##### 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 SECURITIESEXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007
 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
(State of incorporation) 
75-0778259
(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 ü No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one): þ
    
    Large accelerated filer
    
    o
    
    Accelerated filer
    
    
    o

    Non-accelerated filer
    
    o
    
    Smaller reporting company(Do not check if a 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  No ü Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the close of business on January 23, 2008: 122,389,169 shares
of common stock, par value $ .25 per share.




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##### 



Centex Corporation and Subsidiaries Form 10-Q Table of Contents
December 31, 2007 PART
I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    2Statements of Consolidated Earnings
    
    
    2Consolidated Balance Sheets with Consolidating Details
    
    
    4Statements of Consolidated Cash Flows with Consolidating Details
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    59Item 4.
    
    Controls and Procedures
    
    
    59PART
II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    60Item 1A.
    
    Risk Factors
    
    
    60Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    64Item 6.
    
    Exhibits
    
    
    64Signatures
    
    
    
    
    66Certificate of Correction to the Restricted Articles of IncorporationWaiver LetterComputation of Ratio of Earnings to Fixed ChargesCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements Centex Corporation and Subsidiaries
Statements of Consolidated Earnings
(Dollars in thousands, except per share data)
(unaudited) For the Three Months Ended December 31,2007
    
    
    2006RevenuesHome Building
    
    $
    1,811,084
    
    
    $
    2,587,251Financial Services
    
    
    62,203
    
    
    
    107,577Other
    
    
    32,800
    
    
    
    31,3881,906,087
    
    
    
    2,726,216Costs and ExpensesHome Building
    
    
    2,375,824
    
    
    
    2,783,488Financial Services
    
    
    122,687
    
    
    
    91,081Other
    
    
    31,217
    
    
    
    32,681Corporate General and Administrative
    
    
    37,850
    
    
    
    72,3692,567,578
    
    
    
    2,979,619Loss from Unconsolidated Entities and Other
    
    
    (60,525
    )
    
    
    (46,165
    )Interest and Other Income
    
    
    1,320
    
    
    
    Earnings (Loss) from Continuing Operations
Before Income Taxes
    
    
    (720,696
    )
    
    
    (299,568
    )Income Tax (Benefit) Provision
    
    
    254,492
    
    
    
    (57,223
    )Earnings (Loss) from Continuing Operations
    
    
    (975,188
    )
    
    
    (242,345
    )Earnings from Discontinued Operations, net of Tax
Provision of $0 and $8,219
    
    
    
    
    
    
    14,199Net Earnings (Loss)
    
    $
    (975,188
    )
    
    $
    (228,146
    )Basic Earnings (Loss) Per ShareContinuing Operations
    
    $
    (7.94
    )
    
    $
    (2.02
    )Discontinued Operations
    
    
    
    
    
    
    0.12$
    (7.94
    )
    
    $
    (1.90
    )Diluted Earnings (Loss) Per ShareContinuing Operations
    
    $
    (7.94
    )
    
    $
    (2.02
    )Discontinued Operations
    
    
    
    
    
    
    0.12$
    (7.94
    )
    
    $
    (1.90
    )Average Shares OutstandingBasic
    
    
    122,787,414
    
    
    
    119,935,522Dilutive Securities:Options
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Diluted
    
    
    122,787,414
    
    
    
    119,935,522Cash Dividends Per Share
    
    $
    0.04
    
    
    $
    0.04
 See Notes to Consolidated Financial Statements. 2




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##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Earnings
(Dollars in thousands, except per share data)
(unaudited) For the Nine Months Ended December 31,2007
    
    
    2006RevenuesHome Building
    
    $
    5,720,388
    
    
    $
    7,895,135Financial Services
    
    
    240,869
    
    
    
    350,896Other
    
    
    102,247
    
    
    
    99,6736,063,504
    
    
    
    8,345,704Costs and ExpensesHome Building
    
    
    7,357,765
    
    
    
    7,640,413Financial Services
    
    
    340,466
    
    
    
    285,149Other
    
    
    97,733
    
    
    
    101,465Corporate General and Administrative
    
    
    117,371
    
    
    
    172,1377,913,335
    
    
    
    8,199,164Loss from Unconsolidated Entities and Other
    
    
    (112,360
    )
    
    
    (36,476
    )Interest and Other Income
    
    
    24,145
    
    
    
    Earnings (Loss) from Continuing Operations
Before Income Taxes
    
    
    (1,938,046
    )
    
    
    110,064Income Tax (Benefit) Provision
    
    
    (187,690
    )
    
    
    99,559Earnings (Loss) from Continuing Operations
    
    
    (1,750,356
    )
    
    
    10,505Earnings from Discontinued Operations, net of Tax
Provision of $2,087 and $36,857
    
    
    3,376
    
    
    
    59,006Net Earnings (Loss)
    
    $
    (1,746,980
    )
    
    $
    69,511Basic Earnings (Loss) Per ShareContinuing Operations
    
    $
    (14.32
    )
    
    $
    0.09Discontinued Operations
    
    
    0.02
    
    
    
    0.49$
    (14.30
    )
    
    $
    0.58Diluted Earnings (Loss) Per ShareContinuing Operations
    
    $
    (14.32
    )
    
    $
    0.09Discontinued Operations
    
    
    0.02
    
    
    
    0.47$
    (14.30
    )
    
    $
    0.56Average Shares OutstandingBasic
    
    
    122,188,922
    
    
    
    120,507,675Dilutive Securities:Options
    
    
    
    
    
    
    3,955,648Other
    
    
    
    
    
    
    61,540Diluted
    
    
    122,188,922
    
    
    
    124,524,863Cash Dividends Per Share
    
    $
    0.12
    
    
    $
    0.12
 See Notes to Consolidated Financial Statements. 3




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##### Table of Contents



Centex Corporation and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited) Centex Corporation and SubsidiariesDecember 31, 2007
    
    
    March 31, 2007AssetsCash and Cash Equivalents
    
    $
    61,872
    
    
    $
    882,754Restricted Cash
    
    
    71,493
    
    
    
    146,532Receivables -
Mortgage Loans, net
    
    
    747,757
    
    
    
    1,687,645Trade and Other, including Notes of $6,563 and $10,295
    
    
    430,707
    
    
    
    227,618Inventories -
Housing Projects
    
    
    6,354,306
    
    
    
    8,474,883Land Held for Development and Sale
    
    
    454,347
    
    
    
    158,212Land Held Under Option Agreements Not Owned
    
    
    177,763
    
    
    
    282,116Other
    
    
    31,169
    
    
    
    35,868Investments -
Joint Ventures and Other
    
    
    241,094
    
    
    
    281,644Unconsolidated Subsidiaries
    
    
    
    
    
    
    Property and Equipment, net
    
    
    91,214
    
    
    
    136,172Other Assets -
Deferred Income Taxes, net
    
    
    626,072
    
    
    
    489,814Goodwill
    
    
    158,207
    
    
    
    219,042Deferred Charges and Other, net
    
    
    184,916
    
    
    
    177,633$
    9,630,917
    
    
    $
    13,199,933Liabilities and Stockholders EquityAccounts Payable
    
    $
    337,963
    
    
    $
    520,833Accrued Liabilities
    
    
    1,822,295
    
    
    
    1,822,429Debt -
Centex
    
    
    3,623,236
    
    
    
    3,904,425Financial Services
    
    
    569,081
    
    
    
    1,663,040Payable from Affiliates
    
    
    
    
    
    
    Commitments and ContingenciesMinority Interests
    
    
    81,217
    
    
    
    176,937Stockholders Equity -
Preferred Stock: Authorized 5,000,000 Shares, None Issued

    
    
    
    
    
    Common Stock: $.25 Par Value; Authorized 300,000,000Shares; Outstanding 122,250,768 and 119,969,733 Shares
    
    
    31,565
    
    
    
    31,041Capital in Excess of Par Value
    
    
    91,739
    
    
    
    48,349Retained Earnings
    
    
    3,281,062
    
    
    
    5,250,873Treasury Stock, at Cost; 4,010,772 and 4,193,523 Shares
    
    
    (207,241
    )
    
    
    (217,994
    )Total Stockholders Equity
    
    
    3,197,125
    
    
    
    5,112,269$
    9,630,917
    
    
    $
    13,199,933
 See Notes to Consolidated Financial Statements. 4




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##### Table of Contents



Centex Corporation and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited) Centex*
    
    
    Financial ServicesDecember 31, 2007
    
    
    March 31, 2007
    
    
    December 31, 2007
    
    
    March 31, 2007$
    54,294
    
    
    $
    870,688
    
    
    $
    7,578
    
    
    $
    12,06628,102
    
    
    
    56,467
    
    
    
    43,391
    
    
    
    90,065
    
    
    
    
    
    
    
    747,757
    
    
    
    1,687,645374,975
    
    
    
    175,683
    
    
    
    55,732
    
    
    
    51,9356,354,306
    
    
    
    8,474,883
    
    
    
    
    
    
    
    454,347
    
    
    
    158,212
    
    
    
    
    
    
    
    177,763
    
    
    
    282,116
    
    
    
    
    
    
    
    18,319
    
    
    
    27,121
    
    
    
    12,850
    
    
    
    8,747241,094
    
    
    
    281,644
    
    
    
    
    
    
    
    313,612
    
    
    
    137,704
    
    
    
    
    
    
    
    77,246
    
    
    
    119,203
    
    
    
    13,968
    
    
    
    16,969561,361
    
    
    
    465,247
    
    
    
    64,711
    
    
    
    24,567149,255
    
    
    
    210,090
    
    
    
    8,952
    
    
    
    8,952169,687
    
    
    
    163,497
    
    
    
    15,229
    
    
    
    14,136$
    8,974,361
    
    
    $
    11,422,555
    
    
    $
    970,168
    
    
    $
    1,915,082$
    328,531
    
    
    $
    510,106
    
    
    $
    9,432
    
    
    $
    10,7271,744,966
    
    
    
    1,719,753
    
    
    
    77,329
    
    
    
    102,6763,623,236
    
    
    
    3,904,425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    569,081
    
    
    
    1,663,040
    
    
    
    
    
    
    
    25,826
    
    
    
    (23,788
    )80,503
    
    
    
    176,002
    
    
    
    714
    
    
    
    935
    
    
    
    
    
    
    
    
    
    
    
    31,565
    
    
    
    31,041
    
    
    
    1
    
    
    
    191,739
    
    
    
    48,349
    
    
    
    478,467
    
    
    
    275,4673,281,062
    
    
    
    5,250,873
    
    
    
    (190,682
    )
    
    
    (113,976
    )(207,241
    )
    
    
    (217,994
    )
    
    
    
    
    
    
    3,197,125
    
    
    
    5,112,269
    
    
    
    287,786
    
    
    
    161,492$
    8,974,361
    
    
    $
    11,422,555
    
    
    $
    970,168
    
    
    $
    1,915,082
  *
    
    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. 5




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##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited) Centex Corporation and SubsidiariesFor the Nine Months Ended December 31,2007
    
    
    2006Cash Flows  Operating ActivitiesNet Earnings (Loss)
    
    $
    (1,746,980
    )
    
    $
    69,511AdjustmentsDepreciation and Amortization
    
    
    40,384
    
    
    
    42,958Stock-based Compensation
    
    
    29,620
    
    
    
    52,446Provision for Losses on Mortgage Loans Held for Investment and
Construction Loans
    
    
    82,775
    
    
    
    27,836Impairments and Write-off of Assets
    
    
    1,641,304
    
    
    
    499,177Deferred Income Tax (Benefit) Provision
    
    
    (27,029
    )
    
    
    (49,014
    )Loss (Earnings) of Joint Ventures and Unconsolidated Subsidiaries
    
    
    125,333
    
    
    
    58,973Distributions of Earnings of Joint Ventures and
Unconsolidated Subsidiaries
    
    
    6,769
    
    
    
    88,522Minority Interest, net of Taxes
    
    
    (221
    )
    
    
    (411
    )Gain on Sale of Assets
    
    
    (16,966
    )
    
    
    (126,038
    )Changes in Assets and Liabilities, Excluding Effect of Acquisitions
Decrease (Increase) in Restricted Cash
    
    
    27,916
    
    
    
    15,325(Increase) Decrease in Receivables
    
    
    (173,062
    )
    
    
    40,882Decrease in Mortgage Loans Held for Sale
    
    
    751,313
    
    
    
    259,761Decrease (Increase) in Receivables from Affiliates
    
    
    
    
    
    
    Decrease (Increase) in Housing Projects and Land Held for
    
    
    179,189
    
    
    
    (1,455,848
    )Development and Sale
Decrease (Increase) in Other Inventories
    
    
    17,865
    
    
    
    (103
    )Decrease in Accounts Payable and Accrued Liabilities
    
    
    (449,651
    )
    
    
    (37,953
    )Decrease (Increase) in Other Assets, net
    
    
    24,455
    
    
    
    (5,132
    )Other
    
    
    150
    
    
    
    110513,164
    
    
    
    (518,998
    )Cash Flows  Investing ActivitiesPayments received on Notes Receivable
    
    
    4,158
    
    
    
    11,757Increase in Mortgage Loans Held for Investment
    
    
    
    
    
    
    (292,448
    )Decrease (Increase) in Construction Loans
    
    
    59,546
    
    
    
    (112,946
    )Investment in and Advances to Joint Ventures
    
    
    (160,877
    )
    
    
    (187,052
    )Distributions of Capital from Joint Ventures
    
    
    67,755
    
    
    
    148,242(Increase) Decrease in Investments in and Advances to Unconsolidated
Subsidiaries
    
    
    
    
    
    
    Purchases of Property and Equipment, net
    
    
    (9,595
    )
    
    
    (26,929
    )Proceeds from Dispositions
    
    
    21,978
    
    
    
    494,013Other
    
    
    (3,563
    )
    
    
    (6,105
    )(20,598
    )
    
    
    28,532Cash Flows  Financing ActivitiesDecrease (Increase) in Restricted Cash
    
    
    47,123
    
    
    
    (90,182
    )(Decrease) Increase in Short-term Debt, net
    
    
    (1,034,766
    )
    
    
    294,129Centex
Issuance of Long-term Debt
    
    
    
    
    
    
    500,641Repayment of Long-term Debt
    
    
    (281,214
    )
    
    
    (192,991
    )Financial Services
Issuance of Long-term Debt
    
    
    
    
    
    
    961,126Repayment of Long-term Debt
    
    
    (60,000
    )
    
    
    (746,680
    )Proceeds from Stock Option Exercises
    
    
    30,543
    
    
    
    53,800Purchases of Common Stock, net
    
    
    (598
    )
    
    
    (263,235
    )Dividends Paid and Capital Contributions Received
    
    
    (14,536
    )
    
    
    (14,302
    )(1,313,448
    )
    
    
    502,306Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (820,882
    )
    
    
    11,840Cash and Cash Equivalents at Beginning of Period(1)
    
    
    882,754
    
    
    
    47,955Cash and Cash Equivalents at End of Period(2)
    
    $
    61,872
    
    
    $
    59,795
 See Notes to Consolidated Financial Statements.  (1)
    
    Amount includes cash and cash equivalents of discontinued operations of $0 as of March 31,
2007 and $4,605 as of March 31, 2006.(2)
    
    Amount includes cash and cash equivalents of discontinued operations of $0 as of December 31,
2007 and $1,436 as of December 31, 2006. 6




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##### Table of Contents



Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited) Centex *
    
    
    Financial ServicesFor the Nine Months Ended December 31,
    
    
    For the Nine Months Ended December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006$
    (1,746,980
    )
    
    $
    69,511
    
    
    $
    (61,706
    )
    
    $
    84,22735,688
    
    
    
    36,198
    
    
    
    4,696
    
    
    
    6,76029,620
    
    
    
    52,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,775
    
    
    
    27,8361,641,304
    
    
    
    499,177
    
    
    
    
    
    
    
    13,116
    
    
    
    (117,029
    )
    
    
    (40,145
    )
    
    
    68,015187,039
    
    
    
    (25,254
    )
    
    
    
    
    
    
    21,769
    
    
    
    684,302
    
    
    
    
    
    
    
    
    
    
    
    (437
    )
    
    
    (221
    )
    
    
    26(16,966
    )
    
    
    (4,772
    )
    
    
    
    
    
    
    (121,266
    )28,365
    
    
    
    17,229
    
    
    
    (449
    )
    
    
    (1,904
    )(202,314
    )
    
    
    49,811
    
    
    
    29,252
    
    
    
    (8,929
    )
    
    
    
    
    
    
    
    751,313
    
    
    
    259,761
    
    
    
    
    
    
    
    49,614
    
    
    
    (15,765
    )179,189
    
    
    
    (1,455,848
    )
    
    
    
    
    
    
    8,763
    
    
    
    (463
    )
    
    
    9,102
    
    
    
    360(423,009
    )
    
    
    (38,482
    )
    
    
    (26,642
    )
    
    
    (8,173
    )25,547
    
    
    
    (12,159
    )
    
    
    (1,092
    )
    
    
    7,027150
    
    
    
    110
    
    
    
    
    
    
    
    (218,719
    )
    
    
    (245,660
    )
    
    
    796,497
    
    
    
    297,9754,158
    
    
    
    11,651
    
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    (292,448
    )
    
    
    
    
    
    
    
    59,546
    
    
    
    (112,946
    )(160,877
    )
    
    
    (187,052
    )
    
    
    
    
    
    
    67,755
    
    
    
    148,242
    
    
    
    
    
    
    
    (252,614
    )
    
    
    12,672
    
    
    
    
    
    
    
    (7,900
    )
    
    
    (20,526
    )
    
    
    (1,695
    )
    
    
    (6,403
    )21,978
    
    
    
    37,676
    
    
    
    
    
    
    
    468,132(3,563
    )
    
    
    (6,105
    )
    
    
    
    
    
    
    (331,063
    )
    
    
    (3,442
    )
    
    
    57,851
    
    
    
    56,441
    
    
    
    
    
    
    
    47,123
    
    
    
    (90,182
    )(807
    )
    
    
    179,584
    
    
    
    (1,033,959
    )
    
    
    114,545
    
    
    
    500,641
    
    
    
    
    
    
    
    (281,214
    )
    
    
    (192,991
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    961,126
    
    
    
    
    
    
    
    (60,000
    )
    
    
    (746,680
    )30,543
    
    
    
    53,800
    
    
    
    
    
    
    
    (598
    )
    
    
    (263,235
    )
    
    
    
    
    
    
    (14,536
    )
    
    
    (14,302
    )
    
    
    188,000
    
    
    
    (595,780
    )(266,612
    )
    
    
    263,497
    
    
    
    (858,836
    )
    
    
    (356,971
    )(816,394
    )
    
    
    14,395
    
    
    
    (4,488
    )
    
    
    (2,555
    )870,688
    
    
    
    36,711
    
    
    
    12,066
    
    
    
    11,244$
    54,294
    
    
    $
    51,106
    
    
    $
    7,578
    
    
    $
    8,689
  *
    
    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. 7




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##### Table of Contents



Centex Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007
(Unless otherwise indicated, dollars and shares in thousands, except per share data)
(unaudited) (A) SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated interim financial statements include the accounts of Centex Corporation and
all subsidiaries, partnerships 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, and Note (F), Indebtedness.
All significant intercompany balances and transactions have been eliminated. The unaudited
statements have been prepared in accordance 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 accordance 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. 8




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##### 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 Months
    
    
    For the Nine MonthsEnded December 31,
    
    
    Ended December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Total Interest Incurred
    
    $
    68,206
    
    
    $
    98,150
    
    
    $
    226,643
    
    
    $
    393,951Less  Interest Capitalized
    
    
    (56,999
    )
    
    
    (74,314
    )
    
    
    (178,369
    )
    
    
    (219,623
    )Financial Services Interest Expense
    
    
    (11,207
    )
    
    
    (23,836
    )
    
    
    (48,274
    )
    
    
    (66,436
    )Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107,892
    )Interest Expense, net
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capitalized Interest Charged to Home
Buildings Costs and Expenses
    
    $
    69,854
    
    
    $
    66,811
    
    
    $
    209,618
    
    
    $
    150,664
 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 of Financial Accounting Standards Board (FASB) Statement No. 109, Accounting for
Income Taxes (SFAS 109), the Company assesses, on a quarterly basis, the realizability of its
deferred income tax asset. 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 income tax asset will not be realized. Realization of deferred income 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 the adoption of FIN 48. In accordance with the provisions of FIN 48, the Company recognizes in its 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. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in
the financial statements as a component of the income tax provision, which is consistent with the
Companys historical accounting policy. The Companys liability for unrecognized tax benefits,
combined with accrued interest and penalties, is reflected as a component of accrued liabilities. 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. Prior to the adoption of FIN 48, the Company applied Statement of Financial Accounting
Standards (SFAS) No. 5, Accounting for Contingencies (SFAS 5), to assess and provide for
potential income tax exposures. In accordance with SFAS 5, the Company maintained reserves for tax
contingencies based on reasonable estimates of the tax liabilities, interest, and penalties (if
any) that may result from tax audits. FIN 48 substantially 9




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##### Table of Contents



changes the applicable accounting model and is likely to cause greater volatility in the
income statements and effective tax rates as more items are recognized and/or derecognized
discretely within income tax expense. Stock-Based Employee Compensation Arrangements The Company accounts for its stock-based compensation arrangements in accordance with the
provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), under which 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 options granted
is calculated under the Black-Scholes option-pricing model. The following information represents the Companys grants of stock-based compensation to
employees and directors during the nine months ended December 31, 2007 and the year ended March 31,
2007: Number ofShares
    
    Fair ValuePeriod of Grant
    
    Grant Type

    
    Granted
    
    of GrantFor the year ended March 31, 2007
    
    Stock Options
    
    1,420.3
    
    $
    28,603.0Stock Units
    
    366.2
    
    $
    19,955.4Restricted Stock
    
    121.2
    
    $
    6,379.9For the nine months ended December 31, 2007
    
    Stock Options
    
    646.6
    
    $
    10,116.9Stock Units
    
    261.5
    
    $
    11,368.1Restricted Stock
    
    160.1
    
    $
    5,035.0
 In addition to the stock-based awards in the above table, the Company issued to officers and
employees during the first quarter of fiscal year 2008 long-term performance awards that vest after
three years with an initial aggregate value of $18.9 million. These awards will be settled in cash
and adjusted based on the Companys performance relative to its peers in earnings per share growth
and return on equity, as well as changes in the Companys stock price between the date of grant and
the end of the performance period. 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 construction services operations (Construction Services)
and sub-prime lending operations (Home Equity), see Note (L), Discontinued Operations.
Accordingly, all Construction Services cash flows prior to disposal are included with the Centex
cash flows and all Home Equity cash flows prior to disposal are included with the Financial
Services cash flows. The following table provides supplemental disclosures related to the Statements of
Consolidated Cash Flows: For the Three Months
    
    
    For the Nine MonthsEnded December 31,
    
    
    Ended December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Cash Paid for Interest
    
    $
    65,318
    
    
    $
    88,930
    
    
    $
    219,313
    
    
    $
    377,418Net Cash Paid for Taxes
    
    $
    81
    
    
    $
    19,237
    
    
    $
    209,286
    
    
    $
    290,104
 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 December 31, 2007
and March 31, 2007, the Company consolidated $71.7 million and $152.9 million, respectively, of
land as inventory under the caption land held under option agreements not owned. The Company
also recorded $68.3 million and $90.5 million as of December 31, 2007 and March 31, 2007,
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 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 increase to 10




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##### Table of Contents



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 (i.e., loans in foreclosure included in trade and other receivables,
real-estate owned included in other inventories, etc.) 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. SFAS 157 will be
effective for the Company as of April 1, 2008. The Company is currently evaluating the impact, if
any, of adopting SFAS 157 on its financial statements. The FASB Staff has exposed for comment a FASB Staff Position (FSP) that would delay 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 the deferral would apply 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 (e.g.
inventory impairment assessments). For the Company, the FSP, as proposed, would defer the
application of SFAS 157 to nonfinancial assets and nonfinancial liabilities to April 1, 2009. 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, will enable some 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. SFAS 159 will be
effective for the Company as of April 1, 2008. The Company expects that the adoption of SFAS 159
will not have a material impact on its results of operations or financial position. In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109
requires that the expected net future cash flows related to the associated servicing of a loan
should be included in the measurement of all written loan commitments that are accounted for at
fair value through earnings. The provisions of SAB 109 are applicable to written loan commitments
issued or modified beginning January 1, 2008. The Company expects that the adoption of SAB 109
will not have a material impact on its results of operations or financial position. 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 earnings. 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 is currently evaluating the impact, if
any, of adopting SFAS 160 on its financial statements. Reclassifications Certain prior year balances have been reclassified to be consistent with the December 31, 2007
presentation, including reclassification of certain restricted cash balances to cash flows from
financing activities, reclassification of construction lending activity to cash flows from
investing activities, reclassification of the construction loan allowance against the related
mortgage, reclassification of certain inventory amounts from housing projects to other inventory,
and reclassifications of discontinued operations. 11




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##### 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, 2007
    
    
    119,970
    
    
    $
    31,041
    
    
    $
    48,349
    
    
    $
    5,250,873
    
    
    $
    (217,994
    )
    
    $
    5,112,269Adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    (4,898
    )
    
    
    (208,295
    )
    
    
    
    
    
    
    (213,193
    )Issuance of Restricted Stock
and Stock Units
    
    
    363
    
    
    
    40
    
    
    
    (17,419
    )
    
    
    
    
    
    
    11,351
    
    
    
    (6,028
    )Stock Compensation
    
    
    
    
    
    
    
    
    
    
    29,620
    
    
    
    
    
    
    
    
    
    
    
    29,620Exercise of Stock Options
Including Tax Benefits
    
    
    1,934
    
    
    
    483
    
    
    
    35,948
    
    
    
    
    
    
    
    
    
    
    
    36,431Cash Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,536
    )
    
    
    
    
    
    
    (14,536
    )Purchase of Common
Stock for Treasury
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (598
    )
    
    
    (598
    )Other Stock Transactions
    
    
    4
    
    
    
    1
    
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    140Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,746,980
    )
    
    
    
    
    
    
    (1,746,980
    )Balance, December 31, 2007
    
    
    122,251
    
    
    $
    31,565
    
    
    $
    91,739
    
    
    $
    3,281,062
    
    
    $
    (207,241
    )
    
    $
    3,197,125
 (C) MORTGAGE LOANS Mortgage loans receivable consist of the following: As ofDecember 31, 2007
    
    
    March 31, 2007Mortgage Loans Held for Sale
    
    $
    569,491
    
    
    $
    1,313,561Construction Loans, net of
Allowance of $72,342 and $5,826
    
    
    178,266
    
    
    
    374,084Mortgage Loans Receivable, net
    
    $
    747,757
    
    
    $
    1,687,645
 As of December 31, 2007, Financial Services is committed, under existing construction loan
agreements, to fund $74.4 million in addition to the construction loan balance shown above.
Financial Services has ceased origination of new construction loans; however, it will fulfill its
existing funding commitments. (D) INVENTORIES Housing Projects and Land Held for Development and Sale A summary of housing projects is provided below: As ofDecember 31, 2007
    
    
    March 31, 2007Direct Construction
    
    $
    2,676,264
    
    
    $
    3,041,290Land Under Development
    
    
    3,678,042
    
    
    
    5,433,593Housing Projects
    
    $
    6,354,306
    
    
    $
    8,474,883
 For the three and nine months ended December 31, 2007, the Company recorded $502.9 million and
$1,492.4 million, respectively, in land-related impairments due to challenging market conditions.
For the three and nine months ended December 31, 2006, the Company recorded $205.4 million and
$235.4 million, respectively, in land-related impairments. Land-related impairments during the
three months ended December 31, 2007 represented 147 neighborhoods and land investments.
Land-related impairments during the nine months ended December 31, 12




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##### Table of Contents



2007 represented 316 neighborhoods and land investments, certain of which have been impaired more
than once. At December 31, 2007, the remaining carrying value of neighborhoods and land
investments for which an impairment was recorded in the three months ended December 31, 2007 was
$683.0 million. Land Held Under Option Agreements Not Owned and Other Land Deposits 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 December 31, 2007, the Company had 161 land option agreements. In accordance with the provisions of FIN 46, the Company is the primary beneficiary of $71.7
million and $152.9 million as of December 31, 2007 and March 31, 2007, respectively, of land, which
represents the remaining purchase price of the land. 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 December 31, 2007, 11 land option agreements were consolidated pursuant to
FIN 46. In addition to land options recorded pursuant to FIN 46, the Company determined that five land
option agreements represent financing arrangements pursuant to the provisions of SFAS 49, Product
Financing Arrangements (SFAS 49). As a result, the Company recorded $68.3 million and $90.5
million as of December 31, 2007 and March 31, 2007, 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 ofDecember 31, 2007
    
    
    March 31, 2007Cash Deposits included in:Land Held for Development and Sale
    
    $
    36,688
    
    
    $
    89,737Land Held Under Option Agreements Not Owned
    
    
    37,806
    
    
    
    38,642Total Cash Deposits in Inventory
    
    
    74,494
    
    
    
    128,379Letters of Credit
    
    
    1,493
    
    
    
    12,854Total Invested through Deposits or
Secured with Letters of Credit
    
    $
    75,987
    
    
    $
    141,233Total Purchase Price of Land Option Agreements
    
    $
    1,812,704
    
    
    $
    3,324,636
 In addition to deposits, the Company capitalizes pre-acquisition development costs related to
land held under option agreements. As of December 31, 2007 and March 31, 2007, pre-acquisition
costs recorded to land held for development and sale were $21.8 million and $48.0 million,
respectively. Also 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 intends to
sell within one year, which amounted to $395.9 million and $20.5 million as of December 31, 2007
and March 31, 2007, 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 $26.4 million and $87.6 million for the three and nine months ended December 31, 2007,
respectively, as compared to $138.0 million and $263.8 million for the three and nine months ended
December 31, 2006, respectively. 13




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##### Table of Contents



(E) GOODWILL A summary of changes in goodwill by segment for the nine months ended December 31, 2007 is
presented below: As of
    
    
    Goodwill
    
    
    Goodwill
    
    
    Goodwill
    
    
    As ofMarch 31, 2007
    
    
    Acquired
    
    
    Disposed
    
    
    Impairments
    
    
    December 31, 2007Home BuildingEast
    
    $
    27,945
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    27,945Southeast
    
    
    29,160
    
    
    
    
    
    
    
    
    
    
    
    (22,452
    )
    
    
    6,708Central
    
    
    7,654
    
    
    
    
    
    
    
    (595
    )
    
    
    (3,488
    )
    
    
    3,571Texas
    
    
    9,720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,720Northwest
    
    
    22,721
    
    
    
    
    
    
    
    
    
    
    
    (13,755
    )
    
    
    8,966Southwest
    
    
    24,301
    
    
    
    
    
    
    
    
    
    
    
    (21,627
    )
    
    
    2,674Other homebuilding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Home Building
    
    
    121,501
    
    
    
    
    
    
    
    (595
    )
    
    
    (61,322
    )
    
    
    59,584Financial Services
    
    
    8,952
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,952Other
    
    
    88,589
    
    
    
    2,598
    
    
    
    (1,516
    )
    
    
    
    
    
    
    89,671Total
    
    $
    219,042
    
    
    $
    2,598
    
    
    $
    (2,111
    )
    
    $
    (61,322
    )
    
    $
    158,207
 Goodwill for the Other segment at December 31, 2007 relates to the Companys home services
operations. Goodwill is tested for impairment at the reporting unit level on an annual basis
(January 1) or when management determines that due to certain circumstances the carrying amount of
goodwill may not be recoverable. In the quarter ended September 30, 2007, management determined
that events and circumstances had occurred that indicated the remaining goodwill balances within
the homebuilding reporting units of the segment may not be recoverable. These events included, but
were not limited to, the significant land-related impairments and write-offs taken across all
homebuilding segments except for Texas and an unprecedented disturbance within the mortgage markets
that made it more difficult for certain homebuilding customers to obtain mortgage financing. Based on these factors, homebuilding goodwill was evaluated for impairment during the second
quarter of fiscal year 2008. As a result of the impairment test, the Company recorded goodwill
impairments as outlined in the table above. 14




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##### Table of Contents



(F) INDEBTEDNESS A summary of the balances of short-term and long-term debt (debt instruments with original
maturities greater than one year) and weighted-average interest rates at December 31, 2007 and
March 31, 2007 is presented below. Due dates are presented in fiscal years. As ofDecember 31, 2007
    
    
    March 31, 2007Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageInterest
    
    

    
    
    
    
    InterestRate
    
    
    
    
    
    
    RateShort-term Debt:Centex
    
    $
    
    
    
    
    
    
    
    $
    1,807
    
    
    
    Financial ServicesFinancial Institutions
    
    
    569,081
    
    
    
    5.38
    %
    
    
    428,144
    
    
    
    5.56
    %Harwood Street Funding I, LLC Secured
Liquidity Notes
    
    
    
    
    
    
    
    
    
    
    1,174,896
    
    
    
    5.38
    %Consolidated Short-term Debt
    
    
    569,081
    
    
    
    
    
    
    
    1,604,847Long-term Debt:CentexMedium-term Note Programs
    
    
    
    
    
    
    
    
    
    
    170,000
    
    
    
    5.61
    %Senior Notes, due through 2017
    
    
    3,619,137
    
    
    
    5.89
    %
    
    
    3,708,976
    
    
    
    5.89
    %Other Indebtedness, due through 2018
    
    
    4,099
    
    
    
    7.34
    %
    
    
    23,642
    
    
    
    6.57
    %3,623,236
    
    
    
    
    
    
    
    3,902,618Financial ServicesHarwood Street Funding I, LLC Variable-Rate
Subordinated Extendable Certificates
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    7.32
    %Consolidated Long-term Debt
    
    
    3,623,236
    
    
    
    
    
    
    
    3,962,618Total Debt
    
    $
    4,192,317
    
    
    
    
    
    
    $
    5,567,465
 As of March 31, 2007, Centexs short-term debt consisted of land and land-related acquisition
notes of $1.8 million. 15




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##### Table of Contents



The weighted-average interest rates for short-term and long-term debt during the nine months
ended December 31, 2007 and 2006 were: For the Nine Months Ended December 31,2007
    
    
    2006Short-term Debt:Centex
    
    
    
    
    
    
    5.33
    %Financial Services
    
    
    6.05
    %
    
    
    3.57
    %Long-term Debt:CentexMedium-term Note Programs
    
    
    5.68
    %
    
    
    6.07
    %Senior Notes
    
    
    5.86
    %
    
    
    5.85
    %Other Indebtedness
    
    
    6.69
    %
    
    
    6.05
    %Subordinated Debentures
    
    
    
    
    
    
    8.75
    %Financial ServicesHarwood Street Funding I, LLC Variable-Rate
Subordinated Extendable Certificates
    
    
    7.42
    %
    
    
    7.31
    %
 Maturities of Centexs and Financial Services long-term debt during the next five years
ending March 31 of each year and thereafter are: FinancialCentex
    
    
    Services
    
    
    Total2008
    
    $
    300,637
    
    
    $
    
    
    
    $
    300,6372009
    
    
    151,790
    
    
    
    
    
    
    
    151,7902010
    
    
    225,411
    
    
    
    
    
    
    
    225,4112011
    
    
    700,255
    
    
    
    
    
    
    
    700,2552012
    
    
    349,422
    
    
    
    
    
    
    
    349,422Thereafter
    
    
    1,895,721
    
    
    
    
    
    
    
    1,895,721$
    3,623,236
    
    
    $
    
    
    
    $
    3,623,236
 Under debt covenants contained in the Companys multi-bank revolving credit facility, the
Company is required to maintain compliance with certain financial covenants. Material covenants
include a maximum leverage ratio and a minimum tangible net worth. 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, the Companys
committed bank warehouse credit facility contains various affirmative and negative covenants that
are generally customary for a facility of this type. At December 31, 2007, the Company was in
compliance with its debt covenants. The Company obtained a waiver for the third quarter of fiscal year 2008, waiving any event of
default under its financial covenants caused by the recognition of a deferred income tax asset
valuation allowance. The Company will seek an amendment to its multi-bank revolving credit facility in the fourth
quarter of fiscal year 2008, which will include modifications to the covenant provisions included
in the credit facility. The amendment may also include, among other things, a reduction in the
commitment amount under this facility and a borrowing base formula to calculate credit
availability, triggered only if the Companys senior unsecured debt falls below investment grade as
rated by two out of the three principal rating agencies. 16




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##### Table of Contents



Credit Facilities The Companys existing credit facilities and available borrowing capacity as of December 31,
2007 are summarized below: Existing Credit
    
    
    AvailableFacilities
    
    
    CapacityCentexMulti-Bank Revolving Credit FacilityRevolving Credit
    
    $
    1,250,000
    
    
    $
    1,250,000Letters of Credit
    
    
    835,000
    
    
    
    416,9452,085,000
    
    
    
    1,666,945
    (1)Financial ServicesSecured Credit Facilities
    
    
    457,000
    
    
    
    57,274
    (2)Other Facilities
    
    
    250,000
    
    
    
    
    (3)707,000
    
    
    
    57,274$
    2,792,000
    
    
    $
    1,724,219
  (1)
    
    This is an unsecured, committed, multi-bank revolving credit facility, maturing in July 2010,
that serves as funding for general corporate purposes and provides $835 million of letter of
credit capacity. As of December 31, 2007, there were no amounts outstanding under the
revolving credit facility.(2)
    
    CTX Mortgage Company, LLC maintains $457 million of secured, committed mortgage warehouse
facilities.(3)
    
    There will be no additional borrowings under these facilities. Amounts outstanding of $169.4
million as of December 31, 2007 will be repaid using the proceeds from the sale of the loans
or the underlying collateral or repaid by Financial Services. Funding of Mortgage Loans CTX Mortgage Company, LLC has 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 bank 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. The
termination of HSF-I was entirely due to these external market factors and not to any quality or
performance issues related to HSF-I or its underlying collateral. CTX Mortgage Company, LLC is currently funding its mortgage originations primarily through
borrowings under a committed bank warehouse credit facility and a mortgage loan sale agreement.
The warehouse facility generally allows CTX Mortgage Company, LLC to sell to the bank, on a
revolving basis, mortgage loans up to an aggregate specified amount. Simultaneously, the bank has
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
facility are conforming loans, FHA/VA eligible loans, and jumbo loans meeting conforming
underwriting guidelines except as to the size of the loan. 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 Standard & Poors (S&P) or Fitch or below Ba1 by Moodys
Investors Service (Moodys). The Companys long-term unsecured debt is currently rated BBB- by
S&P, BBB by Fitch and Ba1 by Moodys. CTX Mortgage Company, LLC may also seek to enter into
additional mortgage warehouse facilities with other lenders. Borrowings under the warehouse
facility constitute short-term debt of Financial Services. 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 records a liability for its estimated losses for these obligations and such amount is
included in its loan origination reserve. 17




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##### 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 the Company
may be required to fund Financial Services loan originations and make additional capital
contributions to Financial Services. Although the Company believes that Financial Services could
broker loans to other mortgage companies 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. HSF-I was a variable interest entity of which the Company was the primary beneficiary and that
was consolidated in the Companys financial statements. Prior to August 2007, substantially all of
the mortgage loans originated by CTX Mortgage Company, LLC were funded through the sale of such
mortgage loans to HSF-I under the terms of a mortgage loan purchase agreement. HSF-I obtained the
funds needed to purchase eligible mortgage loans from CTX Mortgage Company, LLC by issuing (1)
short-term secured liquidity notes, (2) medium-term debt and (3) subordinated certificates. As of
December 31, 2007, HSF-I had no outstanding secured liquidity notes, medium-term debt or
subordinated certificates. All of HSF-Is outstanding secured liquidity notes were redeemed in
accordance with their scheduled maturity dates, and in November 2007, all outstanding subordinated
certificates were redeemed. CTX Mortgage Company, LLC and its related companies sold $1.95 billion and $2.31 billion of
mortgage loans to investors during the three months ended December 31, 2007 and 2006, respectively,
and $7.03 billion and $7.56 billion during the nine months ended December 31, 2007 and 2006,
respectively. CTX Mortgage Company, LLC and its related companies recognized gains on sales of
mortgage loans and related derivative activity of $21.8 million and $36.4 million during the three
months ended December 31, 2007 and 2006, respectively, and $91.2 million and $122.8 million during
the nine months ended December 31, 2007 and 2006, 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. A summary of the Companys Home Building joint ventures is presented below: As of December 31, 2007
    
    
    As of March 31, 2007Centexs
    
    
    
    
    
    
    
    
    
    
    CentexsShare
    
    
    
    
    
    
    
    
    
    
    ShareActive (1)
    
    
    Investments
    
    
    of Debt
    
    
    Active (1)
    
    
    Investments
    
    
    of DebtUnleveraged Joint Ventures
    
    
    25
    
    
    $
    31,655
    
    
    $
    
    
    
    
    28
    
    
    $
    33,369
    
    
    $
    Joint Ventures with Debt:
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    21Limited Maintenance
Guarantee (2) (3) (4)
    
    
    
    
    
    
    87,866
    
    
    
    50,833
    
    
    
    
    
    
    
    108,057
    
    
    
    162,425Repayment Guarantee (2) (5)
    
    
    
    
    
    
    2,513
    
    
    
    14,142
    
    
    
    
    
    
    
    2,247
    
    
    
    16,045Completion Guarantee (4)
    
    
    
    
    
    
    106,513
    
    
    
    172,783
    
    
    
    
    
    
    
    126,469
    
    
    
    209,927No Recourse or Guarantee
    
    
    
    
    
    
    12,547
    
    
    
    24,000
    
    
    
    
    
    
    
    11,502
    
    
    
    24,00043
    
    
    $
    241,094
    
    
    $
    261,758
    
    
    
    49
    
    
    $
    281,644
    
    
    $
    412,397
  (1)
    
    The number of active 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 24 and 28 of the active joint ventures
as of December 31, 2007 and March 31, 2007, respectively.(2)
    
    These amounts represent the Companys maximum exposure related to the joint ventures debt at
each respective date.(3)
    
    The Company has guaranteed that certain of the joint ventures will maintain a specified loan
to value ratio. For certain joint ventures, the Company has 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. For certain
joint ventures, the Company has contributed additional capital in order to complete land
development.(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. 18




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##### Table of Contents



Total joint venture debt outstanding as of December 31, 2007 and March 31, 2007 was $571.9
million and $1.0 billion, 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. During the three months ended December 31, 2007, the lender to certain of the Companys joint
ventures has notified the Company that it believes the joint ventures are in default of certain
joint venture loan agreements as a result of the Companys joint venture partner not complying with
all aspects of the joint ventures loan agreements. The lender has not taken any action against
the joint ventures or the Company at this time. Additionally, a lender to two of the Companys
other joint ventures has notified the Company that it believes the joint ventures are in default of
their joint venture loan agreements for not meeting their contractual obligations. The Company is
currently in discussions with the lender. Based upon the terms and debt amounts outstanding for
these joint ventures and the terms of the joint venture agreements, the Company does not believe
its exposure related to these joint venture defaults will be material to its financial position or
results of operations. A summary of the estimated maturities of our 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 December 31, 2007, and the Company has not
projected the early repayment of joint venture debt. For the Fiscal Years EndedMarch 31,2008
    
    $
    52,5112009
    
    
    124,1032010
    
    
    34,7822011
    
    
    25,6012012
    
    
    24,761Thereafter
    
    
    $
    261,758
 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 the Home Building line of business, 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. The Company does not expect 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 December 31,
2007 and March 31, 2007 is presented below (dollars in millions): As of December 31, 2007
    
    
    As of March 31, 2007Letters of Credit
    
    
    Surety Bonds
    
    
    Letters of Credit
    
    
    Surety BondsHome Building
    
    $
    180.3
    
    
    $
    1,825.6
    (1)
    
    $
    209.1
    
    
    $
    1,542.3Financial Services
    
    
    25.7
    
    
    
    13.1
    
    
    
    0.7
    
    
    
    10.7Other
    
    
    187.5
    
    
    
    1.7
    
    
    
    94.4
    
    
    
    1.7Discontinued Operations (2)
    
    
    25.0
    
    
    
    3,544.0
    
    
    
    38.1
    
    
    
    4,161.8$
    418.5
    
    
    $
    5,384.4
    
    
    $
    342.3
    
    
    $
    5,716.5
  (1)
    
    The Company estimates that $670.7 million of work remains to be performed on these projects
as of December 31, 2007.(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 $3.54 billion at December 31,
2007, although the risk of liability with respect to these surety bonds declines as the
relevant 19




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##### Table of Contents



construction projects are performed. At December 31, 2007, the Company estimates
that $726.8 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. 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), A1 (Moodys) credit
rating. The obligation of such financial institution under the back-up indemnity is $1.10
billion as of December 31, 2007, 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 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 5, 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 December 31, 2007 and March 31, 2007, the Company had recorded $304.1
million and $280.2 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,
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 nine months
ended December 31, 2007 and the year ended March 31, 2007: December 31, 2007
    
    
    March 31, 2007
    (1)Balance at Beginning of Period
    
    $
    44,293
    
    
    $
    47,199Warranties Issued
    
    
    24,634
    
    
    
    42,422Settlements Made
    
    
    (32,762
    )
    
    
    (45,228
    )Changes in Liability of Pre-Existing
Warranties, Including Expirations
    
    
    (863
    )
    
    
    (100
    )Balance at End of Period
    
    $
    35,302
    
    
    $
    44,293
  (1)
    
    For the nine months ended December 31, 2006, warranties issued, settlements
made and changes in liability of pre-existing warranties were $37,008, $(37,146) and
$(100), respectively. 20




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##### Table of Contents



Financial Services has established a liability for anticipated losses associated with mortgage
loans originated. Changes in Financial Services liability are as follows for the nine months
ended December 31, 2007 and the year ended March 31, 2007: December 31, 2007
    
    
    March 31, 2007
    (1)Balance at Beginning of Period
    
    $
    16,863
    
    
    $
    18,500Provision for Losses
    
    
    1,270
    
    
    
    2,160Settlements
    
    
    (6,752
    )
    
    
    (1,178
    )Changes in Pre-Existing Reserves
    
    
    4,614
    
    
    
    (2,619
    )Balance at End of Period
    
    $
    15,995
    
    
    $
    16,863
   (1)
    
    For the nine months ended December 31, 2006, provisions for losses,
settlements and changes in pre-existing reserves were $1,561, $(716) and $(2,355),
respectively. Forward Trade and Interest Rate Lock Commitments Forward trade commitments represent the fair value of 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 mortgagors that are expected to close. Fair value
is estimated using quoted market prices for current dealer commitments to purchase loans. At
December 31, 2007, the Company had $221.4 million of commitments to deliver mortgages to investors
against interest rate lock commitments. In addition, at December 31, 2007, the Company had
commitments to deliver approximately $628.0 million of mortgage loan inventory to investors. Interest rate lock commitments (IRLCs) represent the fair value of individual mortgagor
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. Fair value is
estimated using quoted market prices on fixed loan commitments in the mortgage pipeline. At
December 31, 2007, the Company had loan commitments to prospective mortgagors of $238.5 million. For additional information on forward trade commitments and interest rate lock commitments,
please refer to 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. 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. In January 2003, the Company received a request for information from the United States
Environmental Protection Agency (EPA) pursuant to Section 308 of the Clean Water Act seeking
information about storm water pollution prevention practices at projects that the Company had
completed or were building. Subsequently, the EPA limited its request to Home Buildings operations
at 30 neighborhoods. Home Building has provided the requested information and the United States
Department of Justice (the Justice Department), acting on behalf of the EPA, has asserted that
some of these and certain other neighborhoods have violated regulatory requirements applicable to
storm water discharges, and that injunctive relief and civil penalties may be warranted. Home
Building believes it has defenses to the allegations made by the EPA and is exploring methods of
settling this matter. In any settlement, the Justice Department will want the Company to pay
civil penalties and sign a consent decree affecting the Companys storm water pollution prevention
practices at construction sites. 21




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##### Table of Contents



(H) COMPREHENSIVE INCOME A summary of comprehensive income is presented below: For the Three Months Ended
    
    
    For the Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net Earnings (Loss)
    
    $
    (975,188
    )
    
    $
    (228,146
    )
    
    $
    (1,746,980
    )
    
    $
    69,511Other Comprehensive Income, net of Tax:Unrealized Loss on Hedging Instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,036Foreign
Currency Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Hedging Gain Reclassified to Net Earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,738
    )Comprehensive Income (Loss)
    
    $
    (975,188
    )
    
    $
    (228,146
    )
    
    $
    (1,746,980
    )
    
    $
    60,881
 The unrealized gain on hedging instruments represented the deferral in other comprehensive
income (loss) of the unrealized gain on interest rate swap agreements designated as cash flow
hedges. The accumulated other comprehensive income associated with Home Equitys hedging gains for
the nine months ended December 31, 2006 was reclassified to earnings from discontinued operations
and included in the gain on sale of Home Equity recorded in the second quarter of fiscal year 2007. (I) BUSINESS SEGMENTS As of December 31, 2007, 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
Virginia Southeast:Florida, Georgia (Atlanta only) and Tennessee Central:Indiana, Illinois, Michigan, Minnesota, Missouri, Ohio and Pennsylvania Texas:Texas Northwest:Colorado, Hawaii, Nevada (except Las Vegas), Northern California, Oregon,
Washington Southwest:Arizona, Southern California, Nevada (Las Vegas only), New Mexico Other homebuilding(1)  (1)
    
    Other homebuilding includes projects that the Company plans to build-out and
liquidate, and ancillary businesses (including framing and holding companies)
conducting business in the following states: Florida, North Carolina, New Hampshire
and Texas. In addition, Other homebuilding includes amounts consolidated under the
caption land held under option agreements not owned and capitalized interest for all
regions. The Companys mortgage lending, title agency services and insurance products represent one
reporting segment, Financial Services. Our home team service operations have been combined with
our Other segment. In fiscal year 2007, the Company completed the sale of Construction Services and Home Equity.
For additional information regarding the sale of these entities, 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 purchase and development of land or lots and
the construction and sale of detached and attached single-family homes and land or lots. During
the three months ended December 31, 2007, approximately 80% of the homes closed were single-family,
detached homes. Included in Home Buildings loss from unconsolidated entities and other for the
three and nine months ended December 31, 2007 is the Companys share of joint venture impairments
totaling $24.9 million and $88.5 million, respectively. During the three and nine months ended
December 31, 2006, the Company recorded $96.4 million and $106.9 million, respectively, as its
share of joint venture impairments. 22




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##### Table of Contents



Financial Services Financial Services operations consist primarily of mortgage lending, title agency services
and the sale of title insurance and other insurance products. These activities include mortgage
origination and other related services for homes sold by the Companys subsidiaries and others.
Financial Services revenues include interest income of $14.6 million and $32.0 million for the
three months, and $61.8 million and $91.2 million for the nine months, ended December 31, 2007 and
2006, respectively. The majority of the Companys interest income in each year is earned by the
Financial Services segment. 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 expenses,
including Home Building corporate-related general and administrative expenses and interest income.
Also included in the Other segment are the Companys home services operations, which are not
material for purposes of segment reporting. The following are components of the Other segments loss from continuing operations before
income tax: For the Three Months Ended
    
    
    For the Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating Earnings (Loss) from
Home Services Operations
    
    $
    1,458
    
    
    $
    (1,226
    )
    
    $
    4,166
    
    
    $
    (4,324
    )Interest Income and Other Income
    
    
    1,320
    
    
    
    
    
    
    
    24,145
    
    
    
    Corporate General and Administrative Expense
    
    
    (37,850
    )
    
    
    (72,369
    )
    
    
    (117,371
    )
    
    
    (172,137
    )Other
    
    
    125
    
    
    
    (67
    )
    
    
    348
    
    
    
    2,532$
    (34,947
    )
    
    $
    (73,662
    )
    
    $
    (88,712
    )
    
    $
    (173,929
    )
 A summary of the revenues and earnings or loss of the Companys segments is as follows: For the Three Months Ended December 31,2007
    
    
    2006Earnings
    
    
    Earnings
    
    
    
    
    
    
    Earnings
    
    
    Earnings(Loss)
    
    
    (Loss) from
    
    
    
    
    
    
    (Loss)
    
    
    (Loss) fromfrom
    
    
    Continuing
    
    
    
    
    
    
    from
    
    
    ContinuingUnconsolidated
    
    
    Operations
    
    
    
    
    
    
    Unconsolidated
    
    
    OperationsEntities and
    
    
    Before
    
    
    
    
    
    
    Entities and
    
    
    BeforeRevenues
    
    
    Other
    
    
    Income Tax
    
    
    Revenues
    
    
    Other
    
    
    Income TaxHome
Building
East
    
    $
    376,321
    
    
    $
    (7,046
    )
    
    $
    (47,892
    )
    
    $
    518,342
    
    
    $
    355
    
    
    $
    (31,231
    )Southeast
    
    
    206,755
    
    
    
    729
    
    
    
    (127,261
    )
    
    
    340,574
    
    
    
    2,739
    
    
    
    9,615Central
    
    
    184,376
    
    
    
    (1,379
    )
    
    
    (39,877
    )
    
    
    246,275
    
    
    
    1,506
    
    
    
    (27,940
    )Texas
    
    
    225,290
    
    
    
    87
    
    
    
    9,343
    
    
    
    276,819
    
    
    
    146
    
    
    
    22,595Northwest
    
    
    373,234
    
    
    
    (27,723
    )
    
    
    (199,612
    )
    
    
    507,520
    
    
    
    (39,308
    )
    
    
    (81,885
    )Southwest
    
    
    411,110
    
    
    
    (26,242
    )
    
    
    (186,447
    )
    
    
    603,057
    
    
    
    (16,591
    )
    
    
    (128,047
    )Other homebuilding
    
    
    33,998
    
    
    
    1,049
    
    
    
    (33,519
    )
    
    
    94,664
    
    
    
    4,988
    
    
    
    (5,509
    )Total Home Building
    
    
    1,811,084
    
    
    
    (60,525
    )
    
    
    (625,265
    )
    
    
    2,587,251
    
    
    
    (46,165
    )
    
    
    (242,402
    )Financial Services
    
    
    62,203
    
    
    
    
    
    
    
    (60,484
    )
    
    
    107,577
    
    
    
    
    
    
    
    16,496Other
    
    
    32,800
    
    
    
    
    
    
    
    (34,947
    )
    
    
    31,388
    
    
    
    
    
    
    
    (73,662
    )Total
    
    $
    1,906,087
    
    
    $
    (60,525
    )
    
    $
    (720,696
    )
    
    $
    2,726,216
    
    
    $
    (46,165
    )
    
    $
    (299,568
    )
 23




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##### Table of Contents



For the Nine Months Ended December 31,2007
    
    
    2006Earnings
    
    
    Earnings
    
    
    
    
    
    
    Earnings
    
    
    Earnings(Loss)
    
    
    (Loss) from
    
    
    
    
    
    
    (Loss)
    
    
    (Loss) fromfrom
    
    
    Continuing
    
    
    
    
    
    
    from
    
    
    ContinuingUnconsolidated
    
    
    Operations
    
    
    
    
    
    
    Unconsolidated
    
    
    OperationsEntities and
    
    
    Before
    
    
    
    
    
    
    Entities and
    
    
    BeforeRevenues
    
    
    Other
    
    
    Income Tax
    
    
    Revenues
    
    
    Other
    
    
    Income TaxHome BuildingEast
    
    $
    1,225,327
    
    
    $
    (9,026
    )
    
    $
    (12,830
    )
    
    $
    1,635,305
    
    
    $
    1,809
    
    
    $
    127,304Southeast
    
    
    680,734
    
    
    
    (22,336
    )
    
    
    (293,366
    )
    
    
    1,120,665
    
    
    
    5,944
    
    
    
    93,337Central
    
    
    591,384
    
    
    
    542
    
    
    
    (98,345
    )
    
    
    819,717
    
    
    
    2,062
    
    
    
    (18,119
    )Texas
    
    
    716,329
    
    
    
    519
    
    
    
    43,187
    
    
    
    788,872
    
    
    
    344
    
    
    
    66,490Northwest
    
    
    1,164,610
    
    
    
    (50,860
    )
    
    
    (427,460
    )
    
    
    1,549,103
    
    
    
    (28,128
    )
    
    
    69,246Southwest
    
    
    1,208,604
    
    
    
    (32,646
    )
    
    
    (782,190
    )
    
    
    1,744,098
    
    
    
    (25,629
    )
    
    
    (136,083
    )Other homebuilding
    
    
    133,400
    
    
    
    1,447
    
    
    
    (178,733
    )
    
    
    237,375
    
    
    
    7,122
    
    
    
    16,071Total Home Building
    
    
    5,720,388
    
    
    
    (112,360
    )
    
    
    (1,749,737
    )
    
    
    7,895,135
    
    
    
    (36,476
    )
    
    
    218,246Financial Services
    
    
    240,869
    
    
    
    
    
    
    
    (99,597
    )
    
    
    350,896
    
    
    
    
    
    
    
    65,747Other
    
    
    102,247
    
    
    
    
    
    
    
    (88,712
    )
    
    
    99,673
    
    
    
    
    
    
    
    (173,929
    )Total
    
    $
    6,063,504
    
    
    $
    (112,360
    )
    
    $
    (1,938,046
    )
    
    $
    8,345,704
    
    
    $
    (36,476
    )
    
    $
    110,064
 A summary of the impairments and write-offs of the Companys segments is as follows: For the Three Months Ended December 31,2007
    
    
    2006Goodwill
    
    
    Land-related
    
    
    Land-related
    
    
    Goodwill
    
    
    Land-related
    
    
    Land-relatedImpairments
    
    
    Impairments
    
    
    Write-offs
    
    
    Impairments
    
    
    Impairments
    
    
    Write-offsHome Building
East
    
    $
    
    
    
    $
    41,490
    
    
    $
    10,647
    
    
    $
    
    
    
    $
    55,957
    
    
    $
    31,787Southeast
    
    
    
    
    
    
    115,793
    
    
    
    830
    
    
    
    
    
    
    
    9,888
    
    
    
    6,606Central
    
    
    
    
    
    
    26,219
    
    
    
    3,894
    
    
    
    
    
    
    
    16,224
    
    
    
    15,445Texas
    
    
    
    
    
    
    363
    
    
    
    904
    
    
    
    
    
    
    
    298
    
    
    
    370Northwest
    
    
    
    
    
    
    169,244
    
    
    
    5,204
    
    
    
    
    
    
    
    58,864
    
    
    
    31,662Southwest
    
    
    
    
    
    
    120,764
    
    
    
    4,934
    
    
    
    
    
    
    
    64,153
    
    
    
    52,106Other homebuilding
    
    
    
    
    
    
    29,076
    
    
    
    (47
    )
    
    
    
    
    
    
    (19
    )
    
    
    26Total Home Building
    
    
    
    
    
    
    502,949
    
    
    
    26,366
    
    
    
    
    
    
    
    205,365
    
    
    
    138,002Financial Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    502,949
    
    
    $
    26,366
    
    
    $
    
    
    
    $
    205,365
    
    
    $
    138,002
 For the Nine Months Ended December 31,2007
    
    
    2006Goodwill
    
    
    Land-related
    
    
    Land-related
    
    
    Goodwill
    
    
    Land-related
    
    
    Land-relatedImpairments
    
    
    Impairments
    
    
    Write-offs
    
    
    Impairments
    
    
    Impairments
    
    
    Write-offsHome Building
East
    
    $
    
    
    
    $
    59,599
    
    
    $
    26,252
    
    
    $
    
    
    
    $
    55,957
    
    
    $
    37,516Southeast
    
    
    22,452
    
    
    
    201,262
    
    
    
    14,685
    
    
    
    
    
    
    
    16,028
    
    
    
    21,183Central
    
    
    3,488
    
    
    
    68,066
    
    
    
    12,432
    
    
    
    
    
    
    
    16,224
    
    
    
    25,329Texas
    
    
    
    
    
    
    363
    
    
    
    1,768
    
    
    
    
    
    
    
    298
    
    
    
    389Northwest
    
    
    13,755
    
    
    
    375,121
    
    
    
    18,357
    
    
    
    
    
    
    
    58,864
    
    
    
    50,175Southwest
    
    
    21,627
    
    
    
    615,983
    
    
    
    13,929
    
    
    
    
    
    
    
    88,037
    
    
    
    127,368Other homebuilding
    
    
    
    
    
    
    172,034
    
    
    
    131
    
    
    
    
    
    
    
    (19
    )
    
    
    1,828Total Home Building
    
    
    61,322
    
    
    
    1,492,428
    
    
    
    87,554
    
    
    
    
    
    
    
    235,389
    
    
    
    263,788Financial Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    61,322
    
    
    $
    1,492,428
    
    
    $
    87,554
    
    
    $
    
    
    
    $
    235,389
    
    
    $
    263,788
 24




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##### Table of Contents



A summary of assets by segment is as follows: As ofDecember 31, 2007
    
    
    March 31, 2007Inventory
    
    
    Total Assets
    
    
    Inventory
    
    
    Total AssetsHome BuildingEast
    
    $
    1,336,744
    
    
    $
    1,542,762
    
    
    $
    1,477,904
    
    
    $
    1,663,815Southeast
    
    
    1,421,822
    
    
    
    1,532,284
    
    
    
    1,703,614
    
    
    
    1,821,660Central
    
    
    426,840
    
    
    
    455,001
    
    
    
    606,508
    
    
    
    652,799Texas
    
    
    610,630
    
    
    
    629,340
    
    
    
    605,200
    
    
    
    630,396Northwest
    
    
    1,314,516
    
    
    
    1,380,767
    
    
    
    1,725,847
    
    
    
    1,829,961Southwest
    
    
    1,437,455
    
    
    
    1,537,078
    
    
    
    2,112,369
    
    
    
    2,304,415Other homebuilding
    
    
    454,615
    
    
    
    1,439,434
    
    
    
    704,868
    
    
    
    1,212,444Total Home Building
    
    
    7,002,622
    
    
    
    8,516,666
    
    
    
    8,936,310
    
    
    
    10,115,490Financial Services
    
    
    12,850
    
    
    
    970,168
    
    
    
    8,747
    
    
    
    1,915,082Other (1)
    
    
    2,113
    
    
    
    144,083
    
    
    
    6,022
    
    
    
    1,169,361Total
    
    $
    7,017,585
    
    
    $
    9,630,917
    
    
    $
    8,951,079
    
    
    $
    13,199,933
  (1)
    
    The Companys consolidated deferred income tax asset valuation allowance is reflected in the
Other segment. (J) INCOME TAXES The Company recognized an income tax provision of $254.5 million and an income tax benefit of
$57.2 million for the three months ended December 31, 2007 and 2006, respectively. The Company
recognized an income tax benefit of $187.7 million for the nine months ended December 31, 2007
versus income tax expense of $99.6 million for the same period of the prior year. The significant
changes in the Companys effective tax rate reflect the establishment of a deferred income tax
asset valuation allowance, the recognition of a liability for unrecognized tax benefits and related
accrued interest, nondeductible compensation, a reduction of the domestic manufacturing deduction
and a decrease in pre-tax earnings. The Companys deferred income tax asset was $626.1 million and $489.8 million as of December
31, 2007 and March 31, 2007, respectively. The increase in the deferred income tax asset was due
primarily to land-related impairments, which were partially offset by
a $500 million deferred tax asset valuation
allowance recorded during the three months ended December 31, 2007. In accordance with the provisions of SFAS 109, the Company assesses, on a quarterly basis, the
realizability of its deferred income tax asset. 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 income tax asset will not be realized. Realization of deferred income 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 $500 million of the Companys deferred income tax
asset 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 established a valuation allowance, which increased losses from continuing
operations by $500 million, or $4.07 per share, during the three months ended December 31, 2007. Realization of the remaining deferred income tax asset of $626.1 million as of December 31,
2007 is not assured. The valuation allowance may be increased or decreased as conditions change or
if the Company is unable to implement certain tax planning strategies. On April 1, 2007, the Company 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. The total amount of gross unrecognized tax benefits as of April 1, 2007 was
$341.4 million (which excludes interest, penalties, and the tax benefit relating to the
deductibility of interest and state income tax). The total amount of unrecognized tax benefits
that, if recognized, would affect the Companys effective tax rate was $248.8 million as of April
1, 2007. Since the adoption of FIN 48 on April 1, 2007, there have been no material changes to the
components of the Companys total unrecognized tax benefit, including the amounts that, if
recognized, would affect the Companys 25




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##### Table of Contents



effective tax rate. 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
relating to 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 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. The IRS has commenced an examination of our federal
tax returns for fiscal years 2005 and 2006. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in
the financial statements as a component of the income tax provision that is consistent with the
Companys historical accounting policy. After the adoption of FIN 48, the total amount of gross
accrued interest and penalties was $112.3 million. As of December 31, 2007, gross accrued interest
and penalties was $145.9 million. For the three and nine months ended December 31, 2007, the
Company accrued $13.6 million and $33.6 million, respectively, of gross accrued interest and
penalties. 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 (forward trade
commitments) designated as fair value hedges to hedge the interest rate risk related to its
portfolio of mortgage loans held for sale. In addition, Financial Services enters into other
derivatives not designated as hedges. The following discussion summarizes our derivatives used to
manage the risk of interest rate fluctuations. Fair Value Hedges Financial Services enters into certain forward trade commitments designated as fair value
hedges to hedge the interest rate risk related to its portfolio of mortgage loans held for sale.
Accordingly, changes in the fair value of the forward trade commitments and the mortgage loans, for
which the hedge relationship is deemed effective, are recorded as an adjustment to earnings. To
the extent the hedge is effective, gains or losses in the value of the hedged loans due to interest
rate movement will be offset by an equal and opposite gain or loss in the value of the forward
trade commitment. This will result in no impact to earnings. To the extent the hedge contains
some ineffectiveness, the ineffectiveness is recognized immediately in earnings. The amount of
hedge ineffectiveness included in earnings was a gain of $0.5 million for the three months and a
loss of $10.7 million for the nine months ended December 31, 2007, respectively. For the three and
nine months ended December 31, 2006, the amount of hedge ineffectiveness included in earnings was a
gain of $4.0 million and $7.1 million, respectively. Other Derivatives 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 does not include future cash flows related to the
associated servicing of the loan or the value of any internally-developed intangible assets.
Subsequent changes in the fair value of the IRLCs are recorded as an adjustment to earnings. To offset the interest rate risk related to its IRLCs, Financial Services executes forward
trade commitments. Certain forward trade commitments are not designated as hedges and are
derivative instruments. 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 other derivatives resulted in a gain of $0.1
million for the three months and a loss of $1.6 million for the nine months ended December 31,
2007, respectively, compared to a loss of $0.2 million and $1.9 million for the three and nine
months ended December 31, 2006, respectively. 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 $15.5
million at December 31, 2007. 26




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##### Table of Contents



(L) DISCONTINUED OPERATIONS Condensed Financial Information In fiscal year 2007, the Company completed the sale of Home Equity and Construction Services
to unrelated third parties. Prior to their sale, Home Equity was included in the Financial
Services segment and Construction Services was a separate reporting segment. Home Equity and
Construction Services were reclassified to discontinued operations in March 2006 and March 2007,
respectively. All prior period information for these operations has been reclassified to
discontinued operations. A brief summary of each transaction is provided below. Home Equity On July 11, 2006, the Company sold Home Equity and received $518.5 million in cash, net of
related expenses and as adjusted for the settlement of post-closing adjustments. In connection
with the sale, all intercompany accounts with Home Equity were repaid and settled. As a result of
the sale, Home Equity is no longer a subsidiary of Centex Corporation and has changed its name to
Nationstar Mortgage, LLC. The purchase price was based on the book value of Home Equity, plus a
premium calculated in accordance with agreed upon formulas and procedures. Additionally, the Company has agreed to indemnify the purchaser of Home Equity for certain
contingencies. The Company does not believe such contingencies, if paid, will be material to the
Companys results of operations or financial position. The net gain on sale recorded in connection
with the sale of Home Equity, including post-closing adjustments recognized subsequent to December
31, 2006, is summarized below: For the Year EndedMarch 31, 2007Sales and Related Proceeds, net of Related Expenses
    
    $
    518,500Assets Sold
    
    
    (400,706
    )Intercompany Liability Paid by Buyer
    
    
    (11,795
    )Deferred Income
    
    
    (6,100
    )Hedging Gain
    
    
    25,466Pre-tax Gain on Sale
    
    
    125,365Income Tax Expense
    
    
    (50,390
    )Net Gain on Sale
    
    $
    74,975
 Construction Services On March 30, 2007, the Company sold Construction Services and received $344.8 million in cash,
net of related expenses and as adjusted for the estimated settlement of post-closing adjustments.
In connection with the sale, all intercompany accounts with Construction Services were repaid and
settled. As a result of the sale, Construction Services is no longer a subsidiary of Centex
Corporation and has changed its name to Balfour Beatty Construction Group, Inc. 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 (the Additional Payments). The Additional
Payments will be made in connection with an election with respect to this transaction pursuant to
Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the 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 Earnings. 27




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##### Table of Contents



The stock purchase agreement provided for a post-closing adjustment, which was intended to
reflect a final calculation of, among other things, the final stockholders equity balance of
Construction Services immediately prior to its sale. In connection with the sale, Construction
Services was required to pay a dividend to Centex Corporation equal to its stockholders equity.
The effect of the post-closing adjustment was estimated in the Companys calculation of the gain on
sale of Construction Services for the year ended March 31, 2007, but was subject to change. During
the first quarter of fiscal year 2008, the amount of the post-closing adjustment was determined,
which resulted in an additional $5.5 million pre-tax gain on sale. A summary of the Companys
calculation of the gain on sale of Construction Services is below: For the Nine Months Ended
    
    
    For the Year EndedDecember 31, 2007
    
    
    March 31, 2007Sales and Related Proceeds, net of
Related Expenses
    
    $
    5,463
    
    
    $
    344,752Assets Sold
    
    
    
    
    
    
    Pre-tax Gain on Sale
    
    
    5,463
    
    
    
    344,752Income Tax Expense
    
    
    (2,087
    )
    
    
    (131,695
    )Net Gain on Sale
    
    $
    3,376
    
    
    $
    213,057
 Summarized Financial Information 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 Ended
    
    
    For the Nine Months EndedDecember 31,
    
    
    December 31,2007(1)
    
    
    2006(2)
    
    
    2007(1)
    
    
    2006 (2)Revenues
    
    $
    
    
    
    $
    558,234
    
    
    $
    
    
    
    $
    1,705,084Costs and Expenses
    
    
    
    
    
    
    (547,462
    )
    
    
    
    
    
    
    (1,723,657
    )Earnings from Unconsolidated Entities
and Other
    
    
    
    
    
    
    246
    
    
    
    
    
    
    
    612Earnings (Loss) Before Income Taxes
    
    
    
    
    
    
    11,018
    
    
    
    
    
    
    
    (17,961
    )Provision (Benefit) for Income Taxes
    
    
    
    
    
    
    3,865
    
    
    
    
    
    
    
    (6,623
    )Gain on Sale, net of Tax
    
    
    
    
    
    
    7,046
    
    
    
    3,376
    
    
    
    70,344$
    
    
    
    $
    14,199
    
    
    $
    3,376
    
    
    $
    59,006
  (1)
    
    Includes Construction Services only.(2)
    
    Includes Construction Services and Home Equity. (M) SUBSEQUENT EVENTS In the fourth quarter of fiscal year 2008, the Company will seek an amendment to its
multi-bank revolving credit facility, which will include modifications to the covenant provisions
included in the credit facility. The amendment may also include, among other things, a reduction
in the commitment amount under this facility and a borrowing base formula to calculate credit
availability, triggered only if the Companys senior unsecured debt falls below investment grade as
rated by two out of the three principal rating agencies. 28




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##### 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 and nine months ended December 31, 2007 were
materially affected by continuing adverse conditions impacting our homebuilding and mortgage
lending operations. The market conditions continued to deteriorate significantly during the three
and nine months ended December 31, 2007, and it is uncertain when they will improve. A summary of
our results of operations by line of business is as follows (dollars in thousands): For the Three Months Ended December 31,2007
    
    
    2006
    
    
    ChangeRevenuesHome Building
    
    $
    1,811,084
    
    
    $
    2,587,251
    
    
    
    (30.0
    %)Financial Services
    
    
    62,203
    
    
    
    107,577
    
    
    
    (42.2
    %)Other
    
    
    32,800
    
    
    
    31,388
    
    
    
    4.5
    %Total
    
    $
    1,906,087
    
    
    $
    2,726,216
    
    
    
    (30.1
    %)Earnings (Loss) from Continuing Operations
Before Income TaxesHome Building
    
    $
    (625,265
    )
    
    $
    (242,402
    )
    
    
    157.9
    %Financial Services
    
    
    (60,484
    )
    
    
    16,496
    
    
    
    (466.7
    %)Other
    
    
    (34,947
    )
    
    
    (73,662
    )
    
    
    (52.6
    %)Total
    
    $
    (720,696
    )
    
    $
    (299,568
    )
    
    
    140.6
    %
 For the Nine Months Ended December 31,2007
    
    
    2006
    
    
    ChangeRevenuesHome Building
    
    $
    5,720,388
    
    
    $
    7,895,135
    
    
    
    (27.5
    %)Financial Services
    
    
    240,869
    
    
    
    350,896
    
    
    
    (31.4
    %)Other
    
    
    102,247
    
    
    
    99,673
    
    
    
    2.6
    %Total
    
    $
    6,063,504
    
    
    $
    8,345,704
    
    
    
    (27.3
    %)Earnings (Loss) from Continuing Operations
Before Income TaxesHome Building
    
    $
    (1,749,737
    )
    
    $
    218,246
    
    
    
    (901.7
    %)Financial Services
    
    
    (99,597
    )
    
    
    65,747
    
    
    
    (251.5
    %)Other
    
    
    (88,712
    )
    
    
    (173,929
    )
    
    
    (49.0
    %)Total
    
    $
    (1,938,046
    )
    
    $
    110,064
    
    
    
    (1,860.8
    %)
 Beginning in fiscal year 2006, many U.S. housing markets began to experience a significant
downturn, which directly affected, and continues to affect, 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:  
    increased inventory of new and existing homes for sale, including homes in
foreclosure,
    reduced availability and increased cost of mortgage financing due to the significant
mortgage market disruption in recent periods,
    a decrease in the 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,
    a decline in homebuyer demand due to lower consumer confidence in the consumer real
estate market and an inability of many homebuyers to sell their existing homes, and
    pricing pressures resulting from the need for home prices to meet FHA and other
conforming loan limits and the imbalance between housing supply and housing demand as
evidenced by homebuilders offering 29




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##### Table of Contents



significant discounts and sales incentives to homebuyers and seeking to liquidate unsold
inventories in order to generate cash. The inventory of new and existing homes for sale remains high as homebuilders have continued
to build unsold homes and foreclosures continue to increase. The hesitancy in homebuyer demand can
be attributed to concerns of prospective homebuyers that prices will continue to decline and, in
fact, the excess supply of homes for sale and the need for builders to generate cash have caused
homebuilders and other home sellers to reduce prices. Other prospective homebuyers have been
unable to sell their existing homes. Moreover, during 2007, the mortgage markets experienced a
significant disruption, which led to an unprecedented combination of reduced investor demand for
mortgage loans and mortgage-backed securities, tightened credit requirements for homebuyers,
reduced mortgage loan liquidity and increased credit risk premiums. As a result, prospective
borrowers experienced more difficulty or more 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 impacted Home Buildings operating results for the nine
months ended December 31, 2007 as evidenced by the following:  
    a $2,174.7 million decrease in homebuilding revenues, net of discounts,
    $1,492.4 million in land-related impairments,
    $88.5 million in our share of joint ventures impairments,
    $87.6 million in write-offs of land deposits and pre-acquisition costs, and
    $61.3 million in goodwill impairments. Revenues for the three and nine months ended December 31, 2007 decreased 30.1% and 27.3%,
respectively, when compared to the same periods of the prior year. Earnings (loss) from continuing
operations before income taxes were losses of $720.7 million and $1,938.0 million for the three and
nine months ended December 31, 2007, respectively, as compared to a loss of $299.6 million and
earnings of $110.1 million for the three and nine months ended December 31, 2006, respectively. 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 model, and we recorded
significant impairments totaling $502.9 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
primarily attributable to lower home prices, increases in discounts and sales incentives, including
increases in financing and closing costs, increases in sales commissions to help stimulate sales
and close homes. In addition, customer cancellation rates remain elevated when compared to
historical levels. Customer discounts have steadily increased on a quarterly basis since the
fourth quarter of fiscal year 2006. Customer discounts increased to 15.2% of housing revenues for
the three months ended December 31, 2007, up from 8.3% in the same period of the prior year. For
the nine months ended December 31, 2007, customer discounts increased to 11.6% of housing revenues,
up from 6.5% in the same period of the prior year. As a percentage of revenues, closing and
financing costs have increased from 3.0% to 3.5% for the three months, and from 2.6% to 3.3% for
the nine months, ended December 31, 2007 as compared to the same periods of the prior year. Sales
commissions, as a percentage of revenues, have increased from 4.3% to 4.9% for the three months,
and from 4.0% to 4.7% for the nine months, ended December 31, 2007 as compared to the same periods
of the prior year. Financial Services operating losses for the three and nine months ended December 31, 2007
were $60.5 million and $99.6 million, respectively, as compared to operating earnings of $16.5
million and $65.7 million for the three and nine months ended December 31, 2006, respectively. For
the three and nine months ended December 31, 2007, mortgage loan origination volume decreased 33.7%
and 24.6%, respectively. These changes are primarily attributable to the adverse conditions in the
mortgage markets described above, which also resulted in an increase in reserves and decreases in
gain on sale of mortgages, broker fees and net interest income. Continued adverse market
conditions and further declines in homebuyer demand could have a negative impact on Financial
Services future 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 cash flow from operations and our committed credit facilities are adequate to
meet our currently anticipated operating needs, capital expenditures and debt service requirements.
However, further deterioration in market conditions, including lower 30




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demand or prices for our homes or further disruption 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, which could reduce cash flow and profits and require that we seek
amendments or waivers to our credit facilities to ensure continued availability of committed debt
financing. 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 and
severity 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 has decreased from 6,386 units as of December 31, 2006 to 4,259 units
as of December 31, 2007. Since December 31, 2006, our land position has decreased by 67,415 lots
or 36.2%. Further, selling, general and administrative expenses have decreased from $370.6 million
and $1,123.5 million for the three and nine months ended December 31, 2006, respectively, to $255.0
million and $850.2 million, respectively, for the same periods 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 nine months ended December 31, 2007, we generated $513.2 million in cash flows from
operating activities, which was primarily derived through sales of mortgage loans that were not
reinvested in new mortgage loans. HOME BUILDING The following summarizes the results of our Home Building operations (dollars in thousands
except per unit data): For the Three Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    ChangeRevenues  Housing
    
    $
    1,787,990
    
    
    
    (28.9
    %)
    
    $
    2,516,089
    
    
    
    (14.9
    %)Revenues  Land Sales and Other
    
    
    23,094
    
    
    
    (67.5
    %)
    
    
    71,162
    
    
    
    50.5
    %Cost of Sales  Housing
    
    
    (1,564,552
    )
    
    
    (22.6
    %)
    
    
    (2,020,158
    )
    
    
    (2.9
    %)Cost of Sales  Land Sales and Other
    
    
    (556,320
    )
    
    
    41.6
    %
    
    
    (392,758
    )
    
    
    762.1
    %Selling, General and Administrative Expenses
    
    
    (254,952
    )
    
    
    (31.2
    %)
    
    
    (370,572
    )
    
    
    (2.1
    %)Goodwill Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from Unconsolidated Entities and Other (1)
    
    
    (60,525
    )
    
    
    31.1
    %
    
    
    (46,165
    )
    
    
    (194.4
    %)Operating Earnings (Loss)(2)
    
    $
    (625,265
    )
    
    
    157.9
    %
    
    $
    (242,402
    )
    
    
    (144.3
    %)Operating Earnings (Loss) as a Percentage of
Revenues:Housing Operations (3)
    
    
    (1.8
    %)
    
    
    (6.8
    )
    
    
    5.0
    %
    
    
    (11.8
    )Total Homebuilding Operations
    
    
    (34.5
    %)
    
    
    (25.1
    )
    
    
    (9.4
    %)
    
    
    (27.6
    )
 31




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For the Nine Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeRevenues  Housing
    
    $
    5,626,727
    
    
    
    (26.7
    %)
    
    $
    7,679,986
    
    
    
    (4.4
    %)Revenues  Land Sales and Other
    
    
    93,661
    
    
    
    (56.5
    %)
    
    
    215,149
    
    
    
    (17.5
    %)Cost of Sales  Housing
    
    
    (4,787,106
    )
    
    
    (18.2
    %)
    
    
    (5,854,303
    )
    
    
    3.1
    %Cost of Sales  Land Sales and Other
    
    
    (1,659,126
    )
    
    
    150.4
    %
    
    
    (662,605
    )
    
    
    237.9
    %Selling, General and Administrative Expenses
    
    
    (850,211
    )
    
    
    (24.3
    %)
    
    
    (1,123,505
    )
    
    
    6.2
    %Goodwill Impairments
    
    
    (61,322
    )
    
    
    100.0
    %
    
    
    
    
    
    
    Earnings (Loss) from Unconsolidated Entities
and Other (1)
    
    
    (112,360
    )
    
    
    208.0
    %
    
    
    (36,476
    )
    
    
    (154.2
    %)Operating Earnings (Loss)(2)
    
    $
    (1,749,737
    )
    
    
    (901.7
    %)
    
    $
    218,246
    
    
    
    (84.7
    %)Operating Earnings (Loss) as a Percentage of
Revenues:Housing Operations (3)
    
    
    (0.2
    %)
    
    
    (9.3
    )
    
    
    9.1
    %
    
    
    (7.0
    )Total Homebuilding Operations
    
    
    (30.6
    %)
    
    
    (33.4
    )
    
    
    2.8
    %
    
    
    (14.4
    )
  (1)
    
    Earnings (Loss) from Unconsolidated Entities and Other include our share of joint ventures
impairments.(2)
    
    Operating earnings (loss) represent Home Buildings earnings exclusive of certain
homebuilding corporate general and administrative expenses.(3)
    
    Operating earnings (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. Home Building consists of the following reporting segments that have operations located in the
following states:  East:
 Southeast:
 Central:
 Texas:
 Northwest:
 Southwest:
 Other homebuilding (1)
  (1)
    
    Other homebuilding includes projects that we plan to build-out and liquidate,
and ancillary businesses (including framing and holding companies) conducting business
in the following states: Florida, North Carolina, New Hampshire and Texas. In
addition, Other homebuilding includes amounts consolidated under the caption land held
under option agreements not owned and capitalized interest for all regions. 32




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For the Three Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeUnits ClosedEast
    
    
    1,229
    
    
    
    (23.4
    %)
    
    
    1,604
    
    
    
    (11.1
    %)Southeast
    
    
    820
    
    
    
    (28.3
    %)
    
    
    1,144
    
    
    
    (21.4
    %)Central
    
    
    932
    
    
    
    (17.4
    %)
    
    
    1,128
    
    
    
    (18.7
    %)Texas
    
    
    1,355
    
    
    
    (20.5
    %)
    
    
    1,704
    
    
    
    (4.1
    %)Northwest
    
    
    980
    
    
    
    (14.0
    %)
    
    
    1,140
    
    
    
    3.4
    %Southwest
    
    
    1,252
    
    
    
    (14.9
    %)
    
    
    1,472
    
    
    
    (11.2
    %)Other homebuilding
    
    
    89
    
    
    
    (47.0
    %)
    
    
    168
    
    
    
    (47.8
    %)6,657
    
    
    
    (20.4
    %)
    
    
    8,360
    
    
    
    (12.0
    %)Average Revenue Per UnitEast
    
    $
    299,578
    
    
    
    (6.9
    %)
    
    $
    321,719
    
    
    
    (8.3
    %)Southeast
    
    $
    247,626
    
    
    
    (14.8
    %)
    
    $
    290,778
    
    
    
    1.6
    %Central
    
    $
    196,340
    
    
    
    (9.1
    %)
    
    $
    215,955
    
    
    
    (1.5
    %)Texas
    
    $
    165,249
    
    
    
    2.8
    %
    
    $
    160,794
    
    
    
    7.5
    %Northwest
    
    $
    380,664
    
    
    
    (12.0
    %)
    
    $
    432,751
    
    
    
    (12.5
    %)Southwest
    
    $
    326,770
    
    
    
    (18.3
    %)
    
    $
    400,054
    
    
    
    (4.7
    %)Other homebuilding
    
    $
    311,101
    
    
    
    (22.7
    %)
    
    $
    402,351
    
    
    
    35.0
    %Total Home Building
    
    $
    268,588
    
    
    
    (10.8
    %)
    
    $
    300,968
    
    
    
    (3.2
    %)
 For the Nine Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeUnits ClosedEast
    
    
    3,901
    
    
    
    (21.7
    %)
    
    
    4,982
    
    
    
    (1.2
    %)Southeast
    
    
    2,501
    
    
    
    (31.3
    %)
    
    
    3,642
    
    
    
    (10.3
    %)Central
    
    
    2,879
    
    
    
    (22.6
    %)
    
    
    3,722
    
    
    
    (10.4
    %)Texas
    
    
    4,245
    
    
    
    (11.9
    %)
    
    
    4,818
    
    
    
    (1.5
    %)Northwest
    
    
    2,976
    
    
    
    (12.2
    %)
    
    
    3,391
    
    
    
    3.9
    %Southwest
    
    
    3,284
    
    
    
    (20.1
    %)
    
    
    4,111
    
    
    
    (5.3
    %)Other homebuilding
    
    
    316
    
    
    
    (41.2
    %)
    
    
    537
    
    
    
    (53.0
    %)20,102
    
    
    
    (20.2
    %)
    
    
    25,203
    
    
    
    (6.3
    %)Average Revenue Per UnitEast
    
    $
    307,029
    
    
    
    (6.2
    %)
    
    $
    327,385
    
    
    
    (3.1
    %)Southeast
    
    $
    265,589
    
    
    
    (9.9
    %)
    
    $
    294,680
    
    
    
    4.5
    %Central
    
    $
    203,799
    
    
    
    (6.4
    %)
    
    $
    217,833
    
    
    
    Texas
    
    $
    166,930
    
    
    
    5.6
    %
    
    $
    158,124
    
    
    
    6.9
    %Northwest
    
    $
    390,042
    
    
    
    (13.1
    %)
    
    $
    448,850
    
    
    
    (3.8
    %)Southwest
    
    $
    365,466
    
    
    
    (11.7
    %)
    
    $
    414,082
    
    
    
    3.0
    %Other homebuilding
    
    $
    343,237
    
    
    
    3.1
    %
    
    $
    332,912
    
    
    
    33.9
    %Total Home Building
    
    $
    279,909
    
    
    
    (8.1
    %)
    
    $
    304,725
    
    
    
    2.1
    %
 Revenues Housing revenues decreased for the three and nine months ended December 31, 2007 as compared
to December 31, 2006 primarily due to decreases in units closed and, to a lesser extent, a decrease
in average revenue per unit. For the three and nine months ended December 31, 2007, average
revenue per unit (which is net of customer discounts) decreased primarily as a result of increases
in discounts and lower prices experienced in many of our markets. Customer discounts increased to
15.2% of housing revenues for the three months ended December 31, 2007, up from 8.3% for the three
months ended December 31, 2006. For the nine months ended December 31, 2007, customer discounts
increased to 11.6% of housing revenues, up from 6.5% in the prior year. For the three and nine
months ended December 31, 2007, our closings declined as a result of decreases in sales orders
caused principally by the challenging market conditions described above. 33




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Revenues from land sales and other decreased 67.5% to $23.1 million for the three months and
56.5% to $93.7 million for the nine months ended December 31, 2007 as compared to the same periods
in the prior year. Although the timing and amount of land sales vary from period to period, the
decrease in revenues from land sales is primarily the result of the imbalance between supply and
demand. Most large homebuilders have walked away from a significant amount of lot option contracts
and, given the uncertainty with the homebuilding industry, there are fewer land buyers wanting to
purchase land. Changes in average operating neighborhoods and closings per average neighborhood are outlined
in the tables below: For the Three Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    ChangeAverage Operating Neighborhoods (1)
    
    
    644
    
    
    
    (7.9
    %)
    
    
    699
    
    
    
    10.1
    %Closings Per Average Neighborhood
    
    
    10.3
    
    
    
    (14.2
    %)
    
    
    12.0
    
    
    
    (20.0
    %)
 For the Nine Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    ChangeAverage Operating Neighborhoods (1)
    
    
    659
    
    
    
    (3.9
    %)
    
    
    686
    
    
    
    11.0
    %Closings Per Average Neighborhood
    
    
    30.5
    
    
    
    (16.9
    %)
    
    
    36.7
    
    
    
    (15.6
    %)
  (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 peaked at 702 neighborhoods as of December 31, 2006, and it has
steadily decreased to a neighborhood count of 636 as of December 31, 2007. The drop in
neighborhood count is primarily the result of our decision to build-out and not reinvest in certain
markets and our decision to sell virtually all of our assets in the Ohio markets. Operating Margins Homebuilding operating margins (consisting of operating earnings or loss as a percentage of
revenues) declined to (34.5%) for the three months and (30.6%) for the nine months ended December
31, 2007 as compared to (9.4%) for the three months, and 2.8% for the nine months, ended December
31, 2006. The decrease in homebuilding operating margins as compared to the prior year is
primarily attributable to the following factors: (1) decreases in revenues, net of discounts, (2)
land-related and goodwill impairments, (3) our share of joint ventures impairments, and (4)
write-offs of land deposits and pre-acquisition costs. The $60.5 million in losses from
unconsolidated entities and other for the three months ended December 31, 2007 includes $24.9
million of our share of joint ventures impairments and our share of joint ventures losses. The
$112.4 million in losses from unconsolidated entities and other for the nine months ended December
31, 2007 is primarily due to $88.5 million of our share of joint ventures impairments. Homebuilding operating margins were significantly impacted by $502.9 million of land-related
impairments in the three months and $1,492.4 million of land-related impairments in the nine months
ended December 31, 2007. We periodically reassess 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 December 31, 2007, we reviewed
approximately 1,040 housing projects and land investments for potential land-related impairments.
Approximately 940 of these housing projects are owned land positions that are either designated as
active neighborhoods or are under development and are not considered active. The remaining 100
housing projects represent controlled land positions approved for purchase. Land-related
impairments during the three months ended December 31, 2007 represented 147 neighborhoods and land
investments. Land-related impairments during the nine months ended December 31, 2007 represented
316 neighborhoods and land investments, certain of which have been impaired more than once. In addition to land-related impairments, we recorded $61.3 million in goodwill impairments
during the second quarter of fiscal year 2008, which represents 50.5% of our total homebuilding
goodwill balance at the beginning of our fiscal year. The goodwill impairments contributed to the
decrease in homebuilding operating margins for the nine months ended December 31, 2007. 34




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##### Table of Contents



Also, during the three months ended December 31, 2007, we determined it was probable we would
not exercise certain lot option contracts, which resulted in a write-off of 23 option contracts and
related pre-acquisition costs, resulting in a remaining balance of 161 outstanding option contracts
and deposits (including contracts in the due diligence process) at December 31, 2007. The following tables summarize Home Buildings 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 December 31,2007
    
    
    2006Goodwill
    
    
    Land-related
    
    
    Land-related
    
    
    Goodwill
    
    
    Land-related
    
    
    Land-relatedImpairments
    
    
    Impairments
    
    
    Write-offs
    
    
    Impairments
    
    
    Impairments
    
    
    Write-offsEast
    
    $
    
    
    
    $
    41,490
    
    
    $
    10,647
    
    
    $
    
    
    
    $
    55,957
    
    
    $
    31,787Southeast
    
    
    
    
    
    
    115,793
    
    
    
    830
    
    
    
    
    
    
    
    9,888
    
    
    
    6,606Central
    
    
    
    
    
    
    26,219
    
    
    
    3,894
    
    
    
    
    
    
    
    16,224
    
    
    
    15,445Texas
    
    
    
    
    
    
    363
    
    
    
    904
    
    
    
    
    
    
    
    298
    
    
    
    370Northwest
    
    
    
    
    
    
    169,244
    
    
    
    5,204
    
    
    
    
    
    
    
    58,864
    
    
    
    31,662Southwest
    
    
    
    
    
    
    120,764
    
    
    
    4,934
    
    
    
    
    
    
    
    64,153
    
    
    
    52,106Other homebuilding
    
    
    
    
    
    
    29,076
    
    
    
    (47
    )
    
    
    
    
    
    
    (19
    )
    
    
    26$
    
    
    
    $
    502,949
    
    
    $
    26,366
    
    
    $
    
    
    
    $
    205,365
    
    
    $
    138,002
 For the Nine Months Ended December 31,2007
    
    
    2006Goodwill
    
    
    Land-related
    
    
    Land-related
    
    
    Goodwill
    
    
    Land-related
    
    
    Land-relatedImpairments
    
    
    Impairments
    
    
    Write-offs
    
    
    Impairments
    
    
    Impairments
    
    
    Write-offsEast
    
    $
    
    
    
    $
    59,599
    
    
    $
    26,252
    
    
    $
    
    
    
    $
    55,957
    
    
    $
    37,516Southeast
    
    
    22,452
    
    
    
    201,262
    
    
    
    14,685
    
    
    
    
    
    
    
    16,028
    
    
    
    21,183Central
    
    
    3,488
    
    
    
    68,066
    
    
    
    12,432
    
    
    
    
    
    
    
    16,224
    
    
    
    25,329Texas
    
    
    
    
    
    
    363
    
    
    
    1,768
    
    
    
    
    
    
    
    298
    
    
    
    389Northwest
    
    
    13,755
    
    
    
    375,121
    
    
    
    18,357
    
    
    
    
    
    
    
    58,864
    
    
    
    50,175Southwest
    
    
    21,627
    
    
    
    615,983
    
    
    
    13,929
    
    
    
    
    
    
    
    88,037
    
    
    
    127,368Other homebuilding
    
    
    
    
    
    
    172,034
    
    
    
    131
    
    
    
    
    
    
    
    (19
    )
    
    
    1,828$
    61,322
    
    
    $
    1,492,428
    
    
    $
    87,554
    
    
    $
    
    
    
    $
    235,389
    
    
    $
    263,788
 We assess the recoverability of our 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. Home Building selling, general and administrative expenses decreased $115.6 million and $273.3
million for the three and nine months ended December 31, 2007, respectively, when compared to the
same periods in the prior year. The decrease in selling, general and administrative expenses for
the three and nine months ended December 31, 2007 is primarily due to decreases in compensation and
benefit costs as a result of reductions in personnel and decreases in our estimated
performance-related incentive compensation. The following tables summarize Home Buildings
selling, general and administrative expenses (dollars in thousands): For the Three Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeCompensation and Benefits
    
    $
    83,589
    
    
    
    (44.4
    %)
    
    $
    150,424
    
    
    
    (17.8
    %)Sales Commissions
    
    
    88,340
    
    
    
    (19.7
    %)
    
    
    110,046
    
    
    
    2.0
    %Advertising and Marketing
    
    
    31,995
    
    
    
    (38.7
    %)
    
    
    52,152
    
    
    
    27.7
    %Other
    
    
    51,028
    
    
    
    (11.9
    %)
    
    
    57,950
    
    
    
    23.7
    %Selling, General and Administrative Expenses
    
    $
    254,952
    
    
    
    (31.2
    %)
    
    $
    370,572
    
    
    
    (2.1
    %)SG&A as a Percentage of Revenues
    
    
    14.1
    %
    
    
    (0.2
    )
    
    
    14.3
    %
    
    
    1.7
 35




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##### Table of Contents



For the Nine Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeCompensation and Benefits
    
    $
    305,205
    
    
    
    (37.9
    %)
    
    $
    491,358
    
    
    
    (3.9
    %)Sales Commissions
    
    
    270,198
    
    
    
    (15.0
    %)
    
    
    317,765
    
    
    
    8.0
    %Advertising and Marketing
    
    
    116,423
    
    
    
    (21.6
    %)
    
    
    148,498
    
    
    
    28.7
    %Other
    
    
    158,385
    
    
    
    (4.5
    %)
    
    
    165,884
    
    
    
    21.7
    %Selling, General and Administrative Expenses
    
    $
    850,211
    
    
    
    (24.3
    %)
    
    $
    1,123,505
    
    
    
    6.2
    %SG&A as a Percentage of Revenues
    
    
    14.9
    %
    
    
    0.7
    
    
    
    14.2
    %
    
    
    1.4
 Sales Orders, Backlog Units and Land Holdings The following tables summarize sales orders and backlog units: For the Three Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeSales Orders (in Units)East
    
    
    934
    
    
    
    (22.7
    %)
    
    
    1,209
    
    
    
    (9.8
    %)Southeast
    
    
    707
    
    
    
    20.4
    %
    
    
    587
    
    
    
    (56.5
    %)Central
    
    
    687
    
    
    
    (15.6
    %)
    
    
    814
    
    
    
    (28.1
    %)Texas
    
    
    1,208
    
    
    
    (22.6
    %)
    
    
    1,560
    
    
    
    (9.8
    %)Northwest
    
    
    872
    
    
    
    (14.5
    %)
    
    
    1,020
    
    
    
    8.1
    %Southwest
    
    
    1,070
    
    
    
    17.5
    %
    
    
    911
    
    
    
    (40.3
    %)Other homebuilding
    
    
    59
    
    
    
    55.3
    %
    
    
    38
    
    
    
    (64.5
    %)5,537
    
    
    
    (9.8
    %)
    
    
    6,139
    
    
    
    (24.5
    %)Sales Per Average Neighborhood
    
    
    8.6
    
    
    
    (2.3
    %)
    
    
    8.8
    
    
    
    (31.3
    %)
 For the Nine Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeSales Orders (in Units)East
    
    
    3,333
    
    
    
    (16.2
    %)
    
    
    3,975
    
    
    
    (21.4
    %)Southeast
    
    
    2,179
    
    
    
    (9.9
    %)
    
    
    2,419
    
    
    
    (43.3
    %)Central
    
    
    2,567
    
    
    
    (18.5
    %)
    
    
    3,149
    
    
    
    (22.8
    %)Texas
    
    
    3,910
    
    
    
    (23.4
    %)
    
    
    5,104
    
    
    
    3.7
    %Northwest
    
    
    2,577
    
    
    
    (18.5
    %)
    
    
    3,162
    
    
    
    0.2
    %Southwest
    
    
    3,252
    
    
    
    (1.2
    %)
    
    
    3,292
    
    
    
    (42.1
    %)Other homebuilding
    
    
    146
    
    
    
    25.9
    %
    
    
    116
    
    
    
    (87.6
    %)17,964
    
    
    
    (15.3
    %)
    
    
    21,217
    
    
    
    (24.5
    %)Sales Per Average Neighborhood
    
    
    27.3
    
    
    
    (11.7
    %)
    
    
    30.9
    
    
    
    (32.1
    %)
 36




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##### Table of Contents



As ofDecember 31, 2007
    
    
    March 31, 2007Change
    
    
    
    
    
    
    ChangeBacklog UnitsEast
    
    
    1,280
    
    
    
    (30.7
    %)
    
    
    1,848
    
    
    
    (39.9
    %)Southeast
    
    
    1,197
    
    
    
    (21.2
    %)
    
    
    1,519
    
    
    
    (56.2
    %)Central
    
    
    1,432
    
    
    
    (17.9
    %)
    
    
    1,744
    
    
    
    (22.9
    %)Texas
    
    
    1,685
    
    
    
    (16.6
    %)
    
    
    2,020
    
    
    
    (7.7
    %)Northwest
    
    
    1,406
    
    
    
    (22.1
    %)
    
    
    1,805
    
    
    
    (18.5
    %)Southwest
    
    
    1,471
    
    
    
    (2.1
    %)
    
    
    1,503
    
    
    
    (52.6
    %)Other homebuilding
    
    
    42
    
    
    
    (80.2
    %)
    
    
    212
    
    
    
    (79.0
    %)8,513
    
    
    
    (20.1
    %)
    
    
    10,651
    
    
    
    (38.7
    %)
 For the three and nine months ended December 31, 2007, sales orders declined in most of the
regions in which we do business when compared to the same periods of the prior year. We expect
that the decreases in sales orders in the three and nine months ended December 31, 2007 will
continue to impact 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 prospective buyers to sell their existing
homes. The decline in homebuyer demand has also been caused by the tightened homebuyer credit
requirements. These factors are evidenced by lower customer traffic and cancellation rates that
are much higher than our long-term average cancellation rates ranging from 18% to 26%. For the
three and nine months ended December 31, 2007, cancellation rates were 33.0% and 33.2%,
respectively. Cancellation rates for the three and nine months ended December 31, 2006 were 38.5%
and 36.0%, respectively. In light of the continuing adverse market conditions, our strategy is to focus on selling
homes and reducing inventories, reducing costs, generating cash and simplifying our business. As a
percentage of revenues during the three and nine months ended December 31, 2007, we increased
advertising costs, sales commissions and sales incentives, when compared to the same periods of the
prior year, to help stimulate sales orders and sell our existing inventory. We curtailed housing
starts so that we could reduce our speculative inventory. We have also taken steps to reduce our
land position. The following table summarizes our land position: As ofDecember 31, 2007
    
    
    March 31, 2007Lots
    
    
    Lots
    
    
    
    
    
    
    Lots
    
    
    LotsOwned
    
    
    Controlled
    
    
    Total Lots
    
    
    Owned
    
    
    Controlled
    
    
    Total LotsEast
    
    
    16,073
    
    
    
    11,116
    
    
    
    27,189
    
    
    
    18,604
    
    
    
    25,829
    
    
    
    44,433Southeast
    
    
    23,547
    
    
    
    3,301
    
    
    
    26,848
    
    
    
    25,485
    
    
    
    7,113
    
    
    
    32,598Central
    
    
    6,746
    
    
    
    3,375
    
    
    
    10,121
    
    
    
    8,851
    
    
    
    5,303
    
    
    
    14,154Texas
    
    
    15,263
    
    
    
    5,400
    
    
    
    20,663
    
    
    
    16,113
    
    
    
    10,405
    
    
    
    26,518Northwest
    
    
    8,339
    
    
    
    4,441
    
    
    
    12,780
    
    
    
    10,388
    
    
    
    6,224
    
    
    
    16,612Southwest
    
    
    13,988
    
    
    
    3,428
    
    
    
    17,416
    
    
    
    14,694
    
    
    
    6,755
    
    
    
    21,449Other homebuilding
    
    
    3,645
    
    
    
    
    
    
    
    3,645
    
    
    
    4,176
    
    
    
    80
    
    
    
    4,25687,601
    
    
    
    31,061
    
    
    
    118,662
    
    
    
    98,311
    
    
    
    61,709
    
    
    
    160,020Change
    
    
    (10.9
    %)
    
    
    (49.7
    %)
    
    
    (25.8
    %)
    
    
    (9.7
    %)
    
    
    (67.0
    %)
    
    
    (45.9
    %)
 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 December 31, 2007 and March 31, 2007 were 18,359 and 13,301,
respectively, including 1,599 and 1,608, respectively, of lots for model homes completed or under
construction. We decreased our total land position when compared to March 31, 2007 with the most pronounced
declines occurring in lots controlled. The decrease in our land position for the nine months ended
December 31, 2007 is a result of our decision to decrease land purchases and new lot option
arrangements. Based on current market conditions, we believe we are oversupplied in total lots in
certain markets and will continue to take the necessary steps 37




---



##### Table of Contents



to reduce our land position. These steps may
include one or more sales of land. Any such sales would
require the negotiation of mutually acceptable arrangements with third-party buyers and could take
an extended period of time to complete. There can be no assurance that such sales could be
completed on terms or within a timeframe acceptable to us. As compared to December 31, 2006, our
total land position has decreased by 67,415 lots or 36.2%. Included in our total land position are
4,069 and 4,914 lots controlled through joint venture arrangements as of December 31 and March 31,
2007, respectively. We have completed due diligence on 16,152 lots of the 31,061 lots we control.
Generally, lots where we have completed due diligence have more substantial deposits and
pre-acquisition costs incurred, and the deposits are non-refundable. Regional Discussion Changes in revenues and operating earnings for our homebuilding reporting segments are
outlined in the tables below (dollars in thousands): For the Three Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeRevenuesEast
    
    $
    376,321
    
    
    
    (27.4
    %)
    
    $
    518,342
    
    
    
    (18.2
    %)Southeast
    
    
    206,755
    
    
    
    (39.3
    %)
    
    
    340,574
    
    
    
    (20.4
    %)Central
    
    
    184,376
    
    
    
    (25.1
    %)
    
    
    246,275
    
    
    
    (19.4
    %)Texas
    
    
    225,290
    
    
    
    (18.6
    %)
    
    
    276,819
    
    
    
    2.4
    %Northwest
    
    
    373,234
    
    
    
    (26.5
    %)
    
    
    507,520
    
    
    
    (8.3
    %)Southwest
    
    
    411,110
    
    
    
    (31.8
    %)
    
    
    603,057
    
    
    
    (13.3
    %)Other homebuilding
    
    
    33,998
    
    
    
    (64.1
    %)
    
    
    94,664
    
    
    
    (18.4
    %)$
    1,811,084
    
    
    
    (30.0
    %)
    
    $
    2,587,251
    
    
    
    (13.9
    %)Operating Earnings (Loss)East
    
    $
    (47,892
    )
    
    
    53.3
    %
    
    $
    (31,231
    )
    
    
    (124.4
    %)Southeast
    
    
    (127,261
    )
    
    NM
    
    
    9,615
    
    
    
    (85.4
    %)Central
    
    
    (39,877
    )
    
    
    42.7
    %
    
    
    (27,940
    )
    
    
    (258.1
    %)Texas
    
    
    9,343
    
    
    
    (58.7
    %)
    
    
    22,595
    
    
    
    (11.0
    %)Northwest
    
    
    (199,612
    )
    
    
    143.8
    %
    
    
    (81,885
    )
    
    
    (152.5
    %)Southwest
    
    
    (186,447
    )
    
    
    45.6
    %
    
    
    (128,047
    )
    
    
    (200.3
    %)Other homebuilding
    
    
    (33,519
    )
    
    
    508.4
    %
    
    
    (5,509
    )
    
    
    (120.4
    %)$
    (625,265
    )
    
    
    157.9
    %
    
    $
    (242,402
    )
    
    
    (144.3
    %)
 NM = Not meaningful For the Nine Months Ended December 31,2007
    
    
    2006Change
    
    
    
    
    
    
    ChangeRevenuesEast
    
    $
    1,225,327
    
    
    
    (25.1
    %)
    
    $
    1,635,305
    
    
    
    (5.7
    %)Southeast
    
    
    680,734
    
    
    
    (39.3
    %)
    
    
    1,120,665
    
    
    
    (9.9
    %)Central
    
    
    591,384
    
    
    
    (27.9
    %)
    
    
    819,717
    
    
    
    (10.1
    %)Texas
    
    
    716,329
    
    
    
    (9.2
    %)
    
    
    788,872
    
    
    
    6.4
    %Northwest
    
    
    1,164,610
    
    
    
    (24.8
    %)
    
    
    1,549,103
    
    
    
    0.9
    %Southwest
    
    
    1,208,604
    
    
    
    (30.7
    %)
    
    
    1,744,098
    
    
    
    (0.4
    %)Other homebuilding
    
    
    133,400
    
    
    
    (43.8
    %)
    
    
    237,375
    
    
    
    (36.4
    %)$
    5,720,388
    
    
    
    (27.5
    %)
    
    $
    7,895,135
    
    
    
    (4.8
    %)Operating Earnings (Loss)East
    
    $
    (12,830
    )
    
    
    (110.1
    %)
    
    $
    127,304
    
    
    
    (60.7
    %)Southeast
    
    
    (293,366
    )
    
    
    (414.3
    %)
    
    
    93,337
    
    
    
    (56.3
    %)Central
    
    
    (98,345
    )
    
    
    442.8
    %
    
    
    (18,119
    )
    
    
    (129.4
    %)Texas
    
    
    43,187
    
    
    
    (35.0
    %)
    
    
    66,490
    
    
    
    11.1
    %Northwest
    
    
    (427,460
    )
    
    
    (717.3
    %)
    
    
    69,246
    
    
    
    (82.2
    %)Southwest
    
    
    (782,190
    )
    
    
    474.8
    %
    
    
    (136,083
    )
    
    
    (143.9
    %)Other homebuilding
    
    
    (178,733
    )
    
    NM
    
    
    16,071
    
    
    
    (77.0
    %)$
    (1,749,737
    )
    
    
    (901.7
    %)
    
    $
    218,246
    
    
    
    (84.7
    %)
 38




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##### Table of Contents



East Revenues decreased 27.4% for the three months ended December 31, 2007 primarily due to a 23.4%
decrease in units closed when compared to the three months ended December 31, 2006. All markets in
the East region experienced decreases in units closed except for the Raleigh and Charleston
markets. Average revenue per unit decreased 6.9% as a result of an increase in discounts as a
percentage of housing revenues from 6.8% to 13.3% for the three months ended December 31, 2007.
Sales orders decreased 22.7% when compared to the same period in the prior year, which represents
the largest decrease in sales orders of any of our regions. Significant decreases in sales orders
occurring in the Charlotte and Washington, D.C. markets were partially offset by significant
increases in sales orders experienced in the Myrtle Beach and Charleston markets. The largest
increases in discounts were experienced in the New Jersey and Myrtle Beach markets. Operating losses increased $16.7 million to $47.9 million for the three months ended December
31, 2007 as compared to the same period in the prior year. Substantially all of the East regions
operating losses were experienced in the Washington, D.C. and New Jersey markets as a result of
land-related impairments, write-offs of deposits and pre-acquisition costs and our share of joint
venture impairments. Most other markets within the East region generated operating earnings. Revenues decreased 25.1% for the nine months ended December 31, 2007 primarily due to
significant decreases in revenues in the Hilton Head, Washington, D.C., New Jersey and Myrtle Beach
markets. These same four markets were also primarily the reason for the 21.7% decrease in units
closed when compared to the nine months ended December 31, 2006. Average revenue per unit
decreased 6.2% when compared to the same period in the prior year, with the largest decrease
occurring in the Washington, D.C. market. Discounts increased from 5.5% for the nine months ended
December 31, 2006 to 9.7% as all markets in the East region experienced an increase in discounts.
Sales orders decreased 16.2% when compared to the same period in the prior year primarily due to
decreases in customer traffic and neighborhood counts. Operating earnings decreased $140.1 million to a loss of $12.8 million for the nine months
ended December 31, 2007 as compared to the same period in the prior year with the most of the
decrease occurring in the Washington, D.C., Myrtle Beach and New Jersey markets. The decrease in
operating earnings is primarily the result of a decrease in average revenue per unit, which was not
offset by commensurate reductions in construction costs, and increases in discounts and sales
incentives. Southeast Revenues decreased 39.3% when compared to the three months ended December 31, 2006. All
markets in the Southeast region experienced decreases in revenues, with the largest decreases
occurring in the West Florida and Southwest Florida markets. The decrease in revenues was
primarily due to a decrease in units closed, with all markets in the region experiencing a decrease
in units closed except for the North Florida and Orlando markets. Average revenue per unit also
contributed to the decrease in revenues as discounts as a percentage of housing revenues increased
from 11.3% to 17.5% for the three months ended December 31, 2007. Sales orders increased 20.4%
with significant increases experienced in the Southwest Florida and Orlando markets, and
cancellation rates improved significantly from 46.8% to 25.3% for the three months ended December
31, 2007. The Southeast region incurred an operating loss of $127.3 million for the three months ended
December 31, 2007 as compared to earnings of $9.6 million in the same period of the prior year.
The Nashville market was the only market in the Southeast region that reported operating earnings
for the three months ended December 31, 2007. The most significant decrease in operating earnings
occurred in the Southwest Florida, West Florida, and Orlando markets, which incurred total charges
of $96.6 million for land-related impairments. For the nine months ended December 31, 2007, a 31.3% decrease in units closed was the primary
contributor to the 39.3% decrease in revenues when compared to the nine months ended December 31,
2006. All markets in the Southeast region experienced substantial decreases in revenues and units
closed, with the exception of the Orlando market. Average revenue per unit decreased 9.9% when
compared to the same period in the prior year primarily due to an increase in discounts from 8.2%
for the nine months ended December 31, 2006 to 15.9%. Although cancellation rates improved from
41.5% to 29.3% for the current year-to-date period, sales orders decreased 9.9%. Significant sales
order increases were experienced in the Southwest Florida and North Florida markets, where
cancellation rates improved significantly. 39




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##### Table of Contents



The Southeast region incurred an operating loss of $293.4 million for the nine months ended
December 31, 2007 as compared to earnings of $93.3 million in the same period of the prior year.
The Nashville market was the only market in the Southeast region that reported operating earnings
for the nine months ended December 31, 2007. A substantial portion of the operating loss for the
third quarter of fiscal year 2008 can be attributed to the Southwest Florida and Southeast Florida
markets, which also recorded the majority of the land-related impairments, goodwill impairments and
write-offs of deposits and pre-acquisition costs in the region. Central Revenues for the three months ended December 31, 2007 decreased 25.1% as all markets within
the Central region experienced a decrease in revenues when compared to the same period of the prior
year. Contributing to the decrease in revenues were a 17.4% decrease in units closed and a 9.1%
decrease in average revenue per unit when compared to three months ended December 31, 2006.
Discounts as a percentage of housing revenues contributed to the decrease in average revenue per
unit, as discounts increased from 8.5% to 14.1% for the third quarter of fiscal year 2008. All
markets within the central region experienced increases in discounts. Sales orders decreased 15.6%
versus the third quarter of fiscal year 2007, which is reflective of a 36.7% decrease in customer
traffic. The Minnesota market was the only market within the Central region to experience an
increase in units closed and sales orders. The Central region realized an operating loss of $39.9 million for the three months ended
December 31, 2007 as compared to a loss of $27.9 million in the same period of the prior year. All
markets within the Central region realized an operating loss. The operating loss was primarily the
result of land-related impairments recognized in the Detroit and Illinois markets. Revenues for the nine months ended December 31, 2007 decreased 27.9% primarily due to a 22.6%
decrease in units closed as compared to the nine months ended December 31, 2006. All markets in
the Central region experienced significant decreases in revenues and units closed. Discounts as a
percentage of housing revenues increased from 7.4% to 11.6% for the nine months ended December 31,
2007, which contributed to the 6.4% decrease in average revenue per unit. Sales orders decreased
18.5% as the region experienced a 28.2% decrease in customer traffic. Cancellation rates improved
slightly from 34.7% to 32.8% when compared to the same period of the prior year. A majority of the Central regions operating loss of $98.3 million for the nine months ended
December 31, 2007 can be attributed to the Detroit market, which also experienced a majority of the
land-related impairments and write-offs of deposits and pre-acquisition costs. All markets within
the Central region reported a decrease in operating earnings for the nine months ended December 31,
2007, and the Minnesota market was the only market to report operating earnings. Texas Revenues for the Texas region for the three months ended December 31, 2007 decreased 18.6%
compared to the prior year, representing the most moderate decrease in revenues for any of our
regions. A 20.5% decrease in closings was the primary factor contributing to the decrease in
revenues. All markets within the Texas region experienced a decrease in units closed; however, the
decrease in units closed was partially offset by an increase in average revenue per unit. The
Texas region was the only one of our regions to realize an increase in average revenue per unit.
Discounts as a percentage of housing revenues increased slightly in all markets to 6.4% for the
three months ended December 31, 2007, which represents the lowest discount percentage for any of
our regions for the third quarter of fiscal year 2008. Sales orders decreased 22.6%, with the
largest decreases occurring in the Dallas/Ft. Worth and San Antonio markets. Operating earnings for the three months ended December 31, 2007 decreased $13.3 million to
$9.3 million when compared to the same period in the prior year. The majority of the operating
earnings were generated in the San Antonio and Central Texas markets. The decrease in operating
earnings for the three months ended December 31, 2007 is primarily due to the decrease in units
closed. Revenues for the Texas region for the nine months ended December 31, 2007 decreased 9.2%
compared to the same period in the prior year. The decrease in revenues was primarily due to an
11.9% decrease in units closed, which was partially offset by a 5.6% increase in average revenue
per unit. The largest decrease in revenues occurred in the Houston market while the only increase
occurred in the San Antonio market. Average revenue per unit increased in all markets in the Texas
region, despite an increase in discounts from 3.4% to 4.8% for the nine months ended December 31,
2007. Sales orders decreased 23.4%, which represents the largest decrease in sales orders for all 40




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of our regions. The largest decrease in sales orders occurred in the Dallas/Ft. Worth market
where customer traffic has declined and cancellation rates have increased. Operating earnings for the nine months ended December 31, 2007 were $43.2 million, a $23.3
million decrease when compared to the same period in the prior year. The Texas region was the only
one of our regions to realize operating earnings. The decrease in operating earnings is primarily
the result of discounts and sales incentives. 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 prior periods. 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 December 31, 2007 decreased 26.5% as compared to the three
months ended December 31, 2006. Decreases in both average revenue per unit and units closed
contributed to the decrease in revenues. The Reno, Seattle and Bay Area markets all had increases
in units closed when compared to the same period in the prior year, but Reno was the only one of
the three to achieve increases in both average revenue per unit and units closed. Discounts also
contributed to the decrease in revenues as discounts as a percentage of housing revenues increased
from 10.6% to 18.3% for the three months ended December 31, 2007. The highest discounting occurred
in the Sacramento and Bay Area markets. Sales orders for the three months ended December 31, 2007
decreased 14.5% despite significant increases realized in the Reno and Portland markets. Operating losses in the Northwest region increased $117.7 million to $199.6 million when
compared to the same period of the prior year primarily due to $110.4 million in additional
land-related impairments. The majority of the land-related impairments for the third quarter of
fiscal year 2008 were recorded in the Bay Area and Sacramento markets. Revenues for the nine months ended December 31, 2007 decreased 24.8% as compared to the nine
months ended December 31, 2006, which was due to a combination of a 13.1% decrease in average
revenue per unit and a 12.2% decrease in units closed. All markets in the Northwest region
experienced substantial decreases in revenues with the exception of Portland. Discounts as a
percentage of housing revenues increased from 8.5% to 13.8% for the nine months ended December 31,
2007, with the largest increase occurring in the Sacramento market. The Denver market was the only
market within the region that decreased its discounts. Sales orders for the nine months ended
December 31, 2007 decreased 18.5% primarily due to a 20.0% decrease in customer traffic. The Reno
market was the only market within the Northwest region to experience an increase in sales orders. The Northwest region experienced an operating loss of $427.5 million for the nine months ended
December 31, 2007 as compared to earnings of $69.2 million in the same period of the prior year. A
substantial portion of the operating loss was realized in the Reno and Sacramento markets, which
also recognized the majority of the land-related impairments and write-offs of deposits and
pre-acquisition costs. In addition, we recorded our share of a joint ventures impairment in the
Sacramento market. The Portland market was the only market within the region to generate operating
earnings. Southwest The decrease in the Southwest regions revenues for the three months ended December 31, 2007
was primarily due to a combination of an 18.3% decrease in average revenue per unit and a 14.9%
decrease in units closed when compared to the same period in the prior year. All markets within
the Southwest region experienced a decrease in average revenue per unit as discounts increased from
8.6% to 17.5% for the three months ended December 31, 2007. Significant increases in discounts
occurred in the Los Angeles, New Mexico and Phoenix markets. Sales orders increased 17.5%
primarily due to increases in the Los Angeles and Phoenix markets. Cancellation rates dropped from
50.4% for the three months ended December 31, 2006 to 35.3%, which also contributed to the increase
in sales orders. The Southwest region experienced an operating loss of $186.4 million for the three months
ended December 31, 2007, which was the second largest experienced by all of our regions. The New
Mexico market was the only market within the Southwest region to report operating earnings. The
operating loss is reflective of $120.8 million in land-related impairments in the three months
ended December 31, 2007. The majority of the land-related impairments were recognized in the
Inland Empire and Phoenix markets. In addition, we recorded $26.7 million as our share of joint
venture losses located in the Southern California market. The decrease in the Southwest regions revenues for the nine months ended December 31, 2007
was primarily due to a 20.1% decrease in units closed and an 11.7% decrease in average revenue per
unit when compared 41




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##### Table of Contents



to the same period in the prior year. The Los Angeles market was the only market within the
region to realize an increase in units closed while all other markets within the region experienced
a substantial decrease in units closed. Additionally, discounts as a percentage of housing
revenues increased from 6.2% to 13.0% for the nine months ended December 31, 2007, with the most
significant discounts offered in the Phoenix market. Sales orders decreased 1.2% when compared to
the nine months ended December 31, 2006, which represents a small decrease when compared to the
decreases experienced in most of our other regions. The Southwest region experienced an operating loss of $782.2 million for the nine months ended
December 31, 2007 as compared to a loss of $136.1 million in the same period of the prior year.
The Southwest region incurred the most substantial operating losses of all of our regions for the
period. With the exception of the New Mexico market, all markets within the Southwest region
reported significant operating losses and land-related impairments. The operating loss includes
$651.5 million in land-related impairments, goodwill impairments and write-offs of deposits and
pre-acquisition costs in the nine months ended December 31, 2007. The operating loss is also
reflective of a decrease in average revenue per unit, which was not offset by commensurate
reductions in construction costs and increases in discounts and sales incentives. 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. None of the operating segments included in Other homebuilding are significant.
Additionally, 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 $33.5 million and $178.7
million for the three and nine months ended December 31, 2007, respectively, as compared to a loss
of $5.5 million and earnings of $16.1 million in the same periods of the prior year. These
decreases in operating earnings are primarily the result of $29.1 million and $172.0 million in
land-related impairments in the three and nine months ended December 31, 2007, respectively. These
land-related impairments were all recognized on projects located in Florida, Texas and North
Carolina. 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 other homebuilders, refinancing of existing
mortgages, title agency services and the sale of title insurance and other insurance products,
including property and casualty. 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. Net origination fees, mortgage servicing
rights, and other revenues derived from the origination of mortgage loans are deferred and
recognized when the related loan is sold to a third-party purchaser. 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 net interest income, 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 currently is instead
relying on a committed bank warehouse credit facility and a mortgage loan sale agreement to provide
funding for its loan originations. HSF-I was a variable interest entity of which we were the
primary beneficiary and was consolidated in our financial statements. In November 2007, we
terminated HSF-I and all of its outstanding obligations were redeemed. 42




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##### Table of Contents



The following summarizes Financial Services results (dollars in thousands): For the Three Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeRevenues
    
    $
    62,203
    
    
    
    (42.2
    %)
    
    $
    107,577
    
    
    
    (4.7
    %)Cost of Sales
    
    
    (11,207
    )
    
    
    (53.0
    %)
    
    
    (23,836
    )
    
    
    37.9
    %Selling, General and Administrative Expenses
    
    
    (111,480
    )
    
    
    65.8
    %
    
    
    (67,245
    )
    
    
    (9.8
    %)Operating Earnings (Loss)
    
    $
    (60,484
    )
    
    
    (466.7
    %)
    
    $
    16,496
    
    
    
    (21.4
    %)Operating Margin
    
    
    (97.2
    %)
    
    
    (112.5
    )
    
    
    15.3
    %
    
    
    (3.3
    )Financial Services Margin (1)
    
    
    (118.6
    %)
    
    
    (138.3
    )
    
    
    19.7
    %
    
    
    (2.3
    )Net Interest Income
    
    $
    3,375
    
    
    
    (58.7
    %)
    
    $
    8,181
    
    
    
    (8.8
    %)Average Interest Earning Assets
    
    $
    863,283
    
    
    
    (48.4
    %)
    
    $
    1,672,593
    
    
    
    9.1
    %Average Yield
    
    
    6.76
    %
    
    
    (0.90
    )
    
    
    7.66
    %
    
    
    0.81Average Interest Bearing Liabilities
    
    $
    691,079
    
    
    
    (57.4
    %)
    
    $
    1,622,946
    
    
    
    6.3
    %Average Rate Paid
    
    
    6.79
    %
    
    
    0.82
    
    
    
    5.97
    %
    
    
    1.45
 For the Nine Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeRevenues
    
    $
    240,869
    
    
    
    (31.4
    %)
    
    $
    350,896
    
    
    
    2.1
    %Cost of Sales
    
    
    (48,274
    )
    
    
    (27.3
    %)
    
    
    (66,436
    )
    
    
    38.7
    %Selling, General and Administrative Expenses
    
    
    (292,192
    )
    
    
    33.6
    %
    
    
    (218,713
    )
    
    
    (5.8
    %)Operating Earnings (Loss)
    
    $
    (99,597
    )
    
    
    (251.5
    %)
    
    $
    65,747
    
    
    
    3.5
    %Operating Margin
    
    
    (41.3
    %)
    
    
    (60.0
    )
    
    
    18.7
    %
    
    
    0.2Financial Services Margin (1)
    
    
    (51.7
    %)
    
    
    (74.8
    )
    
    
    23.1
    %
    
    
    1.6Net Interest Income
    
    $
    13,547
    
    
    
    (45.3
    %)
    
    $
    24,752
    
    
    
    (15.5
    %)Average Interest Earning Assets
    
    $
    1,147,494
    
    
    
    (27.8
    %)
    
    $
    1,589,211
    
    
    
    (0.6
    %)Average Yield
    
    
    7.18
    %
    
    
    (0.47
    )
    
    
    7.65
    %
    
    
    1.22Average Interest Bearing Liabilities
    
    $
    1,055,755
    
    
    
    (31.8
    %)
    
    $
    1,546,974
    
    
    
    (4.0
    %)Average Rate Paid
    
    
    6.23
    %
    
    
    0.47
    
    
    
    5.76
    %
    
    
    1.79
  (1)
    Financial Services margin is a non-GAAP financial measure, which we believe is useful as it
allows investors to assess the operating performance of our Financial Services operations by
netting the cost of funding mortgage originations (interest expense) against the related
interest income. Financial Services margin is equal to Operating Earnings as a percentage of
Financial Services Revenues less interest expense, all of which are set forth in the table
above. Financial Services revenues for the three and nine months ended December 31, 2007 decreased
as compared to the same periods in the prior year due to decreases in gain on sale of mortgage
loans, broker fees and interest income. Contributing to the decrease in interest income and
average yield was an increase in contractually delinquent loans that are not accruing interest.
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. For the three and
nine months ended December 31, 2007, cost of sales, which is solely comprised of interest expense,
declined as compared to the same periods in the prior year as a result of decreases in average
interest bearing liabilities. These decreases in average interest bearing liabilities were
partially offset by the effect of higher short-term borrowing costs. 43




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During the three and nine months ended December 31, 2007, Financial Services recorded
significant loss provisions as a component of selling, general and administrative expenses. The most
significant provision during the three and nine months ended December 31, 2007 was recorded in
connection with Financial Services construction loans. A construction loan is a loan supporting the construction of a home on the homebuyers lot. Construction on the home must be completed before a
construction loan can be modified into a permanent loan (i.e., a mortgage loan held for sale) and
sold to a third party. Due to their lengthy holding period, construction loans are susceptible to
market value and credit risks. As a result of recent changes in the mortgage markets, declining property values and increasing delinquencies, Financial Services recorded
significant loss provisions during the three and nine months ended December 31, 2007. Financial Services decided in the second quarter of
fiscal year 2008 to discontinue the origination of new construction loans. For additional information on Financial Services provisions,
please refer to our Critical Accounting Estimates, Mortgage Loan Allowances and Related Reserve.
 The following table summarizes Financial Services provisions
(dollars in thousands): For the Three Months Ended
    
    
    For the Nine Months EndedDecember 31, 2007
    
    
    December 31, 2007Provision for Construction Loans
    
    $
    45,401
    
    
    $
    82,775Provision for Loans in Foreclosure
    
    
    16,028
    
    
    
    36,740Provision for Real-estate Owned
    
    
    48
    
    
    
    2,609Anticipated
Losses for Loans Originated
    
    
    3,176
    
    
    
    5,884Total Provisions
    
    $
    64,653
    
    
    $
    128,008
 For the three and nine months ended December 31, 2006, the total provision was $3.0 million
and $7.4 million, respectively. The increases in selling, general and administrative expenses discussed above were partially
offset by decreases in branch operating expenses, branch and corporate compensation, and sales
incentives. Operating margin and Financial Services margin for the three and nine months ended
December 31, 2007 decreased primarily due to increases in selling, general and administrative
expenses. The following tables provide a comparative analysis of: (1) the volume of loan sales to
investors (third parties) and the gains recorded 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 December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeLoan Sales to InvestorsVolume (in millions)
    
    $
    1,954.5
    
    
    
    (15.4
    %)
    
    $
    2,310.1
    
    
    
    (25.5
    %)Number of Loans Sold
    
    
    9,733
    
    
    
    (11.0
    %)
    
    
    10,941
    
    
    
    (31.5
    %)Gain on Sale of Mortgage Loans
    
    $
    21,797
    
    
    
    (40.0
    %)
    
    $
    36,352
    
    
    
    (10.5
    %)Loans Brokered to Third Party LendersVolume (in millions)
    
    $
    416.4
    
    
    
    (46.1
    %)
    
    $
    772.7
    
    
    
    (9.2
    %)Number of Brokered Loans
    
    
    1,277
    
    
    
    (49.4
    %)
    
    
    2,523
    
    
    
    (14.6
    %)Broker Fees
    
    $
    7,772
    
    
    
    (49.6
    %)
    
    $
    15,435
    
    
    
    (2.9
    %)Average Loan SizeLoans Sold to Investors
    
    $
    200,827
    
    
    
    (4.9
    %)
    
    $
    211,142
    
    
    
    8.8
    %Loans Brokered to Third Party
Lenders
    
    $
    326,235
    
    
    
    6.5
    %
    
    $
    306,261
    
    
    
    6.4
    %
 44




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##### Table of Contents



For the Nine Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeLoan Sales to InvestorsVolume (in millions)
    
    $
    7,031.3
    
    
    
    (7.0
    %)
    
    $
    7,562.2
    
    
    
    (17.8
    %)Number of Loans Sold
    
    
    33,605
    
    
    
    (9.7
    %)
    
    
    37,213
    
    
    
    (23.4
    %)Gain on Sale of Mortgage Loans
    
    $
    91,163
    
    
    
    (25.8
    %)
    
    $
    122,824
    
    
    
    (2.5
    %)Loans Brokered to Third Party LendersVolume (in millions)
    
    $
    1,463.1
    
    
    
    (43.6
    %)
    
    $
    2,596.2
    
    
    
    (0.7
    %)Number of Brokered Loans
    
    
    4,291
    
    
    
    (50.4
    %)
    
    
    8,657
    
    
    
    (10.5
    %)Broker Fees
    
    $
    26,493
    
    
    
    (48.4
    %)
    
    $
    51,310
    
    
    
    (0.5
    %)Average Loan SizeLoans Sold to Investors
    
    $
    209,236
    
    
    
    3.0
    %
    
    $
    203,217
    
    
    
    7.2
    %Loans Brokered to Third Party
Lenders
    
    $
    340,976
    
    
    
    13.7
    %
    
    $
    299,901
    
    
    
    11.0
    %
 Gain on sale of mortgage loans decreased for the three and nine months ended December 31, 2007
due to unfavorable pricing on mortgage loan sales when compared to the same periods of the prior
year, resulting from the disruption in the mortgage markets. The unfavorable pricing on mortgage
loans was partially offset by a shift in the product mix of loans originated to more conforming
loans, which generate higher service release premiums than nonconforming loans. Broker fee income
decreased for the three and nine months ended December 31, 2007 as a result of a decrease in the
volume of loans brokered to third party lenders. The decrease in broker volume is also primarily
due to the significant disruption 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 December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeOpen Applications  Beginning
    
    
    16,099
    
    
    
    (24.9
    %)
    
    
    21,436
    
    
    
    (20.9
    %)New Applications
    
    
    26,412
    
    
    
    27.8
    %
    
    
    20,661
    
    
    
    (13.2
    %)Cancelled Applications
    
    
    (17,905
    )
    
    
    85.3
    %
    
    
    (9,665
    )
    
    
    (6.7
    %)Originated Loans
    
    
    (10,036
    )
    
    
    (26.2
    %)
    
    
    (13,605
    )
    
    
    (17.2
    %)Open Applications  Ending
    
    
    14,570
    
    
    
    (22.6
    %)
    
    
    18,827
    
    
    
    (22.0
    %)
 For the Nine Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeOpen Applications  Beginning
    
    
    17,648
    
    
    
    (24.0
    %)
    
    
    23,219
    
    
    
    (6.8
    %)New Applications
    
    
    86,607
    
    
    
    25.9
    %
    
    
    68,779
    
    
    
    (17.6
    %)Cancelled Applications
    
    
    (55,610
    )
    
    
    82.8
    %
    
    
    (30,416
    )
    
    
    (1.0
    %)Originated Loans
    
    
    (34,075
    )
    
    
    (20.3
    %)
    
    
    (42,755
    )
    
    
    (20.1
    %)Open Applications  Ending
    
    
    14,570
    
    
    
    (22.6
    %)
    
    
    18,827
    
    
    
    (22.0
    %)
 45




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##### Table of Contents



The tables below provide a comparative analysis of mortgage loan originations: For the Three Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeOrigination Volume (in millions)
    
    $
    2,183.3
    
    
    
    (33.7
    %)
    
    $
    3,291.0
    
    
    
    (11.9
    %)Number of Originated LoansBuilder
    
    
    4,991
    
    
    
    (21.9
    %)
    
    
    6,393
    
    
    
    (3.4
    %)Retail
    
    
    5,045
    
    
    
    (30.0
    %)
    
    
    7,212
    
    
    
    (26.5
    %)10,036
    
    
    
    (26.2
    %)
    
    
    13,605
    
    
    
    (17.2
    %)Average Loan Size  Originated Loans
    
    $
    217,500
    
    
    
    (10.1
    %)
    
    $
    241,900
    
    
    
    6.3
    %
 For the Nine Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeOrigination Volume (in millions)
    
    $
    7,640.5
    
    
    
    (24.6
    %)
    
    $
    10,136.9
    
    
    
    (14.4
    %)Number of Originated LoansBuilder
    
    
    14,977
    
    
    
    (20.7
    %)
    
    
    18,887
    
    
    
    2.2
    %Retail
    
    
    19,098
    
    
    
    (20.0
    %)
    
    
    23,868
    
    
    
    (31.9
    %)34,075
    
    
    
    (20.3
    %)
    
    
    42,755
    
    
    
    (20.1
    %)Average Loan Size  Originated Loans
    
    $
    224,200
    
    
    
    (5.4
    %)
    
    $
    237,100
    
    
    
    7.2
    %
 Total originations for the three and nine months ended December 31, 2007 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 23% and 20% of our originations for the three months
ended December 31, 2007 and 2006, respectively. Refinancing activity accounted for 19% of our
originations for the nine months ended December 31, 2007 and 2006. For the three months ended
December 31, 2007 and 2006, Financial Services originated 79% and 80% of the non-cash unit closings
of Home Buildings customers, respectively. For the nine months ended December 31, 2007 and 2006,
Financial Services originated 79% of the non-cash unit closings of Home Buildings customers. Beginning in early 2007, the mortgage markets were affected by declines in values and
increased default levels of sub-prime mortgage loans. There is not an industry-wide definition
of a sub-prime mortgage loan. In order to assess our financial exposure as a result of these
developments, we evaluated mortgages originated by Financial Services during fiscal year 2008. For
the purpose of this analysis, we defined a sub-prime mortgage loan as a non-agency eligible loan
with all of the following characteristics: unverified income (documentation); borrower credit
scores (FICO scores) less than 660; and loan-to-value ratios greater than 90%. We concluded that
these sub-prime mortgage loans do not have the potential for a material impact on our operations as
of December 31, 2007. The deterioration of the mortgage markets accelerated during the second quarter of fiscal year
2008, which has resulted in the virtual elimination of the nonconforming mortgage market. As a
result, Financial Services has essentially ceased originating nonconforming loans. Further
disruption in the mortgage markets 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 our home services operations, as well as corporate general and
administrative expense and interest expense. 46




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##### Table of Contents



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 December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeOperating Earnings (Loss) from Home Services
Operations
    
    $
    1,458
    
    
    
    (218.9
    %)
    
    $
    (1,226
    )
    
    
    (21.3
    %)Interest Income and Other Revenue
    
    
    1,320
    
    
    
    100.0
    %
    
    
    
    
    
    
    Corporate General and Administrative Expense
    
    
    (37,850
    )
    
    
    (47.7
    %)
    
    
    (72,369
    )
    
    
    (0.3
    %)Other
    
    
    125
    
    
    
    (286.6
    %)
    
    
    (67
    )
    
    
    100.0
    %Operating Loss
    
    $
    (34,947
    )
    
    
    (52.6
    %)
    
    $
    (73,662
    )
    
    
    (0.6
    %)
 For the Nine Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeOperating Earnings (Loss) from Home Services
Operations
    
    $
    4,166
    
    
    
    (196.3
    %)
    
    $
    (4,324
    )
    
    
    (31.8
    %)Interest Income and Other Revenue
    
    
    24,145
    
    
    
    100.0
    %
    
    
    
    
    
    
    Corporate General and Administrative Expense
    
    
    (117,371
    )
    
    
    (31.8
    %)
    
    
    (172,137
    )
    
    
    (15.3
    %)Other
    
    
    348
    
    
    
    (86.3
    %)
    
    
    2,532
    
    
    
    (642.2
    %)Operating Loss
    
    $
    (88,712
    )
    
    
    (49.0
    %)
    
    $
    (173,929
    )
    
    
    (17.2
    %)
 Our home services revenues increased 4.2% and 7.5% for the three and nine months ended
December 31, 2007, respectively, as compared to the same periods in the prior year. The increases
in revenues for both periods are the result of an expanded customer base. We had 418 thousand pest
defense customers as of December 31, 2007 as compared to 397 thousand as of December 31, 2006. The
positive operating earnings realized by our home services operations for the three and nine months
ended December 31, 2007 are primarily due to the increase in revenues and leverage in selling,
general and administrative expenses. Included in interest income and other revenue for the nine months ended December 31, 2007 is a
$12.9 million gain on the sale of an airplane. Corporate general and administrative expenses
represent corporate employee compensation and benefits, professional services and other corporate
costs such as investor communications, insurance, rent, utilities and travel costs. The following
tables summarize corporate general and administrative expenses (dollars in thousands): For the Three Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeCompensation and Benefits
    
    $
    23,210
    
    
    
    (42.2
    %)
    
    $
    40,137
    
    
    
    (27.8
    %)Professional Services
    
    
    6,366
    
    
    
    (7.6
    %)
    
    
    6,893
    
    
    
    (1.9
    %)Rent and Utilities
    
    
    1,498
    
    
    
    (37.5
    %)
    
    
    2,398
    
    
    
    49.8
    %Travel
    
    
    1,247
    
    
    
    (27.8
    %)
    
    
    1,727
    
    
    
    (33.3
    %)Other
    
    
    5,529
    
    
    
    (73.9
    %)
    
    
    21,214
    
    
    
    269.4
    %General and Administrative Expenses
    
    $
    37,850
    
    
    
    (47.7
    %)
    
    $
    72,369
    
    
    
    (0.3
    %)
 For the Nine Months Ended December 31,2007
    
    2006Change
    
    
    
    
    
    
    ChangeCompensation and Benefits
    
    $
    85,424
    
    
    
    (35.9
    %)
    
    $
    133,232
    
    
    
    (16.8
    %)Professional Services
    
    
    14,283
    
    
    
    (0.6
    %)
    
    
    14,368
    
    
    
    (3.6
    %)Rent and Utilities
    
    
    4,842
    
    
    
    (8.9
    %)
    
    
    5,316
    
    
    
    20.0
    %Travel
    
    
    3,858
    
    
    
    (33.7
    %)
    
    
    5,822
    
    
    
    (17.1
    %)Other
    
    
    8,964
    
    
    
    (33.1
    %)
    
    
    13,399
    
    
    
    (20.1
    %)General and Administrative Expenses
    
    $
    117,371
    
    
    
    (31.8
    %)
    
    $
    172,137
    
    
    
    (15.3
    %)
 47




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##### Table of Contents



The decrease in corporate general and administrative expenses in the three and nine months
ended December 31, 2007 versus the same periods in the prior year is primarily related to decreases
in compensation and benefits. The decrease in compensation and benefits is a result of reductions
in personnel at our corporate offices and decreases in our estimated performance-related incentive
compensation. INCOME TAXES We recognized an income tax provision of $254.5 million and an income tax benefit of $57.2
million for the three months ended December 31, 2007 and 2006, respectively. We recognized an
income tax benefit of $187.7 million for the nine months ended December 31, 2007 versus income tax
expense of $99.6 million for the same period of the prior year. The significant changes in our
effective tax rate reflect the recognition of a deferred income tax asset valuation allowance, the
recognition of a liability for unrecognized tax benefits and related accrued interest,
nondeductible compensation, a reduction of the domestic manufacturing deduction and a decrease in
pre-tax earnings. DISCONTINUED OPERATIONS On July 11, 2006, we sold Home Equity to an unrelated third party and received $518.5 million
in cash, net of related expenses and as adjusted for the settlement of post-closing adjustments,
which includes the repayment of certain intercompany amounts. The purchase price consisted of a
payment based on the book value of the company, plus a premium calculated in accordance with agreed
upon formulas and procedures. 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 the estimated settlement of
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. For additional information on our discontinued operations, see Note (L), Discontinued
Operations, of the Notes to Consolidated Financial Statements. Home Equity Discontinued operations for Home Equity are as follows (dollars in thousands): For the Three Months Ended December 31,
    
    
    For the Nine Months Ended December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    170,124Operating Loss
    
    $
    
    
    
    $
    (260
    )
    
    $
    
    
    
    $
    (44,300
    )Pre-tax Gain on Sale
    
    $
    
    
    
    $
    11,400
    
    
    $
    
    
    
    $
    113,824
 Construction Services Discontinued operations for Construction Services are as follows (dollars in thousands): For the Three Months Ended December 31,
    
    
    For the Nine Months Ended December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    
    
    
    $
    558,234
    
    
    $
    
    
    
    $
    1,534,960Operating Loss
    
    $
    
    
    
    $
    11,278
    
    
    $
    
    
    
    $
    26,339Pre-tax Gain on Sale
    
    $
    
    
    
    $
    
    
    
    $
    5,463
    
    
    $
    
 After the sale of Construction Services, we remain responsible for certain surety bond
obligations relating to Construction Services projects commenced prior to March 30, 2007. At
December 31, 2007, these surety bonds have a total face amount of $3.54 billion, although the risk
of liability with respect to these surety bonds declines as the relevant construction projects are
performed. We estimate that $726.8 million of work remains to be performed on these projects at
December 31, 2007. 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 48




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##### Table of Contents



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 an A+ (S&P) and A1
(Moodys) credit rating. The obligation of such financial institution under the back-up indemnity
is $1.10 billion as of December 31, 2007, which declines to $400 million over time and terminates
in 2016. FINANCIAL CONDITION AND LIQUIDITY The consolidating net cash used in or provided by the 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 Nine Months Ended December 31,2007
    
    
    2006Net Cash Provided by (Used in)Centex*Operating Activities
    
    $
    (218,719
    )
    
    $
    (245,660
    )Investing Activities
    
    
    (331,063
    )
    
    
    (3,442
    )Financing Activities
    
    
    (266,612
    )
    
    
    263,497(816,394
    )
    
    
    14,395Financial ServicesOperating Activities
    
    
    796,497
    
    
    
    297,975Investing Activities
    
    
    57,851
    
    
    
    56,441Financing Activities
    
    
    (858,836
    )
    
    
    (356,971
    )(4,488
    )
    
    
    (2,555
    )Centex Corporation and SubsidiariesOperating Activities
    
    
    513,164
    
    
    
    (518,998
    )Investing Activities
    
    
    (20,598
    )
    
    
    28,532Financing Activities
    
    
    (1,313,448
    )
    
    
    502,306Net (Decrease) Increase in Cash
    
    $
    (820,882
    )
    
    $
    11,840
  *
    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; the Financial Services
subsidiaries and related companies have structured their financing programs substantially on a
stand alone basis; 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
Construction Services cash flows prior to disposal are included with the Centex cash flows and all
Home Equity cash flows prior to disposal are included with the Financial Services cash flows.
Significant components of cash flows from discontinued operations are discussed below. Centex We generally fund our Centex operating and other short-term liquidity needs through 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
nine months ended December 31, 2007, Centexs cash from operating activities was primarily used for
income tax payments, employee compensation and other reductions in accounts payable and accrued
liabilities, which was partially offset by a decrease in inventory. Centexs cash used in
investing activities during the nine months ended December 31, 2007 primarily relates to capital
contributions of $203.0 million made to Financial Services in order to meet the equity requirements
under its committed warehouse facilities and to facilitate the funding of future construction
loans, and to a lesser extent, cash contributions to joint ventures. Cash used in Centexs
financing activities during the nine months ended December 31, 2007 was primarily for the repayment
of $281.2 million in long-term debt. During the nine months ended December 31, 2006, cash was primarily used in Centexs operating
activities to finance increases in Home Building inventories relating to the units under
construction during the period, and for the acquisition of land held for development. The funds
provided by Centexs financing activities for the nine months 49




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##### Table of Contents



ended December 31, 2006 were primarily from debt issued to fund the increased homebuilding
activity, offset by funds used to repay debt and to fund share repurchases. Financial Services We generally fund our Financial Services operating and other short-term liquidity needs
through a committed warehouse facility, 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 nine months ended December 31, 2007 and 2006, 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. The funds provided by Financial Services
investing activities in the nine months ended December 31, 2006 were primarily related to the
proceeds from the sale of Home Equity and Financial Services technology operations. Included in
Financial Services financing activities during the nine months ended December 31, 2007 was cash
used for the repayment of short-term and long-term debt from the proceeds from sales of mortgage
loans. The capital contribution made by Centex to Financial Services described above is also
reflected as a financing activity during the nine months ended December 31, 2007. During the nine
months ended December 31, 2006, Financial Services financing activities also included Home
Equitys issuance of long-term debt used to fund the increase in its mortgage loans held for
investment prior to its sale (see further explanation below). Discontinued Operations Included in Centexs operating cash flows for the nine months ended December 31, 2006 were
general contracting fees obtained through our Construction Services segment. For the nine months
ended December 31, 2006, cash used by Construction Services operating cash flows was $1.2 million. Included in Financial Services operating cash flows for the nine months ended December 31,
2006 were funds from securitizations and interest income on mortgage loans held by Home Equity for
investment. Financial Services cash used in financing activities during the nine months ended
December 31, 2006 was the result of Home Equitys issuance of long-term debt used to fund the
increase in its mortgage loans held for investment prior to its sale. Construction Services and Home Equity 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 December 31, 2007 are summarized
below (dollars in thousands): Existing Credit
    
    AvailableFacilities
    
    CapacityCentexMulti-Bank Revolving Credit FacilityRevolving Credit
    
    $
    1,250,000
    
    
    $
    1,250,000Letters of Credit
    
    
    835,000
    
    
    
    416,9452,085,000
    
    
    
    1,666,945
    (1)Financial ServicesSecured Credit Facilities
    
    
    457,000
    
    
    
    57,274
    (2)Other Facilities
    
    
    250,000
    
    
    
    
    (3)707,000
    
    
    
    57,274$
    2,792,000
    
    
    $
    1,724,219
  (1)
    This is an unsecured, committed, multi-bank revolving credit facility, maturing in July 2010,
that serves as funding for general corporate purpose and provides $835 million of letter of
credit capacity. As of December 31, 2007, there were no amounts outstanding under the
revolving credit facility.(2)
    CTX Mortgage Company, LLC maintains $457 million of secured, committed mortgage warehouse
facilities.(3)
    There will be no additional borrowings under these facilities. Amounts outstanding of $169.4
million as of December 31, 2007 will be repaid using the proceeds from the sale of the loans
or the underlying collateral or repaid by Financial Services.   50




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##### Table of Contents



Our outstanding debt (in thousands) as of December 31, 2007 was as follows (due dates are
presented in fiscal years): CentexSenior Debt:Senior Notes, weighted-average 5.89%, due through 2017
    
    $
    3,619,137Other Indebtedness, weighted-average 7.34%, due through 2018
    
    
    4,0993,623,236Financial ServicesShort-term Debt:Short-term Notes Payable
    
    
    569,081$
    4,192,317
 During the nine months ended December 31, 2007, the principal amount of our outstanding
long-term debt decreased $339.4 million resulting from the following (dollars in millions): Debt Type
    
    AmountCentexIssuances
    
    Other Indebtedness (1)
    
    $
    1.5Retirements, net
    
    Medium-term Note
    
    
    (170.0
    )Senior Note
    
    
    (89.9
    )Other Indebtedness
    
    
    (21.0
    )Financial ServicesRetirements, net
    
    Subordinated Certificates
    
    
    (60.0
    )Total
    
    
    
    $
    (339.4
    )
  (1)
    Amount includes the non-cash assumption of long-term debt. Effective April 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB No. 109, which we refer to as 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 FIN 48, at December 31,
2007, accrued liabilities include $496.7 million in unrecognized tax benefits, accrued interest and
accrued penalties (which excludes the tax benefit relating to the deductibility of interest and
state income tax). Due to the nature of these liabilities and ongoing examinations by taxing
authorities, we are unable to reasonably estimate during which future periods these amounts will
ultimately be settled. For further information regarding FIN 48, see Note (J), Income Taxes, of
the Notes to Consolidated Financial Statements. As of December 31, 2007, our short-term debt was $569.1 million, all of which was applicable
to Financial Services. As of December 31, 2007, we had no amounts outstanding under our revolving
credit facility. From time to time, we borrow under our facility for general working capital
purposes. Amounts are repaid using cash flows from operations. Under debt covenants contained in our multi-bank revolving credit facility, we are required to
maintain compliance with certain financial covenants. In addition, our committed bank warehouse
credit facilities contain various affirmative and negative covenants that are generally customary
for facilities of this type. At December 31, 2007, we were in compliance with all our debt
covenants. We monitor compliance with these covenants on a quarterly basis, including
forward-looking projections. We obtained a waiver for the third quarter of fiscal year 2008, waiving any event of default
under our financial covenants caused by the recognition of a deferred income tax asset valuation
allowance. We will seek an amendment to our multi-bank revolving credit facility in the fourth quarter of
fiscal year 2008, which will include modifications to the covenant provisions included in the
credit facility. The amendment may also include, among other things, a reduction in the commitment
amount under this facility and a borrowing base formula to calculate credit availability, triggered
only if our senior unsecured debt falls below investment grade as rated by two out of the three
principal rating agencies. HSF-I was a variable interest entity of which we were the primary beneficiary and that was
consolidated in our financial statements. Prior to the second quarter of fiscal year 2008,
substantially all of the mortgage loans originated by CTX Mortgage Company, LLC were funded through
the sale of such mortgage loans to HSF-I. HSF-I obtained the funds needed to purchase eligible
mortgage loans from CTX Mortgage Company, LLC, by issuing short-term secured liquidity notes and
other securities. Since the second quarter of fiscal year 2008, HSF-I has not been able to issue
short-term liquidity notes to finance the purchase of mortgage loans from CTX Mortgage Company, LLC
as a 51




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result of current market conditions affecting the mortgage finance industry. Accordingly, CTX
Mortgage Company, LLC discontinued sales of mortgage loans to HSF-I. In November 2007, we
terminated HSF-I and all of its outstanding obligations were redeemed. Our decision to terminate
HSF-I was influenced by external factors and not by any quality or performance issues related to
HSF-I or its underlying collateral. For additional information regarding HSF-I and certain related arrangements, see Note
(F), Indebtedness, of the Notes to Consolidated Financial Statements. Due to the unavailability of HSF-I as a funding source for CTX Mortgage Company, LLCs
mortgage loan originations, CTX Mortgage Company, LLC increased its use of a committed bank
mortgage warehouse credit facility. The bank has the right to terminate its obligation to purchase
any additional mortgage loans under the warehouse facility if our long-term unsecured debt ratings
fall below BB+ by Standard & Poors, which we refer to as S&P, or Fitch or Ba1 by Moodys Investors
Service, which we refer to as Moodys. Our long-term unsecured debt is currently rated BBB- by
S&P, BBB by Fitch and Ba1 by Moodys. CTX Mortgage Company, LLC also uses a mortgage loan sale
agreement to fund its loan originations. CTX Mortgage Company, LLC may seek to enter into
additional mortgage warehouse facilities with other lenders and additional mortgage loan sale
agreements with other investors. 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 we 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 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 general, we believe that our existing sources of funding, including 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 the foreseeable future. As
a supplement to our cash provided by operations, we may elect to sell certain non-strategic
operations. Any such sales would require the negotiation of mutually acceptable arrangements with
a third-party buyer, may require the consent of our lenders under our multi-bank credit facility
and could take an extended period of time to complete. 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 cash flow from operations 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. 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 II, Item
1A, Risk Factors. 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. 52




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A summary of our Home Building joint ventures is presented below (dollars in thousands): As of December 31, 2007
    
    
    As of March 31, 2007Centexs
    
    
    
    
    
    
    
    
    
    
    CentexsShare
    
    
    
    
    
    
    
    
    
    
    ShareActive (1)
    
    
    Investments
    
    
    of Debt
    
    
    Active (1)
    
    
    Investments
    
    
    of DebtUnleveraged Joint Ventures
    
    
    25
    
    
    $
    31,655
    
    
    $
    
    
    
    
    28
    
    
    $
    33,369
    
    
    $
    Joint Ventures with Debt:
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    21Limited Maintenance
Guarantee (2) (3) (4)
    
    
    
    
    
    
    87,866
    
    
    
    50,833
    
    
    
    
    
    
    
    108,057
    
    
    
    162,425Repayment Guarantee (2) (5)
    
    
    
    
    
    
    2,513
    
    
    
    14,142
    
    
    
    
    
    
    
    2,247
    
    
    
    16,045Completion Guarantee (4)
    
    
    
    
    
    
    106,513
    
    
    
    172,783
    
    
    
    
    
    
    
    126,469
    
    
    
    209,927No Recourse or Guarantee
    
    
    
    
    
    
    12,547
    
    
    
    24,000
    
    
    
    
    
    
    
    11,502
    
    
    
    24,00043
    
    
    $
    241,094
    
    
    $
    261,758
    
    
    
    49
    
    
    $
    281,644
    
    
    $
    412,397
  (1)
    The number of active 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 24 and 28 of the active joint ventures as of
December 31, 2007 and March 31, 2007, respectively.(2)
    These amounts represent the Companys maximum exposure related to the joint ventures debt
at each respective date.(3)
    We have guaranteed that certain of the joint ventures will maintain a specified loan to value
ratio. For certain joint ventures, we have 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. For certain joint
ventures, we have contributed additional capital in order to complete land development.(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 December 31, 2007 and March 31, 2007 was $571.9
million and $1.0 billion, 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 its 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 its joint ventures. During the three months ended December 31, 2007, the lender to certain of our joint ventures
has notified us that it believes the joint ventures are in default of certain joint venture loan
agreements as a result of our joint venture partner not complying with all aspects of the joint
ventures loan agreements. The lender has not taken any action against the joint ventures or us at
this time. Additionally, a lender to two of our other joint ventures has notified us that it
believes the joint ventures are in default of their joint venture loan agreements for not meeting
their contractual obligations. We are currently in discussions with the lender. Based upon the
terms and debt amounts outstanding for these joint ventures and the terms of the joint venture
agreements, we do not believe our exposure related to these joint venture defaults will be material
to our financial position or results of operations. 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 December 31, 2007, and
we have not projected the early repayment of joint venture debt. For the Fiscal Years EndedMarch 31,2008
    
    $
    52,5112009
    
    
    124,1032010
    
    
    34,7822011
    
    
    25,6012012
    
    
    24,761Thereafter
    
    
    $
    261,758
 53




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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 December 31, 2007 and March 31, 2007. Financial Services also periodically reviews its construction loan commitments for
collectibility. To establish the appropriate allowance, we first classify our construction 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.
Please refer to Note (C), Mortgage Loans, of the Notes to Consolidated Financial Statements for
additional information on our construction loans and the related allowance as of December 31, 2007
and March 31, 2007. 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 loans in foreclosure. In addition, Financial
Services will foreclose on certain nonperforming construction loans. Loans in foreclosure are
included as a component of trade and other receivables. We establish an allowance for loans in
foreclosure based on our historical loss experience and current loss trends. As of December 31,
2007 and March 31, 2007, we had $43.3 million and $15.6 million in loans in foreclosure,
respectively, which were net of allowances of $49.3 million and $8.3 million, respectively. 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 December 31, 2007
and March 31, 2007, real-estate owned was $12.9 million and $8.7 million, respectively, which were
net of allowances of $10.1 million and $2.7 million, respectively. Although we consider our mortgage loan allowances and related reserve reflected in our
Consolidated Balance Sheets at December 31, 2007 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. 54




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On a quarterly basis we assess our neighborhoods, 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 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),
and
    estimated project life. For the quarter ended December 31, 2007, discount rates used in our estimated discounted cash
flow assessments ranged from 13% to 22%, with an average discount rate of 16%. 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 lot 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 55




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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 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,
    evaluation of 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. During the quarter ended September 30, 2007, we determined circumstances required an interim
review of goodwill recorded in the homebuilding segment. Please refer to Note (E), Goodwill, of
the Notes to Consolidated Financial Statements for additional information on our goodwill
impairments. 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 56




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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. 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 FASB Statement No. 109, Accounting for Income Taxes, we
assess, on a quarterly basis, the realizability of our deferred income tax asset. 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 income tax asset will not be realized.
Realization of deferred income 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. 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. For further discussion regarding the adoption of FIN 48, please refer to Note
(J), Income Taxes, of the Notes to Consolidated Financial Statements. 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. Prior to the adoption of FIN 48, we applied SFAS No. 5, Accounting for Contingencies, to
assess and provide for potential income tax exposures. In accordance with SFAS No. 5, we
maintained reserves for tax contingencies based on reasonable estimates of the tax liabilities,
interest, and penalties (if any) that may result from tax audits. FIN 48 substantially changes the
applicable accounting model and is likely to cause greater volatility in income statements and
effective tax rates as more items are recognized and/or derecognized discretely within income tax
expense. 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. The IRS has 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. 57




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RECENT ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued SFAS No. 157, or SFAS 157, Fair Value Measurements, which
serves to define fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS 157 will be
effective for us as of April 1, 2008. We are currently evaluating the impact, if any, of adopting
SFAS 157 on our financial statements. The FASB Staff has exposed for comment a FASB Staff Position, or FSP, that would delay 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 the deferral would apply 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 (e.g.
inventory impairment assessments). The FSP, as proposed, would defer the application of SFAS 157
to nonfinancial assets and nonfinancial liabilities for us to April 1, 2009. In February 2007, the FASB issued SFAS No. 159, or SFAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities. 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, will enable some 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. SFAS 159 will be
effective for us as of April 1, 2008. We expect that the adoption of SFAS 159 will not have a
material impact on our results of operations or financial position. In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
109, Written Loan Commitments Recorded at Fair Value Through Earnings, which we refer to as SAB
109. SAB 109 requires that the expected net future cash flows related to the associated servicing
of a loan should be included in the measurement of all written loan commitments that are accounted
for at fair value through earnings. The provisions of SAB 109 are applicable to written loan
commitments issued or modified beginning January 1, 2008. We expect that the adoption of SAB 109
will not have a material impact on our results of operations or financial position. 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 earnings. 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 are currently evaluating the impact, if any, of adopting
SFAS 160 on our financial statements.   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, cash flows,
financial resources, changes in interest rates, changes in revenues and cancellation rates, changes
in profitability, interest expense, growth and expansion, anticipated income or losses to be
realized by our investment in unconsolidated entities, the availability and cost to our customers
of mortgage-based financing, the ability to acquire land and options to buy land, the necessity to
value or dispose of land or other assets, or to cancel or renegotiate options to buy land, which
may result in land- 58




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related impairments or write-offs of option deposits and pre-acquisition costs, 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 or to cancel orders
for materials and work, the ability to produce or obtain the liquidity and capital necessary to
finance our operations and expand and take advantage of opportunities in the future, 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 the Companys 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, 2007 and our
Quarterly Reports on Form 10-Q for the quarters ended June 30 and September 30, 2007 (which is
hereby incorporated by reference), 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
which 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. There have been no material changes in our market risk since March 31, 2007. For further
information regarding our market risk, refer to our Annual Report on Form 10-K for the fiscal year
ended March 31, 2007 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 our disclosure controls and procedures as of December 31, 2007. 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 December 31, 2007. There has been no
change in our internal controls over financial reporting during the quarter ended December 31, 2007
that has materially affected, or is reasonably likely to materially affect, our internal controls
over financial reporting. 59




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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
suits filed in various state and federal courts. We believe that none of the litigation matters in
which we, or any of our subsidiaries, are involved would 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 Set forth below is a discussion of the material changes in our risk factors as previously
disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended March
31, 2007 (2007 Form 10-K), as updated in our Quarterly Reports on Form 10-Q for the quarters
ended June 30, 2007 (Q1 Form 10-Q) and September 30, 2007 (Q2 Form 10-Q). The information
presented below updates, and should be read in conjunction with, the risk factors and other
information disclosed in our 2007 Form 10-K, our Q1 Form 10-Q and our Q2 Form 10-Q. The first risk factor contained in Item 1A of the 2007 Form 10-K, under Home Building, is
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 to do so. Beginning in fiscal year 2006, many U.S. housing markets 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:  
    increased inventory of new and existing homes for sale, including homes in
foreclosure,
    reduced availability and increased cost of mortgage financing due to the significant
mortgage market disruption in recent periods,
    a decrease in the 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,
    a decline in homebuyer demand due to lower consumer confidence in the consumer real
estate market and an inability of many homebuyers to sell their existing homes, and
    pricing pressures resulting from the need for home prices to meet FHA and other
conforming loan limits and the imbalance between housing supply and housing demand as
evidenced by homebuilders offering significant discounts and sales incentives to
homebuyers and seeking to liquidate unsold inventories in order to generate cash. These conditions have led to, among other things, (i) significant decreases in our
homebuilding revenues, (ii) substantial land-related impairments, (iii) write-offs of land deposits
and pre-acquisition costs and (iv) goodwill impairments. As a result, our homebuilding operations
have incurred substantial losses in recent periods and are expected to continue to do so, at least
in the near term. Any further worsening in market conditions in the homebuilding industry are
likely to have a further material adverse effect on our business and results of operations. The second risk factor contained in Item 1A of the 2007 Form 10-K, under Home Building, is
amended to read as follows: The market value of land may fluctuate significantly, which has resulted in significant impairments
and write-offs in our land holdings and may continue to do so. The risk of owning land can be substantial for homebuilders. The market value of land,
buildable lots and housing inventories can fluctuate significantly as a result of changing economic
and market conditions, such as the industry downturn we are currently experiencing. 60




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During the three and nine months ended December 31, 2007, we decided not to pursue development
and construction in certain areas where we held land or had made option deposits, which resulted in
$26.4 million and $87.6 million, respectively, in recorded write-offs of option deposits and
pre-acquisition costs. In addition, market conditions led to recorded land-related impairments on
neighborhoods and land during the three and nine months ended December 31, 2007 of $502.9 million
and $1,492.4 million. Land-related impairments during the three months ended December 31, 2007
represented 147 neighborhoods and land investments. Land-related impairments during the nine
months ended December 31, 2007 represented 316 neighborhoods and land investments, certain of which
have been impaired more than once. These market conditions also adversely affected land values in
our Home Building joint ventures. Our share of the joint ventures impairments was $24.9 million
and $88.5 million for the three and nine months ended December 31, 2007, respectively. These
land-related impairments adversely affected our operating earnings and operating margins during the
three and nine months ended December 31, 2007. If market conditions do not improve in future
periods, we may decide not to pursue development and construction in additional areas, which would
lead to further write-offs of option deposits and pre-acquisition costs. Additionally, our
land-related impairment analyses are affected by market conditions and certain assumptions, such as
sales prices, sales rates and discount rates used, and relatively small changes in these
assumptions could lead to significant land-related impairments. The fourth risk factor contained in Item 1A of the 2007 Form 10-K, under Home Building, is
amended to read as follows: Increases in interest rates or changes in federal lending programs, regulations and laws 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 increases in interest rates could cause
potential homebuyers to be less willing or able to purchase 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 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. The Department of Housing and Urban Development (HUD) and
Congress are considering limitations and further regulation of these programs. Such restrictions
may limit the ability of seller-funded non-profit corporations to fund down payment assistance
programs for government-insured mortgage loans. HUD has issued a rule that eliminates
seller-funded down payment assistance as an acceptable minimum investment in the property for FHA
insured loans. However, the implementation of that rule has been delayed as a result of litigation
filed by certain down payment assistance providers. The ultimate outcome of this litigation is
uncertain. If, as a result of legislative, regulatory or other action, certain of the gift fund
programs that our customers use would no longer be available to them, we would expect to work to
provide other financing alternatives, and seek different down payment programs for our customers
that 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. The final risk factor contained in Item 1A of the 2007 Form 10-K, under Home Building, is
amended to read as follows: An inability to obtain bonding could limit the number of projects we are able to pursue, and we
could be adversely affected if we are required to post additional collateral in respect of bonds
issued in connection with past construction projects. As is customary in the homebuilding industry, we often are required to provide surety bonds to
secure our performance under construction contracts, development agreements and other arrangements.
Our ability to obtain surety bonds primarily depends upon our credit rating, capitalization,
working capital, past performance, management expertise and certain external factors, including our
overall capacity in the surety market. Under certain circumstances, such as a claim on the bond, a
breach of the contract to which the bond applies, or a material breach of a representation made to a
surety, we may be required to provide one or more
sureties with additional collateral to support our bond obligations. In addition, in some cases,
upon request of a surety, we may be required to cause the surety to be discharged from all bond
obligations by providing collateral sufficient to cover all of such suretys bond exposure or
alternative funding of such bond obligations. If one or more of our third-party sureties were to request 61




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additional collateral, our obligations could be
significant, which could have a material adverse effect on our financial position or results of
operations. The first and fourth risk factors contained in Item 1A of the 2007 Form 10-K, under Factors
Affecting Multiple Business Segments, are amended to read as follows: Market conditions in the mortgage lending and mortgage finance industries worsened significantly in
2007, which adversely affected the availability of credit for some purchasers of our homes, reduced
the population of potential mortgage customers and reduced mortgage liquidity. Further tightening
of mortgage lending or mortgage financing requirements or further reduced mortgage liquidity could
have a material adverse effect on our homebuilding and mortgage lending operations and their
respective results of operations. In 2007, the mortgage lending industry experienced significant disruption due to, among other
things, defaults on sub-prime loans and a resulting decline in the market value of such loans.
In light of these developments, lenders, investors, regulators and other third parties questioned
the adequacy of loan documentation and credit requirements for certain types of loan programs made
available to borrowers in recent years. This led to reduced investor demand for mortgage loans and
mortgage-backed securities, tightened credit underwriting requirements, reduced liquidity and
increased credit risk premiums. For example, perceived deterioration in credit quality among
sub-prime and other nonconforming loan borrowers has caused almost all lenders to eliminate
sub-prime mortgages and most other loan products that are not conforming loans, FHA/VA-eligible
loans or jumbo loans meeting conforming underwriting guidelines except as to the size of the loan.
In general, fewer loan products and tighter loan qualifications make it more difficult for some
categories of borrowers to finance the purchase of our homes or obtain mortgage loans from us to
finance the purchase of homes sold by others. Furthermore, these developments have resulted and
are expected to continue to result in a reduction in demand for the homes that we sell, and delays
in any general improvement in the housing market have resulted in a reduction in the demand for the
mortgage loans that we originate. These reductions in demand have had and are expected to continue
to have a material adverse effect on our business and results of operations. The adverse market conditions in the mortgage lending industry described above have affected
our business in a number of respects. For example, CTX Mortgage Company, LLC has essentially
ceased originating nonconforming loans. Furthermore, due to the reduction in available mortgage
loan liquidity, CTX Mortgage Company, LLC decided in the second quarter of fiscal year 2008 to
discontinue the origination of new construction loans. In addition, in the second and third
quarters of fiscal year 2008, CTX Mortgage Company, LLC ceased selling loans to HSF-I, which had
been the principal financing vehicle for its operations, and terminated this financing vehicle.
Further disruption in the mortgage markets 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. Further tightening of the mortgage lending markets in the form of reduced numbers or types of
loan products, or tighter loan qualification requirements (including credit score and down payment
requirements), could further reduce the demand for our homes or the mortgages we originate, which
could have a material adverse effect on our business or results of operations. In addition,
further adverse conditions in the mortgage finance markets as a result of further reduced mortgage
liquidity or decreased demand for mortgage loans could result in an inability to sell or finance
the loans we originate, or less favorable terms of sale or reduced yield or greater reserves
pending sale, which could have a material adverse effect on our business or results of operations. We could be adversely affected by a change in our credit rating or a disruption in the capital
markets. Our ability to sustain or grow our business and to operate in a profitable manner depends to a
significant extent upon our ability to access capital. Capital is used principally to finance
operations, purchase and develop land, construct houses and originate mortgage loans. Until
recently, our access to capital was enhanced by the fact that our senior debt securities had an
investment-grade credit rating from each of the principal credit rating agencies, and we were able
to issue commercial paper. During the quarter ended December 31, 2007, Moodys and S&P lowered
their ratings of our senior debt, and changed our commercial paper rating to non-prime. See
Financial Condition and Liquidity in Item 2 of this Report for additional information about our
credit rating. As a result of our current rating, we do not have access to financing strategies
that are available to companies with investment grade ratings. As a consequence, it may become
more difficult and costly for us to access the capital that is required in order to implement our
business plans and operate our business. There can be no assurance that we will not experience a
further downgrade in our credit rating by the rating agencies that would likely result in increased
costs for certain of our financing and also further restrict our ability to finance mortgage loan
originations. 62




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As a result of the more recent adverse market conditions affecting mortgage loans, which
worsened significantly in August 2007, CTX Mortgage Company, LLC no longer relies on asset-backed
funding vehicles, such as HSF-I, for its mortgage funding needs. Instead, CTX Mortgage Company,
LLC uses a committed bank warehouse credit facility and a loan purchase program. A further
downgrade in our credit rating by the rating agencies could result in the wind-down of the
warehouse credit facility. For more information about our current mortgage financing, see the
Financial Condition and Liquidity section of Item 2 of this Report. A long-term or further disruption in the mortgage finance or capital markets could make it
more difficult or more expensive for us to raise capital for use in our business, for our customers
to obtain home loans or for us to sell loans originated by our Financial Services segment.
Further, a reduction of the positive spread between the rate at which we can borrow and the rate at
which we can lend could hurt our ability to profit from our loan origination business. The sixth risk factor discussed in Item 1A of the 2Q Form 10-Q, under Factors Affecting
Multiple Business Segments, is amended to read as follows: Failure to comply with the covenants and conditions imposed by our credit facilities could restrict
future borrowing or cause our debt to become immediately due and payable. Under debt covenants contained in our multi-bank revolving credit facility, we are required to
maintain compliance with certain financial covenants. Material covenants include a maximum
leverage ratio and a minimum tangible net worth. At December 31, 2007, as a result of the
valuation allowance applied to our deferred tax asset in connection with our SFAS 109 assessment,
we would not have been in compliance with certain of the financial covenants in our multi-bank
revolving credit facility, absent a waiver obtained from our lenders. In particular, our lenders
waived any defaults which would have arisen as a result of such valuation allowance solely for the
quarter ended December 31, 2007 and charged us a fee in connection therewith. There can be no
assurance that we will continue to be in compliance with the covenants in our multi-bank revolving
credit facility, and we believe we will need to seek additional waivers or amendments from our
lenders in future periods. Furthermore, there can be no assurance that our lenders will agree to
such waivers or amendments on terms we regard as satisfactory. In addition, our committed bank warehouse credit facility and loan agreement relating to
certain of our joint ventures contain various affirmative and negative covenants and guarantees
that are generally customary for facilities of this type. In order to continue to borrow funds
under these facilities, we will need to continue to be in compliance with these covenants and
guarantees. In general, with respect to our multi-bank revolving credit facility, bank warehouse credit
facility and loan agreement relating to certain of our joint ventures, if we fail to comply with
any of the covenants or guarantees contained therein, which may occur if we experience additional
asset impairments or incur additional net losses, we may be unable to obtain future financing for
working capital, capital expenditures, acquisitions, debt service requirements or other
requirements, or the lending banks could cause our debt to become immediately due and payable, or
we may be required to make certain payments in connection with our joint venture indebtedness. The following risk factor is added under Factors Affecting Multiple Business Segments. We may not realize our net deferred income tax asset. As of December 31, 2007, we have a deferred income tax asset of $1.13 billion for which a $500
million valuation allowance has been established. The ultimate realization of the deferred income
tax asset is dependent upon taxable income in prior carryback years, estimates of future taxable
income, tax planning strategies and, to a lesser extent, reversals of existing taxable temporary
differences. Based on our assessment, including the implementation of certain tax planning
strategies, the realization of approximately $500 million of our deferred income tax asset is
dependent upon future taxable income. The valuation allowance may be increased or decreased as conditions change or if we are unable
to implement certain tax planning strategies. An increase in the valuation allowance would reduce
the carrying value of the deferred income tax asset and increase the provision for income taxes in
the reporting period, which would reduce net income for the period and could have a material
adverse effect on our financial position and results of operations. 63




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Share Repurchases From time to time, we have repurchased 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 December 31, 2007: 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
    
    
    PlansPeriodOctober 1-31
    
    
    1,311
    
    
    $
    25.60
    
    
    
    
    
    
    
    9,399,700November 1-30
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    9,399,700December 1-31
    
    
    6,079
    
    
    $
    25.26
    
    
    
    
    
    
    
    9,399,700Total (1)
    
    
    7,390
    
    
    $
    25.32
    
    
    
    
  (1)
    The 7,390 shares repurchased for the quarter ended December 31, 2007 represent the delivery
to the Company 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 the Companys share repurchase program. On May 11, 2006, the Companys 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. 
 Item 6. Exhibits The following documents are filed as part of this Report.  3.1
    Restated Articles of Incorporation of Centex Corporation
(Centex), as amended (incorporated by reference from Exhibit 3.1 to Centexs
Annual Report on Form 10-K for the fiscal year ended March 31, 2004).3.2
    Certificate of Correction to the Restated Articles of
Incorporation dated November 13, 2007 (filed herewith).3.3
    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, 2007, 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. 64




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10.1
    Executive Severance Policy (incorporated by reference from
Exhibit 10.1 to Centexs Current Report on Form 8-K filed on October 16, 2007).10.2
    Waiver Letter, dated January 28, 2008, among Centex, Bank of
America, N. A. as Administrative Agent, and the lenders party thereto (filed
herewith).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). 65




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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 CORPORATIONRegistrantFebruary 5, 2008
    /s/ Catherine R. SmithCatherine R. SmithExecutive Vice President and Chief Financial Officer
(principal financial officer) February 5, 2008
    /s/ Mark D. KempMark D. KempSenior Vice President-Controller
(principal accounting officer) 66