I,
and is now relying on committed mortgage warehouse credit facilities to provide funding for its
loan originations. HSF-I was a variable interest entity of which we were the primary beneficiary
and it was consolidated in our financial statements. In November 2007, we terminated HSF-I and all
of its outstanding obligations were redeemed. The following summarizes Financial Services results (dollars in thousands): For the Three Months Ended June 30,2008
    
    
    2007Change

    
    
    
    
    
    ChangeRevenues
    
    $
    76,423
    
    
    
    (22.0
    %)
    
    $
    97,966
    
    
    
    (20.2
    %)Cost of Sales
    
    
    (4,303
    )
    
    
    (79.0
    %)
    
    
    (20,488
    )
    
    
    (1.7
    %)Selling, General and Administrative Expenses
    
    
    (66,053
    )
    
    
    5.7
    %
    
    
    (62,509
    )
    
    
    (20.7
    %)Operating Earnings (Loss)
    
    $
    6,067
    
    
    
    (59.5
    %)
    
    $
    14,969
    
    
    
    (35.2
    %)Operating Margin
    
    
    7.9
    %
    
    
    (7.4
    )
    
    
    15.3
    %
    
    
    (3.5
    )Net Interest Income
    
    $
    2,152
    
    
    
    (61.2
    %)
    
    $
    5,552
    
    
    
    (35.0
    %)Average Interest Earning Assets
    
    $
    428,687
    
    
    
    (70.0
    %)
    
    $
    1,428,063
    
    
    
    (9.3
    %)Average Yield
    
    
    6.02
    %
    
    
    (1.27
    )
    
    
    7.29
    %
    
    
    (0.18
    )Average Interest Bearing Liabilities
    
    $
    380,167
    
    
    
    (72.6
    %)
    
    $
    1,389,545
    
    
    
    (9.8
    %)Average Rate Paid
    
    
    4.76
    %
    
    
    (1.22
    )
    
    
    5.98
    %
    
    
    0.55
 Financial Services revenues for the three months ended June 30, 2008 decreased as compared to
the same period in the prior year due to decreases in gain on sale of mortgage loans, broker fees
and interest income. The decreases in gain on sale of mortgage loans and broker fees for the three
months ended June 30, 2008 are due to decreases in the volume of loan sales to investors and loans
brokered to third party lenders. Contributing to the decrease in interest income was an increase
in contractually delinquent loans that are not accruing interest and a decrease in loans
originated. Interest accruals are suspended, except for interest accruals related to insured
mortgage loans, when the mortgage loan becomes contractually delinquent for 90 days or more. At
June 30, 2008 and 2007, mortgage loans on which revenue was not being accrued were $206.4 million
and $46.4 million, respectively. The decrease in revenue was partially offset by the recognition
of $19.6 million of loan origination fees related to the adoption of SFAS 159 on April 1, 2008.
For the three months ended June 30, 2008, cost of sales, which is solely comprised of interest
expense, declined as compared to the same period in the prior year as a result of decreases in
average interest bearing liabilities and short-term borrowing costs. The increase in selling, general and administrative expenses is the result of the recognition
of $22.2 million of loan origination costs at the time of loan origination pursuant to the
provisions of SFAS 159. The increase in selling, general and administrative expenses was partially
offset by decreases in branch operating expenses, branch and corporate compensation, and sales
incentives. Operating margin and Financial Services margin for the three months ended June 30,
2008 decreased primarily due to recognition of loan origination fees in revenues and the decrease
in interest income due to the increase in non-accruing loans. The adoption of SFAS 159 on April 1, 2008 resulted in increases in both revenues and selling,
general and administrative expenses for the three months ended June 30, 2008. Prior to April 1,
2008, these revenues and expenses were reported as net origination fees in revenues. Included in selling, general and administrative expenses are provisions for mortgage loans and
anticipated losses for mortgage loans originated. For additional information on Financial
Services provisions, please refer to our Critical Accounting Estimates, Mortgage Loan
Allowances
and Related Reserve, and Note (C), Mortgage Loans 35




---



##### Table of Contents



Receivable and Real Estate Owned, of the Notes
to Consolidated Financial Statements. The following table summarizes Financial Services
provisions for losses (dollars in thousands): For the Three Months Ended June 30,2008
    
    
    2007Provision
for Losses on Mortgage Loans
    
    $
    646
    
    
    $
    2,677Provision for Real Estate Owned
    
    
    2,067
    
    
    
    292Anticipated Losses for Loans Originated
    
    
    2,928
    
    
    
    583Total Provisions for Losses
    
    $
    5,641
    
    
    $
    3,552
 The following table provides a comparative analysis of: (1) the volume of loan sales to
investors (third parties) and the gains on those sales and related derivative activity, known
collectively as gain on sale of mortgage loans, and (2) loans brokered to third party lenders and
fees received for related broker services (dollars in thousands, except average loan size and
volume): For the Three Months Ended June 30,2008
    
    2007Change
    
    
    
    
    
    ChangeLoan Sales to InvestorsVolume (in millions)
    
    $
    1,608.1
    
    
    
    (31.7
    %)
    
    $
    2,353.3
    
    
    
    (17.6
    %)Number of Loans Sold
    
    
    8,093
    
    
    
    (25.4
    %)
    
    
    10,848
    
    
    
    (24.2
    %)Gain on Sale of Mortgage Loans
    
    $
    30,311
    
    
    
    (21.5
    %)
    
    $
    38,634
    
    
    
    (17.1
    %)Loans Brokered to Third Party LendersVolume (in millions)
    
    $
    180.0
    
    
    
    (69.9
    %)
    
    $
    597.8
    
    
    
    (37.5
    %)Number of Brokered Loans
    
    
    566
    
    
    
    (67.1
    %)
    
    
    1,719
    
    
    
    (46.9
    %)Broker Fees
    
    $
    3,175
    
    
    
    (70.2
    %)
    
    $
    10,657
    
    
    
    (42.7
    %)Average Loan SizeLoans Sold to Investors
    
    $
    198,700
    
    
    
    (8.4
    %)
    
    $
    216,946
    
    
    
    8.7
    %Loans Brokered to Third Party
Lenders
    
    $
    317,965
    
    
    
    (8.6
    %)
    
    $
    347,834
    
    
    
    17.6
    %
 Gain on sale of mortgage loans decreased for the three months ended June 30, 2008 due to a
decrease in the volume of loan sales to investors. The decrease in volume was partially offset by
a shift in the product mix of loans sold to more conforming loans, which generate higher service
release premiums than nonconforming loans. Broker fee income decreased for the three months ended
June 30, 2008 as a result of a decrease in the volume of loans brokered to third party lenders.
The decrease in broker volume is primarily due to the significant disruptions in the mortgage
markets, including the significant reduction of homebuyers access to nonconforming mortgage
products. We track loan applications until such time as the loan application is closed as an originated
loan or cancelled. The application data presented below includes loan applications that resulted
in originated loans in the period presented and applications for loans scheduled to close in
subsequent periods. For the Three Months Ended June 30,2008
    
    
    2007Change
    
    
    
    
    
    
    ChangeOpen Applications  Beginning
    
    
    15,107
    
    
    
    (14.4
    %)
    
    
    17,648
    
    
    
    (24.0
    %)New Applications
    
    
    33,324
    
    
    
    21.0
    %
    
    
    27,549
    
    
    
    8.4
    %Cancelled Applications
    
    
    (25,154
    )
    
    
    76.9
    %
    
    
    (14,222
    )
    
    
    39.0
    %Originated Loans
    
    
    (8,285
    )
    
    
    (30.9
    %)
    
    
    (11,992
    )
    
    
    (20.0
    %)Open Applications  Ending
    
    
    14,992
    
    
    
    (21.0
    %)
    
    
    18,983
    
    
    
    (18.9
    %)
 36




---



##### Table of Contents



The table below provides a comparative analysis of mortgage loan originations: For the Three Months Ended June 30,2008
    
    
    2007Change
    
    
    
    
    
    
    ChangeOrigination Volume (in millions)
    
    $
    1,694.0
    
    
    
    (38.9
    %)
    
    $
    2,770.3
    
    
    
    (20.6
    %)Number of Originated LoansBuilder
    
    
    2,957
    
    
    
    (34.9
    %)
    
    
    4,541
    
    
    
    (25.1
    %)Retail
    
    
    5,328
    
    
    
    (28.5
    %)
    
    
    7,451
    
    
    
    (16.4
    %)8,285
    
    
    
    (30.9
    %)
    
    
    11,992
    
    
    
    (20.0
    %)Average Loan Size  Originated Loans
    
    $
    204,480
    
    
    
    (11.5
    %)
    
    $
    231,000
    
    
    
    (0.8
    %)
 Total originations for the three months ended June 30, 2008 decreased primarily as a result of
a decline in homebuyer demand and a reduction in the number of mortgage product offerings.
Refinancing activity accounted for 20% of our originations for the three months ended June 30, 2008
and 2007. For the three months ended June 30, 2008 and 2007, Financial Services originated 82% and
78% of the non-cash unit closings of Home Buildings customers, respectively. Beginning in early 2007, the mortgage markets were affected by declines in values and
increased default levels of sub-prime mortgage loans. The deterioration of the mortgage markets
accelerated during the second quarter of fiscal year 2008, which resulted in the virtual
elimination of the nonconforming mortgage market which would include sub-prime mortgage loans. As
a result, Financial Services has essentially ceased originating sub-prime or other nonconforming
loans. Further disruptions in the mortgage markets, including changes in mortgage underwriting
requirements, could further reduce the population of potential mortgage customers and/or the profit
on loans we originate, and in turn, negatively impact Financial Services future operating results. OTHER Our Other segment includes corporate general and administrative expense. The following
summarizes the components of the Other segments loss from continuing operations before income tax
(dollars in thousands): For the Three Months Ended June 30,2008
    
    
    2007Change
    
    
    
    
    
    
    ChangeCorporate General and Administrative Expense
    
    $
    (58,639
    )
    
    
    30.4
    %
    
    $
    (44,981
    )
    
    
    (17.9
    %)Interest Expense
    
    
    (6,180
    )
    
    
    100.0
    %
    
    
    
    
    
    
    Other Income
    
    
    7,108
    
    
    
    44.3
    %
    
    
    4,926
    
    
    
    100.0
    %Operating Loss
    
    $
    (57,711
    )
    
    
    44.1
    %
    
    $
    (40,055
    )
    
    
    (26.9
    %)
 Corporate general and administrative expenses represent corporate employee compensation and
benefits, professional and legal costs, and other corporate costs such as investor communications,
rent, utilities and travel costs. The following table summarizes corporate general and
administrative expense (dollars in thousands): For the Three Months Ended June 30,2008
    
    
    2007Change
    
    
    
    
    
    
    ChangeCompensation and Benefits
    
    $
    32,128
    
    
    
    (13.9
    %)
    
    $
    37,314
    
    
    
    (28.4
    %)Professional and Legal Costs
    
    
    15,778
    
    
    
    398.0
    %
    
    
    3,168
    
    
    
    (2.8
    %)Rent and Utilities
    
    
    2,419
    
    
    
    44.5
    %
    
    
    1,674
    
    
    
    22.1
    %Travel
    
    
    1,197
    
    
    
    (3.2
    %)
    
    
    1,236
    
    
    
    (41.0
    %)Other
    
    
    7,117
    
    
    
    347.9
    %
    
    
    1,589
    
    
    
    (139.1
    %)General and Administrative Expense
    
    $
    58,639
    
    
    
    30.4
    %
    
    $
    44,981
    
    
    
    (17.9
    %)
 37




---



##### Table of Contents



The increase in corporate general and administrative expenses in the three months ended
June 30, 2008 versus the same period in the prior year is primarily related to increases in
professional and legal costs. The increase in professional and legal costs is a result of the
increases in reserves, strategic investments to improve our core business processes and the
centralization of certain reporting segment functions. INCOME TAXES We recognized an income tax benefit of $13.6 million and $64.8 million for the three months
ended June 30, 2008 and 2007, respectively, and our effective tax rate for such periods was 7.5%
and 32.9%, respectively. The difference in our tax rate primarily results from the change in the
deferred tax asset valuation allowance. See Note (J), Income Taxes, of the Notes to Consolidated
Financial Statements regarding our valuation allowance. DISCONTINUED OPERATIONS On March 30, 2007, we sold Construction Services to an unrelated third party and received
$344.8 million in cash, net of related expenses and as adjusted for post-closing adjustments. In
connection with the sale, we will also receive an aggregate of $60.0 million in cash to be paid in
annual installments of $4.0 million over a 15-year period. On April 3, 2008, we completed the sale of our home services operations to an unrelated third
party and received $134.6 million in cash, subject to certain post-closing adjustments. As a
result, our home services operations are now reflected as a discontinued operation in our financial
statements. For additional information on our discontinued operations, see Note (L), Discontinued
Operations, of the Notes to Consolidated Financial Statements. Construction Services Discontinued operations for Construction Services are as follows (dollars in thousands): For the Three Months Ended June 30,2008
    
    2007Revenues
    
    $
    
    
    
    $
    Operating Loss
    
    $
    
    
    
    $
    Pre-tax Gain on Sale
    
    $
    
    
    
    $
    5,463
 We remain responsible for certain surety bond obligations relating to Construction Services
projects commenced prior to March 30, 2007. At June 30, 2008, these surety bonds have a total
face amount of $2.56 billion, although the risk of liability with respect to these surety bonds
declines as the relevant construction projects are performed. We estimate that $435.6 million of
work remains to be performed on these projects at June 30, 2008. In connection with certain of
these surety bond obligations, we provided certain sureties with a $100 million letter of credit.
In connection with the sale of Construction Services, the purchaser has agreed to indemnify us
against losses relating to such surety bond obligations, including amounts that may be drawn under
such letter of credit. In addition, we have purchased for our benefit an additional back-up
indemnity provided by a financial institution with a credit rating of A from Standard & Poors, or
S&P, and A2 from Moodys Investors Service, or Moodys. The obligation of such financial
institution under the back-up indemnity is $644.8 million as of June 30, 2008, which declines to
$400 million over time and terminates in 2016. 38




---



##### Table of Contents



Home Services Operations Discontinued operations for our home services operations are as follows (dollars in
thousands): For the Three Months Ended June 30,2008
    
    2007Revenues
    
    $
    
    
    
    $
    34,703Operating Earnings
    
    $
    
    
    
    $
    1,208Pre-tax Gain on Sale
    
    $
    39,244
    
    
    $
    
 FINANCIAL CONDITION AND LIQUIDITY The consolidating net cash used in or provided by our operating, investing and financing
activities is summarized below (dollars in thousands). See Statements of Consolidated Cash Flows
with Consolidating Details for the detail supporting this summary. For the Three Months Ended June 30,2008
    
    
    2007Net Cash Provided by (Used in)Centex*Operating Activities
    
    $
    623,213
    
    
    $
    (533,393
    )Investing Activities
    
    
    126,682
    
    
    
    (61,970
    )Financing Activities
    
    
    (83,227
    )
    
    
    (46,757
    )666,668
    
    
    
    (642,120
    )Financial ServicesOperating Activities
    
    
    (89,518
    )
    
    
    195,355Investing Activities
    
    
    16,308
    
    
    
    17,522Financing Activities
    
    
    55,087
    
    
    
    (220,267
    )(18,123
    )
    
    
    (7,390
    )Centex Corporation and SubsidiariesOperating Activities
    
    
    557,893
    
    
    
    (374,766
    )Investing Activities
    
    
    110,492
    
    
    
    (22,720
    )Financing Activities
    
    
    (19,840
    )
    
    
    (252,024
    )Net (Decrease) Increase in Cash
    
    $
    648,545
    
    
    $
    (649,510
    )
   *
    
    Centex represents a supplemental presentation that reflects the Financial Services segment
as if accounted for under the equity method. We believe that separate disclosure of the
consolidating information is useful because the Financial Services subsidiaries and related
companies operate in a distinctly different financial environment, and Centex has limited
obligations with respect to the indebtedness of our Financial Services subsidiaries and
related companies. Management uses this information in its financial and strategic planning.
We also use this presentation to allow investors to compare us to homebuilders that do not
have financial services operations. In accordance with the provisions of SFAS No. 95, Statement of Cash Flows, the Statements of
Consolidated Cash Flows have not been restated for discontinued operations. As a result, all of
our home services operations and Construction Services cash flows prior to disposal are included
with the Centex cash flows. Significant components of cash flows from discontinued operations are
discussed below. Centex We generally fund Centexs operating and other short-term liquidity needs through available
cash on hand, cash provided by operations, short-term borrowings and the issuance of senior debt.
Centexs operating cash is derived primarily through home and land sales from our homebuilding
operations. During the three months ended June 30, 2008, Centexs cash from operating activities
was primarily provided by federal income tax refunds resulting from the carryback of the fiscal
year 2008 net operating loss to prior years. In addition, our homebuilding operations were cash
flow positive. Centexs cash from investing activities during the three months ended June 30, 2008
primarily relates to net proceeds of $134.6 million related to the sale of our home services
operations, partially offset by net capital contributions of $40.5 million made to Home Building
joint ventures. Cash used in Centexs financing activities during the three months ended June 30,
2008 was primarily for the repayment of $67.6 million in senior notes and other debt. 39




---



##### Table of Contents



During the three months ended June 30, 2007, Centexs cash from operating activities was
primarily used for estimated tax payments, employee compensation and other reductions in accounts
payable and accrued liabilities, as well as investments in inventory. Cash used by Centexs
financing activities for the three months ended June 30, 2007 was primarily for the repayment of
senior notes and other debt. Financial Services We generally fund our Financial Services operating and other short-term liquidity needs
through committed mortgage warehouse credit facilities, proceeds from the sale of mortgage loans
and cash flows from operations. Financial Services operating cash is derived through sales of
mortgage loans and origination and servicing fees. During the three months ended June 30, 2008,
cash used in operations was primarily due to an increase in mortgage loans receivable. Cash
provided by financing activities is principally attributable to short-term borrowings used to fund
increases in mortgage loans receivable. During the three months ended June 30, 2007, cash from operations was provided by proceeds
from sales of mortgage loans that were not reinvested in new mortgage loans and origination and
servicing fees. These funds were used in financing activities to repay short-term debt during the
three months then ended. Discontinued Operations Our home services operations and Construction Services did not require significant capital
resources nor did they provide significant liquidity. As a result, our liquidity and capital
resources have not been materially impacted by the sale of these operations. Credit Facilities and Liquidity Our existing credit facilities and available capacity as of June 30, 2008 are summarized below
(dollars in thousands): Existing Credit
    
    
    AvailableFacilities
    
    
    CapacityCentexMulti-Bank Revolving Credit FacilityRevolving Credit
    
    $
    750,000
    
    
    $
    631,598Letters of Credit
    
    
    600,000
    
    
    
    206,8191,350,000
    
    
    
    838,417Financial ServicesSecured Credit Facilities
    
    
    530,000
    
    
    
    129,560$
    1,880,000
    
    
    $
    967,977
 We maintain a $1.35 billion unsecured, committed credit facility, maturing in July 2010, that
provides funding for general corporate purposes and letters of credit up to a sublimit of $600
million. The multi-bank credit facility includes a borrowing base limitation when we do not have
an investment grade senior unsecured debt rating from at least two of the following rating
agencies: S&P, Moodys and Fitch Ratings, or Fitch. We currently do not have investment grade
ratings and are therefore subject to the borrowing base limitation. Our long-term debt ratings
are currently BB, Ba2 and BB+ from S&P, Moodys and Fitch, respectively. Given the uncertainty of
current market conditions, we anticipate operating under the borrowing base limitation for the
foreseeable future. Under the borrowing base limitation, the sum of our net senior debt (as
defined in the credit agreement), any amounts drawn on the revolving credit facility and
outstanding financial letters of credit may not exceed an amount calculated based on applying
certain percentages to various categories of our unencumbered homebuilding inventory and other
assets. As of June 30, 2008, we had no amounts drawn on the revolving credit facility and $393.2
million of outstanding letters of credit. Included in the outstanding letters of credit are $163.1
million of financial letters of credit. Financial letters of credit are generally issued as a form
of financial or payment guaranty. Available capacity amounts for the revolving credit facility
shown above reflect the borrowing base limitation, but they are further subject to certain
limitations by features in our credit facility commonly referred to as anti-cash hoarding
provisions. The secured credit facilities used by Financial Services are described below. 40




---



##### Table of Contents



Our outstanding debt (in thousands) as of June 30, 2008 was as follows (due dates are
presented in fiscal years): CentexSenior Debt:Senior Notes, weighted-average 5.98%, due through 2017
    
    $
    3,252,640Land Acquisition Notes and Other, weighted-average
10.00%, due through 2018
    
    
    9013,253,541Financial ServicesMortgage Warehouse Facilities, weighted-average 3.64%
    
    
    400,440$
    3,653,981
 During the three months ended June 30, 2008, the principal amount of our outstanding senior
notes and other debt decreased $67.6 million resulting from the following (dollars in thousands): Debt Type
    
    AmountSenior Notes (1)
    
    $
    (66,550
    )Land Acquisition Notes and Other
    
    
    (1,026
    )$
    (67,576
    )
   (1)
    
    Amount includes $106 of debt discount
amortization. Our homebuilding operations also have certain obligations under our joint venture
arrangements, community district development bonds and other special financing districts.
Additionally, Financial Services has committed to fund certain loans. See Note (G), Commitments
and Contingencies, of the Notes to Consolidated Financial Statements for further discussion of
these obligations. We had no borrowings under our revolving credit facility at June 30, 2008 or at any time
during the three months then ended. The multi-bank credit facility contains certain financial
covenants. We are required to maintain compliance with the borrowing base at all times and meet a
tangible net worth minimum and not exceed a certain leverage ratio each quarter. At June 30, 2008,
we were in compliance with all of our financial covenants, as shown in the table below (dollars in
thousands): Required Level
    
    Actual LevelLeverage Ratio
    
    
    52.5
    %
    
    
    44.4
    %Excess Tangible Net Worth
    
    Greater than $0
    
    $
    568,485Excess Borrowing Base
    
    Greater than $0
    
    $
    631,598
 Additionally, if our interest coverage ratio (as defined in the credit agreement) is less than
2 to 1, pricing under the credit facility is increased and the maximum allowed leverage ratio is
decreased in increments of 2.5% each quarter to a floor of 40.0%. We monitor compliance with our
financial covenants on a quarterly basis, including by reviewing forward-looking projections. If
market conditions deteriorate in the future and have an adverse effect on our business, financial
condition or results of operations, including by causing additional significant land-related
charges or other asset impairments, compliance with our financial covenants may be difficult to
maintain. Violations of any of the financial covenants in the credit facility, if not waived by
the lenders or cured, could result in a maturity date acceleration by the lenders. As a result of market conditions affecting the mortgage finance industry, during the fiscal
year 2008, CTX Mortgage Company, LLC increased its use of committed mortgage warehouse credit
facilities. At June 30, 2008, CTX Mortgage Company, LLC had two committed mortgage warehouse
credit facilities with commitments of $375 million and $150 million. Under the $375 million
committed mortgage warehouse credit facility, which was scheduled to mature in August 2008, the
bank has the option to convert the facility to an amortizing loan based on the ultimate sale of the
underlying collateral and not to purchase any additional mortgage loans under the warehouse
facility if our long-term unsecured debt ratings fall below BB by S&P and Fitch or below Ba2 by
Moodys. A further downgrade in our credit rating by a rating agency could result in the wind-down
of the $375 million warehouse facility. During July 2008, CTX Mortgage Company, LLC executed an
amendment to this warehouse facility to lower the commitment to $325 million from $375 million and
extend the maturity of the facility by 60 days to October 31, 2008. 41




---



##### Table of Contents



If the current funding sources were to become unavailable, Financial Services would need to
make other financing arrangements to fund its mortgage loan origination activities, or Centex
Corporation may be required to fund Financial Services loan originations and make additional
capital contributions to Financial Services. Although we believe that Financial Services could
broker loans to other mortgage companies, sell loans directly to FNMA, or arrange for alternative
financing that is common for other homebuilders and mortgage companies, there can be no assurance
that such financing would be available on satisfactory terms, and any delay in obtaining such
financing could adversely affect the results of operations of Financial Services. In order to reduce debt and to decrease future cash interest payments, as well as principal
payments that are due at maturity or would be required to be made upon redemption, we may, from
time to time, repurchase our outstanding debt securities for cash in open market purchases or
privately negotiated transactions. We will evaluate any such transactions in light of market
conditions prevailing at the time, taking into account our liquidity, our future debt service
requirements and our requirements for future access to capital. In general, we believe that our existing cash and future sources of funding, cash flow from
operations and our committed credit facilities are adequate to meet our currently anticipated
operating needs, capital expenditures and debt service requirements for at least the next twelve
months. As a supplement to our cash provided by operations, we may elect to sell certain
non-strategic assets. There can be no assurance that such sales could be completed on terms or
within a timeframe acceptable to us in order to create additional cash flow. In addition, our
future liquidity and capital requirements may vary depending on a number of factors, including
market conditions in the homebuilding industry, the availability of financing to homebuyers, the
level of competition and general and economic factors beyond our control. These and other
developments could reduce our cash flow, cause us to incur additional losses, cause us not to be in
compliance with financial and other covenants and require that we seek amendments or waivers to our
credit facilities to ensure continued availability of committed debt financing. We cannot predict
what effect these factors will have on our future liquidity. For additional information on factors
impacting our liquidity and capital resources, please refer to Part I, Item 1A, Risk Factors of
our Annual Report on Form 10-K, and Part II, Item 1A, Risk Factors below. CERTAIN OFF-BALANCE SHEET OBLIGATIONS The following is a summary of certain off-balance sheet arrangements and other obligations and
their possible effects on our liquidity and capital resources. Joint Ventures We conduct a portion of our land acquisition, development and other activities through our
participation in joint ventures in which we hold less than a majority interest. These land-related
activities typically require substantial capital, and partnering with other homebuilders or
developers and, to a lesser extent, financial partners, allows Home Building to share the risks and
rewards of ownership and to provide broader strategic advantages. We account for our investments in joint ventures under the equity method of accounting whereby
our investment is increased by contributions and our share of joint venture earnings is reduced by
distributions and our share of joint venture losses. Investments in joint ventures in which our
interest exceeds 50% have been consolidated. 42




---



##### Table of Contents



A summary of our Home Building joint ventures is presented below (dollars in thousands): As of June 30, 2008
    
    
    As of March 31, 2008Centex's
    
    
    
    
    
    
    
    
    
    
    Centex'sNumber
    
    
    
    
    
    
    Share
    
    
    Number
    
    
    
    
    
    
    Shareof JVs (1)
    
    
    Investments
    
    
    of Debt
    
    
    of JVs (1)
    
    
    Investments
    
    
    of DebtUnleveraged Joint Ventures
    
    
    26
    
    
    $
    163,894
    
    
    $
    
    
    
    
    29
    
    
    $
    70,043
    
    
    $
    Joint Ventures with Debt:
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    13Limited Maintenance
Guarantee (2) (3) (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,311
    
    
    
    27,500Repayment Guarantee (2) (5)
    
    
    
    
    
    
    3,296
    
    
    
    14,249
    
    
    
    
    
    
    
    3,154
    
    
    
    13,692Completion Guarantee (4)
    
    
    
    
    
    
    44,446
    
    
    
    127,434
    
    
    
    
    
    
    
    78,274
    
    
    
    133,935No Recourse or Guarantee
    
    
    
    
    
    
    6,997
    
    
    
    24,000
    
    
    
    
    
    
    
    12,040
    
    
    
    24,00037
    
    
    $
    218,633
    
    
    $
    165,683
    
    
    
    42
    
    
    $
    206,822
    
    
    $
    199,127
   (1)
    
    The number of joint ventures includes unconsolidated Home Building joint ventures for which
we have an investment balance as of the end of the period and/or current fiscal year activity.
We were the managing member of 22 and 23 of the active joint ventures as of June 30, 2008 and
March 31, 2008, respectively. The number of joint ventures includes 12 and 17 joint ventures
as of June 30, 2008 and March 31, 2008, respectively, for which substantially all of the joint
ventures activities are complete.(2)
    
    Centexs share of debt represents our maximum exposure related to the joint ventures debt at
each respective date.(3)
    
    We guaranteed that certain of the joint ventures would maintain a specified loan to value
ratio. For certain joint ventures, we contributed additional capital in order to maintain
loan to value requirements.(4)
    
    Certain joint venture agreements require us to guarantee the completion of a project or
phase if the joint venture does not perform the required land development. A portion of
these completion guarantees are joint and several with our partners.(5)
    
    We have guaranteed repayment of a portion of certain joint venture debt limited to our
ownership percentage of the joint venture or a percentage thereof. Total joint venture debt outstanding as of June 30, 2008 and March 31, 2008 was $350.5 million
and $423.2 million, respectively. Debt agreements for joint ventures vary by lender in terms of
structure and level of recourse. For certain of the joint ventures, we are also liable on a
contingent basis, through other guarantees, letters of credit or other arrangements, with respect
to a portion of the construction debt. Additionally, we have agreed to indemnify the construction
lender for certain environmental liabilities in the case of most joint ventures and most guarantee
arrangements provide that we are liable for our proportionate share of the outstanding debt if the
joint venture files for voluntary bankruptcy. To date, we have not been requested to perform under
the environmental liabilities or voluntary bankruptcy guarantees for any of our joint ventures. Three of our joint ventures are in default of their joint venture debt agreements as of
June 30, 2008. In addition, we expect four other joint ventures to be in default of their joint
venture debt agreements subsequent to June 30, 2008. Our share of the total debt of these joint
ventures that are either in default, or expected to be in default, is
$87.0 million and is included
in the table above. We are in discussions with the joint venture partners and lenders with respect
to each joint venture. For all of our joint ventures, recourse under debt agreements is limited to
either the underlying collateral or completion obligations of the joint venture partners. A summary of the estimated maturities of our share of joint ventures debt is provided below
(dollars in thousands). We have estimated the debt maturities with the assumption that all
payments are first applied to pay down the outstanding debt balances as of June 30, 2008, and we
have not projected the early repayment of joint venture debt. For the Fiscal Years EndedMarch 31,2009
    
    $
    112,7842010
    
    
    14,5082011
    
    
    13,6912012
    
    
    24,700$
    165,683
 43




---



##### Table of Contents



CRITICAL ACCOUNTING ESTIMATES Some of our critical accounting policies require the use of judgment in their application or
require estimates of inherently uncertain matters. Our accounting policies are in compliance with
generally accepted accounting principles; however, a change in the facts and circumstances of the
underlying transactions could significantly change the application of the accounting policies and
the resulting financial statement impact. Listed below are those policies that we believe are
critical and require the use of complex judgment in their application. Our critical accounting
estimates have been discussed with the members of the Audit Committee of the Board of Directors. Mortgage Loan Allowances and Related Reserve Financial Services has established a liability for anticipated losses associated with mortgage
loans originated and sold based upon, among other things, historical loss rates and current trends
in loan originations. This liability includes losses and settlements associated with certain
borrower payment defaults, credit quality issues, or misrepresentations and reflects our judgment
of the loss exposure at the end of the reporting period. Please refer to Note (G), Commitments
and Contingencies, of the Notes to Consolidated Financial Statements for additional information on
this reserve as of June 30, 2008 and March 31, 2008. Financial Services also periodically reviews its construction loan commitments for
collectibility. To establish the appropriate allowance, we first classify our construction loans,
which are included in other mortgage loans, into risk categories. These categories are based on,
among other things, the loan product, the borrowers credit profile, the draw activity on the loan,
the loan delinquency rate, and the historical realization on construction loans. Each category of
loans is then evaluated for potential credit and market-related risks. The allowance for loans we
expect to convert to permanent loans that will be held for sale is based on the estimated market
value of the loans. The allowance for loans we expect to eventually default is based on the credit
risk of the loan. From time to time, Financial Services will be required to repurchase certain loans we
originated and sold to third parties under the representations and warranty provisions in our loan
sale agreements. If a repurchased loan is performing, it is classified as a mortgage loan held for
sale and will most likely be sold to a third party. If a repurchased loan is nonperforming, the
loan and its related allowance are classified as other mortgage loans. In addition, Financial
Services will foreclose on certain nonperforming construction loans. We establish an allowance for
loans in foreclosure based on our historical loss experience and current loss trends. Please refer
to Note (C), Mortgage Loans Receivable and Real Estate Owned, of the Notes to Consolidated
Financial Statements for additional information on our other mortgage loans and the related
allowance as of June 30, 2008 and March 31, 2008. If a nonperforming loan becomes current, it is reclassified to mortgage loans held for sale.
On all other nonperforming loans, we proceed to foreclose on the loan. Once we have received title
to the underlying collateral, we classify the loan amount, net of its allowance, as real estate
owned. We establish an allowance for real estate owned based upon the estimated value of the
property. Real estate owned is reflected as a component of other inventory. At June 30, 2008 and
March 31, 2008, real estate owned was $10.3 million and $10.9 million, respectively, which were net
of allowances of $11.9 million and $12.8 million, respectively. Although we consider our mortgage loan allowances and related reserve reflected in our
Consolidated Balance Sheets at June 30, 2008 to be adequate, there can be no assurance that these
allowances and related reserve will prove to be sufficient over time to cover ultimate losses in
connection with our loan originations. These allowances and related reserve may prove to be
inadequate due to unanticipated adverse changes in the economy, the mortgage market, or discrete
events adversely affecting specific customers. Inventory Valuation Land acquisition, land development, and home construction costs include costs incurred (land
acquisition and development, direct construction, capitalized interest and real estate taxes), as
well as certain estimated costs. These estimated costs include accruals for estimated costs
incurred but not yet paid and estimates of remaining costs. These estimates are based on
homebuilding and land development budgets that are assembled from historical experience and local
market conditions. Actual results may differ from anticipated costs due to a variety of factors
including, but not limited to, a change in the length of construction period, a change in cost of
construction materials and contractors, and a change in housing demand. To mitigate these factors,
we regularly review and revise our construction budgets and estimates of costs to complete. On a quarterly basis we assess each neighborhood and land investment, which include housing
projects and land held for development and sale, in order to identify underperforming neighborhoods
and to identify land investments that may not be recoverable through future operations. Each
neighborhood is assessed as an individual project. This quarterly assessment is an integral part
of our local market level processes. We measure the 44




---



##### Table of Contents



recoverability of assets by comparing the
carrying amount of an asset to its estimated future undiscounted net cash flows. These evaluations
are significantly impacted by the following key assumptions related to the project:  
    estimates of average future selling prices,
    estimates of future construction and land development costs, and
    estimated future sales rates. These key assumptions are dependent on project specific local market (or neighborhood)
conditions and are inherently uncertain. Local market-specific factors that may impact our project
assumptions include:  
    historical project results such as average sales price and sales rates, if closings
have occurred in the project,
    competitors local market (or neighborhood) presence and their competitive actions,
    project specific attributes such as location desirability and uniqueness of product
offering,
    potential for alternative product offerings to respond to local market conditions,
and
    current local market economic and demographic conditions and related trends and
forecasts. These and other factors are considered by our local personnel as they prepare or update the
project level assumptions. The key assumptions included in our estimated future undiscounted net
cash flows are interrelated. For example, a decrease in estimated sales price due to increased
discounting may result in a complementary increase in sales rates. Based on the results of our
assessments, if the carrying amount of the neighborhood exceeds the estimated undiscounted cash
flows, an impairment is recorded to reduce the carrying value of the project to fair value. Fair
value is determined based on discounted estimated cash flows for a neighborhood. Discount rates
used in our evaluations are based on a risk free interest rate, increased for estimates of market
risks associated with a neighborhood. Market risks considered in our discount rate include, among
others:  
    geographic location of project,
    product type (for example, multifamily high rise product or single family product),
    average sales price of the product, and
    estimated project life. For the quarter ended June 30, 2008, discount rates used in our estimated discounted cash flow
assessments ranged from 13% to 18%, with an average discount rate of 15%. Our quarterly assessments reflect managements estimates, which we believe are reasonable;
however, if homebuilding market conditions continue to deteriorate, or if the current challenging
market conditions continue for an extended period, future results could differ materially from
managements judgments and estimates. Land Held Under Option Agreements Not Owned and Other Land Deposits Under certain land option agreements with unaffiliated entities, we pay a stated deposit in
consideration for the right to purchase land at a future time, usually at predetermined prices. We
evaluate these entities in accordance with the provisions of FIN 46, which require us to
consolidate the financial results of a variable interest entity if we are its primary beneficiary.
Variable interest entities are entities in which (1) equity investors do not have a controlling
financial interest and/or (2) the entity is unable to finance its activities without additional
subordinated financial support from other parties. The primary beneficiary of a variable interest
entity is the owner or investor that absorbs a majority of the variable interest entitys expected
losses and/or receives a majority of the variable interest entitys expected residual returns. If
we determine that we are the primary beneficiary, we consolidate the assets and liabilities of the
variable interest entity. We determine if we are the primary beneficiary based upon analysis of the variability of the
expected gains and losses of the variable interest entity. Expected gains and losses of the
variable interest entity are highly dependent upon our estimates of the variability and
probabilities of future land prices and the probabilities of expected cash flows and entitlement
risks related to the underlying land, among other factors. We perform our analysis at the
inception of each land option agreement. Local market personnel are actively involved in our
evaluation, including the development of our estimates of expected gains and losses of the variable
interest entity. To the extent an option agreement is significantly modified or amended, the
agreement is reevaluated pursuant to FIN 46. Based on our evaluation, if we are the primary
beneficiary of those entities for which we have entered into land option agreements, the variable
interest entity is consolidated. To the extent financial statements or other information is
available, we consolidate the assets and liabilities of the variable interest entity. If financial
statements for the variable interest entity are not available, we record the remaining purchase
price of land in the Consolidated Balance Sheets under the 45




---



##### Table of Contents



caption, land held under option
agreements not owned, with a corresponding increase in minority interests. See Note (D),
Inventories, of the Notes to Consolidated Financial Statements for further discussion on the
results of our analysis of land option agreements. In addition to land options recorded pursuant to FIN 46, we evaluate land options in
accordance with the provisions of SFAS No. 49, Product Financing Arrangements. When our deposits
and pre-acquisition development costs exceed certain thresholds, or we have determined it is likely
we will exercise our option, we record the remaining purchase price of land in the Consolidated
Balance Sheets under the caption land held under option agreements not owned, with a
corresponding increase to accrued liabilities. In addition to the land options recorded pursuant to FIN 46 and SFAS No. 49 discussed above,
we have other land option deposits for which the underlying asset is not consolidated. These land
option agreements and related pre-acquisition costs are capitalized in accordance with SFAS No. 67,
Accounting for Costs and Initial Rental Operations of Real Estate Projects. Land option deposits (including those consolidated) and pre-acquisition costs are expensed if
the option agreement terminates, is in default, expires by its terms or if we determine it is
probable that the property will not be acquired. On a periodic basis, we assess the probability of
acquiring the land we control under option agreements. This assessment is performed for each
option agreement by local market personnel. The key factors that impact our assessment include:  
    local market housing inventory levels for both existing and new homes,
    our existing local supply of owned and controlled lots,
    contract purchase price and terms,
    local regulatory environment and, if not fully entitled, likelihood of obtaining
required approvals, and
    local market economic and demographic factors such as job growth, long- and
short-term interest rates, consumer confidence, population growth and immigration. Goodwill Goodwill represents the excess of purchase price over net assets of businesses acquired.
Goodwill is tested for impairment at the reporting unit level on an annual basis (at January 1) or
when management determines that due to certain circumstances the carrying amount of goodwill may
not be recoverable. Goodwill is tested for impairment using a two-step process with the first step
comparing the fair value of the reporting unit with its carrying amount, including goodwill. If
the carrying amount exceeds the fair value, the second step is performed to measure the amount of
impairment loss to be recognized, defined as the carrying value of the reporting unit goodwill that
exceeds the implied fair value of that goodwill. We periodically evaluate whether events and circumstances have occurred that indicate the
remaining balance of goodwill may not be recoverable. Fair value is estimated using a discounted
cash flow or market valuation approach. Key assumptions utilized in our discounted cash flow model
include estimated future sales levels, estimated costs of sales, varying discount rates and working
capital constraints as they principally relate to estimated future inventory levels. Material
variations of these assumptions may have a significant impact to the carrying value of goodwill. We had no impairments of goodwill for the three months ended June 30, 2008 and June 30, 2007. Warranty Accruals Home Building offers a ten-year limited warranty for most homes constructed and sold. The
warranty covers defects in materials or workmanship in the first two years of the home and certain
designated components or structural elements of the home in the third through tenth years. Home
Building estimates the costs that may be incurred under its warranty program for which it will be
responsible and records a liability at the time each home is closed. Factors that affect Home
Buildings warranty liability include the number of homes closed, historical and anticipated rates
of warranty claims and cost per claim. Home Building periodically assesses the adequacy of its
recorded warranty liability and adjusts the amounts as necessary. Although we consider the
warranty accruals reflected in our Consolidated Balance Sheets to be adequate, there can be no
assurance that this accrual will prove to be sufficient over time to cover ultimate losses. 46




---



##### Table of Contents



Insurance Accruals We have certain self-insured retentions and deductible limits under our workers compensation,
automobile and general liability insurance policies. We establish reserves for our self-insured
retentions and deductible limits based on an analysis of historical claims and an estimate of
claims incurred but not yet reported. Projection of losses concerning these liabilities is subject
to a high degree of variability due to factors such as claim settlement patterns, litigation trends
and legal interpretations, among others. On an annual basis, we engage actuaries to assist in the
evaluation and development of claim rates and required reserves for self insurance, including
reserves related to construction defects and general liability claims. We periodically assess the
adequacy of our insurance accruals and adjust the amounts as necessary. Although we consider the
insurance accruals reflected in our Consolidated Balance Sheets to be adequate, there can be no
assurance that this accrual will prove to be sufficient over time to cover ultimate losses. Income Taxes We account for income taxes on the deferral method whereby deferred tax assets and liabilities
are provided for the tax effect of differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, or SFAS 109,
we assess, on a quarterly basis, the realizability of our deferred tax assets. A valuation
allowance must be established when, based upon the evaluation of all available evidence, it is more
likely than not that all or a portion of the deferred tax assets will not be realized. Realization
of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of
future taxable income, tax planning strategies and reversals of existing taxable temporary
differences. SFAS 109 provides that forming a conclusion that a valuation allowance is not needed
is difficult when there is negative evidence such as cumulative losses in recent years or losses
expected in early future years. Please refer to Note (J), Income Taxes, of the Notes to
Consolidated Financial Statements regarding our valuation allowance. On April 1, 2007, we adopted FIN 48. The cumulative effect of the adoption of FIN 48 was
recorded as a $208.3 million reduction to beginning retained earnings in the first quarter of
fiscal year 2008. In accordance with the provisions of FIN 48, we recognize in our financial
statements the impact of tax return positions or future tax positions if it is more likely than not
to prevail (defined as a likelihood of more than fifty percent of being sustained upon audit, based
on the technical merits of the tax position). Tax positions that meet the more likely than not
threshold are measured (using a probability weighted approach) at the largest amount of tax benefit
that has a greater than fifty percent likelihood of being realized upon settlement. For further
discussion regarding the adoption of FIN 48, please refer to Note (J), Income Taxes, of the Notes
to Consolidated Financial Statements. The federal statute of limitations has expired for our federal tax returns filed for tax years
through March 31, 2000. In July 2007, we received a revenue agents report from the Internal
Revenue Service, or IRS, relating to the ongoing audit of our federal income tax returns for fiscal
years 2001 through 2004. We believe that our tax return positions are supported and will
vigorously dispute the proposed adjustments. In fiscal year 2008, the IRS commenced an examination
of our federal income tax returns for fiscal years 2005 and 2006. The estimated liability for
unrecognized tax benefits is periodically assessed for adequacy and may be affected by changing
interpretations of laws, rulings by tax authorities, certain changes and/or developments with
respect to audits, and expiration of the statute of limitations. The outcome for a particular
audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases,
appeal or litigation process. The actual benefits ultimately realized may differ from our
estimates. As each audit is concluded, adjustments, if any, are appropriately recorded in our
financial statements. Additionally, in future periods, changes in facts, circumstances, and new
information may require us to adjust the recognition and measurement estimates with regard to
individual tax positions. Changes in recognition and measurement estimates are recognized in the
period in which the change occurs. RECENT ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157, that
serves to define fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. We adopted SFAS 157
effective April 1, 2008. For further discussion regarding the adoption of SFAS 157, please refer
to Note (H), Fair Values of Financial Instruments, of the Notes to Consolidated Financial
Statements. In February 2008, the FASB issued FASB Staff Position, or FSP, FAS 157-2 that delays
the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except 47




---



##### Table of Contents



those that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Examples of items to which this FSP applies include, but are not
limited to, reporting units measured at fair value in the first step of a goodwill impairment test
and long-lived assets (asset groups) measured at fair value for an impairment assessment (i.e.,
inventory impairment assessments). This FSP defers the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities for us to April 1, 2009. We are currently evaluating the
impact, if any, of SFAS 157 related to nonfinancial assets and nonfinancial liabilities on our
results of operations or financial position. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, or SFAS 159. Under the provisions of SFAS 159, companies may elect to
measure specified financial instruments, warranty and insurance contracts at fair value on a
contract-by-contract basis, with changes in fair value recognized in earnings. The election,
called the fair value option, enables companies to reduce the volatility in reported earnings
caused by measuring related assets and liabilities differently, and it is simpler than using the
complex hedge-accounting requirements in FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities to achieve similar results. We adopted SFAS 159 effective
April 1,
2008. For further discussion regarding the adoption of SFAS 159, please refer to Note (H),
Fair Values of Financial Instruments, of the Notes to Consolidated Financial Statements. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51, or SFAS 160. Under the provisions of SFAS 160,
a noncontrolling interest in a subsidiary, or minority interest, must be classified as equity and
the amount of consolidated net income specifically attributable to the minority interest must be
clearly identified in the statement of consolidated operations. SFAS 160 also requires consistency
in the manner of reporting changes in the parents ownership interest and requires fair value
measurement of any noncontrolling interest retained in a deconsolidation. SFAS 160 will be
effective for us as of April 1, 2009. We do not expect the adoption of SFAS 160 to have a material
impact on our financial statements. 48




---



##### Table of Contents



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report includes various forward-looking statements, which are not facts or guarantees of
future performance and which are subject to significant risks and uncertainties. Certain information included in this Report or in other materials we have filed or will file
with the SEC, as well as information included in oral statements or other written statements made
or to be made by us, contains or may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act of 1934 and the Private
Securities Litigation Reform Act of 1995, as amended. You can identify these statements by the
fact that they do not relate to matters of a strictly factual or historical nature and generally
discuss or relate to forecasts, estimates or other expectations regarding future events.
Generally, the words believe, expect, intend, estimate, anticipate, project, may,
can, could, might, will and similar expressions identify forward-looking statements,
including statements related to expected operating and performing results, planned transactions,
planned objectives of management, future developments or conditions in the industries in which we
participate and other trends, developments and uncertainties that may affect our business in the
future. Such statements include information related to anticipated operating results, financial
resources, changes in interest rates and other developments and conditions in financing markets,
changes in revenues, changes in profitability, interest expense, growth and expansion, our
investment in unconsolidated entities, the ability to acquire land, the ability to gain approvals
and to open new neighborhoods, the ability to sell homes and properties, the ability to deliver
homes from backlog, the ability to secure materials and contractors, the ability to produce the
liquidity and capital necessary for our business, the completion of and effects from planned
transactions and stock market valuations. From time to time, forward-looking statements also are
included in our other periodic reports on Forms 10-K, 10-Q and 8-K, press releases and
presentations, on our web site and in other material released to the public. Forward-looking statements are not historical facts or guarantees of future performance but
instead represent only our beliefs at the time the statements were made regarding future events,
which are subject to significant risks, uncertainties, and other factors, many of which are outside
of our control and certain of which are listed above. Any or all of the forward-looking statements
included in this Report and in any other reports or public statements made by us may turn out to be
materially inaccurate. This can occur as a result of incorrect assumptions or as a consequence of
known or unknown risks and uncertainties. Many of the risks and uncertainties mentioned in this
Report or another report or public statement made by us, including the risk factor section of our
Annual Report on Form 10-K for the fiscal year ended March 31, 2008, will be important in
determining whether these forward-looking statements prove to be accurate. Consequently, neither
our stockholders nor any other person should place undue reliance on our forward-looking statements
and should recognize that actual results may differ materially from those that may be anticipated
by us. All forward-looking statements made in this Report are made as of the date hereof, and the
risk that actual results will differ materially from expectations expressed in this Report will
increase with the passage of time. We undertake no obligation, and disclaim any duty, to publicly
update or revise any forward-looking statements, whether as a result of new information, future
events, changes in our expectations or otherwise. However, we may make further disclosures
regarding future events, trends and uncertainties in our subsequent reports on Forms 10-K, 10-Q and
8-K to the extent required under the Exchange Act. The above cautionary discussion of risks,
uncertainties and possible inaccurate assumptions relevant to our business includes factors we
believe could cause our actual results to differ materially from expected and historical results.
Other factors beyond those listed above, including factors unknown to us and factors known to us
that we have not determined to be material, could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995 and all of our
forward-looking statements are expressly qualified in their entirety by the cautionary statements
contained or referenced in this section. 
 Item 3.     Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks related to fluctuations in interest rates on our direct debt
obligations and mortgage loans receivable. We utilize derivative instruments, including interest
rate swaps, in conjunction with our overall strategy to manage the outstanding debt that is subject
to changes in interest rates. We utilize forward sale commitments to mitigate the risk associated
with the majority of our mortgage loan portfolio. Other than the forward commitments and interest
rate swaps discussed earlier, we do not utilize forward or option contracts on foreign currencies
or commodities, or other types of derivative financial instruments. 49




---



##### Table of Contents



There have been no material changes in our market risk since March 31, 2008. For further
information regarding our market risk, refer to our Annual Report on Form 10-K for the fiscal year
ended March 31, 2008 and Note (K), Derivatives and Hedging, of the Notes to Consolidated
Financial Statements. 
 Item 4.     Controls and Procedures An evaluation has been performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of June 30, 2008. Based
on that evaluation, our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2008.
There has been no change in our internal controls over financial reporting during the quarter ended
June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting. 50




---



##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1.     Legal Proceedings In the normal course of our business, we and/or our subsidiaries are named as defendants in
certain suits filed in various state and federal courts, including construction defect claims,
contract disputes and employee-related matters. We believe that none of the litigation matters in
which we, or any of our subsidiaries, are involved are likely to have a material adverse effect on
our consolidated financial condition or operations. For a discussion of certain litigation and similar proceedings in which we are involved,
please refer to Note (G), Commitments and Contingencies, of the Notes to Consolidated Financial
Statements, which is incorporated by reference herein. 
 Item 1A.     Risk Factors Our business and operations are subject to various risks and uncertainties, which are
described in our various reports, including those set forth in Item 1A of Part I of our Annual
Report on Form 10-K for the fiscal year ended March 31, 2008, or the 2008 Form 10-K. Set forth
below is a discussion of the material changes in our risk factors since the 2008 Form 10-K. The
information presented below updates, and should be read in conjunction with, the risk factors and
other information disclosed in our 2008 Form 10-K. (1) The first and fourth risk factors contained in Item 1A of the 2008 Form 10-K, under Home
Building, are amended to read as follows: The homebuilding industry is undergoing a significant downturn; this downturn has had a material
adverse effect on our business and results of operations and is expected to continue. Beginning in fiscal year 2006, the U.S. housing industry began to experience a significant
downturn, which has had and continues to have a material adverse effect on our business and results
of operations. We believe the principal factors that have caused this downturn include each of the
following, the impact of which varies based upon geographic market and product segment and the time
since commencement of the downturn:  
    decreased affordability of housing in selected markets as a result of significant
price appreciation in the years preceding the downturn and tightened credit standards
for homebuyers,
    declining homebuyer demand due to lower consumer confidence in the consumer real
estate market and an inability of many homebuyers to sell their existing homes,
    increased inventory of new and existing homes for sale, including the impact of
increases in residential foreclosures,
    reduced availability and increased cost of mortgage financing due to the significant
mortgage market disruptions, and
    pricing pressures resulting from a variety of factors, including the decision of
homebuilders to offer significant discounts and sales incentives to liquidate unsold
inventories in order to generate cash, and the need for home prices to fall within
mortgage qualification limits. These conditions have led to, among other things, (i) significant decreases in our
homebuilding revenues, (ii) substantial land-related and goodwill impairments, (iii) significant
losses on land sales, (iv) significant write-offs of land deposits and pre-acquisition costs, and
(v) significant joint ventures impairments. As a result, our homebuilding operations incurred
substantial losses and may continue to do so. Any worsening in market conditions in the
homebuilding industry would have a further material adverse effect on our business and results of
operations. Increases in interest rates, decreases in the availability of mortgage financing or other changes
in market conditions could make it more difficult or costly for customers to purchase our homes. Most of our homebuilding customers finance their home purchases through our Financial Services
operations or, in some cases, third-party lenders. In general, housing demand is adversely
affected by increases in interest rates or by decreases in the availability of mortgage financing
as a result of increased credit standards, deteriorating customer credit quality or disruptions or
other adverse conditions in mortgage lending markets. Any further increases in credit standards or
increases in interest rates could cause potential homebuyers to be less willing or able to purchase 51




---



##### Table of Contents



our homes. In general, if mortgage rates increase, it could become more difficult or costly for
customers to purchase our homes, which would have an adverse effect on our results of operations. Certain of our homebuyers use down payment assistance programs, which represented
approximately 25% of our units closed during the quarter ended June 30, 2008. These programs allow
homebuyers to receive gift funds from non-profit corporations to be used as a down payment.
Homebuilders are a source of funding for these programs. Congress has enacted legislation to
eliminate use of these programs in connection with FHA insured loans for contracts entered into
after September 30, 2008. In light of the legislation, we will seek other financing alternatives,
and seek different down payment programs for our customers who meet
applicable guidelines. There can be no assurance, however, that any such alternative programs
would be as attractive to our customers as the programs offered today and that our sales would not
suffer. (2) A new risk factor is hereby added to the existing risk factors under Home Building to
read as follows: Our results of operations are subject to significant changes in the cost of raw materials and other
components of our houses and labor that are dependent on or impacted by increases in energy costs. Recently, the cost of fuel and other sources of energy have increased dramatically. Some of
these costs are borne by us directly, such as fuel for company-related motor vehicles and energy
for the office buildings that we occupy. These increases in energy costs have also increased costs
for our suppliers, who provide raw materials and the other components of our houses, and
subcontractors, whose employees help construct our homes. Many of these cost increases are being
passed on to us, and these and any additional cost increases could materially and adversely affect
our cost of sales and operating profits. (3) The fourth risk factor contained in Item 1A of the 2008 Form 10-K, under Factors
Affecting Multiple Business Segments, is amended to read as follows: Changes in laws or other events that adversely affect liquidity in the secondary mortgage market
could hurt our business. The government-sponsored enterprises, principally FNMA and FHLMC, play a significant role in
buying home mortgages and creating investment securities that they either sell to investors or hold
in their portfolios. These organizations provide liquidity to the secondary mortgage market. FNMA
and FHLMC have recently experienced financial difficulties. Any new federal laws or regulations
that restrict or curtail their activities, or any other events or conditions that prevent or
restrict these enterprises from continuing their historic businesses, could affect the ability of
our customers to obtain the mortgage loans or could increase mortgage interest rates or credit
standards, which could reduce demand for our homes and/or the loans that we originate and adversely
affect our results of operations. 52




---



##### Table of Contents



Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds Share Repurchases From time to time, we repurchase shares of our common stock pursuant to publicly announced
share repurchase programs. The following table details our common stock repurchases for the three
months ended June 30, 2008: Issuer Purchases of Equity SecuritiesTotal Number of
    
    Maximum Number ofTotal Number
    
    
    
    
    
    Shares Purchased
    
    Shares that May Yet Beof Shares
    
    Average Price
    
    as Part of Publicly
    
    Purchased Under thePurchased
    
    Paid Per Share
    
    Announced Plans
    
    PlansPeriodApril 130
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    9,399,700May 131
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    9,399,700June 130
    
    
    533
    
    
    $
    14.22
    
    
    
    
    
    
    
    9,399,700Total (1)
    
    
    533
    
    
    $
    14.22
    
    
    
    
   (1)
    
    The 533 shares repurchased for the quarter ended June 30, 2008 represent the delivery to us
by employees or directors of previously issued shares to satisfy the exercise price of options
and/or withholding taxes that arise on the exercise of options or the vesting of restricted
stock. These transactions are authorized under the terms of the equity plans under which the
options or other equity were awarded; however, these transactions are not considered
repurchases pursuant to our share repurchase program. On May 11, 2006, our Board of Directors authorized the repurchase of 12 million shares of our
common stock. After giving effect to repurchases after that date, the current approved repurchase
authorization is 9,399,700 shares. Purchases are made in the open market or in block purchases,
and such transactions may be effected from time to time or pursuant to share repurchase plans under
SEC Rule 10b5-1. The share repurchase authorization has no stated expiration date. 53




---



##### Table of Contents



Item 6.     Exhibits The following documents are filed as part of this Report.  3.1
    Amended and Restated Articles of Incorporation of Centex
Corporation (Centex) (incorporated by reference from Exhibit 3.1 to Centexs
Current Report on Form 8-K filed on July 15, 2008).3.2
    Amended and Restated By-Laws of Centex dated October 10, 2007
(incorporated by reference from Exhibit 3.1 to Centexs Current Report on Form
8-K filed on October 16, 2007).4.1
    Specimen Centex common stock certificate (incorporated by reference
from Exhibit 4.1 to Centexs Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006).4.2
    Any instrument with respect to long-term debt, where the securities
authorized thereunder do not exceed 10% of the total assets of Centex and its
subsidiaries, has not been filed; these instruments relate to (a) long-term
senior debt of Centex issued pursuant to supplements to the indentures filed as
Exhibits 4.5 and 4.6 to Centexs Annual Report on Form 10-K for the fiscal year
ended March 31, 2008, which supplements have also been filed with the SEC as
exhibits to various Centex registration statements or to reports incorporated by
reference in such registration statements, (b) long-term debt issued pursuant to
indentures or other agreements in connection with certain asset securitizations
involving certain subsidiaries of Centex in private transactions and (c) other
long-term debt of Centex; Centex agrees to furnish a copy of such instruments to
the SEC upon request.10.1
    Centex Corporation 2003 Annual Incentive Compensation Plan* (as
amended through May 7, 2008, including amendments approved by stockholders on
July 10, 2008) (incorporated by reference from Exhibit 10.1 to Centexs Current
Report on Form 8-K filed on
July 15, 2008).10.1a
    Form of award agreement for incentive compensation (2009)*
(incorporated by reference from Exhibit 10.8 to Centexs Current Report on Form
8-K filed on May 13, 2008).10.2
    Centex Corporation 2003 Equity Incentive Plan* (as amended through
May 7, 2008, exclusive of amendments to be approved by stockholders)
(incorporated by reference from Exhibit 10.6 to Centexs Annual Report on Form
10-K for the fiscal year ended March 31, 2008).10.2a
    Centex Corporation 2003 Equity Incentive Plan* (as amended through
May 7, 2008, including amendments approved by stockholders on July 10, 2008)
(incorporated by reference from Exhibit 10.2 to Centexs Current Report on Form
8-K filed on July 15, 2008).10.2b
    Form of stock option award for 2003 Equity Incentive Plan*
(incorporated by reference from Exhibit 10.6 to Centexs Current Report on Form
8-K filed on May 13, 2008).10.2c
    Form of stock unit award for 2003 Equity Incentive Plan*
(incorporated by reference from Exhibit 10.6b to Centexs Annual Report on Form
10-K for the fiscal year ended March 31, 2008).10.2d
    Form of long term performance unit award for 2003 Equity Incentive
Plan* (May 2008 award) (incorporated by reference from Exhibit 10.7 to Centexs
Current Report on Form 8-K filed on May 13, 2008).10.2e
    Form of restricted stock award under 2003 Equity Incentive Plan*
(incorporated by reference from Exhibit 10.3 to Centexs Current Report on Form
8-K filed on July 15, 2008). 54




---



##### Table of Contents



10.3
    Form of stock option award for 2001 Stock Plan* (incorporated by
reference from Exhibit 10.5 to Centexs Current Report on Form 8-K filed on May
13, 2008).10.4
    Form of award agreement for Long Term Incentive Plan* (incorporated
by reference from Exhibit 10.4a to Centexs Annual Report on Form 10-K for the
fiscal year ended March 31, 2008).10.5
    Form of deferred compensation agreement for Executive Deferred
Compensation Plan* (incorporated by reference from Exhibit 10.9a to Centexs
Annual Report on Form 10-K for the fiscal year ended March 31, 2008).10.6
    Summary of Outside Director Compensation Plan* (incorporated by
reference from Exhibit 10.10 to Centexs Annual Report on Form 10-K for the
fiscal year ended March 31, 2008).10.7
    Form of Indemnification Agreement for Officers*, as adopted on May
8, 2008 (incorporated by reference from Exhibit 10.1 to Centexs Current Report
on Form 8-K filed on May 13, 2008).12.1
    Computation of Ratio of Earnings to Fixed Charges (filed herewith).31.1
    Certification of the Chief Executive Officer of Centex Corporation
pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act
of 1934, as amended (filed herewith).31.2
    Certification of the Chief Financial Officer of Centex Corporation
pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act
of 1934, as amended (filed herewith).32.1
    Certification of the Chief Executive Officer of Centex Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).32.2
    Certification of the Chief Financial Officer of Centex Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).* Management contract or compensatory plan or arrangement. 55




---



##### Table of Contents



Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTEX CORPORATIONRegistrantAugust 5, 2008
    
    /s/ Catherine R. SmithCatherine R. SmithExecutive Vice President and Chief Financial Officer(principal financial officer)August 5, 2008
    
    /s/ Mark D. KempMark D. KempSenior Vice President and Controller(principal accounting officer)
 56