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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 1-14122

D.R. Horton, Inc.

(817) 390-8200

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.    o

         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, 2004, the aggregate market value of the outstanding shares held by non-affiliates of the registrant was approximately $7,532,556,000. Solely for purposes of this calculation, all directors and executive officers were excluded as affiliates of the registrant.

         As of December 2, 2004, there were 236,185,469 shares of Common Stock, par value $.01 per share, issued and 233,532,669 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated herein by reference in Part III.

Table of Contents

PART 1

      D.R. Horton, Inc. is a national homebuilder. We construct and sell high quality single-family homes, designed principally for first-time and move-up homebuyers, through our operating divisions in 21 states and 63 metropolitan markets of the United States, primarily under the name of D.R. Horton, America’s Builder. D.R. Horton, Inc. is a Fortune 500 company listed on the New York Stock Exchange under the ticker symbol “DHI.” 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.

      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 1992, we completed our initial public offering of our common stock. From inception, we have consistently grown the size of our company by investing our available capital into our existing homebuilding markets and into start-up operations in new markets. Additionally, from July 1993 to February 2002, we acquired 17 other homebuilding companies, which strengthened our market position in existing markets and expanded our geographic presence and product offerings in other markets. We are now the largest homebuilding company in the United States, based on domestic homebuilding revenues, homes sold and homes closed during the year ended September 30, 2004. 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, 2004, we closed 43,567 homes with an average closing sales price approximating $240,800.

      Through our financial services operations, we provide mortgage banking and title agency services to homebuyers in many of our homebuilding markets. DHI Mortgage, our wholly owned subsidiary, provides mortgage financing services, principally to purchasers of homes we build and sell. Our subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to purchasers of homes we build and sell.

      Our financial reporting segments consist of homebuilding and financial services. Our homebuilding operations are a substantial part of our business, comprising approximately 98% of consolidated revenues and approximately 95% of consolidated income before income taxes in fiscal year 2004. Our homebuilding segment generates the majority of its revenues from the sale of completed homes with a lesser amount from the sale of land and lots. In addition to building traditional single family detached homes, the homebuilding segment also builds attached homes, such as town homes, condominiums, duplexes, and triplexes, which share common walls and roofs. Approximately 84%, 91%, and 92% of home sales revenues in fiscal 2004, 2003 and 2002, respectively, were generated from the sale of detached homes. 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.

      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, proxy statements 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 301 Commerce Street, Fort Worth, Texas 76102. Our telephone number is (817) 390-8200, 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, our homebuilding activities were conducted in the Dallas/ Fort Worth area. We then began diversifying geographically by entering additional markets, both through startup operations and acquisitions.

      We believe our diversification strategy mitigates the effects of local and regional economic cycles and enhances our growth potential. Typically, we do not invest material amounts of capital 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. While we believe there are significant growth opportunities in our existing markets, we also intend to continue our diversification strategy by seeking to enter new markets. We continually monitor the sales, margins and returns achieved in each of our markets as part of our evaluation of the use of our capital.

      We decentralize our homebuilding activities to give more operating flexibility to our local division presidents. We have 42 separate operating divisions, some of which are 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, land acquisition and development personnel, 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 and their management teams, who are intimately familiar with local conditions, make better decisions regarding local operations. Our division presidents receive performance bonuses based upon achieving targeted financial measures 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;
	•	Selecting building plans and architectural schemes;
	•	Obtaining all necessary building approvals;
	•	Selecting and managing construction subcontractors and suppliers;
	•	Planning and managing homebuilding schedules; and
	•	Developing and implementing marketing plans.

      We centralize the key risk elements of our homebuilding business through our regional and corporate offices. We have six separate homebuilding operating regions, each of which generally consists of a region

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      Our corporate office departments are responsible for establishing our operational policies and internal control standards and monitoring compliance with established policies and controls throughout our operations. The corporate office also has primary responsibility for direct management of certain key risk elements and initiatives through the following centralized functions:

	•	Financing;
	•	Cash management;
	•	Risk and litigation management;
	•	Capital allocation;
	•	Oversight of inventory levels;
	•	Environmental assessments of land and lot acquisitions;
	•	Approval and funding of land and lot acquisitions;
	•	Accounting and management reporting;
	•	Internal audit;
	•	Information technology systems;
	•	Administration of payroll and employee benefits;
	•	Negotiation of national purchasing contracts; and
	•	Monitoring and analysis of margins, returns and expenses.

      We control our overhead costs by centralizing certain administrative and accounting functions and by closely monitoring the number of administrative personnel and management positions in our operating divisions and our corporate office. We also minimize advertising costs by actively participating in promotional activities sponsored by local real estate brokers and trade associations.

      We control construction costs by striving to efficiently design our homes, by obtaining competitive bids for construction materials and labor and by negotiating favorable pricing from our primary subcontractors and suppliers based on the volume of services and products we purchase from them on a local, regional and national basis. We monitor our construction costs on each house through our purchasing and construction budgeting systems, and we monitor our inventory levels, margins, returns and expenses through our management information systems.

      We have recently focused on internal growth. However, as an integral component of our operational strategy, we continue to evaluate opportunities for strategic acquisitions. We believe that expanding our operations through the acquisition of existing homebuilding companies affords us several benefits not found in start-up operations. Such benefits include:

	•	Established land positions and inventories;
	•	Existing relationships with land owners, developers, subcontractors and suppliers; and
	•	Proven product acceptance by homebuyers and local brand name recognition in new markets.

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      In evaluating potential acquisition candidates, we seek homebuilding companies that have excellent reputations, track records of profitability and strong management teams. We limit 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 a positive impact on our earnings within one year. We believe that our acquisition evaluation and due diligence processes and our decentralized operating approach with centralized controls have contributed to the successful integration of our prior acquisitions. In the future, we will continue to evaluate potential acquisition opportunities that satisfy our acquisition criteria in existing or new markets.

Markets

      We conduct our homebuilding operations in all of the geographic regions, states and markets listed below, and we conduct our mortgage and title operations in many of these markets as indicated in the following table:

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      When evaluating the viability of new or existing homebuilding markets, we consider the following factors, among others:

	•	Regional economic conditions;
	•	Job growth;
	•	Land availability;
	•	Local land development process;
	•	New home sales activity;
	•	Competition;
	•	Secondary home sales activity; and
	•	Local housing products, features and pricing.

      Our homebuilding revenues from home sales by geographic region are:

      Our homebuilding revenues from land and lot sales by geographic region are:

      The majority of our homebuilding inventories are concentrated in six states: Arizona, California, Colorado, Florida, Nevada and Texas.

Land Policies

      Typically, we acquire land only after we have completed appropriate due diligence and after we have obtained the rights (“entitlements”) to begin development or construction work. 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 obtained. Although we purchase and develop land primarily to support our homebuilding activities, occasionally we sell lots and land to other developers and homebuilders.

      We also enter into land/lot option contracts, in which we purchase the right, but generally not the obligation, to buy land or lots at predetermined prices on a defined schedule commensurate with

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      We limit our exposure to real estate inventory risks by:

	•	Maintaining approximately a three to four year supply of land/lots controlled (owned and optioned);
	•	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 land/lot option contracts, where possible;
	•	Limiting the size of acquired land parcels to smaller tracts, where possible;
	•	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; and
	•	Closely monitoring the number of speculative homes (homes started without an executed sales contract) built in each subdivision.

Construction

      Our home designs are prepared by architects in each of our markets to appeal to local tastes and preferences of homebuyers in each community. We also offer optional interior and exterior features to allow homebuyers to enhance the basic home design and to allow us to generate additional revenues from each home sold.

      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, review the work of subcontractors for 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 to six months.

      We do not maintain significant inventories of construction materials, except for work in progress 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 cancelable 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. We generally do not offer our model homes for sale until the completion of a subdivision. Our sales personnel assist prospective homebuyers 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.

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      We advertise in our local markets as necessary. We advertise in newspapers and trade publications (i.e. real estate broker, mortgage company and utility publications), as well as with marketing brochures and newsletters. We also use billboards, radio and television advertising and our Internet website to market the location, price range and availability of our homes. To minimize advertising costs, we also 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, so we expend significant effort to create an attractive atmosphere in our model homes.

      In addition to using model homes, we typically build a limited number of speculative homes in each subdivision to enhance our marketing and sales efforts to prospective homebuyers who are relocating to our markets and to independent brokers, who often represent homebuyers requiring a completed home within 60 days. We sell a majority of these speculative homes while they are under construction or immediately following completion. We determine the number of speculative homes to build in each market based on local market factors, such as new job growth, the number of job relocations, housing demand, seasonality and our past experience in the market.

      Our sales contracts require an earnest money deposit of at least $500. The amount of earnest money required varies between markets and subdivisions, and may significantly exceed $500. Additionally, customers are generally required to pay additional deposits when they select options or upgrade features for their homes. Most of our sales contracts stipulate that when customers cancel their contracts with us, we have the right to retain their earnest money and option deposits; however, our operating divisions occasionally choose to refund such deposits. Our sales contracts also include a financing contingency which permits customers to cancel and receive a refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified period, and our contracts may include other contingencies, such as the sale of an existing home. Generally, the length of time between the signing of a sales contract for a home and delivery of the home to the buyer (closing) is three to six months.

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 homebuyers’ 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 homebuyers. We provide our homebuyers 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 Mortgage Financing

      We provide mortgage financing services principally to purchasers of homes we build and sell in the majority of our homebuilding markets through our wholly-owned subsidiary, DHI Mortgage. DHI Mortgage coordinates and expedites the entire sales transaction for both our homebuyers and our homebuilding operations by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis. During the year ended September 30, 2004, 92% of DHI Mortgage’s loan volume related to homes closed by our homebuilding operations, and DHI Mortgage provided mortgage financing services for approximately 61% of our total homes closed.

      DHI Mortgage originates mortgage loans, and then packages and sells substantially all of the loans and their servicing rights to third-party investors shortly after origination on a non-recourse or limited recourse basis. In markets where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make available to homebuyers a range of mortgage financing programs.

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Title Services

      We serve as a title insurance agent in selected markets by providing title insurance policies, examination and closing services to purchasers of homes we build and sell, through our subsidiary title companies. We assume little or no underwriting risk associated with these title policies.

Employees

      At September 30, 2004, we employed 7,466 persons, of whom 1,420 were sales and marketing personnel, 2,571 were executive, administrative and clerical personnel, 2,170 were involved in construction, and 1,305 worked in mortgage and title operations. The Company had fewer than 20 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 homebuilding industry is highly competitive. We compete in each of our markets with numerous other national, regional and local homebuilders for homebuyers, desirable properties, raw materials, skilled labor and financing. Our homes compete on the basis of quality, price, design, mortgage financing terms and location.

Governmental Regulation and Environmental Matters

      The homebuilding industry is subject to extensive and complex regulations. We and our subcontractors must comply with various federal, state and local laws and regulations, including zoning, density and development requirements, building, environmental, advertising and real estate sales rules and regulations. These requirements affect the development process, as well as building materials to be used, building designs and minimum elevation of properties. Our homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA are subject to inspection by them. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.

      Our new housing developments may be subject to various assessments for schools, parks, streets and other public improvements. These assessments increase our development and homebuilding costs and can cause increases in the prices of our homes.

      Our homebuilding operations are also 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 may prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas.

      Our mortgage company 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, GNMA, Fannie Mae and Freddie Mac 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 served as our principal executive and administrative offices from September 1992 through November 2004. In December 2004, we began leasing approximately 160,000 square feet of office space in downtown Fort Worth, Texas that serves as our principal executive and corporate administrative offices.

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      We also own several office buildings totaling approximately 128,000 square feet and we lease approximately 994,000 square feet of office space under leases expiring through October 2011, in our various operating markets to house our homebuilding and financial services operating division and region offices.

      We are involved in lawsuits and other contingencies in the ordinary course of business. Management believes that, while the ultimate outcome of the contingencies cannot be predicted with certainty, the ultimate liability, if any, will not have a material adverse effect on our financial position or operations.

      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 January 12, 2004 and dividends declared per share (split-adjusted).

      As of December 2, 2004, the closing price was $35.29, and there were approximately 682 holders of record.

      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 many of our 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, 2004, we had approximately $789.9 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)	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. See Note C to the Consolidated Financial Statements for additional details concerning the Company’s merger with Schuler.
(2)	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

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	of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
(3)	All basic and diluted income per share amounts and cash dividends declared 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 splits (effected as 50% stock dividends) of April 9, 2002 and January 12, 2004.

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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, 2004 and 2003, and for the years ended September 30, 2004, 2003 and 2002. 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 wholly-owned, majority-owned and 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 21 states and 63 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 sales contracts with our homebuyers, or when we require advance payment from homebuyers for custom changes, upgrades or options related to their homes, we record the cash deposits received as liabilities until the homes are closed or the contracts are canceled. We either retain or refund to the homebuyer 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 transfer all underwriting risk associated with title insurance policies to third-party insurers. We recognize the majority of the revenues associated with our mortgage operations when the mortgage loans and related servicing rights are sold to third-party investors. Origination fees, net of direct origination costs, are deferred and recognized as revenues, along with the associated gains and losses on the sales of the loans and related servicing rights, when the loans are sold. We sell all mortgage loans and related servicing rights to third-party investors.

      Inventories and Cost of Sales — 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, such as utilities, maintenance, and cleaning, are charged to selling, general and administrative (SG&A) expense as incurred. All indirect overhead costs, such as compensation of construction superintendents, sales personnel and division and region management, advertising and builder’s risk insurance are charged to SG&A expense as incurred.

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      We use the specific identification method for the purpose of accumulating home construction costs. Cost of sales for homes closed includes the specific construction costs of each home and 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 generally have not yet paid and recorded 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 remaining to be paid on 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 be paid on closed homes 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 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.

      Consolidation of Variable Interest Entities — In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” as amended (“FIN 46”). FIN 46 provides guidance for the financial accounting and reporting of interests in certain variable interest entities, which FIN 46 defines as 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, defined as the primary beneficiary of the variable interest entity.

      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, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of our option deposits are non-refundable. Certain non-refundable deposits are deemed to create a variable interest in a variable interest entity under the requirements of FIN 46. As such, certain of our option purchase contracts result in the acquisition of a variable interest in the entity holding the land parcel under option.

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

      Since we own no equity interest in any of the unaffiliated variable interest entities that we must consolidate pursuant to FIN 46, we generally have little or no control or influence over the operations of these entities or their owners. When our requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required. In most cases, the fair value of the assets of the consolidated entities have been assumed to be the remaining contractual purchase price of the land or lots we are purchasing. In these cases, it is assumed that the entities have no debt obligations and the only asset recorded is the land or lots we have the option to buy with a related offset to 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.

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      Warranty Costs — We have established warranty reserves by charging cost of sales and crediting a warranty liability for each home closed. We estimate the amounts charged 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.

      Insurance Claim Costs — We have, and require the majority of our subcontractors to have, general liability and workers compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. We reserve for costs to cover our self-insured and deductible amounts under those policies and for any estimated costs of claims and lawsuits in excess of our coverage limits or not covered by our policies, based on an analysis of our historical claims, which includes an estimate of construction defect claims incurred but not yet reported. Projection of losses related to these liabilities is subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of products we build, claim settlement patterns, insurance industry practices, and legal interpretations, among others. Because of the high degree of judgment required in determining these estimated reserve amounts, actual future costs could differ significantly 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. 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. Any future reductions in anticipated LIBOR rates could result in corresponding future reductions in their market value and charges to our income statements. Similarly, any future increases in anticipated LIBOR rates could result in corresponding future increases in their market value and increases in our reported earnings. We cannot predict the changes in either future LIBOR rates or the market values of our swaps.

      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 “Goodwill”. 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 is greater than their book value and therefore no impairment of goodwill exists. We regularly 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. 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

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      In March 2004, the FASB issued a Proposed Statement of Financial Accounting Standard which would amend SFAS No. 123 and require companies that issue share-based payments to record compensation expense based on the fair value of the share-based payment. We will adopt the proposed statement when it becomes effective, and we do not expect this change in accounting principle to materially affect our results of operations in future periods.

Results of Operations — Overview

      We experienced significant increases in revenues and earnings during the fiscal years ended September 30, 2004 and 2003, driven primarily by the continued growth of our homebuilding operations and by significant improvements in homebuilding profit margins.

      The demand from first-time and move-up homebuyers has remained favorable. Population growth, demographics, immigration, household formations and changes in home ownership rates were the primary long-term factors driving this housing demand, with particular strength in our Southeast, Southwest and West regions. Low mortgage rates were a positive influence on housing demand during 2004 and 2003, during a period of generally weak employment levels. In addition, because the homebuilding industry in the United States is highly fragmented, we have been able to capitalize on the benefits of our size, such as our capital strength and access to lower material, labor and capital costs, to generate continued growth by increasing market share.

      The mortgage industry was negatively impacted by a decline in loan refinancing activity during 2004. This resulted in increased competitive conditions and lower margins in the mortgage markets, including the market for mortgage loans for new home construction.

      Key financial highlights for our fiscal years ended September 30, 2004 and 2003 were as follows:

	•	Our homebuilding operations generated year-over-year increases in the value of net new sales orders, homes closed and revenues exceeding 20% in both fiscal 2004 and 2003.
	•	Homebuilding operating margins increased by 3.5 and 1.8 percentage points during fiscal 2004 and 2003, respectively, due to improvements in homebuilding gross margins and control of overhead costs.
	•	Homebuilding pre-tax income increased 65% and 55% in fiscal 2004 and 2003, respectively.
	•	Our sales backlog at September 30, 2004 was $4.6 billion, a fiscal year-end record and 25% higher than our backlog at September 30, 2003.
	•	Homebuilding debt to total capitalization (net of cash), which is calculated as homebuilding notes payable net of cash divided by total capital (homebuilding notes payable net of cash plus stockholders’ equity), was 38.9% at September 30, 2004, an improvement of 1.1 percentage points from the prior year, and an all-time low for the Company.

	•	Total financial services revenues increased 4% and 55% in fiscal 2004 and 2003, respectively, reflecting the focus of our mortgage and title operations on supporting our growing homebuilding

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		business, offset by the effects of increased competition in the mortgage industry for new home loans in fiscal 2004.
	•	Financial services pre-tax income declined by 20% in fiscal 2004 after having increased by 66% in fiscal 2003, due to lower operating margins caused by the competitive conditions in the mortgage industry and changes in the product mix of mortgage loans originated and sold in 2004.

	•	Net income increased 56% and 55% in fiscal 2004 and 2003, respectively, due to the improvements in consolidated revenues and homebuilding operating margins.
	•	Diluted earnings per share increased 51% and 43% for fiscal 2004 and 2003, respectively.
	•	The effective income tax rate for fiscal year 2004 was 38.4%, as compared to 37.9% in fiscal 2003 and 37.5% in fiscal 2002. The increases in our effective income tax rates in 2004 and 2003 were due primarily to increases in pre-tax income in states with higher state income tax rates.

      Our operating strategy for fiscal 2005 and future years is to take advantage of opportunities to grow our homebuilding business, while continuing to generate profitability improvements and maintaining a strong balance sheet. We plan to execute our growth strategy primarily by investing our available capital in our existing homebuilding markets through our capital allocation process.

Results of Operations — Homebuilding

      The following tables set forth key operating and financial data for our homebuilding operations as of and for the fiscal years ended September 30, 2004 and 2003:

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Homebuilding Operating Margin Analysis

      Net new sales orders represent the number and dollar value of new sales contracts executed with customers, net of sales contract cancellations, during the year. The value of net new sales orders increased 24%, to $11,406.2 million (45,263 homes) in 2004 from $9,162.3 million (38,725 homes) in 2003. The average price of a net new sales order in 2004 was $252,000, up 7% from the $236,600 average in 2003. The number of homes sold, value and the average price of net new sales orders increased in each of our market regions during 2004 due to the successful execution of our growth strategies and generally strong demand for our homes in all of our market regions. The largest increases in the value of net new sales orders occurred in the Southeast and Mid-Atlantic regions, which is a result of our efforts to significantly increase our presence in our Florida, Virginia and Maryland markets, where housing demand is strong. The increase in our average selling price reflects our ability to increase prices in the markets where demand for our homes is strongest, while we continue our efforts to ensure that our product offerings and prices remain affordable for our target customers, typically first-time and move-up homebuyers, in most of our markets.

      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, that can result in cancellations. In the past, our backlog has been a reliable indicator of the level of future closings, although contracts in backlog may not all result in closings. At September 30, 2004, the value of our backlog of sales orders was $4,568.5 million (17,184 homes), up 25% from $3,653.4 million (15,488 homes) at September 30, 2003. The average sales price of homes in backlog was $265,900 at September 30, 2004, up 13% from the $235,900 average at September 30, 2003. The value of our sales backlog increased in four of our five market regions, led by a 92% increase in the Southeast region, which is a result of our efforts to significantly increase our presence in our Florida markets. The average selling price of homes in backlog increased in all of our market regions, reflecting the generally strong demand for our homes in fiscal 2004 which allowed us to increase prices.

      Revenues from home sales increased 26%, to $10,491.1 million (43,567 homes closed) in 2004 from $8,334.1 million (35,934 homes closed) in 2003. Revenues from home sales increased by more than 20%

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      Total homebuilding gross profit increased by 41%, to $2,460.7 million in 2004 from $1,746.3 million in 2003. Including sales of both homes and land/lots, total homebuilding gross profit as a percentage of homebuilding revenues increased 2.7 percentage points, to 23.1% in 2004, from 20.4% in 2003. Gross profit from home sales as a percentage of home sales revenues increased 2.2 percentage points, to 22.8% in 2004, from 20.6% in 2003, which is attributable to our ability to increase home prices due to strong demand for our homes in many of our markets and our ongoing efforts to control and reduce construction costs as we achieve greater economies of scale.

      Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 17%, to $959.0 million in 2004 from $817.0 million in 2003. As a percentage of revenues, SG&A expenses decreased 0.6 percentage points, to 9.0% in 2004 from 9.6% in 2003. The improvement in SG&A expenses as a percentage of revenues is attributable to our ongoing cost control efforts and our ability to generate higher revenue levels that better leverage our existing fixed SG&A costs.

      Interest incurred related to homebuilding debt decreased by 1%, to $236.7 million in 2004 from $239.5 million in 2003. Our average homebuilding debt increased 5% in 2004 from 2003; however, during the past two years we have replaced certain of our higher interest rate notes with notes bearing lower interest rates and we have restructured and amended our unsecured revolving credit facility, which lowered our interest costs, resulting in this slight decrease in interest incurred in 2004.

      We capitalize interest costs only to inventory under construction or development. During both years our inventory under construction or development exceeded our interest bearing debt; therefore, we capitalized all interest from homebuilding debt except for the unamortized discounts and fees related to debt we paid off prior to maturity. Interest amortized to cost of sales increased by 13% to $249.0 million in 2004 from $219.4 million in 2003. This increase was attributable to a 20% increase in total cost of sales, partially offset by the effects of the decline in interest incurred.

      Other income associated with homebuilding activities was $9.9 million in 2004, compared to other expense of $9.4 million in 2003. The major component of other income in 2004 was an increase in the fair value of our interest rate swaps of $8.1 million. The major component of other expense in 2003 was $11.8 million of minority interests in the income of our consolidated joint ventures.

      The following tables set forth key operating and financial data for our homebuilding operations as of and for the fiscal years ended September 30, 2003 and 2002: