PULTE HOMES INC/MI/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9804

PULTE HOMES, INC.
(Exact name of registrant as specified in its charter)


MICHIGAN		38-2766606
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

100 Bloomfield Hills Parkway, Suite 300
Bloomfield Hills, Michigan 48304
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (248) 647-2750

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

YES ü NO .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act).

YES ü NO

Number of shares of common stock outstanding as of July 31, 2003: 61,599,127

Website Access to Company Reports, Codes and Charters

Pulte’s internet website address is www.pulte.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers, our corporate governance guidelines and the charters of the Audit, Compensation, and Nominating and Governance Committees of our Board of Directors, are also posted on our website.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1 Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002
		Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002
		Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2003 and 2002
		Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002
		Notes to Condensed Consolidated Financial Statements
	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3 Quantitative and Qualitative Disclosures About Market Risk
	Item 4 Controls and Procedures
PART II OTHER INFORMATION
	Item 4 Submission of Matters to a Vote of Security Holders
	Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 Rule 13a-14(a) Certification by CEO
EX-31.2 Rule 13a-14(a) Certification by CFO
EX-32.1 Certification Pursuant to Section 906
EX-32.2 Certification Pursuant to Section 906

PULTE HOMES, INC.

INDEX


			Page No.

PART I FINANCIAL INFORMATION

	Item 1 Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002		3

		Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002		4

		Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2003 and 2002		5

		Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002		6

		Notes to Condensed Consolidated Financial Statements		7

	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			21

	Item 3 Quantitative and Qualitative Disclosures About Market Risk			31

	Item 4 Controls and Procedures			32

PART II OTHER INFORMATION

	Item 4 Submission of Matters to a Vote of Security Holders			33

	Item 6 Exhibits and Reports on Form 8-K			33

SIGNATURES				34

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

PULTE HOMES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)


			June 30,		December 31,
			2003		2002

			(Unaudited)		(Note)
ASSETS
Cash and equivalents			$	391,087	$	613,168
Unfunded settlements				71,270		60,641
House inventory				1,107,441		863,507
Land inventory				3,910,822		3,430,090
Land, not owned, under option agreements				60,000		—
Residential mortgage loans available-for-sale				431,735		600,339
Goodwill				307,693		307,693
Intangible assets, net of accumulated amortization of $15,671 and $11,546 in 2003 and 2002, respectively				147,829		151,954
Other assets				886,372		833,279
Deferred income taxes				14,767		27,784

	Total assets		$	7,329,016	$	6,888,455

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
	Accounts payable, accrued and other liabilities, including book overdrafts of $208,659 and $181,816 in 2003 and 2002, respectively		$	1,637,936	$	1,565,131
	Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets			381,355		559,621
	Income taxes			55,690		90,009
	Senior notes and subordinated notes			2,269,955		1,913,268

		Total liabilities		4,344,936		4,128,029
Shareholders’ equity				2,984,080		2,760,426

			$	7,329,016	$	6,888,455

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)


					Three Months Ended						Six Months Ended
					June 30,						June 30,

					2003			2002			2003			2002

Revenues:
	Homebuilding				$	1,925,711		$	1,661,670		$	3,449,150		$	3,017,275
	Financial services					31,774			23,842			59,370			46,866
	Corporate					700			51			2,255			163

				Total revenues		1,958,185			1,685,563			3,510,775			3,064,304

Expenses:
	Homebuilding, principally cost of sales					1,730,593			1,516,696			3,124,023			2,759,710
	Financial services					12,488			9,376			24,225			21,088
	Corporate, net					22,746			14,513			39,670			29,679

				Total expenses		1,765,827			1,540,585			3,187,918			2,810,477

Other income:
	Equity income					4,475			3,244			13,135			6,929

Income from continuing operations before income taxes						196,833			148,222			335,992			260,756
Income taxes						74,833			57,814			127,691			101,708

Income from continuing operations						122,000			90,408			208,301			159,048
Loss from discontinued operations						(283	)		(205	)		(447	)		(733	)

Net income					$	121,717		$	90,203		$	207,854		$	158,315

Per share data:
	Basic:
		Income from continuing operations			$	2.01		$	1.49		$	3.43		$	2.64
		Loss from discontinued operations				—			—			—			(.01	)

		Net income			$	2.01		$	1.49		$	3.43		$	2.63

	Assuming dilution:
		Income from continuing operations			$	1.95		$	1.45		$	3.34		$	2.57
		Loss from discontinued operations				—			—			—			(.01	)

		Net income			$	1.95		$	1.45		$	3.34		$	2.56

	Cash dividends declared				$	.04		$	.04		$	.08		$	.08

	Number of shares used in calculation:
		Basic:
			Weighted-average common shares outstanding			60,684			60,500			60,675			60,106
		Assuming dilution:
			Effect of dilutive securities			1,788			1,859			1,601			1,827

			Adjusted weighted-average common shares and effect of dilutive securities			62,472			62,359			62,276			61,933

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($000’s omitted)
(Unaudited)


											Accumulated
											Other
					Additional						Comprehensive
		Common			Paid-in			Unearned			Income			Retained
		Stock			Capital			Compensation			(Loss)			Earnings			Total

Shareholders’ Equity, December 31, 2002		$	611		$	933,162		$	(9,866	)	$	(35,371	)	$	1,871,890		$	2,760,426
Stock option exercise, including tax benefit of $9,134			7			25,459			—			—			—			25,466
Stock-based compensation			—			6,344			—			—			—			6,344
Restricted stock award			2			(2	)		—			—			—			—
Restricted stock award amortization			—			—			2,814			—			—			2,814
Cash dividends declared			—			—			—			—			(4,885	)		(4,885	)
Stock repurchases			(4	)		(6,066	)		—			—			(12,234	)		(18,304	)
Comprehensive income (loss):
	Net income		—			—			—			—			207,854			207,854
	Change in fair value of derivatives		—			—			—			2,094			—			2,094
	Foreign currency translation adjustments		—			—			—			2,271			—			2,271

	Total comprehensive income																	212,219

Shareholders’ Equity, June 30, 2003		$	616		$	958,897		$	(7,052	)	$	(31,006	)	$	2,062,625		$	2,984,080

Shareholders’ Equity, December 31, 2001		$	592		$	862,881		$	(3,859	)	$	(13,969	)	$	1,431,020		$	2,276,665
Stock option exercise, including tax benefit of $20,638			17			52,084			—			—			—			52,101
Restricted stock award			2			11,316			(11,318	)		—			—			—
Restricted stock award amortization			—			—			2,498			—			—			2,498
Cash dividends declared			—			—			—			—			(4,866	)		(4,866	)
Comprehensive income (loss):
	Net income		—			—			—			—			158,315			158,315
	Change in fair value of derivatives		—			—			—			437			—			437
	Foreign currency translation adjustments		—			—			—			(17,152	)		—			(17,152	)

	Total comprehensive income																	141,600

Shareholders’ Equity, June 30, 2002		$	611		$	926,281		$	(12,679	)	$	(30,684	)	$	1,584,469		$	2,467,998

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)


					For The Six Months Ended
					June 30,

					2003			2002

Cash flows from operating activities:
	Net income				$	207,854		$	158,315
	Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
			Amortization and depreciation			18,658			16,752
			Stock-based compensation expense			9,158			2,498
			Deferred income taxes			13,017			10,490
			Other, net			(3,701	)		(2,954	)
			Increase (decrease) in cash due to:
				Inventories		(783,989	)		(426,519	)
				Residential mortgage loans available-for-sale		156,678			145,804
				Other assets		(14,333	)		41,992
				Accounts payable, accrued and other liabilities		102,818			78,238
				Income taxes		(25,194	)		72,050

Net cash provided by (used in) operating activities						(319,034	)		96,666

Cash flows from investing activities:
	Other, net					(16,671	)		(9,401	)

Net cash provided by (used in) investing activities						(16,671	)		(9,401	)

Cash flows from financing activities:
	Proceeds from borrowings					695,946			357,353
	Repayment of borrowings					(576,229	)		(327,872	)
	Issuance of common stock					16,332			31,463
	Common stock repurchases					(18,304	)		—
	Dividends paid					(4,885	)		(4,866	)
	Other, net					—			43

Net cash provided by (used in) financing activities						112,860			56,121

Effect of exchange rate changes on cash and equivalents						764			(2,763	)

Net increase (decrease) in cash and equivalents						(222,081	)		140,623
Cash and equivalents at beginning of period						613,168			72,144

Cash and equivalents at end of period					$	391,087		$	212,767

Supplemental disclosure of cash flow information—cash paid during the period for:
		Interest, net of amounts capitalized			$	19,833		$	22,656

		Income taxes			$	138,370		$	16,565

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of presentation and significant accounting policies

     The consolidated financial statements include the accounts of Pulte Homes, Inc. and all of its direct subsidiaries (the “Company” or “Pulte”). The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc. (PDCI), North American Builders Indemnity Company (NABIC), the Company’s captive insurance company, Del Webb Corporation (Del Webb) and other subsidiaries, which are engaged in the homebuilding business. PDCI’s operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation (International) and other subsidiaries, which are engaged in the homebuilding business. PDCI’s non-operating thrift subsidiary, First Heights Bank, fsb (First Heights), is classified as a discontinued operation. The Company also has a mortgage banking company, Pulte Mortgage LLC (Pulte Mortgage), which is a subsidiary of PHC.

     The accompanying unaudited condensed consolidated financial 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, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

     Certain amounts previously reported in the 2002 financial statements and notes thereto were reclassified to conform to the 2003 presentation.

     Effective January 1, 2002, the Company reorganized its structure within Mexico to create a single company, Pulte Mexico S. de R.L. de C.V. (Pulte Mexico). Under the new ownership structure, these operations, which were primarily conducted through joint ventures, have been combined into Pulte Mexico and are 63.8% owned by International. Results for the six months ended June 30, 2002 include joint venture operations for one month and operations as a consolidated entity for five months, as the Mexican operations report on a one-month lag.

Allowance for warranties

     Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. The Company estimates the costs to be incurred under these warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

     Changes to the Company’s allowance for warranties for the six months ended June 30, 2003 are as follows ($000’s omitted):


December 31, 2002	$	51,973
Warranty reserves provided		33,149
Payments and other adjustments		(35,415	)

June 30, 2003	$	49,707

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

1. Basis of presentation and significant accounting policies (continued)

Stock-based compensation

The Company currently has several stock-based employee compensation plans. Effective January 1, 2003 the Company adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting for Stock Issued to Employees.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the prospective method, the Company will recognize compensation expense based on the fair value provisions of SFAS No. 123 for all new stock option grants effective January 1, 2003. Grants made prior to January 1, 2003 will continue to be accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With the exception of certain variable stock option grants, no stock-based employee compensation cost is reflected in net income for grants made prior to January 1, 2003, as all options granted in those years had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding stock options in each period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2003		2002		2003		2002

Net income, as reported ($000’s omitted)		$	121,717	$	90,203	$	207,854	$	158,315
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects ($000’s omitted)			2,858		—		3,224		—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ($000’s omitted)			3,306		3,835		5,942		6,592

Pro forma net income ($000’s omitted)		$	121,269	$	86,368	$	205,136	$	151,723

Earnings per share:
	Basic — as reported	$	2.01	$	1.49	$	3.43	$	2.63

	Basic — pro forma	$	2.00	$	1.43	$	3.38	$	2.52

	Diluted — as reported	$	1.95	$	1.45	$	3.34	$	2.56

	Diluted — pro forma	$	1.94	$	1.39	$	3.29	$	2.45

The Company also recorded compensation expense for restricted stock awards, net of related tax effects, of $1.3 million and $2.5 million for the three and six months ended June 30, 2003 compared to $0.8 million and $1.5 million for the three and six months ended June 30, 2002. These amounts have been excluded from the reconciliation above as they would have no impact on pro forma net income as presented.

Land, not owned, under option agreements

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” Until this interpretation was issued, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the expected losses from the variable interest entity’s activities or is entitled to receive a majority of the entity’s expected residual returns. FIN 46 applied immediately to all variable interest entities created after January 31, 2003 and effective no later than the beginning of the first interim period that starts after June 15, 2003 for variable interest entities created prior to February 1, 2003.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

1. Basis of presentation and significant accounting policies (continued)

Land, not owned, under option agreements (continued)

     In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of houses in the future. Pursuant to these land option agreements, the Company will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FIN 46, if the entity holding the land under option is a variable interest entity, the Company’s deposit represents a variable interest in that entity. The Company does not guarantee the obligations or performance of the variable interest entity.

     In applying the provisions of FIN 46, the Company evaluated all post-January 31, 2003 land option agreements and determined that the Company was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, the Company is required to consolidate the fair value of the variable interest entity. At June 30, 2003, the Company classified $60 million as Land, Not Owned, Under Option Agreements representing the fair value of land under contract including deposits. The corresponding liability has been classified as Accounts Payable, Accrued and Other Liabilities on the balance sheet. The adoption of FIN 46 has had no impact on the Company’s results of operations or cash flows.

     The Company is in the process of evaluating its land option agreements and joint venture agreements entered into prior to February 1, 2003. Depending on the terms and conditions of these agreements, the Company may be required to consolidate other variable interest entities. This evaluation will be completed by September 30, 2003.

2. Segment information

     The Company’s operations are classified into three reportable segments: Homebuilding, Financial Services and Corporate.

     The Company’s Homebuilding segment consists of the following operations:

• Domestic Homebuilding, the Company’s core business, is engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for the first-time, first and second move-up, and active adult home buyers.

• International Homebuilding is primarily engaged in the acquisition and development of land principally for residential purposes, and the construction of housing on such land in Mexico, Puerto Rico and Argentina.

The Company’s Financial Services segment consists principally of mortgage banking and title operations conducted through Pulte Mortgage and other Company subsidiaries.

Corporate is a non-operating business segment which supports the operations of the Company’s subsidiaries by acting as the internal source of financing, developing and implementing strategic initiatives centered on new business development and operating efficiencies, and providing the necessary administrative functions to support the Company as a publicly traded entity listed on the New York Stock Exchange.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2. Segment information (continued)


			Operating Data by Segment ($000's omitted)

			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2003			2002			2003			2002

Revenues:
	Homebuilding		$	1,925,711		$	1,661,670		$	3,449,150		$	3,017,275
	Financial services			31,774			23,842			59,370			46,866
	Corporate			700			51			2,255			163

Total revenues				1,958,185			1,685,563			3,510,775			3,064,304

Cost of sales:
	Homebuilding			1,504,480			1,326,190			2,708,040			2,406,176

Selling, general and administrative:
	Homebuilding			199,988			172,438			377,551			322,236
	Financial services			10,761			7,955			20,821			18,081
	Corporate			15,596			4,194			21,156			7,333

		Total selling, general and administrative		226,345			184,587			419,528			347,650

Interest:
	Homebuilding			17,103			11,367			28,512			19,890
	Financial services			1,727			1,421			3,404			3,007
	Corporate			10,164			9,821			20,735			19,375

		Total interest		28,994			22,609			52,651			42,272

Other (income) expense, net:
	Homebuilding			9,022			6,701			9,920			11,408
	Corporate			(3,014	)		498			(2,221	)		2,971

		Total other (income) expense, net		6,008			7,199			7,699			14,379

Total costs and expenses				1,765,827			1,540,585			3,187,918			2,810,477

Equity income:
	Homebuilding			2,903			1,548			10,306			4,291
	Financial services			1,572			1,696			2,829			2,638

		Total equity income		4,475			3,244			13,135			6,929

Income (loss) before income taxes:
	Homebuilding			198,021			146,522			335,433			261,856
	Financial services			20,858			16,162			37,974			28,416
	Corporate			(22,046	)		(14,462	)		(37,415	)		(29,516	)

Total income before income taxes			$	196,833		$	148,222		$	335,992		$	260,756

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2. Segment information (continued)


		Asset Data by Segment ($000's omitted)

				Financial
		Homebuilding		Services		Corporate		Total

At June 30, 2003:
	Inventory	$	5,078,263	$	—	$	—	$	5,078,263

	Total assets		6,702,284		473,527		153,205	$	7,329,016

At December 31, 2002:
	Inventory	$	4,293,597	$	—	$	—	$	4,293,597

	Total assets		6,092,102		645,977		150,376	$	6,888,455

3. Senior notes and subordinated notes

     In February 2003, the Company sold $300 million of 6.25% unsecured senior notes, callable prior to maturity and guaranteed by Pulte and certain wholly owned subsidiaries of Pulte. The notes are due in 2013.

     In March 2003, under the terms of Del Webb’s $200 million 9.375% senior subordinated notes due 2009, the Company exercised its optional right to redeem the remaining outstanding principal balance of approximately $155 million. The notes were redeemed in May 2003 at a price equal to 104.688% of the principal amount. Furthermore, the Company’s $175 million 9.5% senior notes matured and were retired in April 2003.

     In May 2003, the Company sold $400 million of 6.375% unsecured senior notes, callable prior to maturity and guaranteed by Pulte and certain wholly owned subsidiaries of Pulte. The notes are due in 2033.

4. Shareholder’s equity

     In October 2002, the Company’s Board of Directors authorized the repurchase of $100 million of Company common stock in open-market transactions or otherwise. Pursuant to this authorization, 395,400 common shares were repurchased at an aggregate cost of approximately $18.2 million during the first half of 2003. At June 30, 2003, the Company had remaining authorization to purchase common stock aggregating $77.5 million.

Accumulated other comprehensive income (loss)

     The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):


		June 30,			December 31,
		2003			2002

Foreign currency translation adjustments:
	Argentina	$	(24,292	)	$	(26,876	)
	Mexico		(6,928	)		(6,615	)
Change in fair value of derivatives, net of income taxes of $80 in 2003 and $1,204 in 2002			214			(1,880	)

		$	(31,006	)	$	(35,371	)

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

5. Discontinued operations

     In July 2003, the United States Court of Federal Claims issued an opinion finding that the Company had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract with the Company. The opinion follows the Court’s August 17, 2001 ruling that held that the United States breached the contract related to the Company’s 1988 acquisition of five savings and loan associations by enacting Section 13224 of the Omnibus Budget Reconciliation Act of 1993. Final judgment is expected in the near future, but is subject to appeal. Accordingly, any gain from this litigation will be recognized only upon final resolution.

6. Supplemental Guarantor information ($000’s omitted)

     The Company has the following outstanding senior note obligations: (1) $100 million, 7%, due 2003, (2) $112 million, 8.375%, due 2004, (3) $125 million, 7.3%, due 2005, (4) $200 million, 8.125%, due 2011, (5) $499 million, 7.875%, due 2011, (6) $300 million, 6.25%, due 2013, (7) $150 million, 7.625%, due 2017, (8) $300 million, 7.875%, due 2032, and (9) $400 million, 6.375%, due 2033. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by the Company’s wholly owned Domestic Homebuilding subsidiaries (collectively, the Guarantors). The Company has outstanding $92 million, 10.25%, senior subordinated notes due 2010, which are callable in the first quarter of 2004 at a price equal to 105.125% of the principal. Such obligations to pay principal, premium, if applicable, and interest are guaranteed jointly and severally on a senior subordinated basis by the Guarantors. Such guarantees are full and unconditional. The principal non-Guarantors include PDCI, International, Pulte Mortgage, NABIC and First Heights.

     Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by and the operations of the combined groups.

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2003
($000’s omitted)


		Unconsolidated

												Consolidated
		Pulte		Guarantor		Non-Guarantor			Eliminating			Pulte
		Homes, Inc.		Subsidiaries		Subsidiaries			Entries			Homes, Inc.

ASSETS
Cash and equivalents		$	—	$	314,133	$	76,954		$	—		$	391,087
Unfunded settlements			—		91,248		(19,978	)		—			71,270
House and land inventories			—		4,841,809		176,454			—			5,018,263
Land, not owned, under option agreements			—		60,000		—			—			60,000
Residential mortgage loans available-for-sale			—		—		431,735			—			431,735
Goodwill			—		306,993		700			—			307,693
Intangible assets			—		147,829		—			—			147,829
Other assets			71,757		723,506		91,109			—			886,372
Deferred income taxes			14,767		—		—			—			14,767
Investment in subsidiaries			4,247,371		104,176		1,959,137			(6,310,684	)		—
Advances receivable — subsidiaries			2,389,122		—		—			(2,389,122	)		—

		$	6,723,017	$	6,589,694	$	2,716,111		$	(8,699,806	)	$	7,329,016

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued and other liabilities		$	143,043	$	1,330,397	$	164,496		$	—		$	1,637,936
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets			—		—		381,355			—			381,355
Income taxes			55,690		—		—			—			55,690
Senior notes and subordinated notes			2,173,103		96,852		—			—			2,269,955
Advances payable — subsidiaries			1,367,101		798,508		223,513			(2,389,122	)		—

	Total liabilities		3,738,937		2,225,757		769,364			(2,389,122	)		4,344,936
Shareholders’ equity			2,984,080		4,363,937		1,946,747			(6,310,684	)		2,984,080

		$	6,723,017	$	6,589,694	$	2,716,111		$	(8,699,806	)	$	7,329,016

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2002
($000’s omitted)


		Unconsolidated

												Consolidated
		Pulte		Guarantor		Non-Guarantor			Eliminating			Pulte
		Homes, Inc.		Subsidiaries		Subsidiaries			Entries			Homes, Inc.

ASSETS
Cash and equivalents		$	—	$	541,095	$	72,073		$	—		$	613,168
Unfunded settlements			—		66,203		(5,562	)		—			60,641
House and land inventories			—		4,143,827		149,770			—			4,293,597
Residential mortgage loans available-for-sale			—		—		600,339			—			600,339
Goodwill			—		306,993		700			—			307,693
Intangible assets			—		151,954		—			—			151,954
Other assets			54,295		683,859		95,125			—			833,279
Deferred income taxes			27,784		—		—			—			27,784
Investment in subsidiaries			3,553,786		93,710		1,809,031			(5,456,527	)		—
Advances receivable — subsidiaries			1,470,816		1,491		—			(1,472,307	)		—

		$	5,106,681	$	5,989,132	$	2,721,476		$	(6,928,834	)	$	6,888,455

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued and other liabilities		$	125,941	$	1,281,648	$	157,542		$	—		$	1,565,131
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets			—		—		559,621			—			559,621
Income taxes			90,009		—		—			—			90,009
Senior notes and subordinated notes			1,652,602		260,666		—			—			1,913,268
Advances payable — subsidiaries			477,703		770,488		224,116			(1,472,307	)		—

	Total liabilities		2,346,255		2,312,802		941,279			(1,472,307	)		4,128,029
Shareholders’ equity			2,760,426		3,676,330		1,780,197			(5,456,527	)		2,760,426

		$	5,106,681	$	5,989,132	$	2,721,476		$	(6,928,834	)	$	6,888,455

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2003
($000’s omitted)


			Unconsolidated

															Consolidated
			Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
			Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.

Revenues:
	Homebuilding		$	—		$	1,876,777		$	48,934		$	—		$	1,925,711
	Financial services			—			3,633			28,141			—			31,774
	Corporate			22			537			141			—			700

Total revenues				22			1,880,947			77,216			—			1,958,185

Expenses:
	Homebuilding:
		Cost of sales		—			1,466,183			38,297			—			1,504,480
		Selling, general and administrative and other expense		2,447			213,029			10,637			—			226,113
	Financial services			—			1,160			11,328			—			12,488
	Corporate, net			25,852			(2,191	)		(915	)		—			22,746

Total expenses				28,299			1,678,181			59,347			—			1,765,827

Other Income:
Equity income				—			2,695			1,780			—			4,475

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries				(28,277	)		205,461			19,649			—			196,833
Income taxes (benefit)				(11,300	)		78,899			7,234			—			74,833

Income (loss) from continuing operations before equity in income of subsidiaries				(16,977	)		126,562			12,415			—			122,000
Loss from discontinued operations				(282	)		—			(1	)		—			(283	)

Income (loss) before equity in income of subsidiaries				(17,259	)		126,562			12,414			—			121,717

Equity in income (loss) of subsidiaries:
	Continuing operations			138,977			11,449			74,031			(224,457	)		—
	Discontinued operations			(1	)		—			—			1			—

				138,976			11,449			74,031			(224,456	)		—

Net income			$	121,717		$	138,011		$	86,445		$	(224,456	)	$	121,717

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2003
($000’s omitted)


			Unconsolidated

															Consolidated
			Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
			Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.

Revenues:
	Homebuilding		$	—		$	3,356,884		$	92,266		$	—		$	3,449,150
	Financial services			—			6,799			52,571			—			59,370
	Corporate			22			1,921			312			—			2,255

Total revenues				22			3,365,604			145,149			—			3,510,775

Expenses:
	Homebuilding:
		Cost of sales		—			2,634,059			73,981			—			2,708,040
		Selling, general and administrative and other expense		4,294			391,309			20,380			—			415,983
	Financial services			—			2,257			21,968			—			24,225
	Corporate, net			41,994			(949	)		(1,375	)		—			39,670

Total expenses				46,288			3,026,676			114,954			—			3,187,918

Other Income:
Equity income				—			9,070			4,065			—			13,135

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries				(46,266	)		347,998			34,260			—			335,992
Income taxes (benefit)				(18,596	)		133,198			13,089			—			127,691

Income (loss) from continuing operations before equity in income of subsidiaries				(27,670	)		214,800			21,171			—			208,301
Loss from discontinued operations				(447	)		—			—			—			(447	)

Income (loss) before equity in income of subsidiaries				(28,117	)		214,800			21,171			—			207,854

Equity in income (loss) of subsidiaries:
	Continuing operations			235,971			20,627			131,357			(387,955	)		—
	Discontinued operations			—			—			—			—			—

				235,971			20,627			131,357			(387,955	)		—

Net income			$	207,854		$	235,427		$	152,528		$	(387,955	)	$	207,854

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2002
($000’s omitted)


			Unconsolidated

														Consolidated
			Pulte			Guarantor		Non-Guarantor			Eliminating			Pulte
			Homes, Inc.			Subsidiaries		Subsidiaries			Entries			Homes, Inc.

Revenues:
	Homebuilding		$	—		$	1,610,406	$	51,264		$	—		$	1,661,670
	Financial services			—			3,211		20,631			—			23,842
	Corporate			27			24		—			—			51

Total revenues				27			1,613,641		71,895			—			1,685,563

Expenses:
	Homebuilding:
		Cost of sales		—			1,286,111		40,079			—			1,326,190
		Selling, general and administrative and other expense		2,056			178,574		9,876			—			190,506
	Financial services			—			936		8,440			—			9,376
	Corporate, net			14,155			96		262			—			14,513

Total expenses				16,211			1,465,717		58,657			—			1,540,585

Other Income:
Equity income				—			955		2,289			—			3,244

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries				(16,184	)		148,879		15,527			—			148,222
Income taxes (benefit)				(6,639	)		58,196		6,257			—			57,814

Income (loss) from continuing operations before equity in income of subsidiaries				(9,545	)		90,683		9,270			—			90,408
Loss from discontinued operations				(202	)		—		(3	)		—			(205	)

Income (loss) before equity in income of subsidiaries				(9,747	)		90,683		9,267			—			90,203

Equity in income (loss) of subsidiaries:
	Continuing operations			99,953			8,239		73,111			(181,303	)		—
	Discontinued operations			(3	)		—		—			3			—

				99,950			8,239		73,111			(181,300	)		—

Net income			$	90,203		$	98,922	$	82,378		$	(181,300	)	$	90,203

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2002
($000’s omitted)


			Unconsolidated

														Consolidated
			Pulte			Guarantor		Non-Guarantor			Eliminating			Pulte
			Homes, Inc.			Subsidiaries		Subsidiaries			Entries			Homes, Inc.

Revenues:
	Homebuilding		$	—		$	2,943,642	$	73,633		$	—		$	3,017,275
	Financial services			—			6,255		40,611			—			46,866
	Corporate			129			34		—			—			163

Total revenues				129			2,949,931		114,244			—			3,064,304

Expenses:
	Homebuilding:
		Cost of sales		—			2,348,268		57,908			—			2,406,176
		Selling, general and administrative and other expense		5,402			331,162		16,970			—			353,534
	Financial services			—			1,911		19,177			—			21,088
	Corporate, net			27,220			2,092		367			—			29,679

Total expenses				32,622			2,683,433		94,422			—			2,810,477

Other Income:
Equity income				—			1,504		5,425			—			6,929

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries				(32,493	)		268,002		25,247			—			260,756
Income taxes (benefit)				(13,996	)		104,758		10,946			—			101,708

Income (loss) from continuing operations before equity in income of subsidiaries				(18,497	)		163,244		14,301			—			159,048
Loss from discontinued operations				(730	)		—		(3	)		—			(733	)

Income (loss) before equity in income of subsidiaries				(19,227	)		163,244		14,298			—			158,315

Equity in income (loss) of subsidiaries:
	Continuing operations			177,545			14,365		109,348			(301,258	)		—
	Discontinued operations			(3	)		—		—			3			—

				177,542			14,365		109,348			(301,255	)		—

Net income			$	158,315		$	177,609	$	123,646		$	(301,255	)	$	158,315

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2003
($000’s omitted)


				Unconsolidated
																Consolidated
				Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
				Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.

Cash flows from operating activities:
	Net income			$	207,854		$	235,427		$	152,528		$	(387,955	)	$	207,854
	Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
		Equity in income of subsidiaries			(235,971	)		(20,627	)		(131,357	)		387,955			—
		Amortization and depreciation			564			16,360			1,734			—			18,658
		Stock-based compensation expense			9,158			—			—			—			9,158
		Deferred income taxes			13,017			—			—			—			13,017
		Other, net			—			(1,514	)		(2,187	)		—			(3,701	)
		Increase (decrease) in cash due to:
			Inventories		—			(759,041	)		(24,948	)		—			(783,989	)
			Residential mortgage loans available-for-sale		—			—			156,678			—			156,678
			Other assets		(17,462	)		(21,448	)		24,577			—			(14,333	)
			Accounts payable, accrued and other liabilities		15,390			62,340			25,088			—			102,818
			Income taxes		(86,230	)		54,240			6,796			—			(25,194	)

Net cash provided by (used in) operating activities					(93,680	)		(434,263	)		208,909			—			(319,034	)

Cash flows from investing activities:
	Dividends received from subsidiaries				—			13,000			—			(13,000	)		—
	Investment in subsidiary				(451,538	)		(871	)		(1,000	)		453,409			—
	Advances to affiliates				(857,261	)		1,491			(2,524	)		858,294			—
	Other, net				—			(11,052	)		(5,619	)		—			(16,671	)

Net cash provided by (used in) investing activities					(1,308,799	)		2,568			(9,143	)		1,298,703			(16,671	)

Cash flows from financing activities:
	Proceeds from borrowings				694,937			—			1,009			—			695,946
	Repayment of borrowings				(175,000	)		(220,583	)		(180,646	)		—			(576,229	)
	Capital contributions from parent				—			451,538			1,871			(453,409	)		—
	Advances from affiliates				889,399			(26,221	)		(4,884	)		(858,294	)		—
	Issuance of common stock				16,332			—			—			—			16,332
	Common stock repurchases				(18,304	)		—			—			—			(18,304	)
	Dividends paid				(4,885	)		—			(13,000	)		13,000			(4,885	)

Net cash provided by (used in) financing activities					1,402,479			204,734			(195,650	)		(1,298,703	)		112,860

Effect of exchange rate changes on cash and equivalents					—			—			764			—			764

Net increase (decrease) in cash and equivalents					—			(226,961	)		4,880			—			(222,081	)

Cash and equivalents at beginning of period					—			541,095			72,073			—			613,168

Cash and equivalents at end of period				$	—		$	314,134		$	76,953		$	—		$	391,087

PULTE HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2002
($000’s omitted)


			Unconsolidated
															Consolidated
			Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
			Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.

Cash flows from operating activities:
	Net income		$	158,315		$	177,609		$	123,646		$	(301,255	)	$	158,315
	Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
		Equity in income of subsidiaries		(177,542	)		(14,365	)		(109,348	)		301,255			—
		Amortization and depreciation		513			15,207			1,032			—			16,752
		Stock-based compensation expense		2,498			—			—			—			2,498
		Deferred income taxes		10,490			—			—			—			10,490
		Other, net		—			957			(3,911	)		—			(2,954	)
		Increase (decrease) in cash due to:
		Inventories		—			(394,556	)		(31,963	)		—			(426,519	)
		Residential mortgage loans available-for-sale		—			—			145,804			—			145,804
		Other assets		(1,609	)		49,597			(5,996	)		—			41,992
		Accounts payable, accrued and other liabilities		(8,367	)		72,520			14,085			—			78,238
		Income taxes		(4,117	)		70,998			5,169			—			72,050

Net cash provided by (used in) operating activities				(19,819	)		(22,033	)		138,518			—			96,666

Cash flows from investing activities:
	Dividends received from subsidiaries			—			16,500			—			(16,500	)		—
	Investment in subsidiary			—			(645	)		—			645			—
	Advances to affiliates			(179,108	)		38,777			32,681			107,650			—
	Other, net			—			(7,018	)		(2,383	)		—			(9,401	)

Net cash provided by (used in) investing activities				(179,108	)		47,614			30,298			91,795			(9,401	)

Cash flows from financing activities:
	Proceeds from borrowings			298,819			58,455			79			—			357,353
	Repayment of borrowings			(111,365	)		(70,596	)		(145,911	)		—			(327,872	)
	Capital contributions from parent			—			—			645			(645	)		—
	Advances from affiliates			(30,745	)		107,766			30,629			(107,650	)		—
	Issuance of common stock			31,463			—			—			—			31,463
	Dividends paid			(4,866	)		—			(16,500	)		16,500			(4,866	)
	Other, net			—			—			43			—			43

Net cash provided by (used in) financing activities				183,306			95,625			(131,015	)		(91,795	)		56,121

Effect of exchange rate changes on cash and equivalents				—			—			(2,763	)		—			(2,763	)

Net increase (decrease) in cash and equivalents				(15,621	)		121,206			35,038			—			140,623

Cash and equivalents at beginning of period				15,621			33,643			22,880			—			72,144

Cash and equivalents at end of period			$	—		$	154,849		$	57,918		$	—		$	212,767

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:

A summary of our operating results by business segment for the three and six-month periods ended June 30, 2003 and 2002 is as follows ($000’s omitted):


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2003			2002			2003			2002

Pre-tax income (loss):
	Homebuilding operations		$	198,021		$	146,522		$	335,433		$	261,856
	Financial services operations			20,858			16,162			37,974			28,416
	Corporate			(22,046	)		(14,462	)		(37,415	)		(29,516	)

Pre-tax income from continuing operations				196,833			148,222			335,992			260,756
Income taxes				74,833			57,814			127,691			101,708

Income from continuing operations				122,000			90,408			208,301			159,048
Loss from discontinued operations				(283	)		(205	)		(447	)		(733	)

Net income			$	121,717		$	90,203		$	207,854		$	158,315

Per share data — assuming dilution:
Income from continuing operations			$	1.95		$	1.45		$	3.34		$	2.57
Loss from discontinued operations				—			—			—			(.01	)

		Net income	$	1.95		$	1.45		$	3.34		$	2.56

A comparison of pre-tax income (loss) for the three and six months ended June 30, 2003 and 2002 is as follows:

• Continued strong demand for new housing in many of our markets, geographic and product mix shifts, and benefits from the ongoing initiatives to leverage construction costs throughout the operations drove pre-tax income of our homebuilding business segment to increase 35% and 28%, respectively. Domestic average unit selling prices increased 8% and 7%, respectively. Such factors combined to drive domestic homebuilding settlement gross margin percentages up 190 basis points and 140 basis points, respectively.

• Pre-tax income of our financial services business segment increased 29% and 34%, respectively, as a result of increased volume, a favorable interest rate environment and effective leverage of overhead costs. The increase in volume was driven in large part by a 600 basis point increase in the capture rate for both periods.

• Higher compensation-related expenses, specifically the expensing of stock options and performance based incentives, drove the increase in pre-tax loss of our corporate business segment for both periods.

Homebuilding Operations:

Our Homebuilding segment consists of the following operations:

• We conduct our Domestic Homebuilding operations in 44 markets, located throughout 26 states. Domestic Homebuilding offers a broad product line to meet the needs of the first-time, first and second move-up, and active adult homebuyers.

• We conduct our International Homebuilding operations through subsidiaries of Pulte International Corporation (International) in Mexico, Puerto Rico and Argentina. International Homebuilding product offerings focus on the demand of first-time buyers and middle-to-upper income consumer groups.

Certain operating data relating to our homebuilding operations and Pulte-affiliated joint ventures for the three and six months ended June 30, 2003 and 2002, are as follows ($000’s omitted):


			Three Months Ended				Six Months Ended
			June 30,				June 30,

			2003		2002		2003		2002

Pulte Homebuilding settlement revenues:
	Domestic		$	1,845,461	$	1,576,285	$	3,292,659	$	2,885,873
	International			48,934		51,264		92,266		73,633

		Total Pulte		1,894,395		1,627,549		3,384,925		2,959,506

Pulte-affiliate international homebuilding settlement revenues				8,016		6,655		16,537		31,108

Total Pulte/Pulte-affiliate homebuilding settlement revenues			$	1,902,411	$	1,634,204	$	3,401,462	$	2,990,614

Pulte homebuilding settlements units:
	Domestic			7,112		6,593		12,897		12,095
	International			1,468		1,732		2,659		2,453

		Total Pulte		8,580		8,325		15,556		14,548

Pulte-affiliate international homebuilding settlement units				37		43		85		964

Total Pulte and Pulte-affiliate settlement units				8,617		8,368		15,641		15,512

Homebuilding Operations (continued):

Domestic Homebuilding:

The Domestic Homebuilding business unit represents our core business. Operations are conducted in 44 markets, located throughout 26 states, and are organized into five groups as follows:


Northeast:		Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia

Southeast:		Florida, Georgia, North Carolina, South Carolina, Tennessee

Midwest:		Illinois, Indiana, Kansas, Michigan, Minnesota, Ohio

Central:		Colorado, Texas, New Mexico

West:		Arizona, California, Nevada

Our metropolitan Phoenix operations accounted for 12% of Domestic Homebuilding unit net new orders and unit settlements, and 11% of Domestic Homebuilding settlement revenues for the three-month period ended June 30, 2003. Furthermore, our operations in Northern California and Southern California accounted for 11% and 10%, respectively, of Domestic Homebuilding settlement revenues for the same period. For the six-month period of 2003, our metropolitan Phoenix operations accounted for 12% of unit net new orders, 11% of unit settlements and 10% of settlement revenues, while our operations in Northern California accounted for 11% of settlement revenues. For the three-month period ended June 30, 2002, our metropolitan Phoenix operations accounted for 11% of Domestic Homebuilding unit net new orders and unit settlements, and 10% of Domestic Homebuilding settlement revenues. For the six-month period, the metropolitan Phoenix operations accounted for 11% of unit net new orders, 12% of unit settlements and 11% of settlement revenues. No other individual market represented more than 10% of total Domestic Homebuilding unit net new orders, unit settlements or revenues for the three and six-month periods ended June 30, 2003 or 2002.

The following table presents selected unit information for our Domestic Homebuilding operations:


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2003		2002		2003		2002

Unit settlements:
	Northeast		553		504		979		920
	Southeast		1,759		1,888		3,508		3,564
	Midwest		1,041		976		1,883		1,678
	Central		1,133		1,035		1,867		1,753
	West		2,626		2,190		4,660		4,180

			7,112		6,593		12,897		12,095

Net new orders — units*:
	Northeast		909		660		1,645		1,454
	Southeast		2,441		2,285		4,704		4,515
	Midwest		1,422		1,246		2,540		2,546
	Central		1,317		1,308		2,502		2,592
	West		3,102		2,780		6,033		5,260

			9,191		8,279		17,424		16,367

Net new orders — dollars* ($000’s omitted)		$	2,466,000	$	2,041,000	$	4,620,000	$	4,045,000

Unit backlog:
	Northeast						1,795		1,365
	Southeast						4,135		3,510
	Midwest						2,258		2,243
	Central						1,540		1,742
	West						5,471		4,090

							15,199		12,950

Backlog at June 30 — dollars ($000’s omitted)						$	4,244,000	$	3,277,000

* Net new orders for the three and six months ended June 30, 2003, do not include 67 units of acquired backlog and the related dollars.

Homebuilding Operations (continued):

Domestic Homebuilding (continued):

Continued strong demand for new housing was the primary driver for increases in net new orders and unit settlements. Net new orders increased 11% to a record 9,191 units for the three months ended June 30, 2003. Net new orders for the six months ended June 30, 2003 increased 6% to 17,424 units. Unit settlements also set a record for the quarter at 7,112 units, an increase of 8% over the same period in 2002. Unit settlements for the six months ended June 30, 2003 increased 7% to 12,897 units. The average selling price for homes closed increased 8% to $259,000 for the three months ended June 30, 2003, and 7% to $255,000 for the six months then ended. Changes in average selling price reflect a number of factors, including changes in market selling prices and the mix of product closed during each period. Ending backlog, which represents orders for homes that have not yet closed, grew to a record 15,199 units. The dollar value of backlog was up 30% to over $4.2 billion.

The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three and six months ended June 30, 2003 and 2002 ($000’s omitted):


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2003			2002			2003			2002

Home sale revenue (settlements)	$	1,845,461		$	1,576,285		$	3,292,659		$	2,885,873
Land sale revenue		31,316			34,121			64,225			57,769
Home cost of sales		(1,444,008	)		(1,262,544	)		(2,587,824	)		(2,309,469	)
Land cost of sales		(22,175	)		(23,567	)		(46,235	)		(38,799	)
Selling, general and administrative expense		(189,861	)		(163,086	)		(356,961	)		(305,881	)
Interest (a)		(17,103	)		(11,367	)		(28,512	)		(19,890	)
Equity income		2,177			578			8,535			979
Other income (expense), net		(8,166	)		(5,843	)		(9,808	)		(10,154	)

Pre-tax income	$	197,641		$	144,577		$	336,079		$	260,428

Average sales price	$	259		$	239		$	255		$	239

^(a) We capitalize interest cost into homebuilding inventories and charge the interest to homebuilding interest expense over a period that approximates the average life cycle of our communities.

Homebuilding gross profit margins from home settlements increased to 21.8% and 21.4%, respectively, for the three and six months ended June 30, 2003, compared to 19.9% and 20.0%, respectively, for the same periods in the prior year. This increase is attributable to continued strong customer demand, positive home pricing and product and geographic mix. Purchase accounting adjustments associated with the merger with Del Webb reduced gross margin by 10 basis points for both the three and six months ended June 30, 2002.

We consider land development one of our core competencies. This includes the entitlement and development of certain land positions for sale primarily to other homebuilders, as well as to retail and commercial establishments. Contributions from land sales were relatively flat when compared to the prior year period. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of land sales. We continue to rationalize certain existing land positions to ensure the most effective use of capital.

Selling, general and administrative expenses as a percentage of home settlement revenues were flat at 10.3% for the three months and increased 20 basis points to 10.8% for the six months ended June 30, 2003 when compared to the prior year period. Selling, general and administrative expenses in 2003 were negatively impacted by higher startup costs associated with an increased number of new communities and additional expenses incurred in the Northeast and Midwest due to prolonged periods of adverse weather conditions. Selling, general and administrative expenses, as a percentage of home settlement revenues, for 2002, included purchase accounting adjustments which added 20 basis points for both the three and six-month periods.

Homebuilding Operations (continued):

Domestic Homebuilding (continued):

Interest expense increased $5.7 million and $8.6 million, respectively, over the three and six months ended June 30, 2003 as amounts previously capitalized into inventory are charged to interest expense. Interest capitalized into inventory has increased as a result of higher levels of inventory and indebtedness related to the merger with Del Webb and to support the continued growth of the business.

Equity income increased $1.6 million and $7.6 million, respectively, during the three and six-month periods ended June 30, 2003. The increase in both periods was driven by earnings from two Nevada-based joint ventures related to the sale of commercial and residential properties.

Other income (expense), net, totaled expense of $8.2 million and $5.8 million for the three months ended June 30, 2003 and 2002, respectively. The change is primarily due to an isolated construction service expense. Other income (expense), net, for the six-month period was relatively flat as construction service expenses in 2003 were comparable to the write-down of a land development investment and related receivable in 2002.

Domestic Homebuilding inventory at June 30, 2003, was approximately $4.7 billion, of which $3.6 billion related to land and land development. At June 30, 2002, inventory was approximately $4.0 billion, of which $3.1 billion related to land and land development. Other assets included approximately $237.7 million and $260.8 million in land held for disposition at June 30, 2003 and 2002, respectively.

At June 30, 2003 and 2002, our Domestic Homebuilding operations controlled approximately 212,700 and 144,700 lots, respectively. Approximately 94,600 and 83,700 lots were owned, and approximately 59,800 and 34,300 lots were under option agreements approved for purchase at June 30, 2003 and 2002, respectively. In addition, there were approximately 58,300 and 26,700 lots under option agreements, pending approval, at June 30, 2003 and 2002, respectively.

The total purchase price applicable to approved land under option for use by our homebuilding operations at future dates approximated $1.9 billion at June 30, 2003. In addition, the total purchase price applicable to land under option that is pending approval was valued at $1.3 billion at June 30, 2003. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits, which are generally non-refundable, totaling $93.9 million.

International Homebuilding:

Our International Homebuilding operations are primarily conducted through subsidiaries of International in Mexico, Puerto Rico and Argentina.

Mexico Effective January 1, 2002, International reorganized its structure within Mexico to create a single company, Pulte Mexico S. de R.L. de C.V. (Pulte Mexico), which ranks as one of the largest builders in the country. Prior to the reorganization, these operations were conducted primarily through five joint ventures throughout Mexico. Under the new ownership structure, which combines the largest of these entities, we own 63.8% of Pulte Mexico and have consolidated Pulte Mexico into our financial statements. The new operating structure facilitates growth, enables operating leverage and improves efficiencies through standardized systems and procedures.

Puerto Rico Operations in Puerto Rico are conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation, and three joint ventures.

Argentina Operations in Argentina, which are based in the greater Buenos Aires area, are conducted through Pulte SRL, International’s 100%-owned Argentine subsidiary.

Homebuilding Operations (continued):

International Homebuilding (continued):

The following table presents selected financial data for our International Homebuilding operations for the three and six months ended June 30, 2003 and 2002 ($000’s omitted):


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2003			2002			2003			2002

Revenues		$	48,934		$	51,264		$	92,266		$	73,633
Cost of sales			(38,297	)		(40,079	)		(73,981	)		(57,908	)
Selling, general and administrative expense			(10,127	)		(9,352	)		(20,590	)		(16,355	)
Other income (expense), net			(702	)		(82	)		(1,093	)		(858	)
Minority interest			(154	)		(776	)		981			(396	)
Equity in income of joint ventures			726			970			1,771			3,312

Pre-tax income (loss)		$	380		$	1,945		$	(646	)	$	1,428

Unit settlements:
	Pulte		1,468			1,732			2,659			2,453
	Pulte-affiliated entities		37			43			85			964

Total Pulte and Pulte-affiliates			1,505			1,775			2,744			3,417

Unit settlements for Pulte and Pulte-affiliated entities were down 15% and 20%, respectively, for the three and six months ended June 30, 2003, as increases in Puerto Rico were negated by a decline in Mexico. Settlements for Pulte and Pulte-affiliated entities in Mexico were 1,403 and 2,510 for the three and six months ended June 30, 2003 compared to 1,679 and 3,260 in 2002. Activity in Mexico continues to be slowed by the impact of changes made to local lending practices and the lack of alternative funding sources for homebuyers.

Revenues for the three months ended June 30, 2003 declined with the reduction in settlements. Increased revenues for the six-month period are due to consolidation of the operations in Mexico for a full six months in 2003 versus five months in 2002, aided by increased closings in Puerto Rico. Revenues from our operations in Mexico were $37.7 million and $67.0 million, respectively, for the three and six months ended June 30, 2003, compared to $43.8 million and $62.2 million in 2002. Argentina contributed revenues of $7.8 million and $14.6 million for the three and six months ended June 30, 2003 compared to $6.2 million and $10.2 million in 2002. Revenues in Puerto Rico were $3.4 million and $10.6 million, respectively, for the three and six-month periods in 2003 versus $1.2 million for both periods in 2002. Our consolidated operations in Puerto Rico did not have any closings during the first five months of 2002 as various factors delayed the opening of replacement communities.

The decline of sales activity, combined with product mix shifts, had a negative impact on gross margins and selling, general and administrative expenses as a percent of revenues for International. Gross margins declined 10 basis points to 21.7% for the three months ended June 30, 2003 and 160 basis points to 19.8% for the six-month period. Selling, general and administrative expenses as a percent of revenues increased to 20.7% from 18.2% for the three-month period. Selling, general and administrative expenses as a percent of revenues were relatively flat for the six-month period.

Our operations in Argentina recorded transaction losses of $187,000 and $361,000, respectively, for the three and six months ended June 30, 2003, despite a slight recovery by the Argentine peso to U.S. dollar exchange. Foreign currency transaction gains of $94,000 and $75,000 were recorded in the three and six months ended June 30, 2002, respectively. We also recorded a foreign currency translation gain of $2.6 million, as a component of cumulative other comprehensive income during the six months ended June 30, 2003. It remains unclear at this time how the financial and currency markets in Argentina will be impacted through the remainder of 2003 or how the current economic situation may affect customer home buying attitudes and the homebuilding business in general. At June 30, 2003, our investment in Argentina, net of cumulative foreign currency translation adjustments, approximated $15.1 million. Our operations in Mexico have been affected by a fluctuating dollar to Mexican peso exchange where transaction gains and losses were relatively flat for the three-month period. During the six months ended June 30, 2003, our operations in Mexico recorded transaction gains of $186,000 compared to losses of $373,000 in the prior year period. Furthermore, we recorded a foreign currency translation loss of $148,000, as a component of cumulative other comprehensive income during the six months ended June 30, 2003. At June 30, 2003, our investment in Mexico, net of cumulative foreign currency translation adjustments, approximated $66.5 million.

Financial Services Operations:

We conduct our financial services operations principally through Pulte Mortgage LLC (Pulte Mortgage), our mortgage banking subsidiary. Pre-tax income of our financial services operations for the three and six-month periods ended June 30, 2003, was $20.9 million and $38.0 million, respectively, compared to $16.2 million and $28.4 million for the prior year periods. This increase was due to higher production volume and favorable interest rates.

The following table presents mortgage origination data for Pulte Mortgage:


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2003		2002		2003		2002

Total originations:
	Loans		6,776		4,994		11,938		9,220

	Principal ($000’s omitted)	$	1,161,000	$	804,400	$	2,028,200	$	1,476,200

Originations for Pulte customers:
	Loans		5,411		4,393		9,554		7,956

	Principal ($000’s omitted)	$	923,400	$	708,800	$	1,614,100	$	1,273,400

Mortgage origination unit and principal volume for the three months ended June 30, 2003, increased 36% and 44%, respectively, and 29% and 37% for the six-month period, respectively. The growth can be attributed to an increase in the capture rate from 77% to 83% for the three-month period and 76% to 82% for the six-month period and an increase in the average loan size over both periods. Our Domestic Homebuilding customers continue to account for the majority of total loan production, representing 80% of total Pulte Mortgage unit production for the three and six months ended June 30, 2003, compared with 88% and 86%, respectively, in 2002. Refinancings accounted for approximately 11% of total originations for the three months ended June 30, 2003, compared to 3% in the prior year. For the six months ended June 30, refinancings represented 11% of total originations in 2003 compared to 5% in 2002. Adjustable rate mortgages (ARMs) represented 15% of total originations for the three months ended June 30, 2003, compared to 11% in the prior year. ARMs represented 14% and 10% of total originations for the six months ended June 30, 2003 and 2002, respectively. At June 30, 2003, loan application backlog doubled to $2.4 billion as compared with $1.2 billion at June 30, 2002.

Income from our title operations increased to $3.0 million for the three months ended June 30, 2003, from $2.7 million in 2002, and to $5.1 million for the six months ended, from $4.9 million in 2002. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $1.1 million for the three months ended June 30, 2003, compared to $1.2 million in 2002, and $2.3 million for the six months ended June 30, 2003 compared to $2.1 million in 2002.

We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments to minimize the impact of changes in interest rates. We do not use derivative financial instruments for trading purposes.

Corporate:

Corporate is a non-operating business segment whose primary purpose is to support the operations of our subsidiaries as the internal source of financing, to develop and implement strategic initiatives centered on new business development and operating efficiencies, and to provide the administrative support associated with being a publicly traded entity listed on the New York Stock Exchange. As a result, the corporate segment’s operating results will vary from quarter to quarter as these strategic initiatives evolve.

The following table presents results of operations for this segment for the three and six-month periods ended June 30, 2003 and 2002 ($000’s omitted):


	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2003		2002		2003		2002

Net interest expense	$	9,464	$	9,770	$	18,480	$	19,212
Other corporate expenses, net		12,582		4,692		18,935		10,304

Loss before income taxes	$	22,046	$	14,462	$	37,415	$	29,516

The increase in other corporate expenses, net for both the three and six months ended June 30, 2003 can be attributed to stock compensation expense and an increase in other performance based compensation expenses, partially offset by income recognized from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale.

Net interest expense for the three and six months ended June 30, 2003 was down slightly from the prior year amounts due to interest income earned on large cash balances held during the first six months of 2003.

Corporate net interest expense is net of amounts capitalized into homebuilding inventories. Capitalized interest is amortized to homebuilding interest expense over a period that approximates the average life cycle of our communities. Interest in inventory at June 30, 2003, increased primarily as a result of higher levels of inventory and indebtedness compounded by an increase in the average life cycle. Information related to Corporate interest capitalized into inventory is as follows ($000’s omitted):


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2003			2002			2003			2002

Interest in inventory at beginning of period	$	165,221		$	89,573		$	142,984		$	68,595
Interest capitalized		32,849			29,241			66,495			58,742
Interest expensed		(17,103	)		(11,367	)		(28,512	)		(19,890	)

Interest in inventory at end of period	$	180,967		$	107,447		$	180,967		$	107,447

Interest incurred for the three and six-month periods ended June 30, 2003 and 2002, excluding interest incurred by our financial services operations, was approximately $43.0 and $87.2 million and $40.1 and $79.2 million, respectively.

Discontinued Operations:

In July 2003, the United States Court of Federal Claims issued an opinion finding that we had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract with us. The opinion follows the Court’s August 17, 2001 ruling that held that the United States breached the contract related to our 1988 acquisition of five savings and loan associations by enacting Section 13224 of the Omnibus Budget Reconciliation Act of 1993. Final judgment is expected in the near future, but is subject to appeal. Accordingly, any gain from this litigation will be recognized only upon final resolution.

Liquidity and Capital Resources:

Our net cash used in operating activities amounted to $319.0 million compared to cash provided by operating activities of $96.7 million in the prior year. This change was primarily driven by an increase in inventories. Net cash used in investing activities of $16.7 million was comparable to last year’s $9.4 million. Net cash provided by financing activities of $112.9 million in 2003 primarily represents proceeds from our $300 million senior notes issued in February 2003 and our $400 million senior notes issued in May 2003 largely offset by the repayment of Pulte Mortgage’s revolving credit facilities, our $175 million 9.5% senior notes and the remaining $155 million of Del Webb’s 9.375% subordinated notes. Net cash used in financing activities was $56.1 million in 2002, as proceeds from the issuance of $300 million senior notes were used for the repayment of certain Del Webb debt and our revolving credit facility.

We finance our homebuilding land acquisitions, development and construction activities from internally generated funds and existing credit agreements. We had no borrowings under our $570 million unsecured revolving credit facility at June 30, 2003.

Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various credit arrangements. At June 30, 2003, Pulte Mortgage has committed credit arrangements of $500 million comprised of a $175 million bank revolving credit facility and a $325 million annual asset-backed commercial paper program. We are currently evaluating this facility in light of our increasing needs. During the first quarter of 2003, the $175 million bank revolving credit facility expired and was replaced with a new $175 million revolving credit facility with substantially the same terms which expire in March 2005. There were approximately $381 million of borrowings outstanding under the $500 million Pulte Mortgage arrangements at June 30, 2003. Mortgage loans originated by Pulte Mortgage are subsequently sold to outside investors. We anticipate that there will be adequate mortgage financing available for purchasers of our homes.

In February 2003, we sold $300 million of 6.25% unsecured senior notes, due in 2013. Proceeds from this issuance were used to retire our $175 million 9.5% senior notes which matured on April 1, 2003 and redeem the remaining outstanding principal balance of approximately $155 million of Del Webb’s $200 million 9.375% senior subordinated notes due 2009 which were called for redemption in March at a price equal to 104.688% of the principal amount.

In May 2003, we sold $400 million of 6.375% unsecured senior notes, due in 2033, in anticipation of the scheduled retirement of approximately $200 million principal outstanding of senior and subordinates notes coming due and callable in the fourth quarter of 2003 and the first quarter of 2004. The balance of this issuance will be used for general corporate purposes to include continued investment in the business.

Pursuant to our $100 million share repurchase program, we repurchased 395,400 common shares at an aggregate cost of approximately $18.2 million during the first six months of 2003. At June 30, 2003, we had remaining authorization to purchase common stock aggregating $77.5 million.

We anticipate that our effective tax rate for 2003 will approximate 38%, a decrease from the 2002 effective tax rate of 39%. Our income tax liability and related effective tax rate are affected by a number of factors. The reduction in the effective tax rate for 2003 is principally due to a lower expected effective state income tax rate for 2003 and the shareholders’ approval of our new Senior Management Annual Incentive Plan, which will allow for full tax deductibility of Plan payments under section 162(m) of the Internal Revenue Service Code.

At June 30, 2003, we had cash and equivalents of $391.1 million and $2.3 billion of senior notes and senior subordinated notes. Other financing included limited recourse collateralized financing totaling $125.0 million. Sources of our working capital at June 30, 2003, include our cash and equivalents, our $570 million committed unsecured revolving credit facility and remaining availability under Pulte Mortgage’s $500 million revolving credit facilities. Our debt-to-total capitalization, excluding our collateralized debt, was approximately 43% at June 30, 2003, and approximately 39% net of cash and equivalents. We expect to maintain our net debt-to-total capitalization at or below the 40% level. It is our intent to exercise the early call provision of the senior subordinated notes issued by Del Webb, as allowed under these notes. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings. At June 30, 2003, we had fully utilized our current mixed securities shelf registration. We intend to initiate a new shelf registration in the near term.

Inflation:

We, and the homebuilding industry in general, may be adversely affected during periods of high inflation, because of higher land and construction costs. Inflation also increases our financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. We attempt to pass through to our customers any increases in our costs through increased sales prices and, to date, inflation has not had a material adverse effect on our results of operations. However, there is no assurance that inflation will not have a material adverse impact on our future results of operations.

New Accounting Pronouncements:

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” Until this interpretation was issued, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the expected losses from the variable interest entity’s activities or is entitled to receive a majority of the entity’s expected residual returns. FIN 46 applied immediately to all variable interest entities created after January 31, 2003 and effective no later than the beginning of the first interim period that starts after June 15, 2003 for variable interest entities created prior to February 1, 2003.

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. Pursuant to these land option agreements, we will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FIN 46, if the entity holding the land under option is a variable interest entity, our deposit represents a variable interest in that entity. We do not guarantee the obligations or performance of the variable interest entity.

In applying the provisions of FIN 46, we evaluated all post-January 31, 2003 land option agreements and determined that we are subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, we are required to consolidate the fair value of the variable interest entity. At June 30, 2003, we classified $60 million as Land, Not Owned, Under Option Agreements, representing the fair value of land under contract including deposits. The corresponding liability has been classified as Accounts Payable, Accrued and Other Liabilities on the balance sheet. The adoption of FIN 46 has had no impact on our results of operations or cash flows.

We are in the process of evaluating our land option agreements and joint venture agreements entered into prior to February 1, 2003. Depending on the terms and conditions of these agreements, we may be required to consolidate other variable interest entities. This evaluation will be completed by September 30, 2003.

Critical Accounting Policies and Estimates:

There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2003 compared to those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2002, except for the following:

Stock-based compensation:

We currently have several stock-based employee compensation plans. Effective January 1, 2003 we adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting for Stock Issued to Employees.” We selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the prospective method, we will recognize compensation expense based on the fair value provisions of SFAS No. 123 for all new stock option grants effective January 1, 2003. Grants made prior to January 1, 2003 will continue to be accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With the exception of certain variable stock option grants, no stock-based employee compensation cost is reflected in net income for grants made prior to January 1, 2003, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

We use the Black-Scholes option-pricing model to determine the fair value of each option grant. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, risk-free interest rates and expected lives. These assumptions reflect management’s best estimates, but these items involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially impacted. Furthermore, if management uses different assumptions in future periods, stock-based compensation expense could be materially impacted in future periods.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative disclosure:

We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following table sets forth, as of June 30, 2003, our rate-sensitive financing obligations principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair market values ($000’s omitted).


			As of June 30, 2003 for the
			years ended December 31,

																		There-						Fair
			2003			2004			2005			2006			2007			after			Total			Value

Rate sensitive liabilities:
	Fixed interest rate debt:
		Senior notes and subordinated notes	$	100,000		$	112,000		$	125,000		$	—		$	—		$	1,940,240		$	2,277,240		$	2,589,898
		Average interest rate		7.00	%		8.38	%		7.30	%		—			—			7.43	%		7.45	%		—
		Limited recourse collateralized financing	$	36,873		$	35,938		$	32,195		$	11,596		$	3,499		$	4,917		$	125,018		$	125,018
		Average interest rate		3.31	%		5.28	%		5.96	%		3.00	%		5.70	%		5.36	%		4.68	%		—

Qualitative disclosure:

This information can be found in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and is incorporated herein by reference.

Special Notes Concerning Forward-Looking Statements

As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2., Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 3., Quantitative and Qualitative Disclosures About Market Risk, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (1) general economic and business conditions; (2) interest rate changes and the availability of mortgage financing; (3) the relative stability of debt and equity markets; (4) competition; (5) the availability and cost of land and other raw materials used by our homebuilding operations; (6) the availability and cost of insurance covering risks associated with our business; (7) shortages and the cost of labor; (8) weather related slowdowns; (9) slow growth initiatives and/or local building moratoria; (10) governmental regulation, including the interpretation of tax, labor and environmental laws; (11) changes in consumer confidence and preferences; (12) required accounting changes; (13) terrorist acts and other acts of war; and (14) other factors over which we have little or no control.

Item 4. Controls and Procedures

Management, including our President & Chief Executive Officer and Executive Vice President & Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2003. Based upon, and as of the date of that evaluation, the President & Chief Executive Officer and Executive Vice President & Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Shareholders was held on May 15, 2003. The following matters were considered and acted upon, with the results indicated below.


					Shares
			Shares		Voted		Shares		Shares
			Voted For		Against		Abstaining		Withheld

Election of Directors
	The election of Director for term expiring 2006:
		Debra J. Kelly-Ennis		55,355,404		—		—		1,917,360
		Patrick J. O’Meara		55,349,983		—		—		1,922,781
		Bernard W. Reznicek		53,211,405		—		—		4,061,359
		Alan E. Schwartz		55,213,013		—		—		2,059,751
Proposal to adopt the Pulte Homes, Inc. Senior Management Annual Incentive Plan.				50,705,581		6,001,404		565,779		—

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number and Description


31.1		Rule 13a-14(a) Certification by Richard J. Dugas, Jr., President and Chief Executive Officer

31.2		Rule 13a-14(a) Certification by Roger A. Cregg, Executive Vice President and Chief Financial Officer

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

On May 13, 2003, we filed a Current Report on Form 8-K, which included two press releases dated the same day, announcing certain executive management changes.

On July 24, 2003, we filed a Current Report on Form 8-K, which included a press release dated the same day, announcing our earnings for the three and six months ended June 30, 2003.

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.

PULTE HOMES, INC.

/s/ Roger A. Cregg
Roger A. Cregg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

/s/ Vincent J. Frees
Vincent J. Frees
Vice President and Controller
(Principal Accounting Officer)

Date: August 6, 2003

10-Q EXHIBIT INDEX


EXHIBIT NO.		DESCRIPTION

EX-31.1		Rule 13a-14(a) Certification by Richard J. Dugas, Jr., President and Chief Executive Officer

EX-31.2		Rule 13a-14(a) Certification by Roger A. Cregg, Executive Vice President and Chief Financial Officer

EX-32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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1.		Basis of presentation and significant accounting policies

		The consolidated financial statements include the accounts of Pulte Homes, Inc. and all of its direct subsidiaries (the “Company” or “Pulte”). The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc. (PDCI), North American Builders Indemnity Company (NABIC), the Company’s captive insurance company, Del Webb Corporation (Del Webb) and other subsidiaries, which are engaged in the homebuilding business. PDCI’s operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation (International) and other subsidiaries, which are engaged in the homebuilding business. PDCI’s non-operating thrift subsidiary, First Heights Bank, fsb (First Heights), is classified as a discontinued operation. The Company also has a mortgage banking company, Pulte Mortgage LLC (Pulte Mortgage), which is a subsidiary of PHC.

		The accompanying unaudited condensed consolidated financial 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, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

		Certain amounts previously reported in the 2002 financial statements and notes thereto were reclassified to conform to the 2003 presentation.

		Effective January 1, 2002, the Company reorganized its structure within Mexico to create a single company, Pulte Mexico S. de R.L. de C.V. (Pulte Mexico). Under the new ownership structure, these operations, which were primarily conducted through joint ventures, have been combined into Pulte Mexico and are 63.8% owned by International. Results for the six months ended June 30, 2002 include joint venture operations for one month and operations as a consolidated entity for five months, as the Mexican operations report on a one-month lag.

		Allowance for warranties

		Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. The Company estimates the costs to be incurred under these warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

		Changes to the Company’s allowance for warranties for the six months ended June 30, 2003 are as follows ($000’s omitted):

1.		Basis of presentation and significant accounting policies (continued)

		Stock-based compensation

		The Company currently has several stock-based employee compensation plans. Effective January 1, 2003 the Company adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting for Stock Issued to Employees.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the prospective method, the Company will recognize compensation expense based on the fair value provisions of SFAS No. 123 for all new stock option grants effective January 1, 2003. Grants made prior to January 1, 2003 will continue to be accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With the exception of certain variable stock option grants, no stock-based employee compensation cost is reflected in net income for grants made prior to January 1, 2003, as all options granted in those years had an exercise price equal to the market value of the underlying common stock on the date of grant.

		The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding stock options in each period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

		The Company also recorded compensation expense for restricted stock awards, net of related tax effects, of $1.3 million and $2.5 million for the three and six months ended June 30, 2003 compared to $0.8 million and $1.5 million for the three and six months ended June 30, 2002. These amounts have been excluded from the reconciliation above as they would have no impact on pro forma net income as presented.

		Land, not owned, under option agreements

		In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” Until this interpretation was issued, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the expected losses from the variable interest entity’s activities or is entitled to receive a majority of the entity’s expected residual returns. FIN 46 applied immediately to all variable interest entities created after January 31, 2003 and effective no later than the beginning of the first interim period that starts after June 15, 2003 for variable interest entities created prior to February 1, 2003.

1.		Basis of presentation and significant accounting policies (continued)

		Land, not owned, under option agreements (continued)

		In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of houses in the future. Pursuant to these land option agreements, the Company will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FIN 46, if the entity holding the land under option is a variable interest entity, the Company’s deposit represents a variable interest in that entity. The Company does not guarantee the obligations or performance of the variable interest entity.

		In applying the provisions of FIN 46, the Company evaluated all post-January 31, 2003 land option agreements and determined that the Company was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, the Company is required to consolidate the fair value of the variable interest entity. At June 30, 2003, the Company classified $60 million as Land, Not Owned, Under Option Agreements representing the fair value of land under contract including deposits. The corresponding liability has been classified as Accounts Payable, Accrued and Other Liabilities on the balance sheet. The adoption of FIN 46 has had no impact on the Company’s results of operations or cash flows.

		The Company is in the process of evaluating its land option agreements and joint venture agreements entered into prior to February 1, 2003. Depending on the terms and conditions of these agreements, the Company may be required to consolidate other variable interest entities. This evaluation will be completed by September 30, 2003.

2.		Segment information

		The Company’s operations are classified into three reportable segments: Homebuilding, Financial Services and Corporate.

		The Company’s Homebuilding segment consists of the following operations:

	•		Domestic Homebuilding, the Company’s core business, is engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for the first-time, first and second move-up, and active adult home buyers.

	•		International Homebuilding is primarily engaged in the acquisition and development of land principally for residential purposes, and the construction of housing on such land in Mexico, Puerto Rico and Argentina.

3.		Senior notes and subordinated notes

		In February 2003, the Company sold $300 million of 6.25% unsecured senior notes, callable prior to maturity and guaranteed by Pulte and certain wholly owned subsidiaries of Pulte. The notes are due in 2013.

		In March 2003, under the terms of Del Webb’s $200 million 9.375% senior subordinated notes due 2009, the Company exercised its optional right to redeem the remaining outstanding principal balance of approximately $155 million. The notes were redeemed in May 2003 at a price equal to 104.688% of the principal amount. Furthermore, the Company’s $175 million 9.5% senior notes matured and were retired in April 2003.

		In May 2003, the Company sold $400 million of 6.375% unsecured senior notes, callable prior to maturity and guaranteed by Pulte and certain wholly owned subsidiaries of Pulte. The notes are due in 2033.

4.		Shareholder’s equity

		In October 2002, the Company’s Board of Directors authorized the repurchase of $100 million of Company common stock in open-market transactions or otherwise. Pursuant to this authorization, 395,400 common shares were repurchased at an aggregate cost of approximately $18.2 million during the first half of 2003. At June 30, 2003, the Company had remaining authorization to purchase common stock aggregating $77.5 million.

		Accumulated other comprehensive income (loss)

		The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):

5.		Discontinued operations

		In July 2003, the United States Court of Federal Claims issued an opinion finding that the Company had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract with the Company. The opinion follows the Court’s August 17, 2001 ruling that held that the United States breached the contract related to the Company’s 1988 acquisition of five savings and loan associations by enacting Section 13224 of the Omnibus Budget Reconciliation Act of 1993. Final judgment is expected in the near future, but is subject to appeal. Accordingly, any gain from this litigation will be recognized only upon final resolution.

6.		Supplemental Guarantor information ($000’s omitted)

		The Company has the following outstanding senior note obligations: (1) $100 million, 7%, due 2003, (2) $112 million, 8.375%, due 2004, (3) $125 million, 7.3%, due 2005, (4) $200 million, 8.125%, due 2011, (5) $499 million, 7.875%, due 2011, (6) $300 million, 6.25%, due 2013, (7) $150 million, 7.625%, due 2017, (8) $300 million, 7.875%, due 2032, and (9) $400 million, 6.375%, due 2033. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by the Company’s wholly owned Domestic Homebuilding subsidiaries (collectively, the Guarantors). The Company has outstanding $92 million, 10.25%, senior subordinated notes due 2010, which are callable in the first quarter of 2004 at a price equal to 105.125% of the principal. Such obligations to pay principal, premium, if applicable, and interest are guaranteed jointly and severally on a senior subordinated basis by the Guarantors. Such guarantees are full and unconditional. The principal non-Guarantors include PDCI, International, Pulte Mortgage, NABIC and First Heights.

		Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by and the operations of the combined groups.

	•		Continued strong demand for new housing in many of our markets, geographic and product mix shifts, and benefits from the ongoing initiatives to leverage construction costs throughout the operations drove pre-tax income of our homebuilding business segment to increase 35% and 28%, respectively. Domestic average unit selling prices increased 8% and 7%, respectively. Such factors combined to drive domestic homebuilding settlement gross margin percentages up 190 basis points and 140 basis points, respectively.

	•		Pre-tax income of our financial services business segment increased 29% and 34%, respectively, as a result of increased volume, a favorable interest rate environment and effective leverage of overhead costs. The increase in volume was driven in large part by a 600 basis point increase in the capture rate for both periods.

	•		Higher compensation-related expenses, specifically the expensing of stock options and performance based incentives, drove the increase in pre-tax loss of our corporate business segment for both periods.

	•		We conduct our Domestic Homebuilding operations in 44 markets, located throughout 26 states. Domestic Homebuilding offers a broad product line to meet the needs of the first-time, first and second move-up, and active adult homebuyers.

	•		We conduct our International Homebuilding operations through subsidiaries of Pulte International Corporation (International) in Mexico, Puerto Rico and Argentina. International Homebuilding product offerings focus on the demand of first-time buyers and middle-to-upper income consumer groups.