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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 1-14122

D.R. HORTON, INC.

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

    Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes þ         No o

    As of March 31, 2003, the aggregate market value of the outstanding shares held by non-affiliates of the registrant was approximately $2,291,672,000. Solely for purposes of this calculation, all directors and executive officers were excluded as affiliates of the registrant.

    As of December 4, 2003, there were 157,535,358 shares of Common Stock, par value $.01 per share, issued and 154,882,558 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the registrant’s definitive Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated herein by reference in Part III.

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PART 1

      D. R. Horton, Inc. is a national homebuilder. (Unless the context otherwise requires, the terms “D.R. Horton,” the “Company,” “we” and “our” used herein refer to D.R. Horton, Inc., a Delaware corporation, and its predecessors and subsidiaries.) As a national homebuilder, we construct and sell single-family homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest and West regions of the United States. We offer high quality homes, designed principally for first-time and move-up home buyers. Our homes generally range in size from 1,000 to 5,000 square feet and range in price from $80,000 to $900,000. For the year ended September 30, 2003, we closed 35,934 homes with an average sales price approximating $231,900.

      We are one of the largest and most geographically diversified homebuilders in the United States, with operating divisions in 20 states and 47 markets as of September 30, 2003. The markets we operate in include: Albuquerque, Atlanta, Austin, Baltimore, Bend (Oregon), Birmingham, Charleston, Charlotte, Chicago, Colorado Springs, Columbia, Dallas, Denver, Fort Collins, Fort Myers/ Naples, Fort Worth, Greensboro, Greenville, Hawaii, Hilton Head, Houston, Inland Empire (Southern California), Jacksonville, Killeen (Texas), Las Vegas, Los Angeles, Maryland-D.C., Miami/ West Palm Beach, Minneapolis/ St. Paul, Myrtle Beach, New Jersey, Oakland, Orange County, Orlando, Phoenix, Portland, Raleigh/ Durham, Sacramento, Salt Lake City, San Antonio, San Diego, San Francisco, Seattle/ Tacoma, Tampa, Tucson, Ventura County and Virginia-D.C.

      We build homes under the following names: D.R. Horton, Cambridge, Continental, Dietz Crane, Emerald, Melody, Milburn, Schuler, Stafford, Torrey, Trimark and Western Pacific.

      Our financial reporting segments consist of homebuilding and financial services. Our homebuilding operations comprise the most substantial part of our business, with approximately 98% of consolidated revenues in fiscal 2001, 2002 and 2003. Our homebuilding operations segment generates the majority of its revenues from the sale of completed homes with a lesser amount from the sale of land and lots. Our financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance and closing services. Financial information, including revenue, pre-tax income and identifiable assets, for both of our reporting segments is included in our consolidated financial statements.

      Donald R. Horton began our homebuilding business in 1978. In 1991, we were incorporated in Delaware to acquire the assets and businesses of our predecessor companies, which were residential home construction and development companies owned or controlled by Mr. Horton. In the last ten fiscal years, we have acquired 17 other homebuilding companies. Our acquisitions have strengthened our market position in existing markets and expanded our geographic presence and product offerings in other markets.

      We make available, as soon as reasonably practicable, on our Internet website all of our reports required to be filed with the Securities and Exchange Commission. These reports include our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, changes in beneficial ownership reports on Forms 3, 4, and 5 and proxy statement and amendments to such reports. These reports may be accessed by going to our website at www.drhorton.com and clicking on the “Investor Relations” link. We will also provide these reports in electronic or paper format to our stockholders free of charge upon request made to our Investor Relations department. Information on our Internet website is not part of this annual report on Form 10-K.

      Our principal executive offices are located at 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006, our telephone number is (817) 856-8200, and our Internet website address is www.drhorton.com.

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Operating Strategy

      We believe that the following operating strategies have enabled us to achieve consistent growth and profitability:

      From 1978 to late 1987, excluding locations acquired in our 1998 merger with Continental Homes, our homebuilding activities were conducted in the Dallas/ Fort Worth area. We then instituted a strategy of diversifying geographically, entering the following of our current markets, both through startup operations and acquisitions, in the years shown:

      We continually monitor the sales and margins achieved in each of the subdivisions in which we operate as part of our evaluation of the use of our capital. While we believe there are significant growth opportunities in our existing markets, we also intend to continue our policy of diversification by seeking to enter new markets. We believe our diversification strategy mitigates the effects of local and regional economic cycles and enhances our growth potential. Typically, we will not invest material amounts in real estate, including raw land, developed lots, models and speculative homes, or overhead in start-up operations in new markets, until such markets demonstrate significant growth potential and acceptance of our products.

      We are currently focusing on internal growth. However, as an integral component of our operational strategy of continued expansion, we are continuing our historical approach of evaluating opportunities for strategic acquisitions in the future. We believe that expanding our operations through the acquisition of

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	•	Established land positions and inventories;
	•	Existing relationships with land owners, developers, subcontractors and suppliers;
	•	Brand name recognition in the local market; and
	•	Proven product acceptance by home buyers in the market.

      In evaluating potential acquisition candidates, we have sought homebuilding companies that have an excellent reputation, a track record of profitability and a strong management team with an entrepreneurial orientation. We have limited the risks associated with acquiring a going concern by conducting extensive operational, financial and legal due diligence on each acquisition and by only acquiring homebuilding companies that we believe will have an immediate positive impact on our earnings. In the last ten fiscal years, we have made 17 acquisitions. In the future, we may resume acquisitions of homebuilders that satisfy our acquisition criteria in existing or new markets.

      We decentralize our homebuilding activities to give more operating flexibility to our local division presidents. We have 43 separate operating divisions, some of which operate in the same market area and some of which operate in more than one market area. Generally, each operating division consists of a division president, a land acquisition manager, a sales manager and sales personnel, a construction manager and construction superintendents, a controller, a purchasing manager and office staff. We believe that division presidents, who are intimately familiar with local conditions, make better decisions regarding local operations. Our division presidents receive performance bonuses based upon achieving targeted operating levels in their operating divisions.

      Each operating division is responsible for:

	•	Site selection, which involves

        — A feasibility study;

        — Soil and environmental reviews;

        — Review of existing zoning and other governmental requirements; and

        — Review of the need for and extent of offsite work required to meet local building codes;

	•	Negotiating lot option or similar contracts;
	•	Overseeing land development;
	•	Planning its homebuilding schedule;
	•	Selecting building plans and architectural schemes;
	•	Obtaining all necessary building approvals; and
	•	Developing a marketing plan.

      The corporate office controls key risk elements through centralized:

	•	Financing;
	•	Cash management;

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	•	Risk management;
	•	Accounting and management reporting;
	•	Payment of subcontractors’ invoices;
	•	Administration of payroll and employee benefits;
	•	Final approval of land and lot acquisitions;
	•	Capital allocation; and
	•	Oversight of inventory levels.

      We control our overhead costs by centralized administrative and accounting functions and by limiting the number of field administrative personnel and middle level management positions. We also minimize advertising costs by participating in promotional activities, publications and newsletters sponsored by local real estate brokers, mortgage companies, utility companies and trade associations.

      We control construction costs through the efficient design of our homes and by obtaining favorable pricing from certain subcontractors and national vendors based on the high volume of services and products they provide us. We also control construction costs by monitoring costs on each house through our purchase order system. We control capital and overhead costs by monitoring our inventory levels through our management information systems.

Markets

      We conduct homebuilding activities in five geographic regions, consisting of:

      When entering new markets or conducting operations in existing markets, among the things we consider are:

	•	Regional economic conditions;
	•	Job growth;
	•	Land availability;
	•	Local land development process;
	•	Consumer tastes;
	•	Competition; and
	•	Secondary home sales activity.

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      Our homebuilding revenues, which include land and lot sales, by geographic region are:

Land Policies

      Typically, we acquire land only after necessary “entitlements” have been obtained, i.e., when we have the right to begin development or construction. Before we acquire lots or tracts of land, we will, among other things, complete a feasibility study, which includes soil tests, independent environmental studies and other engineering work, and determine that all necessary zoning and other governmental entitlements required to develop and use the property for home construction have been acquired. Although we purchase and develop land primarily to support our own homebuilding activities, occasionally we sell lots and land to other developers and homebuilders.

      We also use lot option contracts, in which we purchase the right, but not the obligation, to buy building lots at predetermined prices on a takedown schedule commensurate with anticipated home closings. Lot option contracts generally are on a non-recourse basis, thereby limiting our financial exposure to earnest money deposits given to property sellers. This enables us to control significant lot positions with a minimal capital investment and substantially reduces the risks associated with land ownership and development. At September 30, 2003, about 51% of our total lot position of 179,370 lots was under option contracts.

      The following is a summary of our land/lot positions at September 30, 2003:

      We limit our exposure to real estate inventory risks by:

	•	Generally commencing construction of homes under contract only after receipt of a satisfactory down payment and, where applicable, the buyer’s receipt of mortgage approval;
	•	Limiting the number of speculative homes (homes started without an executed sales contract) built in each subdivision;
	•	Closely monitoring local market and demographic trends, housing preferences and related economic developments, such as new job opportunities, local growth initiatives and personal income trends;
	•	Utilizing lot option contracts, where possible; and
	•	Limiting the size of acquired land parcels to smaller tracts of land.

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Construction

      Our home designs are prepared by architects in each of our markets to appeal to local tastes and preferences of the community. We also offer optional interior and exterior features to enhance the basic home design and to promote our sales efforts.

      Substantially all of our construction work is performed by subcontractors. Our construction supervisors monitor the construction of each home, participate in important design and building decisions, coordinate the activities of subcontractors and suppliers, subject the work of subcontractors to quality and cost controls and monitor compliance with zoning and building codes. Subcontractors typically are retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete construction at a fixed price. Agreements with our subcontractors and suppliers generally are negotiated for each subdivision. We compete with other homebuilders for qualified subcontractors, raw materials and lots in the markets where we operate.

      Construction time for our homes depends on the weather, availability of labor, materials and supplies, size of the home, and other factors. We typically complete the construction of a home within four months.

      We do not maintain significant inventories of construction materials, except for work in process materials for homes under construction. Typically, the construction materials used in our operations are readily available from numerous sources. We have contracts exceeding one year with certain suppliers of our building materials that are cancellable at our option with a 30 day notice. In recent years, we have not experienced any significant delays in construction due to shortages of materials or labor.

Marketing and Sales

      We market and sell our homes through commissioned employees and independent real estate brokers. We typically conduct home sales from sales offices located in furnished model homes in each subdivision. At September 30, 2003, we owned 1,453 model homes, which we generally do not offer for sale until the completion of a subdivision. Our sales personnel assist prospective home buyers by providing them with floor plans, price information, tours of model homes and the selection of options and other custom features. We train and inform our sales personnel as to the availability of financing, construction schedules, and marketing and advertising plans.

      In addition to using model homes, we typically build a limited number of speculative homes in each subdivision to enhance our marketing and sales activities. Construction of these speculative homes also is necessary to satisfy the requirements of relocated personnel and independent brokers, who often represent home buyers requiring a completed home within 60 days. We sell a majority of these speculative homes while they are under construction or immediately following completion. The number of speculative homes is influenced by local market factors, such as new employment opportunities, significant job relocations, growing housing demand and the length of time we have built in the market. Depending upon the seasonality of each market, we attempt to limit our speculative homes in each subdivision. At September 30, 2003, we averaged less than six speculative homes, in various stages of construction, in each subdivision.

      We advertise on a limited basis in newspapers and in real estate broker, mortgage company and utility publications, brochures, newsletters and on billboards. In addition, we use our Internet website to market the location, price range and availability of our homes. To minimize advertising costs, we attempt to operate in subdivisions in conspicuous locations that permit us to take advantage of local traffic patterns. We also believe that model homes play a significant role in our marketing efforts. Consequently, we expend significant effort in creating an attractive atmosphere in our model homes.

      Our sales contracts require a down payment of at least $500. The contracts include a financing contingency which permits customers to cancel if they cannot obtain mortgage financing at prevailing interest rates within a specified period, typically four to six weeks, and may include other contingencies, such as the sale of an existing home. We include a home sale in our sales backlog when the sales contract is signed and we have received the initial down payment. We recognize revenue from the sale of a home only when it is closed and title passes to the home buyer. The average period between the signing of a sales contract for a home and closing is approximately three to five months.

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Customer Service and Quality Control

      Our operating divisions are responsible for pre-closing quality control inspections and responding to customers’ post-closing needs. We believe that prompt and courteous response to home buyers’ needs during and after construction reduces post-closing repair costs, enhances our reputation for quality and service, and ultimately leads to significant repeat and referral business from the real estate community and home buyers. We provide our home buyers with a limited one-year warranty on workmanship and building materials. The subcontractors who perform most of the actual construction also provide us with warranties on workmanship and are generally prepared to respond to us and the homeowner promptly upon request. In addition, we provide a supplemental ten-year limited warranty that covers major construction defects.

Customer Financing

      We provide mortgage financing services principally to purchasers of homes we build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage banking services in Arizona, California, Colorado, Florida, Georgia, Hawaii, Illinois, Maryland, Minnesota, Nevada, New Mexico, North Carolina, Oregon, South Carolina, Texas, Virginia and Washington. During the year ended September 30, 2003, in the markets served, our combined mortgage banking entities provided mortgage financing services for approximately 73% of the homes closed that required mortgage financing, an increase from 72% during the year ended September 30, 2002.

      In other markets where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make available to home buyers a range of conventional mortgage financing programs. By making information about these programs available to prospective home buyers and maintaining a relationship with such mortgage lenders, we are able to coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis.

Title Services

      Through our subsidiaries, Century Title, Custom Title, DRH Title Company of Texas, Ltd., DRH Title Company of Florida, Inc., DRH Title Company of Minnesota, Inc., Grande Title Agency, LLC, Metro Title Company and Travis County Title Company, we serve as a title insurance agent by providing title insurance policies, examination and closing services to purchasers of homes we build in the Atlanta, Austin, Dallas, Fort Worth, Houston, Maryland-D.C., Miami/ West Palm Beach, Minneapolis, New Jersey, Orlando, Phoenix, San Antonio and Virginia-D.C. markets. We assume no underwriting risk associated with these title policies.

Employees

      At September 30, 2003, we employed 6,348 persons, of whom 1,345 were sales and marketing personnel, 2,138 were executive, administrative and clerical personnel, 1,767 were involved in construction, and 1,098 worked in mortgage and title operations. The Company had fewer than 25 employees covered by collective bargaining agreements. Employees of some of the subcontractors which we use are represented by labor unions or are subject to collective bargaining agreements. We believe that our relations with our employees and subcontractors are good.

Competition

      The single family residential housing industry is highly competitive and we compete in each of our markets with numerous other national, regional and local homebuilders. Our homes compete on the basis of quality, price, design, mortgage financing terms and location.

Governmental Regulation and Environmental Matters

      The housing, mortgage and title insurance industries are subject to extensive and complex regulations. We and our subcontractors must comply with various federal, state and local laws and regulations, including

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      We also are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws for each site vary greatly according to location, environmental condition and the present and former uses of the site and adjoining properties. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas.

      Our internal mortgage activities and title insurance agencies must also comply with various federal and state laws, consumer credit rules and regulations and other rules and regulations unique to such activities. Additionally, mortgage loans and title activities originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by those agencies.

      We own a 52,000 square foot office complex, consisting of three single-story buildings of steel and brick construction, located in Arlington, Texas, that serves as our principal executive and administrative offices. We also own a 22,864 square foot building in Lakeville, Minnesota; a 27,000 square foot building in Westminster, Colorado; two buildings in Englewood, Colorado totaling 28,217 square feet; a 16,000 square foot building in The Woodlands, Texas; and a 22,000 square foot building in Rowlett, Texas, that serve as division offices for some of our operating divisions. We lease approximately 796,000 square feet of space for our other operating divisions under leases expiring between October 2003 and March 2011.

      We are a party to routine litigation incidental to our business. Such matters, if decided adversely to us, would not, in the opinion of management, have a material adverse effect upon our financial condition.

      None.

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PART II

      Our common stock (the “Common Stock”) is listed on the New York Stock Exchange under the symbol “DHI”. The following table shows the high and low sales prices for the Common Stock for the periods indicated, as reported by the NYSE, adjusted for the three-for-two stock split (effected as a 50% stock dividend) of April 9, 2002.

      As of December 4, 2003, the closing price was $43.86, and there were approximately 730 holders of record. During fiscal 2003, we declared one quarterly cash dividend of six cents per share and three quarterly cash dividends of seven cents per share. During fiscal 2002, we declared one quarterly cash dividend of five cents per share and three quarterly cash dividends of six cents per share.

      The declaration of cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, our general financial condition and general business conditions. We are required to comply with certain covenants contained in the bank agreements and senior note and senior subordinated note indentures. The most restrictive of these requirements allows us to pay cash dividends on Common Stock in an amount, on a cumulative basis, not to exceed 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, at September 30, 2003, we had approximately $373.4 million available for the payment of dividends, the acquisition of our common stock and other restricted payments.

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      The following selected consolidated financial data are derived from our Consolidated Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements, related Notes thereto and other financial data elsewhere herein. These historical results are not necessarily indicative of the results to be expected in the future.

(1)	See Note C to the audited financial statements for details concerning acquisitions by the Company.
(2)	On February 21, 2002, D.R. Horton, Inc. and Schuler Homes, Inc. completed a merger in which D.R. Horton was the surviving corporation. The total merger consideration consisted of 20,079,532 shares of D.R. Horton common stock, valued at $30.93 per share; $168.7 million in cash; $802.2 million of assumed Schuler debt, $238.2 million of which was paid at closing; $218.7 million of assumed trade payables and other liabilities and $10.8 million of assumed obligations to the Schuler entities’ minority interest holders.

        Schuler’s revenues for the period February 22 through September 30, 2002 were $1,246.6 million.

(3)	In fiscal 2001, we recorded a cumulative effect of a change in accounting principle of $2.1 million, net of income taxes of $1.3 million, as an adjustment to net income, related to our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” See Note A to the audited financial statements.
(4)	All basic and diluted income per share amounts have been restated to reflect the effects of the 9% stock dividend of September 29, 2000, the 11% stock dividend of March 23, 2001 and the three-for-two stock split (effected as a 50% stock dividend) of April 9, 2002.
(5)	On December 1, 2003, our Board of Directors declared a three-for-two common stock split (to be effected as a 50% stock dividend), payable on January 12, 2004 to stockholders of record on December 22, 2003. See Note L to the audited financial statements.

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CRITICAL ACCOUNTING POLICIES

      General — A comprehensive enumeration of the significant accounting policies of D.R. Horton, Inc. and subsidiaries is presented in Note A to the accompanying financial statements as of September 30, 2003 and 2002, and for the years ended September 30, 2003, 2002 and 2001. Each of our accounting policies has been chosen based upon current authoritative literature that collectively comprises Generally Accepted Accounting Principles (“GAAP”) for public companies operating in the United States of America. In instances where alternative methods of accounting are permissible under GAAP, we have chosen the method that most appropriately reflects the nature of our business, the results of our operations and our financial condition, and have consistently applied those methods over each of the periods presented in the financial statements. The Audit Committee of our Board of Directors has reviewed and approved the accounting policies selected.

      Basis of presentation — Our financial statements include the accounts of D.R. Horton, Inc. and all of its majority-owned or controlled subsidiaries. All significant intercompany accounts, transactions and balances have been eliminated in consolidation. We have also consolidated certain variable interest entities from which we are purchasing lots under option purchase contracts, under the requirements of Interpretation No. 46 issued by the Financial Accounting Standards Board (“FASB”).

      Segment information — Our reportable business segments consist of homebuilding and financial services. Our homebuilding segment derives the majority of its revenue from constructing and selling single-family housing in 20 states and 47 markets throughout the United States. The financial services segment generates revenue by originating and selling mortgage loans and by collecting fees for title insurance and closing services in many of the same markets. We have no foreign subsidiaries or operations.

      Revenue recognition — We recognize homebuilding revenues when a home closes and title to and possession of the property are transferred to the buyer. Virtually all of our homebuilding revenues are received in cash within a day or two of closing. We include amounts in transit from title companies at the end of each reporting period in homebuilding cash. When we execute a sales contract with our home buyers, or when we require advance payment from home buyers for custom changes, upgrades or options related to their homes, we record the cash deposits as liabilities until the homes are closed or the contracts are canceled. We either retain or refund to the home buyer deposits on canceled sales contracts, depending upon the applicable provisions of the contract.

      We recognize financial services revenues associated with our title operations as homes are closed, closing services are rendered and title insurance policies are issued, all of which generally occur simultaneously as each home is closed. We recognize the majority of the revenues associated with our mortgage loan operations when the mortgage loans and related servicing rights are sold to third-party investors. We earn mortgage loan origination fees when we close and fund the loans associated with the homes financed. We defer the earned origination fees, net of direct origination costs, and recognize them as revenues, along with the associated gains or losses on the sales of the loans and related servicing rights, when the loans are sold to third-party investors. All of the financial services mortgage loans and related servicing rights are sold to third-party investors. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers.

      Inventories — We use the specific identification method for the purpose of accumulating costs associated with home construction. We state inventories at the lower of historical cost or fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144. In addition to the costs of direct land acquisition, land development and home construction, inventory costs include interest, real estate taxes and direct overhead costs incurred during development and home construction. Applicable direct overhead costs that we incur after development projects or homes are substantially complete are charged to selling, general and administrative (SG&A) expense as incurred. All indirect overhead costs, such as construction superintendents’ compensation, advertising and builder’s risk insurance are either charged to SG&A expense as incurred or, in the case of builder’s risk insurance, amortized to SG&A expense over the applicable policy periods.

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      We amortize to cost of sales for homes closed all applicable land acquisition, land development and related costs (both incurred and estimated to be incurred) based upon the total number of homes expected to be closed in each project. Any changes to the estimated total development costs subsequent to the initial home closings in a project are generally allocated on a pro-rata basis to the remaining homes in the project.

      When a home is closed, we usually have not yet recorded and paid all incurred costs necessary to complete the home. Each month we record as a liability and as a charge to cost of sales the amount we estimate will ultimately be paid related to completed homes that have been closed as of the end of that month. We compare our home construction budgets to actual recorded costs to estimate the additional costs needed to complete each closed home. We monitor the accuracy of each month’s accrual by comparing actual costs incurred on closed homes in subsequent months to the amount we accrued. Although actual costs to complete in the future could differ from our current estimate, our method has historically produced consistently accurate estimates of actual costs to complete closed homes.

      Each quarter, we review all components of our inventory for the purpose of determining whether recorded costs and costs required to complete each home (or project) are recoverable. If our review indicates that an impairment loss is required under the SFAS No. 144 guidelines, we estimate and record such loss to cost of sales in that quarter. To date, such impairment losses have occurred primarily in markets that we have chosen to abandon, and have been insignificant in the aggregate. Fair value estimation under SFAS No. 144 involves management estimates of future revenues and costs and, due to uncertainties in the estimation process, actual results could differ from such estimates.

      Warranty Costs — Warranty reserves have been established by charging cost of sales and crediting a warranty liability for each home closed. The amounts charged are estimated by management to be adequate to cover expected warranty-related costs for materials and labor required under one- and ten-year warranty obligation periods. The one-year warranty is comprehensive for all parts and labor; the ten-year period is for major construction defects. Our warranty cost accruals are based upon our historical warranty cost experience in each market in which we operate and are adjusted as appropriate to reflect qualitative risks associated with the type of homes we build and the geographic areas in which we build them. Actual future warranty costs could differ from our currently estimated amounts.

      Litigation Reserves — Litigation reserves have been established for estimated amounts based on an actuarial analysis of our past history of claims. We have, and require the majority of our subcontractors to have, general liability insurance that protects us against a portion of our risk of loss from construction-related claims. We reserve for costs to cover our self-insured retentions and deductible amounts under those policies and for any costs in excess of our coverage limits. Because of the high degree of judgment required in determining these estimated reserve amounts, actual future litigation costs could differ from our currently estimated amounts.

      Interest rate swaps — We have two interest rate swap agreements with a major United States bank under which we receive each quarter the London Inter-Bank Offered Rate (LIBOR) and pay a fixed amount that averages 5.1% on a total notional amount of $200 million. We entered into both of the ten-year swap contracts in 1998. Because we were unwilling to “buy out” the bank’s current right to cancel each swap during any quarter in which LIBOR exceeds 7%, we chose not to designate the swaps as cash-flow hedges under SFAS No. 133, which we adopted on October 1, 2000. As a result, even though they still protect us to some extent from increases in variable interest rates associated with our revolving credit facility, we are required to record the changes in their market value in our income statement each quarter. At the end of each quarter, the swaps’ market value will have changed depending upon the market’s current anticipation of quarterly LIBOR rate levels from the present until the swaps’ maturity in 2008. The swaps’ market values generally vary directly with changes in anticipated future LIBOR rates. We recorded a gain of $1.8 million during this fiscal year which reduced the liability associated with our interest rate swaps to $20.8 million at September 30, 2003, from $22.6 million at September 30, 2002. The liability is a result of declines in short term interest rates in past years that resulted in a decline in the swaps’ market value. We cannot predict the changes in either future LIBOR rates or the market values of our swaps. Any future reductions in anticipated LIBOR rates could result in corresponding future reductions in their market value and charges to our income statements.

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      Goodwill — We adopted SFAS No. 142 at the beginning of fiscal 2002. Under its provisions, we are no longer permitted to amortize goodwill to earnings. Such amounts are recorded on our balance sheet under the caption “excess of cost over net assets acquired” and, in our homebuilding segment, totaled $578.9 million at September 30, 2003. SFAS No. 142 requires companies to periodically assess recorded goodwill amounts for the purpose of determining whether any impairments have occurred and need to be recorded. We have measured the fair value of our reporting units using a discounted cash flow model and determined that the fair value of our reporting units was greater than their book value and therefore no impairment of goodwill existed. We continually evaluate whether events and circumstances have occurred that indicate the remaining balance of goodwill may not be recoverable. The goodwill assessment procedures required by SFAS No. 142 require management to make comprehensive estimates of future revenues and costs and due to the uncertainties associated with such estimates, actual results could differ from such estimates.

      Stock-based compensation — With the approval of a committee consisting of independent members of our Board of Directors, we occasionally issue to employees options to purchase our common stock. The committee approves grants only out of amounts remaining available for grant from amounts formally authorized by our common stockholders. We grant approved options with strike prices equal to the market price of the common stock on the date of the option grant. The majority of the options granted vest ratably over a ten-year period. We account for options under the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and, accordingly, recognize no compensation expense for the grants. SFAS No. 123 “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” (“SFAS No. 148”) require us to disclose the effects on net income and diluted net income per share had we recorded compensation expense in accordance with SFAS No. 123. The SFAS No. 123 requirements applied only to options granted after its effective date. If we had used the Black-Scholes formula for valuing option grants made after our adoption of SFAS No. 123, our net income would have been $2.3 million, $2.7 million and $4.3 million less than reported amounts for fiscal 2001, 2002 and 2003, respectively, and diluted net income per share would have been $0.02 less than the reported amounts for fiscal 2001 and 2002 and $0.03 less in fiscal 2003. For the present, we have chosen to continue our current method of accounting for stock options until the FASB and/or the Securities and Exchange Commission (“SEC”) have formalized and revised requirements for accounting for stock options. When they do, we will promptly adopt whatever new accounting methods are required.

      Consolidation of Variable Interest Entities — In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 provides guidance for the financial accounting and reporting of interests in certain variable interest entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain business entities that either have equity investors with no voting rights or have equity investors that do not provide sufficient financial resources for the entities to support their activities. FIN 46 requires consolidation of such entities by any company that is subject to a majority of the risk of loss from the entities’ activities or is entitled to receive a majority of the entities’ residual returns or both. We have chosen to fully adopt the provisions of FIN 46 for all variable interest entities as of September 30, 2003.

      In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Under such option purchase contracts, we will fund a stated deposit in consideration for the right to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, most of our option deposits are non-refundable. Certain non-refundable deposits are deemed to create a variable interest in a variable interest entity under the

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      The land sellers are not required to provide to us the financial information of the variable interest entities. Therefore, when our requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities are required. In most cases, the fair value of the assets of the consolidated entities have been assumed to be the contractual purchase price of the land or lots we are buying. In these cases, the only asset the entity is assumed to hold is the land or lots that we are buying with the related offset being recorded as minority interest for the assumed third party investment in the variable interest entity. Creditors, if any, of these variable interest entities have no recourse against us.

RESULTS OF OPERATIONS — CONSOLIDATED

      We provide homebuilding services in 20 states and 47 markets through our 43 homebuilding divisions. Through our financial services operations, we also provide mortgage banking and title agency services in many of these same markets. On February 21, 2002, Schuler Homes, Inc. (“Schuler”) merged into D.R. Horton, Inc. with D.R. Horton, Inc. continuing as the surviving corporation.

      Consolidated revenues increased 29.5% to $8,728.1 million in 2003 from $6,738.8 million in 2002, primarily due to increases in both home sales and financial services revenues. Approximately $498.8 million of the increase in homebuilding revenues was attributable to fiscal 2003 revenues generated by Schuler prior to the February 21, 2003 anniversary date of the acquisition.

      Income before income taxes increased 55.7% to $1,008.2 million in 2003 from $647.5 million in 2002. As a percentage of revenues, income before income taxes increased 2.0 percentage points, to 11.6%, from 9.6% in 2002. Factors contributing to that improvement were a 1.4 percentage point increase in homebuilding gross margins, a 0.2 percentage point improvement in homebuilding SG&A expenses as a percentage of revenues and improved operating margins in our financial services segment.

      The consolidated provision for income taxes increased 57.4% to $382.2 million in 2003, from $242.8 million in 2002, due to the corresponding increase in income before income taxes. The effective income tax rate for fiscal year 2003 was 37.9%, 0.4 percentage points higher than the 37.5% rate of fiscal 2002, due primarily to increases in pre-tax income in states with higher tax rates.

      Consolidated revenues increased 51.2% to $6,738.8 million in 2002 from $4,455.5 million in 2001, primarily due to increases in both home sales and financial services revenues. The increase in home sales revenues was attributable in part to $1,507.2 million in revenues generated by Fortress-Florida, acquired in May 2001, Emerald Builders, acquired in July 2001, and Schuler Homes, Inc., acquired in February 2002, during the periods in 2002 that were less than one year after each was acquired.

      Income before income taxes increased 58.8% to $647.5 million in 2002 from $407.8 million in 2001. As a percentage of revenues, income before income taxes increased 0.4 percentage points, to 9.6%, from 9.2% in 2001. Factors contributing to that improvement were reductions in homebuilding other expense, a 0.1 percentage point improvement in homebuilding SG&A expenses as a percentage of revenues, a significantly improved operating margin in our financial services segment, all offset in part by a 0.5 percentage point decline in our homebuilding gross margins. The decline in the homebuilding gross margin was due primarily to sales of inventory acquired in the Schuler acquisition that had lower gross margins as a result of purchase accounting adjustments that increased the acquired inventory to its fair value as of the date of the acquisition. If the acquired inventory had been recorded at Schuler’s historical cost, rather than adjusted to its fair value at acquisition and to conform to our inventory accounting policies, reported homebuilding gross profit would have been greater by approximately $61.1 million (0.9% of homebuilding revenues).

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      The consolidated provision for income taxes increased 58.8% to $242.8 million in 2002, from $152.9 million in 2001, due to the corresponding increase in income before income taxes. The effective income tax rate of 37.5% remained the same in both periods.

RESULTS OF OPERATIONS — HOMEBUILDING

      We currently conduct our homebuilding operations in five market regions consisting of the following markets:

      The following tables set forth certain operating and financial data for the Company’s homebuilding activities:

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      Sales backlog represents homes under contract but not yet closed at the end of the period, some of which are subject to contingencies, including mortgage loan approval. In the past, our backlog has been a reliable indicator of future closings.

      Revenues from home sales increased 27.6%, to $8,334.1 million (35,934 homes closed) in 2003 from $6,529.6 million (29,761 homes closed) in 2002. Revenues from home sales increased in all of our five market regions, with percentage increases ranging from 5.0% in the Midwest region to 41.4% in the West region. The increases in both revenues and homes closed were due to strong housing demand throughout the majority of our markets and the acquisition of Schuler. Excluding the fiscal 2003 activities of Schuler prior to the February 21, 2003 anniversary date of the acquisition, home sales revenues increased 20.3% to $7,856.0 million (34,410 homes closed) in 2003 from $6,529.6 million (29,761 homes closed) in 2002. Revenues from the sale of land and lots increased 128.0% to $218.0 million in 2003 from $95.6 million in 2002.

      The average selling price of homes we closed during 2003 was $231,900, up 5.7% from $219,400 in 2002. The increase in average selling price was due primarily to the increase in homes closed in the West region, to 33.7% of total homes closed in 2003 from 32.0% of homes closed in 2002. In the West region, average selling prices are higher than in any of our other market regions.

      The value of net new sales orders increased 33.1%, to $9,162.3 million (38,725 homes) in 2003 from $6,885.9 million (31,491 homes) in 2002. The value of net new sales orders increased in all of our five market regions, with percentage increases ranging from 11.5% in the Mid-Atlantic to 46.3% in the West. The overall increase in the value of net new sales orders was due to strong housing demand throughout the majority of our markets. Excluding the fiscal 2003 activities of Schuler prior to the February 21, 2003 anniversary date of the acquisition, the value of net new sales orders increased 22.8%, to $8,452.9 million, and the number of net new sales orders increased 16.6%, to 36,706 homes. The average price of a net new sales order in 2003 was

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      At September 30, 2003, our backlog of sales orders was $3,653.4 million (15,488 homes), up 29.3% from $2,825.2 million (12,697 homes) at September 30, 2002. The average sales price of homes in backlog was $235,900 at September 30, 2003, up 6.0% from the $222,500 average at September 30, 2002. As with the average selling prices of homes closed and sold, the increase in the average selling price of homes in backlog was primarily due to the effect of the increase in homes sold in the West region, which has the highest average sales price of all of our market regions.

      Cost of sales increased by 26.9%, to $6,805.8 million in 2003 from $5,364.4 million in 2002. The increase in cost of sales was primarily attributable to the increase in revenues. Cost of home sales as a percentage of home sales revenues decreased 1.5 percentage points, to 79.4% in 2003, from 80.9% in 2002. Most of the costs associated with the sales of inventory acquired in the Schuler acquisition, with lower gross margins as a result of purchase accounting adjustments that increased the acquired inventory to its fair value as of the date of acquisition, was recognized in 2002.

      Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 26.3%, to $817.1 million in 2003 from $646.8 million in 2002. As a percentage of revenues, SG&A expenses decreased to 9.6% in 2003 from 9.8% in 2002. The 0.2 percentage point decline in SG&A expenses as a percentage of revenues was primarily due to the increased leverage of fixed SG&A expenses achieved by the increase in homebuilding revenues.

      Interest expense associated with homebuilding activities decreased to $5.2 million in 2003 from $6.0 million in 2002. Due to the declining interest rate environment experienced in 2003, our total interest costs as a percentage of average interest-bearing debt declined. Also, throughout 2003, inventory under construction or development grew at a more rapid pace than interest-bearing debt. Therefore, a larger proportion of total interest incurred was capitalized to inventory than in 2002. We follow a policy of capitalizing interest only on inventory under construction or development. During both years, we expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in cost of sales at the time homes are closed.

      Other expense associated with homebuilding activities was $9.4 million in 2003, compared to $16.9 million in 2002. The expense in 2003 is primarily due to a $4.2 million write-down to estimated fair value of the carrying amounts of our investments in start-up and emerging growth companies and $11.8 million of minority interests in the income of our consolidated joint ventures. The expense was offset in part by $3.6 million in interest income and a $1.8 million increase in the fair value of our interest rate swaps. The expense in 2002 was primarily due to a $12.3 million decline in the fair value of our interest rate swaps and a $6.6 million write-down to estimated fair value of the carrying amounts of our investments in start-up and emerging growth companies.

      Revenues from home sales increased 52.2%, to $6,529.6 million (29,761 homes closed) in 2002 from $4,289.8 million (21,371 homes closed) in 2001. Revenues from home sales increased in all of our five market regions, with percentage increases ranging from 3.0% in the Mid-Atlantic region to 125.8% in the West region. The increases in both revenues and homes closed were due to strong housing demand throughout the majority of our markets, an increase in the average selling price of homes closed, and the increases attributable to the acquisition of Fortress-Florida in May 2001, Emerald Builders in July 2001, and Schuler Homes, Inc. in February 2002. In markets where we operated throughout both twelve-month periods, home sales revenues increased by 17.4%, to $5,022.4 million (24,478 homes closed) in 2002 from $4,279.3 million (21,328 homes closed) in 2001.

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      The average selling price of homes closed during 2002 was $219,400, up 9.3% from $200,700 in 2001. The increase in average selling price was primarily due to the higher average selling price ($334,400) of the 3,662 homes closed by the former Schuler divisions, which operate in the western part of the United States with higher prevailing home prices. Excluding Schuler closings, the average selling price of homes we closed was $203,300, up 1.3% from 2001.

      The value of net new sales orders increased 52.9%, to $6,885.9 million (31,491 homes) in 2002 from $4,502.6 million (22,179 homes) in 2001. The value of net new sales orders increased in four of our five market regions, with percentage increases ranging from 16.2% in the Southeast to 117.9% in the West. The value of net new sales orders declined 3.5% in the Midwest. Although our two primary markets in the Midwest (Chicago and Minneapolis/ St. Paul) remained strong, we ceased operations in Cincinnati, Louisville and St. Louis in 2002, which contributed to the slight decline in net new sales orders in that region. The overall increase in the value of net new sales orders was due to strong housing demand throughout the majority of our markets, as well as sales achieved by Fortress-Florida, Emerald Builders and Schuler Homes. In markets where we operated throughout both fiscal years, the value of net new sales orders increased 18.9%, to $5,343.5 million, and the number of net new sales orders increased 16.3%, to 25,762 homes. The average price of a net new sales order in 2002 was $218,700, up 7.7% over the $203,000 average in 2001. The increase in average selling price was primarily due to the higher average selling price ($327,100) of the 3,666 net new sales orders by the former Schuler divisions, which operate in the western part of the United States with higher prevailing home prices. Excluding the Schuler net new sales orders, our average selling price of net new sales orders in 2002 was $204,400, up 0.7% from 2001.

      At September 30, 2002, our backlog of sales orders was $2,825.2 million (12,697 homes), up 46.1% from $1,933.8 million (9,263 homes) at September 30, 2001. In markets where we operated at the end of both fiscal years, our backlog of sales orders increased 20.7%, to $2,333.7 million (11,070 homes). The average sales price of homes in backlog was $222,500 at September 30, 2002, up 6.6% from the $208,800 average at September 30, 2001. As with the average selling prices of homes closed and sold, the increase in the average selling price of homes in backlog was primarily due to the effect of homes in the backlogs of the former Schuler divisions, which operate in the western part of the United States with higher prevailing home prices. Excluding the Schuler amounts, the average price of homes in backlog was $210,800, up 1.0% from 2001.

      Cost of sales increased by 52.1%, to $5,364.4 million in 2002 from $3,527.1 million in 2001. The increase in cost of sales was primarily attributable to the increase in revenues. Cost of home sales as a percentage of home sales revenues increased 0.5 percentage points, to 80.9% in 2002, from 80.4% in 2001. The benefits we achieved in 2002 from our continuing ability to raise prices in selected markets and reduce costs through our national purchasing program were offset by sales of inventory acquired in the Schuler acquisition that had lower gross margins as a result of purchase accounting adjustments that increased the acquired inventory to its fair value as of the date of the acquisition. If the acquired inventory had been recorded at Schuler’s historical cost, rather than adjusted to its fair value at acquisition and to conform to our inventory accounting policies, reported gross profit from home sales would have been greater by approximately $54.0 million (0.8% of home sales revenues). All of the significant purchase accounting adjustments associated with the Schuler acquisition were recorded in 2002. For essentially the same reasons, total homebuilding cost of sales was 81.0% of total homebuilding revenue, up 0.6 percentage points from 80.4% in 2001.

      Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 49.7%, to $646.8 million in 2002 from $432.0 million in 2001. As a percentage of revenues, SG&A expenses decreased to 9.8% in 2002 from 9.9% in 2001. The 0.1 percentage point decline in SG&A expenses as a percentage of revenues was primarily due to the increased leverage of fixed SG&A expenses achieved by the increases in homebuilding revenues.

      Interest expense associated with homebuilding activities decreased to $6.0 million in 2002 from $8.8 million in 2001. As a percentage of homebuilding revenues, homebuilding interest expense decreased to 0.1% in 2002 from 0.2% in 2001. Due to the declining interest rate environment experienced in 2002, our total interest costs as a percentage of average interest-bearing debt declined. Also, throughout 2002, inventory under construction or development grew at a more rapid pace than interest-bearing debt. Therefore, a larger

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      Other expense associated with homebuilding activities was $16.9 million in 2002, as compared to $34.7 million in 2001. The expense in 2002 is primarily due to a $12.3 million decline in the fair value of our interest rate swaps and a $6.6 million write-down to estimated fair value of the carrying amounts of our investments in start-up and emerging growth companies. The expense in 2001 was primarily due to a $13.8 million decline in the fair value of our interest rate swaps and a $22.9 million write-down of the carrying amounts of our investments in start-up and emerging growth companies.

RESULTS OF OPERATIONS — FINANCIAL SERVICES

      Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes we build and sell. Mortgage services are provided in Arizona, California, Colorado, Florida, Georgia, Hawaii, Illinois, Maryland, Minnesota, Nevada, New Mexico, North Carolina, Oregon, South Carolina, Texas, Virginia and Washington. Title agency and closing services are provided in Arizona, Florida, Georgia, Maryland, Minnesota, New Jersey, Texas and Virginia. The following table summarizes financial and other information for the Company’s financial services operations:

      Revenues from the financial services segment increased 54.9%, to $176.0 million in 2003 from $113.6 million in 2002. The increase in financial services revenues was primarily due to the increase in homes closed and the continued expansion of our mortgage loan and title services provided to customers of our homebuilding segment. General and administrative expenses associated with financial services increased 45.0%, to $98.3 million in 2003 from $67.8 million in 2002. As a percentage of financial services revenues, general and administrative expenses decreased by 3.8 percentage points to 55.9% in 2003 from 59.7% in 2002, due primarily to efficiencies realized with the increase in revenues generated from the increase in homes closed.

      Revenues from the financial services segment increased 57.8%, to $113.6 million in 2002 from $72.0 million in 2001. The increase in financial services revenues was due to the rapid expansion of our

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

      At September 30, 2003, we had available cash and cash equivalents of $582.9 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at September 30, 2003, had increased by $739.2 million from September 30, 2002, due to a general increase in business activity, the expansion of operations in our market areas and the adoption of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” The consolidation of these entities added $105.0 million in land inventory not owned to the Company’s balance sheet as of September 30, 2003. The inventory increase was financed largely by retaining earnings and by issuing senior notes. Our revolving credit facility had no amounts outstanding at September 30, 2003 and 2002. Our ratio of homebuilding notes payable (net of cash) to total capital at September 30, 2003 improved 11.3 percentage points, to 40.0% from 51.3% at September 30, 2002. The stockholders’ equity to total assets ratio increased 3.9 percentage points, to 41.6% at September 30, 2003, from 37.7% at September 30, 2002.

      We have an $805 million, unsecured revolving credit facility, including $250 million which may be used for letters of credit. The facility matures in January 2006, and is guaranteed by substantially all of our wholly-owned subsidiaries other than those that make up our financial services segment. At September 30, 2003, we had outstanding homebuilding debt of $2,565.1 million. Under the debt covenants associated with the revolving credit facility, our additional homebuilding borrowing capacity under it is limited to the lesser of the unused portion of the facility, $709.1 million at September 30, 2003, or an amount determined under a borrowing base arrangement. Under the borrowing base limitation, the sum of our senior debt and the amount drawn on our revolving credit facility may not exceed certain percentages of the various categories of our inventory. At September 30, 2003, the borrowing base arrangement would have limited our additional borrowing capacity from any source to $1,644.8 million. At September 30, 2003, we were in compliance with all of the covenants, limitations and restrictions that form a part of our public debt obligations and our bank revolving credit facility. We have entered into multi-year interest rate swap agreements, aggregating a notional amount of $200 million, that have the effect of fixing the interest rate on a portion of the variable rate revolving credit facility at 5.1%.

      On December 3, 2002, we issued $215 million of 7 1/2% senior notes due 2007. The net proceeds from this offering were used to repay borrowings under the unsecured revolving credit facility. These notes are guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries.

      On April 17, 2003, we issued $200 million of 6 7/8% senior notes due 2013. The majority of the net proceeds from this offering was used to redeem the approximately $148.5 million aggregate principal amount outstanding of our 10% senior notes due 2006, which we called for full redemption on April 18, 2003 and redeemed on May 23, 2003, at a redemption price of 100% of the principal amount, together with accrued and unpaid interest thereon to the redemption date. The aggregate redemption price, including accrued interest, amounted to $150.1 million. Concurrent with the redemption, we recorded interest expense of approximately $1.3 million, representing unamortized discount and unamortized debt issuance costs associated with the redeemed notes. The 6 7/8% senior notes due 2013 are guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries.

      On May 27, 2003, we called our zero coupon convertible senior notes due 2021 for redemption. The aggregate accreted value of the notes on the date of the call was $213.6 million. The call for redemption gave the note holders the right to convert their notes into shares of our common stock or to redeem them for their cash accreted value on the redemption date. All of the notes were presented to us by June 26, 2003, for

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      On June 18, 2003, we issued $100 million of 5 7/8% senior notes due 2013. The net proceeds from this offering were used to redeem the $100 million aggregate principal amount outstanding of our 9% senior notes due 2008, which we called for full redemption on June 25, 2003 and redeemed on July 25, 2003, at a redemption price of 104.5% of the principal amount, together with accrued and unpaid interest thereon to the redemption date. The aggregate redemption price, including accrued interest, amounted to $107.0 million. Concurrent with the redemption, we recorded interest expense of approximately $2.5 million, representing the difference between the redemption premium and the unamortized premium associated with the redeemed notes. The 5 7/8% senior notes due 2013 are guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries.

      During fiscal 2003, we repurchased 2,652,800 shares of our common stock in open market transactions at an aggregate purchase price of $58.9 million. On July 31, 2003, our board of directors increased the authorizations for repurchases of our common stock and of our outstanding debt securities to $200 million each. At September 30, 2003, $175.6 million remained of the stock repurchase authorization and $200 million remained of the debt securities repurchase authorization.

      We examine the carrying value of our excess cost over net assets acquired (goodwill) annually to determine whether there are any impairment losses. Impairment is determined to exist when the implied fair value of goodwill is less than its carrying value. Our consolidated goodwill amounted to $578.9 million (homebuilding) and $1.2 million (financial services) at September 30, 2003. We performed the required tests during the last two fiscal years and determined that no goodwill or other intangible asset impairments existed.

      At September 30, 2003, our financial services segment had mortgage loans held for sale of $485.5 million and loan commitments for $458.7 million at fixed rates. We hedge the interest rate risk on these mortgage loans and mortgage loan commitments through the use of best-efforts whole loan delivery commitments, forward sales of mortgage-backed securities and the infrequent purchase of options on financial instruments. Changes in the value of the derivative instruments are recognized in current earnings, as are the changes in the value of the funded loans. Such gains and losses have not significantly affected our financial services results of operations.

      Currently, our wholly-owned mortgage company has a mortgage warehouse loan facility in the amount of $230 million which matures on February 12, 2004, and which is secured by certain mortgage loans held for sale. The mortgage warehouse facility is not guaranteed by either the parent company or any of the subsidiaries that guarantee our homebuilding debt, and is expected to be renewed prior to maturity in the ordinary course of business. At September 30, 2003, $148.0 million had been drawn under the mortgage warehouse facility. Our wholly-owned mortgage company completed a $100 million mortgage-backed commercial paper conduit facility (the “CP conduit facility”) in July 2002. The CP conduit facility was increased to $300 million on July 25, 2003. Although the current agreement governing the CP conduit facility expires on June 29, 2006, maintenance of the facility beyond the first (and subsequent) anniversary date(s) must be annually approved by the sponsoring bank. The CP conduit facility is also secured by certain mortgage loans held for sale and is not guaranteed by either the parent company or any of the subsidiaries that guarantee our homebuilding debt. As of September 30, 2003, $250.0 million had been drawn under the CP conduit facility. The mortgage loans pledged to secure the CP conduit facility are used as collateral for mortgage-backed securities sold in the secondary commercial paper markets at rates that are more attractive than those applicable to the mortgage warehouse facility. All mortgage company activities are financed with the mortgage warehouse facility, the CP conduit facility or internally generated funds. Both of the financial services’ credit facilities contain financial covenants with which we are in compliance.

      Our historical strategy of internal growth and growth by acquisitions has required significant amounts of cash. If we are to achieve our future growth targets, we expect that those cash requirements will continue. We anticipate that future home construction, lot and land purchases and any acquisitions will be funded through internally generated funds, existing and future credit facilities and the issuance of new debt or equity securities. At September 30, 2003, under currently effective shelf registration statements, we had approxi-

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      In the future, we intend to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. We believe that our current cash position, our cash generation capabilities, the amounts available under our revolving line of credit agreements and our ability to access the capital markets in a timely manner with our existing shelf registration statements are adequate to meet our cash needs for the foreseeable future.

      During fiscal 2003, our Board of Directors declared one quarterly cash dividend of $0.06 per common share and three quarterly cash dividends of $0.07 per common share, the last of which was paid on August 22, 2003 to stockholders of record on August 8, 2003. On October 9, 2003 our Board of Directors declared a cash dividend of $0.07 per common share which was paid on October 31, 2003 to stockholders of record on October 20, 2003.

      On December 1, 2003, our Board of Directors declared a three-for-two common stock split (to be effected as a 50% stock dividend) which will be payable on January 12, 2004 to holders of record on December 22, 2003. Cash will be paid in lieu of fractional shares.

      Except for ordinary expenditures for the construction of homes, the acquisition of land and lots for development and sale of homes, at September 30, 2003, we had no material commitments for capital expenditures.

OFF-BALANCE SHEET ARRANGEMENTS

      In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduces the risks associated with land ownership and development. At September 30, 2003, we had $128.6 million in deposits to purchase land and lots with a total purchase price of $2.4 billion. Only $52.0 million of the $2.4 billion in land and lot option purchase contracts contain specific performance clauses which require us to purchase the land or lots. Pursuant to FIN 46, we consolidated certain variable interest entities with assets of $105.0 million.

      At September 30, 2003, we had outstanding letters of credit of $118.6 million and performance bonds of $1,147.1 million, issued by third parties, to secure performance under various contracts. We expect that the obligations secured by these letters of credit and performance bonds will generally be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related letters of credit and performance bonds will be released and we will not have any continuing obligations. We have no material third-party guarantees.

INFLATION

      We and the homebuilding industry in general may be adversely affected during periods of high inflation, primarily 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.

SAFE HARBOR STATEMENT

      Certain statements contained in this report, as well as in other materials we have filed or will file with the Securities and Exchange Commission, statements made by us in periodic press releases and oral statements we make to analysts, stockholders and the press in the course of presentations about us, may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically include the words “anticipate,” “believe,” “expect,” “estimate,” “pro-

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	•	General Economic, Real Estate and Other Conditions—The homebuilding industry is cyclical and is significantly affected by changes in general and local economic conditions, such as employment levels, availability of financing for home buyers, interest rates, consumer confidence and housing demand. Any oversupply of alternatives to new homes, such as rental properties and used homes, could depress new home prices and reduce our margins on the sale of new homes. Homebuilders are also subject to risks related to the availability and cost of land suitable for homebuilding, the availability and cost of materials and labor and adverse weather conditions which can cause delays in construction schedules and cost overruns.
	•	Increases in Interest Rates or Decreases in Mortgage Availability—Virtually all of our customers finance their homes through lenders providing mortgage financing. Any future increases in interest rates or decreases in the availability of mortgage financing could depress the market for new homes by making our homes less affordable.
	•	Governmental Regulations and Environmental Matters—We are subject to extensive and complex regulations that affect the development and homebuilding process, including zoning, density and building standards. Such regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the costs of development or homebuilding. Laws and regulations relating to the protection of the environment can cause delays, increased costs of compliance and prohibitions or restrictions of development and homebuilding activity in environmentally sensitive areas.
	•	Substantial Debt—We have a significant amount of debt. The amount of our debt could limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements. It could also limit our flexibility in planning for, or reacting to, changes in our business and make us more vulnerable in the event of a downturn in our business or in general economic conditions.
	•	Competitive Conditions—The homebuilding industry is very competitive. In each of the markets we serve, we compete with other homebuilders for home buyers, desirable properties, financing, raw materials and skilled labor. Competitive conditions in the homebuilding industry could result in difficulty in acquiring suitable land at acceptable prices, the need for increased selling incentives, lower sales or delays in construction.
	•	Availability of Capital—Our ability to grow our business and operations profitably is substantially dependent upon our ability to generate or obtain capital. Important sources of capital have included the sale of equity or debt and additional bank borrowings. Increases in interest rates, changes in our debt ratings by the national credit rating agencies, concerns by potential investors about the market or the economy, changing lending objectives of financial institutions, or further consolidation of financial institutions that lend to the homebuilding industry could increase our costs of borrowing or reduce the availability of funds necessary for us to achieve our strategic growth objectives. Moreover, the indentures for our outstanding debt contain provisions that may restrict the debt we may incur in the future.
	•	Growth Strategies—Since 1993, we have acquired many homebuilding companies. Although we are currently focusing on internal growth, we may make strategic acquisitions of homebuilding companies in the future. Successful strategic acquisitions require the integration of operations and management and other efforts to realize the benefits that may be available. Although we believe that we have been successful in doing so in the past, we can give no assurance that, when we resume our acquisition

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		activity, we will be able to successfully identify, acquire and integrate strategic acquisitions in the future. Moreover, we may not be able to implement successfully our operating and growth strategies within our existing markets.

      We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.

      We are subject to interest rate risk on our long term debt. We monitor our exposure to changes in interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect our future earnings and cash flows. We have mitigated our exposure to changes in interest rates on our variable rate bank debt by entering into interest rate swap agreements to obtain a fixed interest rate for a portion of the variable rate borrowings. We generally do not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on our fixed-rate debt until such time as we are required to refinance, repurchase or repay such debt.

      Our interest rate swaps were not designated as hedges under SFAS No. 133 when it was adopted on October 1, 2000. We are exposed to market risk associated with changes in the fair values of the swaps, and such changes must be reflected in our income statements.

      Our mortgage company is exposed to interest rate risk associated with its mortgage loan origination services. Interest rate lock commitments (IRLC’s) are extended to borrowers who have applied for loan funding and who meet certain defined credit and underwriting criteria. Typically, the IRLC’s will have a duration of less than six months. Some IRLC’s are committed immediately to a specific investor through the use of best-efforts whole loan delivery commitments, while the majority of IRLC’s are funded prior to being committed to third-party investors. Forward sales of mortgage-backed securities (“FMBS”) are used to protect uncommitted IRLC’s against the risk of changes in interest rates. FMBS related to IRLC’s are classified and accounted for as non-designated derivative instruments, with gains and losses recorded in current earnings. FMBS related to funded, uncommitted loans are designated as fair value hedges, with changes in the value of the derivative instruments recognized in current earnings, along with changes in the value of the funded, uncommitted loans. The effectiveness of the fair value hedges is continuously monitored and any ineffectiveness, which for the years ended September 30, 2001, 2002 and 2003 was not significant, is recognized in current earnings. At September 30, 2003, total FMBS to mitigate interest rate risk related to uncommitted mortgage loans held for sale and uncommitted IRLC’s totaled approximately $216.0 million, the duration of which was less than six months. At September 30, 2003, the fair value of the FMBS and IRLC’s was approximately $26,000.

      The following table sets forth, as of September 30, 2003, for our debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table sets

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors

      We have audited the accompanying consolidated balance sheets of D.R. Horton, Inc. and subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of D.R. Horton, Inc. and subsidiaries at September 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States.

Fort Worth, Texas

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D.R. HORTON, INC. AND SUBSIDIARIES