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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9804
 
PULTE HOMES, INC.
(Exact name of registrant as specified in its charter)
     
MICHIGAN   38-2766606
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
100 Bloomfield Hills Parkway, Suite 300
Bloomfield Hills, Michigan 48304

(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248) 647-2750
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
Common Stock, par value $0.01   New York Stock Exchange
Pulte Homes, Inc. 7.375% Senior Notes due 2046   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ
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 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ
The aggregate market value of the registrant’s voting stock held by nonaffiliates of the registrant as of June 30, 2007, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $4,714,989,510.
As of February 20, 2008, the registrant had 257,522,674 shares of common stock outstanding.
Documents Incorporated by Reference
Applicable portions of the Proxy Statement for the 2008 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form.
 
 

 


 

PULTE HOMES, INC.
TABLE OF CONTENTS
             
Item       Page  
No.       No.  
   
 
       
           
     1       3  
     1A       9  
     1B       13  
     2       13  
     3       13  
     4       14  
     4A       14  
   
 
       
           
     5       15  
     6       17  
     7       19  
     7A       40  
     8       42  
     9       87  
     9A       87  
     9B       89  
     9C       89  
   
 
       
           
     10       89  
     11       89  
     12       89  
     13       89  
     14       89  
   
 
       
           
     15       90  
        95  
 Form of Restricted Stock Award Agreement
 Form of Stock Option Agreement
 Form of Stock Option Agreement
 Ratio of Earnings to Fixed Charges at December 31, 2007
 Subsidiaries of the Registrant
 Consent of Independent Registered Public Accounting Firm
 Rule 13a-14(a) Certification by Richard J. Dugas Jr., President and Chief Executive Officer
 Rule 13a-14(a) Certification by Roger A. Cregg, Executive Vice President and Chief Financial Officer
 Certification Pursuant to Section 1350

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PART I
ITEM 1. BUSINESS
Pulte Homes, Inc.
     Pulte Homes, Inc. is a publicly held holding company whose subsidiaries engage in the homebuilding and financial services businesses. Pulte Homes, Inc. is a Michigan corporation and was organized in 1956. Our assets consist principally of the capital stock of our subsidiaries and our income primarily consists of dividends from our subsidiaries. Our direct subsidiaries include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”), and other subsidiaries engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (“International”), and other subsidiaries engaged in the homebuilding business. We also have a mortgage banking company, Pulte Mortgage LLC (“Pulte Mortgage”), which is a subsidiary of Pulte Home Corporation.
     During 2007 and 2006, the U.S. housing market was impacted by a lack of consumer confidence, decreased housing affordability, and large supplies of resale and new home inventories and related pricing pressures. During 2007, these conditions continued to deteriorate and were accompanied by increased foreclosure activity and constraints on the availability of certain mortgage financing products. These factors contributed to weakened demand for new homes, slower sales, higher cancellation rates, and increased price discounts and selling incentives to attract homebuyers compared with recent years when we had experienced record growth. The combination of these homebuilding industry and related mortgage financing developments resulted in significant decreases in our revenues and profitability during 2007.
     Homebuilding, our core business, is engaged in the acquisition and development of land principally for residential purposes within the continental United States and Puerto Rico and the construction of housing on such land targeted for the first-time, first and second move-up, and active adult home buyers. We have determined our operating segments to be our Areas, which are aggregated into seven reportable segments based on similarities in the economic and geographic characteristics of our homebuilding operations. Accordingly, our reportable homebuilding segments are as follows:
     
Northeast:  
Northeast Area includes the following states: 
Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
New York, Pennsylvania, Virginia
   
 
Southeast:  
Southeast Area includes the following states: 
Georgia, North Carolina, South Carolina, Tennessee
   
 
Florida:  
Florida Area includes the following state: 
Florida
   
 
Midwest:  
Great Lakes Area includes the following states: 
Colorado, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio
   
 
Central:  
Texas Area includes the following state: 
Texas
   
 
Southwest:  
Southwest Area includes the following states: 
Arizona, Nevada, New Mexico
   
 
*California:  
Northern California and Southern California Areas include the following state: 
California
 
*      Our homebuilding operations located in Reno, Nevada are reported in the California segment, while our remaining Nevada homebuilding operations are reported in the Southwest segment.
     We also have one reportable segment for our financial services operations which consists principally of mortgage banking and title operations conducted through Pulte Mortgage and our other subsidiaries. Our financial services segment operates generally in the same markets as our homebuilding segments.

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Pulte Homes, Inc. (continued)
     Financial information, including revenues, income (loss) from continuing operations before income taxes, valuation adjustments and write-offs, depreciation and amortization, equity income (loss), total assets, and inventory for each of our business segments is included in Note 3 of our Consolidated Financial Statements.
Available Information
     Our internet website address is www.pulte.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers, our corporate governance guidelines and the charters of the Audit, Compensation, and Nominating and Governance committees of our Board of Directors are also posted on our website and are available in print, free of charge, upon request.
Homebuilding Operations
                                         
    Years Ended December 31,  
    ($000’s omitted)  
    2007     2006     2005     2004     2003  
Homebuilding settlement revenues
  $ 8,881,509     $ 13,975,387     $ 14,370,667     $ 11,094,617     $ 8,482,341  
 
                             
 
                                       
Homebuilding settlement units
    27,540       41,487       45,630       38,612       32,693  
 
                             
     Through our brands, which include Pulte Homes, Del Webb, and DiVosta, we offer a wide variety of home designs including single family detached, townhouses, condominiums, and duplexes at different prices and with varying levels of options and amenities to all of our major customer segments: first-time, first and second move-up, and active adult. Over our 58-year history, we have delivered over 500,000 homes.
     As of December 31, 2007, our Homebuilding operations offered homes for sale in 636 communities. Sales prices of homes currently offered for sale in 72% of our communities fall within the range of $100,000 to $400,000 with a 2007 average unit selling price of $322,000, compared with $337,000 in 2006, $315,000 in 2005, $287,000 in 2004, and $259,000 in 2003. Sales of single-family detached homes, as a percentage of total unit sales, were 74% in both 2007 and 2006, compared with 72% in 2005, 80% in 2004, and 83% in 2003. The decline in the percentage of single-family detached homes can be attributed to an increase in sales of townhouses, condominiums, and duplexes, which are most popular among our first-time and active adult homebuyers. Our Homebuilding operations are geographically diverse and, as a result, help to insulate us from demand changes in individual markets. As of December 31, 2007, our Homebuilding business operated in 51 markets spanning 26 states.
Land acquisition and development
     We select locations for development of homebuilding communities after completing extensive market research, enabling us to match the location and product offering with our targeted consumer group. We consider factors such as proximity to developed areas, population and job growth patterns and, if applicable, estimated development costs. We historically have managed the risk of controlling our land positions through the use of option contracts. We typically control land with the intent to complete sales of housing units within 24 to 36 months from the date of opening a community, except in the case of certain Del Webb active adult developments and other selected large projects for which the completion of community build-out requires a longer time period due to typically larger project sizes. As a result, land is generally purchased after it is properly zoned and developed or is ready for development. In addition, we dispose of owned land not required in the business through sales to appropriate end users. Where we develop land, we engage directly in many phases of the development process, including land and site planning, and obtaining environmental and other regulatory approvals, as well as constructing roads, sewers, water and drainage facilities, and other amenities. We use our staff and the services of independent engineers and consultants for land development activities. Land development work is performed primarily by independent contractors and local government authorities who construct sewer and water systems in some areas. At December 31, 2007, we controlled approximately 157,900 lots, of which 131,400 were owned and 26,500 were under option agreements.

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Homebuilding Operations (continued)
Sales and marketing
     We are dedicated to improving the quality and value of our homes through innovative proprietary architectural and community designs and state-of-the-art customer marketing techniques. Analyzing various qualitative and quantitative data obtained through extensive market research, we segment our potential customers into well-defined buyer profiles. Segmentation analysis provides a method for understanding the business opportunities and risks across the full spectrum of consumer groups in each market. Once the demands of potential buyers are understood, we link our home design and community development efforts to the specific lifestyle of each targeted consumer group.
     To meet the demands of our various customers, we have established a solid design expertise for a wide array of product lines. We believe that we are an innovator in the design of our homes and we view design capacity as an integral aspect of our marketing strategy. Our in-house architectural services teams and management, supplemented by outside consultants, are successful in creating distinctive design features, both in exterior facades and interior options and features. In certain markets our strategy is to offer “the complete house” in which most features shown in the home are included in the sales price.
     Typically, our sales teams, together with outside sales brokers, are responsible for guiding the customer through the sales process. We are committed to industry-leading customer service through a variety of quality initiatives, including our customer care program, which ensures that homeowners are comfortable at every stage of the building process. Using a seven-step, interactive process, homeowners are kept informed during their homebuilding and home owning experience. The steps include (1) a pre-construction meeting with the superintendent; (2) pre-dry wall frame walk; (3) quality assurance inspection; (4) first homeowner orientation; (5) 30-day follow-up after the close of the home; (6) three-month follow-up; and (7) an 11-month quality list after the close of the home. Fully furnished and landscaped model homes are used to showcase our homes and their distinctive design features. We have success with the first-time buyer in the low to moderate price range; in such cases, financing under United States government-insured and guaranteed programs is often used and is facilitated through our mortgage company. We also enjoy sales to the move-up buyer and, in certain markets, offer semi-custom homes in higher price ranges.
     Through our Del Webb brand, we are better able to address the needs of active adults, among the fastest growing homebuying segments. We offer both destination communities and “in place” communities, for those buyers who prefer to remain in their current geographic area. These communities, with highly amenitized products such as golf courses, recreational centers and educational classes, offer the active adult buyer many options to maintain an active lifestyle.
     We have received recognition and awards as a result of our achievements as a homebuilder. In June 2007, Pulte Homes was named among the Top 100 Best Places to Work in IT in Computerworld’s annual rankings. In April 2007, we ranked number 170 on the FORTUNE 500 List. In addition, our Albuquerque, Central Valley, Chicago (Del Webb), Ft. Myers/Naples, Houston, Jacksonville, L.A./Ventura, Orlando, Palm Beach (DiVosta), Philadelphia (Del Webb) and Tucson (Del Webb) operations were recognized for ranking the highest in their markets in the J.D. Power and Associates® 2007 New Home-Builder Customer Satisfaction Study. Nine of our operations ranked second in their respective markets, while six operations ranked third. Pulte brands, which include Pulte Homes, Del Webb, and DiVosta, were surveyed in 26 of the 34 total markets analyzed. The survey noted customer service, home readiness at the time of closing, and the company’s sales staff as the three factors that most heavily influenced the customer’s overall level of satisfaction. This year’s homebuilder rankings also included new studies which evaluated homebuyers’ satisfaction with new-home quality, new-home design, and builder mortgage origination. Pulte Homes’ market operations earned top rankings for new-home quality in eight markets, new-home design in nine markets, and builder mortgage origination in three markets.
     Our Homeowner for LifeTM philosophy has increased our business from customers who have previously owned a Pulte home or have been referred by a Pulte homeowner by ensuring a positive home buying and home owning experience. We introduce our homes to prospective buyers through a variety of media advertising, illustrated brochures, Internet listings and link placements, and other advertising displays. In addition, our websites, www.pulte.com, www.delwebb.com, and www.divosta.com provide tools to help users find a home that meets their needs, investigate financing alternatives, communicate moving plans, maintain a home, learn more about us, and communicate directly with us. Approximately 7.3 million potential customers visited our websites during 2007.

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Homebuilding Operations (continued)
Construction
     The construction process for our homes begins with the in-house design of the homes we sell. The building phase is conducted under the supervision of our on-site construction superintendents. The construction work is usually performed by independent contractors under contracts that, in many instances, cover both labor and materials on a fixed-price basis. In certain markets, we provide a unique design and production process that is highly efficient, and results in lower costs, higher overall specification, and increased value to our customers. We believe that Pulte Preferred Partnerships (P3), an extension of our quality assurance program, continues to establish new standards for contractor relations. Using a selective process, we have teamed up with what we believe are premier contractors and suppliers to improve all aspects of the land development and house construction processes.
     We maintain efficient construction operations by using standard materials and components from a variety of sources and, when possible, by building on contiguous lots. To minimize the effects of changes in construction costs, the contracting and purchasing of building supplies and materials generally is negotiated at or near the time when related sales contracts are signed. In addition, we leverage our size by actively negotiating our materials needs on a national or regional basis to minimize production component cost. We are also working to establish a more integrated system that can effectively link suppliers, contractors, and the production schedule through various strategic business partnerships and e-business initiatives.
     We cannot determine the extent to which necessary building materials will be available at reasonable prices in the future and have, on occasion, experienced shortages of skilled labor in certain trades and of building materials in some markets.
Competition and other factors
     Our operations are subject to building, environmental, and other regulations of various federal, state, and local governing authorities. For our homes to qualify for Federal Housing Administration (“FHA”) or Veterans Administration (“VA”) mortgages, we must satisfy valuation standards and site, material, and construction requirements of those agencies. Our compliance with federal, state, and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings, or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.
     Our dedication to customer satisfaction is evidenced by our consumer and value-based brand approach to product development and is something that we believe distinguishes us in the homebuilding industry and contributes to our long-term competitive advantage. The housing industry in the United States, however, is highly competitive. In each of our market areas, there are numerous homebuilders with which we compete. We also compete with the resales of existing house inventory. Any provider of housing units, for sale or to rent, including apartment builders, may be considered a competitor. Conversion of apartments to condominiums further provides certain segments of the population an alternative to traditional housing, as does manufactured housing. We compete primarily on the basis of price, reputation, design, location, and quality of our homes. The housing industry is affected by a number of economic and other factors including: (1) significant national and world events, which impact consumer confidence; (2) changes in the costs of building materials and labor; (3) changes in interest rates; (4) changes in other costs associated with home ownership, such as property taxes and energy costs; (5) various demographic factors; (6) changes in federal income tax laws; (7) changes in government mortgage financing programs; and (8) availability of sufficient mortgage capacity. In addition to these factors, our business and operations could be affected by shifts in demand for new homes.

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Financial Services Operations
     We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. Our mortgage bank arranges financing through the origination of mortgage loans primarily for the benefit of our homebuyers. We also engage in the sale of such loans and the related servicing rights. We are a lender approved by the FHA and VA and are a seller/servicer approved by Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other investors. In our conventional mortgage lending activities, we follow underwriting guidelines established by FNMA, FHLMC, and private investors.
     Our mortgage underwriting, processing and closing functions are centralized in Denver, Colorado and Charlotte, North Carolina using a mortgage operations center (“MOC”) concept. We also use a centralized telephone loan officer concept where loan officers are centrally located at mortgage application centers (“MAC”) in Denver and Charlotte. We believe both the MOC and the MAC improve the speed and efficiency of our mortgage operations, thereby improving our profitability and allowing us to focus on creating attractive mortgage financing opportunities for our customers. In 2007, we had a high level of utilization of our online customer questionnaire. The majority of our customers now send us their data online to start the mortgage process. Once the questionnaire is received, an interview is scheduled and the combination of the interview with the data sent online represents our mortgage application.
     In originating mortgage loans, we initially use our own funds and borrowings made available to us through various credit arrangements. Subsequently, we sell such mortgage loans and mortgage-backed securities to outside investors.
     Our capture rates for 2007, 2006, and 2005 were 92%, 91%, and 89%, respectively. Our capture rate represents loan originations from our homebuilding business as a percentage of total loan opportunities from our homebuilding business excluding cash settlements. During 2007, 2006, and 2005, we originated mortgage loans for 76%, 77%, and 75%, respectively, of the homes we sold. Such originations represented substantially all of our total originations in each of those years.
     We sell our servicing rights monthly on a flow basis through fixed price servicing sales contracts to reduce the risks inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time, which substantially reduces the risk of impairment with respect to the fair value of these reported assets. The servicing sales contracts provide for the reimbursement of payments made when loans prepay within specified periods of time, usually 90 days after sale or securitization.
     The mortgage industry in the United States is highly competitive. We compete with other mortgage companies and financial institutions to provide attractive mortgage financing to our homebuyers. The Internet is also an important resource for homebuyers in obtaining financing as a number of companies provide online approval for their customers. These Internet-based mortgage companies may also be considered competitors.
     In originating and servicing mortgage loans, we are subject to rules and regulations of the FHA, VA, GNMA, FNMA, and FHLMC. In addition to being affected by changes in these programs, our mortgage banking business is also affected by several of the same factors that impact our homebuilding business.
     Our subsidiary title insurance companies serve as title insurance agents in selected markets by providing title insurance policies, and examination and closing services to buyers of homes we sell.
Financial Information About Geographic Areas
     We currently operate primarily within the United States. However, we have some non-operating foreign entities, which are insignificant to our consolidated financial results.

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Discontinued Operations
First Heights
     In 2005, we completed the disposal of First Heights, our former bank subsidiary. During the years ended December 31, 2006 and 2005, results of operations were included in income from discontinued operations. Income from discontinued operations for the year ended December 31, 2005 included income tax benefits resulting from the favorable resolution of certain tax matters. We also received payment in December 2005 for a judgment resulting from litigation related to First Heights’ 1988 acquisition from the Federal Savings and Loan Insurance Corporation and First Heights’ ownership of five failed thrifts. The payment was recorded as income from discontinued operations.
Mexico Homebuilding Operations
     In January 2005, the minority shareholders of Pulte Mexico S. de R.L. de C.V. (“Pulte Mexico”) exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to us, the consummation of which resulted in our owning 100% of Pulte Mexico. In March 2005, we purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million in cash. In June 2005, we purchased the remaining 40% of the minority interest of Pulte Mexico for approximately $12.5 million in cash.
     In December 2005, we sold substantially all of our Mexico homebuilding operations to a consortium of purchasers involved in residential and commercial real estate development. We realized cash of $131.5 million related to the sale. The sale of these operations did not include our investment in the capital stock of a mortgage company in Mexico as well as various non-operating entities, which are not considered to be material to our results of operations or our financial position. For 2007, 2006, and 2005, the Mexico homebuilding operations have been presented as discontinued operations in our Consolidated Financial Statements.
Argentina
     In January 2005, we sold all of our Argentina operations to an Argentine company involved in residential and commercial real estate development. For the year ended December 31, 2006, loss from discontinued operations included a provision resulting from a contractual adjustment related to the disposition.
Other Non-Operating Expenses
     Other non-operating expenses, net consists of income and expenses related to corporate services provided to our subsidiaries. These expenses are incurred for financing, developing, and implementing strategic initiatives centered on new business development and operating efficiencies and providing the necessary administrative support associated with being a publicly traded entity listed on the New York Stock Exchange.
Organization/Employees
     All subsidiaries and operating units operate independently with respect to daily operations. Homebuilding real estate purchases and other significant homebuilding, mortgage banking, financing activities and similar operating decisions must be approved by the business unit’s management and/or corporate senior management.
     At December 31, 2007, we employed approximately 8,500 people, of which approximately 2,200 people were employed in our vertically-integrated construction operations in our Southwest reporting segment. Our employees are not represented by any union. Contracted work, however, may be performed by union contractors. Homebuilding and mortgage banking management personnel are paid performance bonuses and incentive compensation. Performance bonuses are based on individual performance while incentive compensation is based on the performance of the applicable business unit, subsidiary or the Company. Our corporate management personnel are paid incentive compensation based on our overall performance. Each subsidiary is given autonomy regarding employment of personnel, although our senior corporate management acts in an advisory capacity in the employment of subsidiary officers. We consider our employee and contractor relations to be satisfactory.

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ITEM 1A. RISK FACTORS
     Discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are, or may become subject. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner.
Downward changes in general economic, real estate construction, or other business conditions could adversely affect our business or our financial results.
     The residential homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, availability of financing, and interest rate levels. Adverse changes in any of these conditions generally, or in the markets where we operate, could decrease demand and pricing for new homes in these areas or result in customer cancellations of pending contracts, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes, either of which could result in a decrease in our revenues and earnings and would adversely affect our financial condition.
The homebuilding industry is currently experiencing an economic down cycle, which has had an adverse effect on our business and results of operations.
     Prior to 2006, land and home prices rose significantly in many of our markets. However, during 2007 and 2006, the homebuilding industry was impacted by lack of consumer confidence, decreased housing affordability, and large supplies of resale and new home inventories which resulted in an industry-wide softening of demand for new homes. As a result of these factors, we have experienced significant decreases in our revenues and profitability. We have also incurred substantial impairments of our land and certain other assets. We cannot predict the duration or the severity of the current market conditions, nor provide any assurances that the adjustments we have made in our operating strategy to address these conditions will be successful.
If the market value of our land and homes drops significantly, our profits could decrease.
     The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. If housing demand decreases below what we anticipated when we acquired our inventory, we may not be able to make profits similar to what we have made in the past, we may experience less than anticipated profits, and/or we may not be able to recover our costs when we sell and build homes. When market conditions are such that land values are not appreciating, option arrangements previously entered into may become less desirable, at which time we may elect to forego deposits and pre-acquisition costs and terminate the agreement. In the face of adverse market conditions, we may have substantial inventory carrying costs, we may have to write-down our inventory to its fair value, and/or we may have to sell land or homes at a loss.
     As a result of the changing market conditions in the homebuilding industry which occurred during 2007 and 2006, we incurred significant land-related charges in 2007 and 2006 resulting from the write-off of deposit and other related costs related to land transactions we no longer plan to pursue, net realizable valuation adjustments related to land positions sold or held for sale, impairments on land assets related to communities under development or to be developed in the future, and impairments of our investments in unconsolidated joint ventures. It is possible that the estimated cash flows from these projects may change and could result in a future need to record additional valuation or net realizable adjustments. Additionally, if conditions in the homebuilding industry worsen in the future or if our strategy related to certain communities changes, we may be required to evaluate our assets, including additional projects, for additional impairments or write-downs, which could result in additional charges that might be significant.

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Our success depends on our ability to acquire land suitable for residential homebuilding at reasonable prices, in accordance with our land investment criteria.
     The homebuilding industry is highly competitive for suitable land. The availability of finished and partially finished developed lots and undeveloped land for purchase that meet our internal criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, zoning, allowable housing density, and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact our results of operations.
     Our long-term ability to build homes depends on our acquiring land suitable for residential building at reasonable prices in locations where we want to build. Over the past few years, we have experienced an increase in competition for suitable land as a result of land constraints in many of our markets. As competition for suitable land increases, and as available land is developed, the cost of acquiring suitable remaining land could rise, and the availability of suitable land at acceptable prices may decline. Any land shortages or any decrease in the supply of suitable land at reasonable prices could limit our ability to develop new communities or result in increased land costs. We may not be able to pass through to our customers any increased land costs, which could adversely impact our revenues, earnings, and margins.
Future increases in interest rates, reductions in mortgage availability, or increases in the effective costs of owning a home could prevent potential customers from buying our homes and adversely affect our business and financial results.
     Most of our customers finance their home purchases through our mortgage bank. Interest rates have been at historical lows for several years. Many homebuyers have also chosen adjustable rate, interest-only, or other types of mortgages that involve lower initial monthly payments. As a result, new homes have been more affordable. Increases in interest rates or decreases in availability of mortgage financing, however, could reduce the market for new homes. Potential homebuyers may be less willing or able to pay the increased monthly costs or to obtain mortgage financing that exposes them to interest rate changes. Lenders may increase the qualifications needed for mortgages or adjust their terms to address any increased credit risk. Even if potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their current homes to potential buyers who need financing. These factors could adversely affect the sales or pricing of our homes and could also reduce the volume or margins in our financial services business. Beginning in early 2007, the availability of certain mortgage financing products has become more constrained as the mortgage industry began to more closely scrutinize sub-prime, Alt-A, and other non-conforming mortgage products. While we do not retain any material risks associated with the loans we originate, our financial services business could be impacted to the extent we are unable to match interest rates and amounts on loans we have committed to originate through the various hedging strategies we employ. Additionally, these developments have had, and may continue to have, a material adverse effect on the overall demand for new housing and thereby on the results of operations for our homebuilding business.
     In addition, we believe that the availability of FHA and VA mortgage financing is an important factor in marketing some of our homes. We also believe that the liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry is important to the housing market. Any limitations or restrictions on the availability of financing by these agencies could adversely affect interest rates, mortgage financing, and our sales of new homes and mortgage loans.
Our future growth may require additional capital, which may not be available.
     Our operations require significant amounts of cash. We may be required to seek additional capital, whether from sales of equity or debt or additional bank borrowings, for the future growth and development of our business. We can give no assurance as to the availability of such additional capital or, if available, whether it would be on terms acceptable to us. Moreover, the indentures for most of our outstanding public debt and the covenants of our revolving credit facility contain provisions that may restrict the debt we may incur in the future. If we are not successful in obtaining sufficient capital, it could reduce our sales and may adversely affect our future growth and financial results.

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Competition for homebuyers could reduce our deliveries or decrease our profitability.
     The housing industry in the United States is highly competitive. We compete primarily on the basis of price, reputation, design, location, and quality of our homes. We compete in each of our markets with numerous national, regional, and local homebuilders. This competition with other homebuilders could reduce the number of homes we deliver or cause us to accept reduced margins in order to maintain sales volume.
     We also compete with resales of existing or foreclosed homes, housing speculators, and available rental housing. Increased competitive conditions in the residential resale or rental market in the regions where we operate could decrease demand for new homes and increase cancellations of sales contracts in backlog.
Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.
     The homebuilding industry is highly competitive for skilled labor and materials. Increased costs or shortages of skilled labor and/or lumber, framing, concrete, steel, and other building materials could cause increases in construction costs and construction delays. The current national debate related to immigration reform could impact the related laws and regulations in the markets in which we operate and result in shortages of skilled labor and higher labor and compliance costs, potentially affecting our ability to complete construction and land development. We generally are unable to pass on increases in construction costs to those customers who have already entered into sale contracts as those sales contracts generally fix the price of the home at the time the contract is signed, which may be well in advance of the construction of the home. Sustained increases in construction costs may, over time, erode our margins, and pricing competition for materials and labor may restrict our ability to pass on any additional costs, thereby decreasing our margins.
Our income tax provision and tax reserves may be insufficient if a taxing authority is successful in asserting positions that are contrary to our interpretations and related reserves, if any.
     Significant judgment is required in determining our provision for income taxes and our reserves for federal, state, and local taxes. In the ordinary course of business, there may be matters for which the ultimate outcome is uncertain. Although we believe our approach to determining the tax treatment is appropriate, no assurance can be given that the final tax authority review will not be materially different than that which is reflected in our income tax provision and related tax reserves. Such differences could have a material adverse effect on our income tax provision in the period in which such determination is made and, consequently, on our net income for such period.
     From time to time, we are audited by various federal, state, and local authorities regarding tax matters. Our current audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit, appeal and, in some cases, litigation process. As each audit is concluded, adjustments, if any, are appropriately recorded in our financial statements in the period determined. To provide for potential tax exposures, we maintain tax reserves based on reasonable estimates of potential audit results. However, if the reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations.
We may not realize our deferred income tax assets.
     The ultimate realization of our deferred income tax assets is dependent upon utilization of taxable income in prior carryback years, generating future taxable income, executing tax planning strategies, and reversals of existing taxable temporary differences. We have recorded a valuation allowance against certain deferred income tax assets. The valuation allowance may fluctuate as conditions change or if we are unable to implement certain tax planning strategies. An increase in the valuation allowance would reduce the carrying value of the deferred income tax assets and have an adverse impact on our financial position and results of operations.
Government regulations could increase the cost and limit the availability of our development and homebuilding projects or affect our related financial services operations and adversely affect our business or financial results.
     Our operations are subject to building, environmental, and other regulations of various federal, state, and local governing authorities. For our homes to qualify for FHA or VA mortgages, we must satisfy valuation standards and site, material, and construction requirements of those agencies. Our compliance with federal, state, and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings, or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.

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     New housing developments may be subject to various assessments for schools, parks, streets, and other public improvements. These can cause an increase in the effective prices for our homes. In addition, increases in property tax rates by local governmental authorities, as recently experienced in response to reduced federal and state funding, can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes.
     We also are subject to a variety of local, state, and federal laws and regulations concerning protection of health, safety, and the environment. The impact of environmental laws varies depending upon the prior uses of the building site or adjoining properties and may be greater in areas with less supply where undeveloped land or desirable alternatives are less available. These matters may result in delays, may cause us to incur substantial compliance, remediation and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas.
     Our financial services operations are also subject to numerous federal, state, and local laws and regulations. These include eligibility requirements for participation in federal loan programs and compliance with consumer lending and similar requirements such as disclosure requirements, prohibitions against discrimination, and real estate settlement procedures. They may also subject our operations to examination by applicable agencies. These may limit our ability to provide mortgage financing or title services to potential purchasers of our homes.
Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.
     As a homebuilder, we are subject to home warranty and construction defect claims arising in the ordinary course of business. We record warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensations, and other business 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. Through our captive insurance subsidiaries, we reserve for costs to cover our self-insured and deductible amounts under these policies and for any costs of claims and lawsuits, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. Because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all our warranty and construction defect claims in the future. Contractual indemnities can be difficult to enforce, we may be responsible for applicable self-insured retentions and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly. We have responded to the recent increases in insurance costs and coverage limitations by increasing our self-insured retentions and claim reserves. There can be no assurance that coverage will not be further restricted and become more costly.
Natural disasters and severe weather conditions could delay deliveries, increase costs, and decrease demand for new homes in affected areas.
     Our homebuilding operations are located in many areas that are subject to natural disasters and severe weather. The occurrence of natural disasters or severe weather conditions can delay new home deliveries, increase costs by damaging inventories, reduce the availability of materials, and negatively impact the demand for new homes in affected areas. Furthermore, if our insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity, or capital resources could be adversely affected.
Inflation may result in increased costs that we may not be able to recoup if demand declines.
     Inflation can have a long-term impact on us because increasing costs of land, materials, and labor may require us to increase the sales prices of homes in order to maintain satisfactory margins. However, inflation is often accompanied by higher interest rates, which have a negative impact on housing demand, in which case we may not be able to raise home prices sufficiently to keep up with the rate of inflation and our margins could decrease.
Future terrorist attacks against the United States or increased domestic and international instability could have an adverse effect on our operations.
     A future terrorist attack against the United States could cause a sharp decrease in the number of new contracts signed for homes and an increase in the cancellation of existing contracts. Accordingly, adverse developments in the war on terrorism, future terrorist attacks against the United States, or increased domestic and international instability could adversely affect our business.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
     This Item is not applicable.
ITEM 2. PROPERTIES
     Our homebuilding and corporate headquarters are located at 100 Bloomfield Hills Parkway, Bloomfield Hills, Michigan 48304, where we lease 155,392 square feet of office space. We lease 54,380 square feet of office space at 1230 West Washington Street, Tempe, Arizona 85281 for certain corporate and business services. Pulte Mortgage’s offices are located at 7475 South Joliet Street, Englewood, Colorado 80112 and 12300 East Arapahoe Road, Centennial, Colorado 80112. We lease approximately 61,436 square feet and 43,050 square feet, respectively, of office space at these locations. Pulte Mortgage also leases 31,803 square feet of office space at 3700 Arco Corporate Drive, Charlotte, North Carolina 28273. Our homebuilding markets and mortgage branch operations generally lease office space for their day-to-day operations.
     Because of the nature of our homebuilding operations, significant amounts of property are held as inventory in the ordinary course of our homebuilding business. Such properties are not included in response to this Item.
     ITEM 3. LEGAL PROCEEDINGS
     We are involved in various legal and governmental proceedings incidental to our continuing business operations, many involving claims related to certain construction defects. The consequences of these matters are not presently determinable but, in our opinion after consulting with legal counsel and taking into account insurance and reserves, the ultimate liability is not expected to have a material adverse impact on our results of operations, financial position, or cash flows.
     In April 2004, we received a request for information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request seeks information about storm water discharge practices in connection with homebuilding projects completed or underway by us. We have provided the EPA with this information. Although the matter has since been referred to the United States Department of Justice (“DOJ”) for enforcement, the EPA has asked that we engage in “pre-filing” negotiations to resolve the matter short of litigation. We are actively engaged in these negotiations. If the negotiations fail and the DOJ alleges that we have violated regulatory requirements applicable to storm water discharges, the government may seek injunctive relief and penalties. We believe that we have defenses to any such allegations. At this time, however, we can neither predict the outcome of this inquiry, nor can we currently estimate the costs that may be associated with its eventual resolution.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     This Item is not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
     Set forth below is certain information with respect to our executive officers.
                     
                Year Became
Name   Age   Position   An Officer
William J. Pulte
    75     Chairman of the Board     1956  
Richard J. Dugas, Jr.
    42     President and Chief Executive Officer     2002  
Steven C. Petruska
    49     Executive Vice President and Chief Operating Officer     2004  
Roger A. Cregg
    51     Executive Vice President and Chief Financial Officer     1997  
James R. Ellinghausen
    49     Executive Vice President, Human Resources     2005  
Peter J. Keane
    42     Senior Vice President, Operations     2006  
Steven M. Cook
    49     Vice President, General Counsel and Secretary     2006  
Vincent J. Frees
    57     Vice President and Controller     1995  
Gregory M. Nelson
    52     Vice President and Assistant Secretary     1993  
Bruce E. Robinson
    46     Vice President and Treasurer     1998  
The following is a brief account of the business experience of each officer during the past five years:
Mr. Pulte was appointed Chairman of the Board in December 2001. He has also served as Chairman of the Executive Committee of the Board of Directors since January 1999.
Mr. Dugas was appointed President and Chief Executive Officer in July 2003. Prior to that date, he served as Executive Vice President and Chief Operating Officer. He was appointed Chief Operating Officer in May 2002 and Executive Vice President in December 2002. Since joining our company in 1994, he has served in a variety of management positions.
Mr. Petruska was appointed Executive Vice President and Chief Operating Officer in January 2004. Since joining our company in 1984, he has held a number of management positions. Most recently, he was the President for both the Arizona Area and Nevada Area operations.
Mr. Cregg was appointed Executive Vice President in May 2003 and was named Chief Financial Officer effective January 1998.
Mr. Ellinghausen was appointed Executive Vice President, Human Resources in December 2006 and previously held the position of Senior Vice President, Human Resources since April 2005. Prior to joining our Company, Mr. Ellinghausen held the position of Head of Human Resources for Bristol-Meyers Squibb Company Worldwide Businesses and was employed by Bristol-Meyers Squibb Company since 1997.
Mr. Keane was appointed Senior Vice President, Operations, in January 2006. He joined Pulte in 1993 and has served in a variety of management positions, mostly in the Midwest region. Most recently, he was the President of the Great Lakes Area.
Mr. Cook was appointed Vice President, General Counsel and Secretary in February 2006. Prior to joining our Company, Mr. Cook most recently held the position of Vice President and Deputy General Counsel, Corporate, at Sears Holdings Corporation and was employed by Sears, Roebuck and Co. since 1996.
Mr. Frees has been Vice President and Controller since May 1995.
Mr. Nelson has been Vice President and Assistant Secretary since August 1993.
Mr. Robinson has been Vice President and Treasurer since July 1998.
There is no family relationship between any of the officers. Each officer serves at the pleasure of the Board of Directors.

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PART II
ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
     Our common shares are listed on the New York Stock Exchange (Symbol: PHM).
     Related Stockholder Matters
     The table below sets forth, for the quarterly periods indicated, the range of high and low closing prices and cash dividends declared per share.
                                                 
    2007   2006
                    Declared                   Declared
    High   Low   Dividends   High   Low   Dividends
1st Quarter
  $ 35.10     $ 25.99     $ 0.04     $ 40.72     $ 36.04     $ 0.04  
2nd Quarter
    27.61       22.45       0.04       37.05       26.56       0.04  
3rd Quarter
    21.85       13.47       0.04       33.23       27.53       0.04  
4th Quarter
    13.68       9.08       0.04       34.80       28.29       0.04  
     At February 20, 2008, there were 1,838 shareholders of record.
Issuer Purchases of Equity Securities (1)
                                 
                            (d)  
                            Approximate dollar  
                    (c)     value of shares  
                    Total number of     that may yet be  
    (a)     (b)     shares purchased     purchased under  
    Total number     Average     as part of publicly     the plans or  
    of shares     price paid     announced plans     programs  
    purchased (2)     per share (2)     or programs     ($000’s omitted)  
October 1, 2007 to October 31, 2007
    582     $ 14.15           $ 102,342 (1)
 
                             
 
                               
November 1, 2007 to November 30, 2007
                    $ 102,342 (1)
 
                             
 
                               
December 1, 2007 to December 31, 2007
    87,535     $ 11.58           $ 102,342 (1)
 
                         
 
                               
Total
    88,117     $ 11.59           $ 102,342 (1)
 
                         
 
(1)   Pursuant to the two $100 million stock repurchase programs authorized and announced by our Board of Directors in October 2002 and 2005 and the $200 million stock repurchase authorized and announced in February 2006 (for a total stock repurchase authorization of $400 million), the Company has repurchased a total of 9,688,900 shares for a total of $297.7 million. There are no expiration dates for the programs.
 
(2)   During October and December 2007, a total of 88,117 shares were surrendered by employees for payment of minimum tax obligations upon the vesting of restricted stock, and were not repurchased as part of our publicly announced stock repurchase programs.
Performance Graph
     The following line graph compares for the fiscal years ended December 31, 2003, 2004, 2005, 2006, and 2007 (a) the yearly cumulative total shareholder return (i.e. , the change in share price plus the cumulative amount of dividends, assuming dividend reinvestment, divided by the initial share price, expressed as a percentage) on Pulte’s common shares, with (b) the cumulative total return of the Standard & Poor’s 500 Stock Index, and with (c) the cumulative total return on the common stock of publicly-traded peer issuers we deem to be our principal competitors in the homebuilding line of business (assuming dividend reinvestment and weighted based on market capitalization at the beginning of each year):

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Performance Graph (continued)
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG PULTE HOMES, INC. , S&P 500 INDEX, AND PEER INDEX
Fiscal Year Ended December 31, 2007
Assumes Initial Investment of $100
(PERFORMANCE GRAPH)
                                                                 
 
        2002     2003     2004     2005     2006     2007  
 
PULTE HOMES INC
      100.00         196.18         268.30         332.10         280.86         90.22    
 
S&P 500 Index — Total Return
      100.00         128.69         142.68         149.69         173.33         182.85    
 
PEER Only**
      100.00         217.61         288.76         336.34         266.28         116.74    
 
 
*   Assumes $100 invested on December 31, 2002, and the reinvestment of dividends.
 
**   Includes Centex Corporation, D.R. Horton Inc., Hovnanian Enterprises, Inc., KB Home, Lennar Corporation, The Ryland Group, Inc., Standard Pacific Corporation, and Toll Brothers, Inc.

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ITEM 6. SELECTED FINANCIAL DATA
     Set forth below is selected consolidated financial data for each of the past five fiscal years. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and Notes thereto included elsewhere in this report.
                                         
    Years Ended December 31,  
    ($000’s omitted)  
    2007     2006     2005     2004     2003  
OPERATING DATA:
                                       
Homebuilding:
                                       
Revenues
  $ 9,121,730     $ 14,075,248     $ 14,528,236     $ 11,400,008     $ 8,701,661  
 
                             
Income (loss) before income taxes
  $ (2,509,492 )   $ 1,010,368     $ 2,298,822     $ 1,635,580     $ 1,000,513  
 
                             
 
                                       
Financial Services:
                                       
Revenues
  $ 134,769     $ 194,596     $ 161,414     $ 112,719     $ 115,847  
 
                             
Income before income taxes
  $ 42,980     $ 115,460     $ 70,586     $ 47,429     $ 68,846  
 
                             
 
                                       
Other non-operating:
                                       
Revenues
  $ 6,595     $ 4,564     $ 4,885     $ 1,749     $ 3,281  
 
                             
Loss before income taxes
  $ (30,391 )   $ (43,100 )   $ (92,394 )   $ (90,685 )   $ (75,351 )
 
                             
 
                                       
Consolidated results:
                                       
Revenues
  $ 9,263,094     $ 14,274,408     $ 14,694,535     $ 11,514,476     $ 8,820,789  
 
                             
Income (loss) from continuing operations before income taxes
  $ (2,496,903 )   $ 1,082,728     $ 2,277,014     $ 1,592,324     $ 994,008  
Income taxes (benefit)
    (222,486 )     393,082       840,126       598,751       376,460  
 
                             
Income (loss) from continuing operations
    (2,274,417 )     689,646       1,436,888       993,573       617,548  
Income (loss) from discontinued operations(a)
    18,662       (2,175 )     55,025       (7,032 )     7,086  
 
                             
 
                                       
Net income (loss)
  $ (2,255,755 )   $ 687,471     $ 1,491,913     $ 986,541     $ 624,634  
 
                             
 
                                       
PER SHARE DATA:
                                       
Earnings per share — basic:
                                       
Income (loss) from continuing operations
  $ (9.02 )   $ 2.73     $ 5.62     $ 3.93     $ 2.53  
Income (loss) from discontinued operations (a)
    0.07       (0.01 )     0.22       (0.03 )     0.03  
 
                             
 
                                       
Net income (loss)
  $ (8.94 )   $ 2.73     $ 5.84     $ 3.91     $ 2.56  
 
                             
Weighted-average common shares outstanding (000’s omitted)
    252,192       252,200       255,492       252,590       244,323  
 
                             
 
                                       
Earnings per share — assuming dilution:
                                       
Income (loss) from continuing operations
  $ (9.02 )   $ 2.67     $ 5.47     $ 3.82     $ 2.46  
Income (loss) from discontinued operations (a)
    0.07       (0.01 )     0.21       (0.03 )     0.03  
 
                             
 
                                       
Net income (loss)
  $ (8.94 )   $ 2.66     $ 5.68     $ 3.79     $ 2.48  
 
                             
Weighted-average common shares outstanding and effect of dilutive securities (000’s omitted)
    252,192       258,621       262,801       260,234       251,460  
 
                             
 
                                       
Shareholders’ equity
  $ 16.80     $ 25.76     $ 23.18     $ 17.68     $ 13.78  
 
                             
 
                                       
Cash dividends declared
  $ 0.16     $ 0.16     $ 0.13     $ 0.10     $ 0.05  
 
                             
 
(a)   Income (loss) from discontinued operations is comprised of our former thrift operation and Argentina and Mexico homebuilding operations which have been presented as discontinued operations for all periods presented.

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ITEM 6. SELECTED FINANCIAL DATA (continued)
                                         
    December 31,
    ($000’s omitted)
    2007   2006   2005   2004   2003
BALANCE SHEET DATA:
                                       
House and land inventories
  $ 7,027,511     $ 9,374,335     $ 8,756,093     $ 7,241,350     $ 5,378,125  
Total assets
    10,225,703       13,176,874       13,060,860       10,406,897       8,072,151  
Senior notes
    3,478,230       3,537,947       3,386,527       2,861,550       2,150,972  
Shareholders’ equity
    4,320,193       6,577,361       5,957,342       4,522,274       3,448,123  
                                         
    Years Ended December 31,
    2007   2006   2005   2004   2003
OTHER DATA:
                                       
Homebuilding:
                                       
Total markets, at year-end
    51       52       54       45       44  
Total active communities
    636       690       662       626       535  
Total settlements — units
    27,540       41,487       45,630       38,612       32,693  
Total net new orders — units (a)
    25,175       33,925       47,531       40,576       34,989  
Backlog units, at year-end
    7,890       10,255       17,817       15,916       13,952  
Average unit selling price
  $ 322,000     $ 337,000     $ 315,000     $ 287,000     $ 259,000  
Gross profit margin from home sales (b)
    (5.0 )%     17.4 %     23.4 %     22.6 %     20.6 %
 
(a)   Total net new orders-units for the year ended December 31, 2003 does not include 1,051 units of acquired backlog.
 
(b)   Homebuilding interest expense, which represents the amortization of capitalized interest, and land and community valuation adjustments are included in homebuilding cost of sales.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
     During 2007 and 2006, the U.S. housing market was impacted by a lack of consumer confidence, decreased housing affordability, and large supplies of resale and new home inventories and related pricing pressures. During 2007, these conditions continued to deteriorate and were accompanied by increased foreclosure activity and constraints on the availability of certain mortgage financing products. These factors contributed to weakened demand for new homes, slower sales, higher cancellation rates, and increased price discounts and selling incentives to attract homebuyers compared with recent years when we had experienced record growth. The combination of these homebuilding industry and related mortgage financing developments resulted in significant decreases in our revenues and profitability during 2007. Additionally, we incurred total land-related charges of $2 billion and $409.5 million in 2007 and 2006, respectively, which represent significant increases from land-related charges of $30 million in 2005. We also recorded impairments of our investments in unconsolidated joint ventures totaling $189.9 million and $95.4 million in 2007 and 2006, respectively, and goodwill impairments of $370 million in 2007.
     We continue to operate our business with the expectation that difficult market conditions will continue to impact us for at least the near term. We expect these trends in our unit settlements and pricing to continue and the majority of the markets we serve to remain challenging throughout 2008. We have adjusted our approach to land acquisition and development and construction practices and continue to shorten our land pipeline, limit land development expenditures, reduce production volumes, and balance home price and profitability with sales pace. We are delaying planned land purchases and development spending and have significantly reduced our total number of controlled lots owned and under option. Additionally, we are significantly reducing the number of speculative homes put into production. While we will continue to purchase select land positions where it makes strategic and economic sense to do so, we currently anticipate minimal investment in new land parcels in the near term. We have also closely evaluated and made significant reductions in employee headcount and overhead expenses. In May 2007, we announced a restructuring plan designed to reduce costs and improve ongoing operating efficiencies, which resulted in related charges of $45.7 million in 2007. Given the persistence of these difficult market conditions, improving the efficiency of our overhead costs will continue to be a significant area of focus. We believe that these measures will help to strengthen our market position and allow us to take advantage of opportunities that may develop in the future.
     Given the continued weakness in new home sales and closings, visibility as to future earnings performance is limited. Our outlook is tempered with caution, as conditions in many of the markets we serve across the United States have become increasingly challenging. Our evaluation for land-related charges recorded to date assumed our best estimates of cash flows for the communities tested. If conditions in the homebuilding industry worsen in the future or if our strategy related to certain communities changes, we may be required to evaluate our assets, including additional projects, for additional impairments or write-downs, which could result in additional charges that might be significant.
     The following is a summary of our operating results for 2007, 2006, and 2005 ($000’s omitted):
                         
    Years Ended December 31,  
    2007     2006     2005  
Pre-tax income (loss):
                       
Homebuilding
  $ (2,509,492 )   $ 1,010,368     $ 2,298,822  
Financial Services
    42,980       115,460       70,586  
Other non-operating
    (30,391 )     (43,100 )     (92,394 )
 
                 
 
                       
Income (loss) from continuing operations before income taxes
    (2,496,903 )     1,082,728       2,277,014  
Income taxes (benefit)
    (222,486 )     393,082       840,126  
 
                 
 
                       
Income (loss) from continuing operations
    (2,274,417 )     689,646       1,436,888  
Income (loss) from discontinued operations
    18,662       (2,175 )     55,025  
 
                 
 
                       
Net income (loss)
  $ (2,255,755 )   $ 687,471     $ 1,491,913  
 
                 
 
                       
Per share data — assuming dilution:
                       
Income (loss) from continuing operations
  $ (9.02 )   $ 2.67     $ 5.47  
Income (loss) from discontinued operations
    0.07       (0.01 )     0.21  
 
                 
Net income (loss)
  $ (8.94 )   $ 2.66     $ 5.68  
 
                 

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Overview (continued)
     The following is a comparison of pre-tax income (loss) for 2007, 2006, and 2005:
  Homebuilding pre-tax loss for 2007 was $2.5 billion compared with Homebuilding pre-tax income of $1 billion and $2.3 billion, respectively, for 2006 and 2005. The pre-tax loss experienced in 2007 resulted from lower settlement revenues combined with lower gross margins. In addition, for 2007 and 2006, results of operations were affected by land-related charges totaling $2 billion and $409.5 million, respectively, and impairments of our investments in unconsolidated joint ventures of $189.9 million and $95.4 million, respectively. Gross margins in 2007 were unfavorably impacted by lower selling prices and increased sales incentives. Land-related charges for 2007 and 2006 consisted of write-offs of deposits and other related costs for land transactions we no longer plan to pursue ($239.7 million and $151.2 million, respectively), net realizable valuation adjustments related to land positions sold or held for sale ($199.2 million and $54.6 million, respectively), and impairments on land assets related to communities under development or to be developed in the future ($1.6 billion and $203.8 million, respectively). In addition, we incurred goodwill impairment charges of $370 million in 2007. There were no significant land-related charges in 2005.
 
  Pre-tax income from our Financial Services business segment decreased 63% in 2007 compared with 2006 after increasing 64% in 2006 compared with 2005. Pre-tax income for 2006 includes a one-time gain of $31.6 million related to the sale of our investment in Su Casita, a Mexican mortgage banking company, which occurred in the first quarter of 2006. The significant decrease in 2007 is also the result of lower loan originations due to significant decreases in the number of homes closed as well as increased loan loss reserves. Capture rates were 92%, 91%, and 89% in 2007, 2006, and 2005, respectively.
 
  Our Other non-operating loss decreased 29% in 2007 compared with 2006 after decreasing 53% in 2006 compared with 2005, due primarily to reductions in compensation-related costs.

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Homebuilding Operations
     The following table presents a summary of pre-tax income (loss) for our Homebuilding operations ($000’s omitted):
                         
    Year Ended December 31,  
    2007     2006     2005  
Home sale revenue (settlements)
  $ 8,881,509     $ 13,975,387     $ 14,370,667  
Land sale revenue
    240,221       99,861       157,569  
Home cost of sales (a)
    (9,329,354 )     (11,544,905 )     (11,005,591 )
Land cost of sales (b)
    (418,177 )     (138,528 )     (139,377 )
Selling, general, and administrative expenses
    (1,060,818 )     (1,136,027 )     (1,107,816 )
Equity income (loss) (c)
    (190,383 )     (95,244 )     72,604  
Other income (expense), net (d)
    (632,490 )     (150,176 )     (49,234 )
 
                 
 
                       
Pre-tax income (loss)
  $ (2,509,492 )   $ 1,010,368     $ 2,298,822  
 
                 
 
                       
Unit settlements
    27,540       41,487       45,630  
 
                       
Average selling price
  $ 322     $ 337     $ 315  
 
                       
Net new orders:
                       
Units
    25,175       33,925       47,531  
Dollars (e)
  $ 7,812,000     $ 11,253,000     $ 15,518,000  
 
                       
Backlog at December 31:
                       
Units
    7,890       10,255       17,817  
Dollars
  $ 2,510,000     $ 3,580,000     $ 6,301,000  
 
(a)   Includes homebuilding interest expense, which represents the amortization of capitalized interest. Home cost of sales also includes land and community valuation adjustments of $1.6 billion, $203.8 million, and $7.7 million for 2007, 2006, and 2005, respectively.
 
(b)   Includes net realizable value adjustments for land held for sale of $199.2 million, $54.6 million, and $3.1 million for 2007, 2006, and 2005, respectively.
 
(c)   Includes impairments of our investments in unconsolidated joint ventures, which totaled $189.9 million and $95.4 million for the years ended December 31, 2007 and 2006, respectively.
 
(d)   Includes the write-off of deposits and other related costs for land option contracts we no longer plan to pursue of $239.7 million, $151.2 million, and $19.2 million for 2007, 2006, and 2005, respectively. For 2007, other income (expense) includes goodwill impairment charges of $370 million. For 2006, other income (expense) also includes $18.6 million related to the closure of our production facility in Virginia.
 
(e)   Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.
     Home sale revenues for the year ended December 31, 2007 were lower than those for the prior year by approximately $5.1 billion, or 36%. Unit settlements decreased 34% in 2007 to 27,540 units, compared with 2006 and increased 9% for 2006 to 41,487 units, compared with 2005. The average selling price for homes closed in 2007, 2006, and 2005 was $322,000, $337,000, and $315,000, respectively. The changes in average selling price reflect a combination of factors, including changes in product mix and geographic mix of homes closed during the period as well as lower market selling prices. The average selling price decreased in the majority of our Homebuilding segments during 2007.
     Homebuilding gross profit margins from home sales in 2007 were negative 5%, compared with positive 17.4% in 2006. In 2006, homebuilding gross profit margins decreased 600 basis points from 23.4% in 2005. The significant decreases in gross profit margins that commenced in 2006 and continued into 2007 were attributable to the difficult market conditions and challenging sales environment where we have realized lower average selling prices and increased sales incentives related to homes closed during the year. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), we recorded land and community valuation adjustments of $1.6 billion and $203.8 million in 2007 and 2006, respectively, which included capitalized interest of $110.8 million and $16 million in 2007 and 2006, respectively. There were no significant valuation adjustments recorded during the year ended December 31, 2005.

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Homebuilding Operations (continued)
     We acquire land primarily for the construction of our homes for sale to homebuyers. We select locations for development of homebuilding communities after completing extensive market research, enabling us to match the location and product offering with our targeted consumer group. Where we develop land, we engage directly in many phases of the development process, including land and site planning, obtaining environmental and other regulatory approvals, as well as constructing roads, sewers, water and drainage facilities, and other amenities. We will often sell select parcels of land within or adjacent to our communities to retail and commercial establishments. We also will, on occasion, sell lots within our communities to other homebuilders. Gross profit from land sales had negative margin contributions of $178 million and $38.7 million for 2007 and 2006, respectively, compared with a positive margin contribution of $18.2 million for 2005. Land sale revenues and their related gains/losses may vary significantly between periods, depending on the timing of land sales. We continue to evaluate our existing land positions to ensure the most effective use of capital. Land held for disposition was $252.6 million as of December 31, 2007, compared with $465.8 million at December 31, 2006. During 2007 and 2006, we recorded net realizable value adjustments for land held for sale of $199.2 and $54.6 million, respectively. There were no significant net realizable value adjustments in 2005.
     For the year ended December 31, 2007, selling, general, and administrative expenses, as a percentage of home settlement revenues, increased 380 basis points to 11.9% compared with 2006, after increasing 40 basis points to 8.1% in 2006 compared with 2005. These increases are attributable primarily to reduced overhead leverage as a result of the significant decrease in revenues, lower absorption into inventory of overhead costs due to lower construction volume, net increases in insurance related expenses of $57.7 million and $15.5 million in 2007 and 2006, respectively, and employee severance benefits, including $32 million of severance benefits related to the restructuring plan initiated in May 2007.
     Equity loss was $190.4 million and $95.2 million for 2007 and 2006, respectively, compared with equity income of $72.6 million for 2005. The equity losses experienced for 2007 and 2006 included impairments related to investments in unconsolidated joint ventures totaling $189.9 million and $95.4 million, respectively. Additionally, the decrease in 2006 equity income, compared with the prior year, is also the result of our January 2006 acquisition of the remaining 50% interest in an entity that supplies and installs basic building components and operating systems. As a result of this acquisition, we own 100% of this entity, which is consolidated in our financial statements. In 2005, earnings for this investment were recorded in equity income. In addition, earnings from our 50% investment in a Nevada-based joint venture, related to the sale of commercial and residential properties, decreased in 2006 as the venture substantially completed its operations in 2005.
     Other income (expense), net includes the write-off of deposits and other related costs resulting from decisions not to pursue certain land acquisitions and options, insurance-related expenses and settlements, and other non-operating expenses. The changes in other income (expense), net are due in part to write-offs of deposit and other related costs during 2007, 2006, and 2005 of $239.7 million, $151.2 million, and $19.2 million, respectively. These write-offs vary in amount from year to year as we continue to evaluate potential land acquisitions for the most effective use of capital. Other income (expense), net also includes goodwill impairment charges of $370 million in 2007 and charges of $2.3 million and $18.5 million in 2007 and 2006, respectively, related to the closure of a production facility located in Virginia.

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Homebuilding Operations (continued)
     For 2007, unit net new orders decreased 26% to 25,175 units compared with 2006. For 2006, unit net new orders decreased 29% to 33,925 units, compared with 2005. Cancellation rates were 33%, 29%, and 17% in 2007, 2006, and 2005, respectively. Most markets experienced a substantial increase in resale and new home inventory, and this, combined with declining consumer confidence, decreased housing affordability, increased interest rates, difficulties experienced by customers in selling their existing homes, and the more restrictive mortgage financing market, has resulted in higher cancellation rates and reduced net new orders during 2007 and 2006.
     The dollar value of net new orders decreased 31% for 2007 compared with 2006 and decreased 27% for 2006 compared with 2005. The average selling price of net new orders decreased 7% to $310,000 in 2007 after increasing 2% to $332,000 in 2006. At December 31, 2007, we had 636 active selling communities, a decrease of 8% from December 31, 2006. At December 31, 2006, we had 690 active selling communities, an increase of 4% from December 31, 2005. Ending backlog, which represents orders for homes that have not yet closed, was 7,890 units at December 31, 2007 with a dollar value of $2.5 billion. Ending backlog was 10,255 units at December 31, 2006 with a dollar value of $3.6 billion.
     At December 31, 2007 and 2006, our Homebuilding operations controlled approximately 157,900 and 232,200 lots, respectively. Approximately 131,400 and 158,800 lots were owned, and approximately 24,800 and 63,700 lots were under option agreements approved for purchase at December 31, 2007 and 2006, respectively. In addition, there were approximately 1,700 and 9,700 lots under option agreements, pending approval, at December 31, 2007 and 2006, respectively. During 2007, we withdrew from land option contracts representing approximately 43,900 lots valued at $2.4 billion.
     The total purchase price related to approved land under option for use by our Homebuilding operations at future dates approximated $1.5 billion at December 31, 2007. In addition, total purchase price related to land under option pending approval was valued at approximately $95.1 million at December 31, 2007. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits and advanced costs totaling $226.2 million, of which $3.7 million is refundable. This balance excludes $25.8 million of contingent payment obligations which may or may not become actual obligations of the Company.

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Homebuilding Segment Operations
     The Homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of first-time, first and second move-up, and active adult homebuyers. We have determined our operating segments to be our Areas, which are aggregated into seven reportable segments based on similarities in the economic and geographic characteristics of our homebuilding operations. We conduct our operations in 51 markets, located throughout 26 states, and have presented our reportable homebuilding segments as follows:
         
Northeast:   Northeast Area includes the following states:
 
      Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
New York, Pennsylvania, Virginia
 
       
Southeast:   Southeast Area includes the following states:
 
      Georgia, North Carolina, South Carolina, Tennessee
 
       
Florida:   Florida Area includes the following state:
 
      Florida
 
       
Midwest:   Great Lakes Area includes the following states:
 
      Colorado, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio
 
       
Central:   Texas Area includes the following state:
 
      Texas
 
       
Southwest:   Southwest Area includes the following states:
 
      Arizona, Nevada, New Mexico
 
       
*California:   Northern California and Southern California Areas include the following state:
 
      California
 
*   Our homebuilding operations located in Reno, Nevada are reported in the California segment, while our Nevada homebuilding operations are reported in the Southwest segment.
     We also have one reportable segment for our financial services operations which consists principally of mortgage banking and title operations conducted through Pulte Mortgage and our other subsidiaries. Our Financial Services segment operates generally in the same markets as our Homebuilding segments.

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Homebuilding Segment Operations (continued)
     The following table presents selected financial information for our homebuilding reporting segments:
                         
    Year Ended December 31,  
    2007     2006     2005  
Home sale revenue (settlements) ($000’s omitted):
                       
Northeast
  $ 1,113,805     $ 1,650,129     $ 1,856,906  
Southeast
    1,173,485       1,254,337       950,792  
Florida
    1,087,918       2,209,864       2,247,513  
Midwest
    1,146,991       1,639,940       2,055,483  
Central
    575,541       894,450       793,273  
Southwest
    2,316,147       3,694,571       3,259,913  
California
    1,467,622       2,632,096       3,206,787  
 
                 
 
  $ 8,881,509     $ 13,975,387     $ 14,370,667  
 
                 
 
                       
Income (loss) before income taxes ($000’s omitted):
                       
Northeast
  $ (149,793 )   $ 127,376     $ 326,399  
Southeast
    72,799       88,162       86,683  
Florida
    (347,587 )     381,924       475,939  
Midwest
    (339,193 )     (90,695 )     140,232  
Central
    (121,351 )     16,038       10,560  
Southwest
    (249,173 )     714,185       745,163  
California
    (545,369 )     107,368       654,940  
Unallocated (a)
    (829,825 )     (333,990 )     (141,094 )
 
                 
 
  $ (2,509,492 )   $ 1,010,368     $ 2,298,822  
 
                 
 
                       
Unit settlements:
                       
Northeast
    2,573       3,489       3,909  
Southeast
    3,990       4,504       4,127  
Florida
    4,007       7,374       8,784  
Midwest
    3,888       5,548       7,344  
Central
    2,623       4,815       4,959  
Southwest
    7,318       10,548       10,237  
California
    3,141       5,209       6,270  
 
                 
 
    27,540       41,487       45,630  
 
                 
 
                       
Net new orders – units:
                       
Northeast
    2,447       2,813       4,019  
Southeast
    3,563       4,632       4,888  
Florida
    4,047       4,501       8,383  
Midwest
    3,319       5,201       7,701  
Central
    2,371       4,323       5,776  
Southwest
    6,609       8,365       10,723  
California
    2,819       4,090       6,041  
 
                 
 
    25,175       33,925       47,531  
 
                 
 
                       
Unit backlog:
                       
Northeast
    791       917       1,593  
Southeast
    1,281       1,708       1,580  
Florida
    1,252       1,212       4,085  
Midwest
    828       1,397       1,744  
Central
    870       1,122       1,614  
Southwest
    2,010       2,719       4,902  
California
    858       1,180       2,299  
 
                 
 
    7,890       10,255       17,817  
 
                 
 
(a)   Unallocated includes amortization of capitalized interest of $315 million, $255.7 million, and $179.6 million for 2007, 2006, and 2005, respectively; goodwill impairment of $370 million for 2007; and shared services that benefit all operating segments, the costs of which are not allocated to the operating segments reported above.

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Homebuilding Segment Operations (continued)
                         
    Year Ended December 31,  
    2007     2006     2005  
Controlled Lots:
                       
Northeast
    13,152       27,524       44,088  
Southeast
    17,170       23,332       31,863  
Florida
    35,348       48,640       70,434  
Midwest
    14,098       23,082       47,414  
Central
    13,023       18,320       28,251  
Southwest
    49,746       66,034       97,290  
California
    15,321       25,291       43,275  
 
                 
 
    157,858       232,223       362,615  
 
                 
 
                       
Land and community valuation adjustments ($000’s omitted):
                       
 
                       
Northeast
  $ 116,418     $ 22,206     $  
Southeast
    17,089       1,083        
Florida
    283,919       22,715        
Midwest
    240,380       73,152       7,110  
Central
    97,615       3,269       608  
Southwest
    335,044       9,774        
California
    398,717       55,569        
 
                 
Total segment land and community valuation adjustments
    1,489,182       187,768       7,718  
Corporate and unallocated (a)
    114,473       16,000        
 
                 
Total valuation adjustments
  $ 1,603,655     $ 203,768     $ 7,718  
 
                 
 
                       
Net realizable value adjustments (NRV) - land held for sale ($000’s omitted):
                       
Northeast
  $ 16,051     $ 3,204     $  
Southeast
    6,652             14  
Florida
    27,633       5,596        
Midwest
    103,374       29,784       314  
Central
    19,140       8,679       2,756  
Southwest
    14,859       7,014        
California
    11,538       293        
 
                 
Total NRV adjustments – land held for sale
    199,247     $ 54,570     $ 3,084  
 
                 
 
                       
Write-off of deposits and pre-acquisition costs ($000’s omitted):
                       
Northeast
  $ 60,863     $ 33,798     $ 2,931  
Southeast
    3,114       4,514       2,194  
Florida
    46,763       25,108       1,119  
Midwest
    10,940       31,644       7,590  
Central
    5,302       3,987       1,767  
Southwest
    54,870       21,013       2,283  
California
    57,864       33,102       2,548  
 
                 
Total segment write-off of deposits and pre-acquisition costs
    239,716       153,166       20,432  
Corporate and unallocated
          (1,981 )     (1,237 )
 
                 
Total write-off of deposits and pre-acquisition costs
  $ 239,716     $ 151,185     $ 19,195  
 
                 
 
                       
Impairments of investments in unconsolidated joint ventures:
                       
Southwest
  $ 59,075     $     $  
California
    128,303       95,400        
Corporate and unallocated (b)
    2,485              
 
                 
Total joint venture impairments
  $ 189,863     $ 95,400     $  
 
                 
 
(a)   Corporate and unallocated includes $110.8 million and $16 million, respectively, of write-offs of capitalized interest related to land and community valuation adjustments recorded during the years ended December 31, 2007 and 2006 and $3.7 million of land and community valuation adjustments related to our Puerto Rico operations for the year ended December 31, 2007.
 
(b)   Corporate and unallocated includes impairments of $2.5 million related to our joint ventures in Puerto Rico.

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Homebuilding Segment Operations (continued)
Northeast:
     For 2007, Northeast home sale revenues decreased 33% compared with the prior year period due to a 26% decrease in unit settlements combined with an 8% decrease in the average selling price, including significant home sale revenue reductions in our Metro New York market. The loss before income taxes was primarily attributable to this reduction in revenues combined with a significant decline in gross margin and $193.3 million in impairments and land-related charges, which resulted in a reduction of approximately 12,800 lots under control. Northeast recorded impairments and land-related charges of $59.2 million in 2006. Net new orders decreased 13% compared with 2006 while the cancellation rate increased to 24% compared with 22% in 2006.
     For 2006, Northeast operations experienced weakened demand for new homes primarily as a result of increases in existing home inventories. Home sale revenues in 2006 decreased 11% due to an 11% decrease in closings. Average sales prices in 2006 were consistent with 2005. For 2006, operating results were negatively impacted by $59.2 million of impairments and land-related charges. There were no significant impairments or land-related charges in 2005. Net new orders for 2006 decreased 30% compared with 2005. During 2006, increased cancellation rates were attributable to lower new order sign-up activity and increased cancellations in all markets. Cancellation rates for 2006 were 22% compared with 14% for 2005.
Southeast:
     Our Southeast segment continued to contribute positively to operating results in 2007 due to strength in local demographic factors and a continued shift in our product mix toward higher price point customers, especially active adult buyers as large active adult communities were opened in our markets in Georgia and the Carolinas at various points during 2006 and 2007. For 2007, Southeast home sale revenues decreased 6% compared with the prior year period as an 11% decrease in unit settlements was offset by a 6% increase in the average selling price. Income before income taxes decreased compared with the prior year period due to $26.9 million in impairments and land-related charges, which resulted in a reduction of approximately 4,700 lots under control. Southeast recorded land-related charges of $5.6 million in 2006. Net new orders declined by 23% compared with 2006 partially due to 2006 including new orders from the successful openings of our large active adult communities in our Charlotte, Raleigh, and Georgia markets. The cancellation rate in 2007 was 28% compared with 24% in 2006.
     For 2006, Southeast operations contributed positively to our Homebuilding operating results, evidenced by increased revenues and unit settlements as well as higher average selling prices and profits compared with prior year periods. The increases in the Southeast’s profitability were attributable to a continued shift in product mix toward the active adult homebuyer. Additionally, we opened a new large active adult community in Charlotte during 2006. Southeast home sale revenues increased 32% compared with 2005 due to a 9% increase in unit settlements combined with a 21% increase in the average selling price. Our Southeast operations recorded impairments and land-related charges of $5.6 million in 2006. There were no significant impairments or land-related charges recorded in 2005. Net new orders in 2006 decreased 5% compared with 2005. The reduction in new orders during 2006 contributed to the increase in cancellation rates. Cancellation rates for 2006 were 24% compared with 18% for 2005.

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Homebuilding Segment Operations (continued)
Florida:
     Our Florida segment continues to be challenged due to the combination of a significant decrease in demand combined with high levels of new and existing home inventories, especially in the southern portion of the state. For 2007, Florida home sale revenues decreased 51% compared with the prior year period due to a 46% decrease in unit settlements combined with a 9% decrease in the average selling price, including significant home sale revenue reductions in our Orlando and Southwest Florida markets. The loss before income taxes was primarily attributable to this reduction in revenues combined with a significant decline in gross margin and $358.3 million in impairments and land-related charges, which resulted in a reduction of approximately 7,700 lots under control. Florida recorded impairments and land-related charges of $53.4 million in 2006. Net new orders declined by 10% due to the difficult market conditions. Cancellation rates for 2007 were 30%, which was comparable to the 2006 cancellation rate of 31%.
     During 2006, our Florida operations experienced weakened demand, largely attributable to increased existing home inventories, especially in Orlando and Naples/Ft. Myers. Florida experienced high cancellation rates and pricing pressures associated with excess inventories and aggressive sales incentives offered by competitors. Florida’s home sale revenues decreased 2% compared with 2005, as a 16% decrease in unit settlements was offset by a 17% increase in average selling price. During 2006, we recorded impairments and land-related charges of $53.4 million. There were no significant impairments and land-related charges recorded in 2005. Net new orders for 2006 decreased 46% compared with 2005. For 2006, increased cancellation rates were attributable to lower new order sign-up activity and increased cancellations in all Florida markets. For 2006, cancellation rates were approximately 31% compared with 12% for 2005.
Midwest:
     Our Midwest segment continues to face difficult local economic conditions in the majority of its markets. For 2007, Midwest home sale revenues decreased 30% compared with the prior year period due to a 30% decrease in unit settlements, as all of our Midwest markets experienced home sale revenue reductions. Average selling prices were flat. The increase in the loss before income taxes was primarily attributable to this reduction in revenues and $354.7 million in impairments and land-related charges, which resulted in a reduction of approximately 2,900 lots under control. Midwest recorded impairments and land-related charges of $134.6 million in the prior year period. Net new orders declined by 36% due to the difficult market conditions. Cancellation rates were approximately 26% for 2007 compared with 20% for 2006.
     The Midwest operations were one of the most challenged areas in the country in 2006 as Cleveland and Michigan experienced weakened demand due to difficult local economic conditions. Midwest home sale revenues decreased 20% compared with 2005 as a 24% decrease in unit settlements was offset by a 6% increase in average selling price. For 2006, Midwest operating results were negatively impacted by impairments and land-related charges of $134.6 million. There were no significant impairments or land-related charges recorded in 2005. During 2006, reduced new order sign-up activity resulted in higher cancellation rates. Net new orders in 2006 decreased 32% compared with 2005. For 2006, cancellation rates were approximately 20% compared with 17% for 2005.
Central:
     For 2007, Central home sale revenues decreased 36% compared with the prior year period due to a 46% decrease in unit settlements, as all of our Central markets experienced home sale revenue reductions. This lower unit volume was partially offset by an 18% increase in average selling prices. The loss before income taxes was primarily attributable to this reduction in revenues and $122.1 million in impairments and land-related charges, which resulted in a reduction of approximately 1,400 lots under control. Central recorded impairments and land-related charges of $15.9 million in 2006. Net new orders declined by 45% due to the difficult market conditions. For 2007, cancellation rates were approximately 34% compared with 30% for 2006.
     For 2006, Central home sale revenue increased 13% compared with 2006 as a 3% decrease in unit settlements was offset by a 16% increase in average selling price. Higher average selling prices realized during 2006 were the result of unit settlements in new communities in Texas. During 2006, Central operating results were negatively impacted by impairments and land-related charges of $15.9 million. There were no significant impairments or land-related charges in 2005. Net new orders for 2006 decreased 25% compared with 2005. For 2006, cancellation rates were approximately 30% compared with 22% for 2005.

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Homebuilding Segment Operations (continued)
Southwest:
     Market conditions in our Arizona operations deteriorated markedly in 2007 while our Las Vegas and New Mexico markets remained challenged as well. For 2007, Southwest home sale revenues decreased 37% compared with the prior year period due to a 31% decrease in unit settlements combined with a 10% decrease in average selling prices, mostly due to home sale revenue reductions in our Las Vegas market. The loss before income taxes was primarily attributable to this decrease in revenues combined with a significant decline in gross margin and $404.8 million in impairments and land-related charges, which resulted in a reduction of approximately 7,600 lots under control. In addition, Southwest’s results include impairments of $59.1 million related to two unconsolidated joint ventures. Southwest recorded impairments and land-related charges of $37.8 million in 2006. Net new orders declined by 21% due to the difficult market conditions. Cancellation rates were approximately 37% for 2007 compared with 35% for 2006.
     In 2006, the Southwest operations contributed positively to our Homebuilding operating results, evidenced by increased revenues, unit settlements and higher average selling prices compared with 2005. Southwest home sale revenue increased 13% in 2006 due to a 3% increase in unit settlements combined with a 10% increase in average selling price. However, during 2006, our Southwest operations recorded impairments and land-related charges of $37.8 million. There were no significant impairments or land-related charges recorded in 2005. Operating results for the Southwest segment were positively impacted by our January 2006 acquisition of the remaining 50% interest in an entity that supplies and installs basic building components and operating systems in both Arizona and Nevada. During 2005, income from this entity was recorded as equity income and had no impact on segment pre-tax income. Net new orders for 2006 decreased 22% compared with 2005. During 2006, reduced new order sign-up activity resulted in higher cancellation rates. For 2006, cancellation rates were approximately 35% compared with 16% for 2005.
California:
     Our California operations have been impacted by significantly weakened demand for new homes, affordability issues, and an excess supply of resale inventory in substantially all of our markets. For 2007, California home sale revenues decreased 44% compared with the prior year period due to a 40% decrease in unit settlements combined with an 8% decrease in average selling prices, as a majority of our California markets experienced home sale revenue reductions. The loss before income taxes was primarily attributable to this reduction in revenues combined with a significant decline in gross margin and $468.1 million in impairments and land-related charges, which resulted in a reduction of approximately 6,900 lots under control. Also included in California’s results for 2007 is an impairment of $128.3 million related to unconsolidated joint ventures. In 2006, California recorded impairments and land-related charges of $89 million and a $95.4 million valuation adjustment related to two of our unconsolidated joint ventures located in Sacramento. Net new orders declined by 31% in 2007 due to the difficult market conditions. Cancellation rates were approximately 43% for 2007 compared with 36% for 2006.
     The California segment was impacted in 2006 by weakened demand for new homes, evidenced by increased resale inventories and pricing pressures, especially in Sacramento. California home sale revenues decreased 18% in 2006 due primarily to a 17% decrease in unit settlements. Average selling prices remained consistent with 2005. In 2006, California recorded impairments and land-related charges of $89 million and a $95.4 million valuation adjustment related to two of our unconsolidated joint ventures located in Sacramento. There were no significant impairments or land-related charges recorded in 2005. During 2006, reduced new order sign-up activity resulted in higher cancellation rates. Net new orders for 2006 decreased 32% compared with 2005. For 2006, cancellation rates were approximately 36% compared with 24% for 2005.

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Financial Services Operations
     We conduct our Financial Services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. We originate mortgage loans using our own funds or borrowings made available through various credit arrangements, and then sell such mortgage loans monthly to outside investors. Also, we sell our servicing rights on a flow basis through fixed price servicing sales contracts. Due to the short period of time the servicing rights are held, we do not amortize the servicing asset. Since the servicing rights are recorded based on the value in the servicing sales contracts, there are no impairment issues related to these assets.
     The following table presents selected financial information for our Financial Services operations ($000’s omitted):
                         
    Years Ended December 31,  
    2007     2006     2005  
Net gain from sale of mortgages
  $ 75,539     $ 110,759     $ 81,084  
Mortgage origination and servicing fees
    12,807       17,317       22,020  
Interest income
    21,807       33,494       25,961  
Title services
    20,802       29,833       29,496  
Other revenues
    3,814       3,193       2,853  
 
                 
Total Financial Services revenues
    134,769       194,596       161,414  
Expenses
    (92,150 )     (111,468 )     (93,574 )
Gain on sale of equity investment
          31,635        
Equity income
    361       697       2,746  
 
                 
Income before income taxes
  $ 42,980     $ 115,460     $ 70,586  
 
                 
 
                       
Total originations:
                       
Loans
    23,404       40,269       42,994  
 
                 
Principal
  $ 5,336,400     $ 8,683,500     $ 8,528,600  
 
                 
 
                       
Originations for Pulte customers:
                       
Loans
    23,272       40,117       42,302  
 
                 
Principal
  $ 5,309,100     $ 8,642,900     $ 8,397,600  
 
                 
     Mortgage origination unit volume and principal volume decreased 42% and 39%, respectively, in 2007 compared with 2006. The decreases in unit and principal volume are due primarily to lower home settlements in 2007 compared with 2006. This factor was partially offset by an increase in the capture rate to 92% in 2007 from 91% in 2006 as well as a higher average loan size. During 2006, mortgage origination unit volume decreased 6% while mortgage origination principal volume increased 2% compared with 2005. The decrease in unit volume is attributable to lower home settlements offset by a higher capture rate in 2006 (91%) compared with 2005 (89%), while the increase in origination principal volume is attributable to a higher average loan size. Our capture rate represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash settlements. Our Homebuilding customers continue to account for substantially all loan production, representing nearly 100% of Pulte Mortgage unit production for 2007 and 2006 compared with 98% in 2005.
     The mortgage industry experienced a significant shift away from adjustable rate mortgages (ARMs) to fixed rate mortgages during 2007 and 2006. ARMs, which generally have a lower profit per loan than fixed rate products, represented 8% of total funded origination dollars and 6% of total funded origination units in 2007 compared with 28% and 22%, respectively, in 2006 and 45% and 39%, respectively, in 2005. Interest-only mortgages, a component of ARMs, represented 74% of ARMs origination dollars and 72% of ARMs origination units in 2007 compared with 79% and 81%, respectively, in 2006 and 65% and 56%, respectively, in 2005. As a result, interest-only mortgages represented 6%, 22%, and 29% of total funded origination dollars in 2007, 2006, and 2005, respectively.

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Financial Services Operations (continued)
     Our customers’ average FICO scores for 2007, 2006, and 2005 were 745, 743, and 741, respectively. Average Combined Loan-to-Value was 82% for both 2007 and 2006 and 81% for 2005. At December 31, 2007, our loan application backlog was $1.5 billion, compared with $2.1 billion and $4.2 billion at December 31, 2006 and 2005, respectively.
     Based on principal dollars, approximately 4% of the loans we originated during 2007 were considered sub-prime loans, which we define as first mortgages with FICO scores below 620. Approximately 14% of 2007 originations were considered Alt-A loans, which we define as non-full documentation first mortgages with FICO scores of 620 or higher. The remaining 82% of 2007 originations were prime loans, which we define as full documentation first mortgages with FICO scores of 620 or higher. Because we sell our loans monthly and retain only limited risk for sold loans for a short period of time, we believe that our Financial Services operations do not have any material direct risks related to sub-prime and Alt-A loans. However, the availability of certain mortgage financing products has become more constrained in 2007 as the mortgage industry is now more closely scrutinizing sub-prime, Alt-A, and other non-conforming mortgage products. These developments have had and may continue to have a material adverse effect on the overall demand for new housing and thereby on the results of operations of both our Homebuilding and Financial Services businesses.
     Pre-tax income decreased 63% in 2007 compared with 2006. During 2006, we sold our investment in Su Casita, a Mexico-based mortgage banking company. As a result of this transaction, we recognized a pre-tax gain of approximately $31.6 million in 2006. Excluding this gain, pre-tax income decreased significantly in 2007 compared with 2006, primarily due to lower originations and increased loan loss reserves. This decrease was partially offset by an increase in average loan size and the shift in funded product mix toward fixed rate and agency loans, which are more profitable for us. The percentage of total origination dollars from brokered loans, which are funded by third party lenders and are therefore less profitable to us, was comparable in 2007 and 2006.
     Pre-tax income increased 64% in 2006 compared with 2005, primarily due to the sale of our investment in Su Casita. Excluding this gain, pre-tax income increased in 2006 compared with 2005 due to the combination of increased origination principal volume and a shift in product mix to more profitable loans, including a small decline in the mix from brokered loans.
     Interest income in 2007 was 35% lower than in 2006, primarily due to the significant decrease in loan origination volume offset slightly by higher loan yields. For 2006, interest income increased 29% compared with 2005, due to the increase in funded origination volume combined with higher loan yields. Revenues from our title operations decreased 30% in 2007 compared with 2006 due to the decline in loan origination volume and stayed fairly even in 2006 compared with 2005 based on the lack of significant change in origination principal volume. Expenses decreased significantly in 2007 due to the decrease in volume and reduced headcount offset by higher loan loss reserves and less leverage of our fixed operating costs.
     Since we sell the majority of our loans monthly and retain only limited risk related to the loans we originate, our overall loan loss reserves have historically not been significant. During 2007, however, we experienced increases in our loans held for investment, non-performing portfolio loans, and foreclosed properties as well as higher expected losses on repurchased loans. As a result, our overall loan loss reserves increased to $11.7 million at December 31, 2007 compared with $1.7 million at December 31, 2006.
     We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments to minimize the impact of changes in interest rates. We do not use derivative financial instruments for trading purposes.

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Other Non-Operating
     Other non-operating expenses consists of income and expenses related to corporate services provided to our subsidiaries. These expenses are incurred for financing, developing, and implementing strategic initiatives centered on new business development and operating efficiencies and providing the necessary administrative support associated with being a publicly traded entity listed on the New York Stock Exchange. Accordingly, these results will vary from year to year as these strategic initiatives evolve.
     The following table presents results of operations ($000’s omitted):
                         
    Years Ended December 31,  
    2007     2006     2005  
Net interest (income) expense
  $ (2,731 )   $ 531     $ 43,344  
Other expenses, net
    33,122       42,569       49,050  
 
                 
 
                       
Loss before income taxes
  $ 30,391     $ 43,100     $ 92,394  
 
                 
     Our higher invested cash balances during 2007 resulted in interest income in excess of amounts expensed compared with net interest expense in 2006. The decrease in net interest expense in 2006 compared with 2005 was the result of an increase in the amount of interest capitalized into homebuilding inventory. Changes in other expenses, net for 2007 and 2006 compared with 2005 were primarily due to reductions in compensation-related costs.
     Interest capitalized into homebuilding inventory is charged to home cost of sales based on the cyclical timing of our unit settlements over a period that approximates the average life cycle of our communities. Interest expensed to homebuilding cost of sales for the years ended December 31, 2007 and 2006 includes $110.8 and $16 million, respectively, related to land and community valuation adjustments. Information related to corporate interest capitalized into homebuilding inventory is as follows ($000’s omitted):
                         
    Years Ended December 31,  
    2007     2006     2005  
Interest in homebuilding inventory at beginning of year
  $ 235,596     $ 229,798     $ 223,591  
Interest capitalized into homebuilding inventory
    240,000       261,486       185,792  
Interest expensed to homebuilding cost of sales
    (314,998 )     (255,688 )     (179,585 )
 
                 
Interest in homebuilding inventory at end of year
  $ 160,598     $ 235,596     $ 229,798  
 
                 
 
                       
Interest incurred *
  $ 243,864     $ 266,561     $ 234,024  
 
                 
 
*   Interest incurred includes interest on our senior debt, short-term borrowings, and other financing arrangements and excludes interest incurred by our financial services operations.
Income Taxes
     Our income tax assets and liabilities and related effective tax rate are affected by a number of factors. Income taxes were provided at an effective tax rate of 8.9%, 36.3%, and 36.9% for 2007, 2006, and 2005, respectively. The effective tax rate during 2007 was lower than in prior years primarily due to a $621.9 million non-cash deferred tax valuation allowance. Excluding the valuation allowance and goodwill impairment charges, the effective tax rate would have been approximately 38% for 2007.

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Discontinued Operations
First Heights
     In 2005, we completed the disposal of First Heights, our former bank subsidiary. During the years ended December 31, 2006 and 2005, after-tax income was $189 thousand and $56.5 million, respectively, and is included in income from discontinued operations. Income from discontinued operations for the year ended December 31, 2005 includes $7.8 million related to the recognition of income tax benefits resulting from the favorable resolution of certain tax matters. We also received payment in December 2005 of a $48.7 million judgment resulting from litigation related to First Heights’ 1988 acquisition from the Federal Savings and Loan Insurance Corporation and First Heights’ ownership of five failed thrifts. The payment was recorded as income from discontinued operations.
Mexico Homebuilding Operations
     In January 2005, the minority shareholders of Pulte Mexico S. de R.L. de C.V. (“Pulte Mexico”) exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to us, the consummation of which resulted in our owning 100% of Pulte Mexico. In March 2005, we purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million in cash. In June 2005, we purchased the remaining 40% of the minority interest of Pulte Mexico for approximately $12.5 million in cash.
     In December 2005, we sold substantially all of our Mexico homebuilding operations to a consortium of purchasers involved in residential and commercial real estate development. We realized cash of $131.5 million related to the sale. The sale of these operations did not include our investment in the capital stock of a mortgage company in Mexico as well as various non-operating entities, which are not considered to be material to the Company’s results of operations or its financial position.
     For 2007, 2006, and 2005, the Mexico homebuilding operations have been presented as discontinued operations in our Consolidated Financial Statements. For 2007, income from discontinued operations represents $18.7 million in refundable income taxes related to our investment in our discontinued Mexico homebuilding operations.
Argentina Operations
     In January 2005, we sold all of our Argentina operations to an Argentine company involved in residential and commercial real estate development. For the year ended December 31, 2006, loss from discontinued operations included a provision of $111 thousand, net of taxes, resulting from a contractual adjustment related to the disposition.
Liquidity and Capital Resources
     We finance our homebuilding land acquisitions, development, and construction activities by using internally-generated funds and existing credit arrangements. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings. Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements. However, we continue to evaluate the impact of market conditions on our liquidity and may determine that modifications are necessary if market conditions continue to deteriorate or if the current difficult market conditions extend beyond our expectations.
     At December 31, 2007, we had cash and equivalents of $1.1 billion and $3.5 billion of senior notes outstanding. Other financing included non-recourse collateralized financing totaling $9.4 million. Sources of our working capital include our cash and equivalents, our committed unsecured revolving credit facility, and Pulte Mortgage’s committed credit arrangements.
     Our ratio of debt-to-total capitalization, excluding our land-collateralized and Pulte Mortgage debt, was 44.6% at December 31, 2007, and approximately 35.9% net of cash and equivalents.
     We amended our unsecured revolving credit facility twice during 2007, decreasing the borrowing capacity from $2.01 billion to $1.86 billion and extending the maturity date from October 2010 to June 2012. In February 2008, we amended the credit facility again and decreased the borrowing capacity to $1.6 billion. Under the terms of the credit facility, we have the capacity to issue letters of credit totaling up to $1.125 billion. Borrowing availability is reduced by the amount of letters of credit outstanding. The credit facility includes a borrowing base limitation when we do not have an investment grade senior unsecured debt rating from at least two of Fitch Ratings, Moody’s Investor Service, and Standard and Poor’s Corporation. Under the borrowing base limitation, the sum of our senior debt and the amount drawn on the revolving credit facility may not exceed an amount based on certain percentages of various categories of our unencumbered inventory and other assets.

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Liquidity and Capital Resources (continued)
     The credit facility contains certain financial covenants. We are required to not exceed a debt-to-total capitalization ratio of 55%, and we are required to meet a tangible net worth minimum each quarter. At December 31, 2007, our debt-to-total capitalization ratio (as defined in the credit facility) was 42.6% while our tangible net worth (as defined in the credit facility) cushion was $818.5 million after giving effect to the February 2008 amendment. In the event market conditions deteriorate in the future and result in additional significant land-related charges, our tangible net worth may come close to or fall below the required minimum. Violations of any of the covenants in the credit facility, if not cured or waived by the lenders, could result in an optional maturity date acceleration by the lenders. In the event this were to occur, we would seek to replace the financing provided by the credit facility. The credit facility no longer contains an interest coverage ratio covenant that could create an event of default for us, but if the interest coverage ratio (as defined in the credit facility) is less than 2 to 1, LIBOR margin and letter of credit pricing under the credit facility can increase in increments ranging from 0.125% to 0.375% and the debt-to-total capitalization ratio covenant threshold can decrease in increments of 2.5%. The credit facility’s uncommitted accordion feature remains unchanged at $2.25 billion. As of December 31, 2007, we had no borrowings outstanding and $1.41 billion available for borrowing under this facility.
     Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements. At December 31, 2007, Pulte Mortgage had committed credit arrangements of $705 million, comprised of a $405 million bank revolving credit facility and a $300 million asset-backed commercial paper program. Due to the reduced loan origination volume and unfavorable changes in the asset-backed commercial paper market, Pulte Mortgage amended its commercial paper program twice during 2007, which, among other things, reduced the capacity from $550 million to the $300 million available at December 31, 2007. In February 2008, Pulte Mortgage further amended the commercial paper program to reduce the capacity to $150 million. After giving effect to the most recent amendment, Pulte Mortgage has committed credit arrangements of $555 million, comprised of a $405 million bank revolving credit facility and a $150 million commercial paper program. The credit agreements require Pulte Mortgage to maintain a consolidated tangible net worth of at least $50 million or eighty-five percent of the average month-end tangible net worth for the last twelve months of the preceding calendar year ($52.8 million for 2008) and funded debt cannot exceed 15 times tangible net worth. Pulte Mortgage had $440.6 million outstanding under its committed credit arrangements at December 31, 2007.
     We have experienced downgrades in our credit ratings during 2007 by each of the major credit rating agencies. While such downgrades do not directly impact our senior notes, they could increase the cost of borrowing under our unsecured revolving credit facility and limit our ability to obtain additional financing or refinancing on favorable terms. In the event of additional downgrades, the lenders under Pulte Mortgage’s asset-backed commercial paper program may have the right at their discretion to require early repayment of outstanding balances or place other restrictions on our ability to utilize the asset-backed commercial paper program. In the event of such an occurrence, we believe we have capacity through other sources to meet Pulte Mortgage’s anticipated financing needs.
     Our net cash provided by operating activities in 2007 amounted to $1.2 billion while net cash used in operating activities was $267.5 million in 2006. For 2005, net cash provided by operating activities was $18.7 million. The primary drivers of cash flow from operations are profitability and investments in inventory. In 2007, the net loss was largely attributable to non-cash asset impairments, including land-related charges, impairments of goodwill and investments in unconsolidated entities, and a deferred tax valuation allowance. In addition, we significantly reduced our investments in land inventory in light of the challenging conditions in the homebuilding industry. In 2006, the reduced profitability compared with 2005 was coupled with significant investments in land inventory. In 2005, net income was offset primarily by significant investments in land inventory.
     Cash used in investing activities was $221.4 million in 2007 compared with $86.7 million in 2006 and $25.3 million in 2005. The increase in cash used in investing activities during 2007 compared with 2006 resulted primarily from investments of $217.5 million in unconsolidated entities. The increase in cash used in investing activities in 2006 compared with 2005 resulted primarily from the use of $65.8 million, net of cash acquired, to purchase the remaining 50% of an entity that installs basic building components and operating systems. In addition, we received cash of $49.2 million in 2006 for the sale of subsidiaries and equity investments, primarily resulting from the sale of our Mexico homebuilding operations.

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Liquidity and Capital Resources (continued)
     Net cash used in financing activities totaled $487.6 million and $96.2 million in 2007 and 2006, respectively, compared with net cash provided by financing activities of $700.4 million in 2005. The cash used in financing activities in 2007 and 2006 were largely attributable to reductions in outstanding borrowings under various credit arrangements as the result of the lower volumes in our Homebuilding and Financial Services operations. Offsetting this to some degree in 2007 was a significant reduction in stock repurchases under our stock repurchase programs. The cash provided by financing activities in 2005 resulted primarily from increased borrowings under our Pulte Mortgage credit arrangements to fund the increase in funded loan originations and the issuance of $650 million in senior notes to help fund additional investments in land inventory.
     Pursuant to the two $100 million stock repurchase programs authorized by our Board of Directors in October 2002 and 2005, and the $200 million stock repurchase authorization in February 2006 (for a total stock repurchase authorization of $400 million), we have repurchased a total of 9,688,900 shares for a total of $297.7 million. There were no repurchases under these programs during 2007. We had remaining authorization to purchase common stock aggregating $102.3 million at December 31, 2007.
Inflation
     We, and the homebuilding industry in general, may be adversely affected during periods of high inflation because of higher land and construction costs. Inflation may also increase our financing, labor, and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. While we attempt to pass to our customers increases in our costs through increased sales prices, the current industry conditions have resulted in lower sales prices in many of our markets. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, affecting our prospective homebuyers’ ability to adequately finance home purchases, our revenues, gross margins, and net income would be adversely affected.
Seasonality
     We experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. Historically, we have experienced significant increases in revenues and cash flow from operations during the fourth quarter based on the timing of home settlements.

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Contractual Obligations and Commercial Commitments
     The following table summarizes our payments under contractual obligations as of December 31, 2007:
                                         
    Payments Due by Period  
    ($000’s omitted)  
    Total     2008     2009-2010     2011-2012     After 2012  
Contractual obligations:
                                       
Long-term debt (a)
  $ 6,408,960     $ 224,857     $ 772,008     $ 1,051,604     $ 4,360,491  
Operating lease obligations
    239,537       56,118       81,714       38,888       62,817  
Other long-term liabilities (b)
    10,465       4,677       4,833       955        
 
                             
 
                                       
Total contractual obligations (c)
  $ 6,658,962     $ 285,652     $ 858,555     $ 1,091,447     $ 4,423,308  
 
                             
 
(a)   Represents our senior notes and related interest payments.
 
(b)   Represents our non-recourse collateralized financing arrangements and related interest payments.
 
(c)   We do not have any payments due in connection with capital lease or purchase obligations.
     We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development, and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we are ready to build homes on them. This reduces our financial risks associated with long-term land holdings. At December 31, 2007, we had agreements to acquire approximately 26,500 homesites through option contracts and unconsolidated entities in which we have investments. At December 31, 2007, we had $222.5 million of non-refundable option deposits and advanced costs related to certain of these agreements.
     We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. We are also subject to income tax in certain foreign jurisdictions related to operations previously sold or discontinued. As of December 31, 2007, we had $86.2 million of gross unrecognized tax benefits and $21.1 million and $12.1 million of related accrued interest and penalties, respectively. We are currently under examination by various taxing jurisdictions and anticipate finalizing the examinations with certain jurisdictions within the next twelve months. However, the final outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 1998-2006.
     The following table summarizes our other commercial commitments as of December 31, 2007:
                                         
    Amount of Commitment Expiration by Period  
    ($000’s omitted)  
    Total     2008     2009-20010     2011-2012     After 2012  
Other commercial commitments:
                                       
Guarantor revolving credit facilities (a)
  $ 1,860,000     $     $     $ 1,860,000     $  
Non-guarantor revolving credit facilities (b)
    705,000       300,000       405,000              
Standby letters of credit (c)
    46,549       39,699       6,850              
 
                             
 
                                       
Total commercial commitments (d)
  $ 2,611,549     $ 339,699     $ 411,850     $ 1,860,000     $  
 
                             
 
(a)   Includes capacity to issue up to $1.125 billion in standby letters of credit, of which $447 million was outstanding at December 31, 2007. In February 2008, we amended the credit facility and decreased the borrowing capacity to $1.6 billion.
 
(b)   Includes credit facility of $405 million and $300 million asset-backed commercial paper program. In February 2008, we amended the commercial paper program to reduce the capacity to $150 million.
 
(c)   Excludes standby letters of credit issued under the Guarantor revolving credit facilities.
 
(d)   Excludes performance and surety bonds of approximately $1.5 billion, which typically do not have stated expiration dates.

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Off-Balance Sheet Arrangements
     We use standby letters of credit and performance bonds to guarantee our performance under various contracts, principally in connection with the development of our projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. At December 31, 2007, we had outstanding letters of credit of $493.6 million. Performance bonds and surety bonds do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $1.5 billion at December 31, 2007, are typically outstanding over a period of approximately 3-5 years. We do not believe that there will be draws upon any such letters of credit or performance bonds.
     In the ordinary course of business, we enter into land option or option type agreements in order to procure land for the construction of houses in the future. At December 31, 2007, these agreements totaled approximately $1.6 billion. Pursuant to these land option agreements, we provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. If the entity holding the land under option is a variable interest entity, our deposit represents a variable interest in that entity. At December 31, 2007, we consolidated certain variable interest entities with assets totaling $20.8 million.
     At December 31, 2007 and 2006, aggregate outstanding debt of unconsolidated joint ventures was $602.5 million and $935.9 million, respectively. At December 31, 2007 and 2006, our proportionate share of joint venture debt was approximately $134 million and $312.8 million, respectively. At December 31, 2007 and 2006, we provided non-recourse debt guarantees for $124.5 million and $304.1 million, respectively, of joint venture debt. In the case of most joint ventures, we have agreed to indemnify the joint venture’s lenders for certain environmental contingencies, and most guarantee arrangements provide that we are responsible for our proportionate share of the outstanding debt if the joint venture voluntarily files for bankruptcy. We would not be responsible under these guarantees unless the joint venture was unable to meet its contractual borrowing obligations or in instances of fraud, misrepresentation, or other bad faith actions by us.
     For 2007, 2006, and 2005, we recognized equity income (loss) from our unconsolidated joint ventures of $(190) million, $(62.9) million, and $75.4 million, respectively. The equity loss recognized during 2007 and 2006 includes land valuation adjustments of $189.9 million and $95.4 million, respectively, which relate to certain of our joint ventures located in our California and Southwest reportable segments.
Critical Accounting Policies and Estimates
     The accompanying consolidated financial statements were prepared in conformity with United States generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 of our Consolidated Financial Statements). Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality.
Revenue recognition
     Homebuilding – Homebuilding revenue and related profit are generally recognized at the time of the closing of the sale, when title to and possession of the property are transferred to the buyer. In situations where the buyer’s financing is originated by Pulte Mortgage, our wholly-owned mortgage subsidiary, and the buyer has not made an adequate initial or continuing investment as required by SFAS No. 66, “Accounting for Sales of Real Estate,” the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor has been completed.

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Critical Accounting Policies and Estimates (continued)
     Financial Services – Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred as an adjustment to the cost of the related mortgage loan until such loan is sold. Gains and losses from sales of mortgage loans are recognized when the loans are sold. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan.
Inventory valuation
     Inventories are stated at accumulated cost unless certain facts indicate such cost would not be recovered from the cash flows generated by future disposition. In this instance, such inventories are measured at fair value in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (SFAS 144). Accumulated cost includes costs associated with land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction.
     We capitalize interest cost into homebuilding inventories. Interest capitalized each quarter is identified as a separate layer in our capitalized interest balance sheet pool. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated to the quarters over the amortization period based on the cyclical timing of unit settlements.
     Sold units are expensed on a specific identification basis. Under the specific identification basis, cost of sales includes the construction cost of the home, an average lot cost based on expected land acquisition and development costs for the project, as well as closing costs and commissions applicable to the home. Construction cost of the home includes amounts paid through the closing date of the home, plus an appropriate accrual for costs incurred but not yet paid, based on an analysis of budgeted construction cost. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Total project land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. Adjustments to estimated total land acquisition and development costs for the project affect the amounts costed for the project’s remaining lots.
Residential mortgage loans
     Residential mortgage loans available-for-sale are stated at the lower of aggregate cost or market value. Gains and losses from sales of mortgage loans are recognized when the loans are sold. We hedge our residential mortgage loans available-for-sale. Gains and losses from closed commitments and futures contracts are matched against the related gains and losses on the sale of mortgage loans.
     Loans held for investment consist of interim financing mortgage loans for certain of our customers as well as a portfolio of loans that either have been repurchased from investors or were not saleable upon closing. These loans are carried at cost and reviewed for impairment when recoverability becomes doubtful.
Goodwill and intangible assets
     We have recorded certain intangible assets and goodwill, most of which relate to the Del Webb merger in 2001. Intangible assets, primarily trademarks and tradenames, were valued using proven valuation procedures and are amortized over their estimated useful life. Goodwill is subject to annual impairment testing. The carrying value and ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows decrease significantly, intangible assets and goodwill may be impaired. If we determine that the carrying value of intangible assets and goodwill may not be recoverable based upon the existence of one or more indicators of impairment, we measure impairment based on several accepted valuation methods. For assets related to ongoing operations, we use a projected undiscounted cash flow method to determine if impairment exists and then measure impairment using discounted cash flows. For assets to be disposed of, we assess the fair value of the asset based on current market conditions for similar assets. For goodwill, we assess fair value by measuring discounted cash flows of our reporting units and measure impairment as the difference between the resulting implied fair value of goodwill and the recorded book value. The estimates of useful lives and expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control.

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Critical Accounting Policies and Estimates (continued)
Allowance for warranties
     Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of recorded warranty liabilities and adjust the amounts as necessary. Although we have not made significant adjustments to the accrual in the past, actual warranty cost in the future could differ from our current estimate.
Insurance
     We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensation, and other business insurance. These insurance policies protect us against a portion of the risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. Through our captive insurance subsidiaries, we reserve for costs to cover our self-insured and deductible amounts under those policies and for any costs of claims and lawsuits, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported.
     We are also self-insured for certain of our medical and dental claims and reserve for costs to cover our liability for such claims, based on analysis of historical claims, which include an estimate of claims incurred but not yet reported.
Stock-based compensation  
     On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS Statement No. 95, “Statement of Cash Flows.” We calculate the fair value of stock options using the Black-Scholes option pricing model. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, the expected dividend yield and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited. The Company adopted SFAS 123(R) using the modified prospective method of transition. Accordingly, prior periods have not been restated. The adoption of SFAS 123(R) did not have a significant effect on basic and diluted earnings per share for the year ended December 31, 2006.
 
     Prior to January 1, 2006, the Company accounted for its stock-based awards under the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under the prospective method, the Company recognized compensation expense on an accelerated basis over the vesting period based on the fair value provisions of SFAS No. 123.
Income taxes
     The Company calculates its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or carryback to prior tax years. In determining the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.
New Accounting Pronouncements
     See Note 1 to the Consolidated Financial Statements included elsewhere in this Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following tables set forth, as of December 31, 2007 and 2006, our rate-sensitive financing obligations, principal cash flows by scheduled maturity, weighted-average interest rates, and estimated fair value ($000’s omitted).
                                                                 
    As of December 31, 2007 for the
    Years ended December 31,
                                            There-           Fair
    2008   2009   2010   2011   2012   after   Total   Value
Rate-sensitive liabilities:
                                                               
 
                                                               
Fixed interest rate debt
                                                               
 
                                                               
Senior notes
  $     $ 338,812     $     $     $ 698,563     $ 2,450,000     $ 3,487,375     $ 2,962,634  
Average interest rate
          4.88 %                 7.95 %     6.24 %     6.45 %      
 
                                                               
Non-recourse collateralized financing
  $ 4,120     $ 3,490     $ 890     $ 890     $     $     $ 9,390     $ 9,390  
Average interest rate
    5.65 %     5.57 %     7.25 %     7.25 %                 5.93 %      
                                                                 
    As of December 31, 2006 for the
    Years ended December 31,
                                            There-           Fair
    2007   2008   2009   2010   2011   after   Total   Value
Rate sensitive liabilities:
                                                               
 
                                                               
Fixed interest rate debt:
                                                               
 
                                                               
Senior notes
  $     $     $ 400,000     $     $ 698,563     $ 2,450,000     $ 3,548,563     $ 3,584,523  
Average interest rate
                4.88 %           7.95 %     6.24 %     6.42 %      
 
                                                               
Non-recourse collateralized financing
  $ 19,755     $ 3,484     $ 3,650     $     $     $     $ 26,889     $ 26,889  
Average interest rate
    .31 %     1.25 %     2.37 %                       .71 %      
     Pulte Mortgage, operating as a mortgage banker, is also subject to interest rate risk. Interest rate risk begins when we commit to lend money to a customer at agreed-upon terms (i.e., commit to lend at a certain interest rate for a certain period of time). The interest rate risk continues through the loan closing and until the loan is sold to an investor. During 2007 and 2006, this period of interest rate exposure averaged approximately 60 days. In periods of rising interest rates, the length of exposure will generally increase due to customers locking in an interest rate sooner as opposed to letting the interest rate float.
     We minimize interest rate risk by (i) financing the loans via a variable rate borrowing agreement tied to LIBOR and A1/P1 commercial paper rates and (ii) hedging our loan commitments and closed loans through derivative financial instruments. These financial instruments include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury future contracts, and options on cash forward placement contracts on mortgage-backed securities. We do not use any derivative financial instruments for trading purposes.
     Hypothetical changes in the fair values of our financial instruments arising from immediate parallel shifts in long-term mortgage rates of plus 50, 100, and 150 basis points would not be material to our financial results.
     At December 31, 2007, our aggregate net investment exposed to foreign currency exchange rate risk includes our remaining non-operating investments in Mexico, which approximated $5 million.

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SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS
     As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 1A., Risk Factors, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A., Quantitative and Qualitative Disclosures About Market Risk, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).
     Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate”, “expect”, “intend”, “plan”, “believe”, “seek”, “estimate”, and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. From time to time, we also may provide oral or written forward-looking statements in other materials released to the public. Such statements are made in good faith by us pursuant to the “Safe Harbor” provisions of the Reform Act. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
     Such forward-looking statements involve known risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from our future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, those set forth under Item 1A. – Risk Factors.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PULTE HOMES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
($000’s omitted, except share data)
                 
    2007     2006  
ASSETS
               
 
               
Cash and equivalents
  $ 1,060,311     $ 551,292  
Unfunded settlements
    38,714       72,597  
House and land inventory
    7,027,511       9,374,335  
Land held for sale
    252,563       465,823  
Land, not owned, under option agreements
    20,838       43,609  
Residential mortgage loans available-for-sale
    447,089       871,350  
Investments in unconsolidated entities
    105,479       150,685  
Goodwill
    5,654       375,677  
Intangible assets, net
    110,704       118,954  
Other assets
    1,050,934       982,034  
Deferred income tax assets
    105,906       170,518  
 
           
 
               
 
  $ 10,225,703     $ 13,176,874  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Liabilities:
               
Accounts payable, including book overdrafts of $185,701 and $280,329 in 2007 and 2006, respectively
  $ 418,637     $ 576,321  
Customer deposits
    132,720       200,478  
Accrued and other liabilities
    1,308,554       1,403,793  
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets
    440,611       814,707  
Income taxes
    126,758       66,267  
Senior notes
    3,478,230       3,537,947  
 
           
 
               
Total liabilities
    5,905,510       6,599,513  
 
           
 
               
Shareholders’ Equity:
               
Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued
           
Common stock, $0.01 par value; 400,000,000 shares authorized, 257,098,765 and 255,315,408 shares issued and outstanding at December 31, 2007 and 2006, respectively
    2,571       2,553  
Additional paid-in capital
    1,362,504       1,284,687  
Accumulated other comprehensive loss
    (4,883 )     (2,986 )
Retained earnings
    2,960,001       5,293,107  
 
           
 
               
Total shareholders’ equity
    4,320,193       6,577,361  
 
           
 
               
 
  $ 10,225,703     $ 13,176,874  
 
           
See Notes to Consolidated Financial Statements.

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PULTE HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2007, 2006, and 2005
(000’s omitted, except per share data)
                         
    2007     2006     2005  
Revenues:
                       
Homebuilding
  $ 9,121,730     $ 14,075,248     $ 14,528,236  
Financial Services
    134,769       194,596       161,414  
Other non-operating
    6,595       4,564       4,885  
 
                 
 
                       
Total revenues
    9,263,094       14,274,408       14,694,535  
 
                 
 
                       
Expenses:
                       
Homebuilding, principally cost of sales
    11,440,839       12,969,636       12,302,018  
Financial Services
    92,150       111,468       93,574  
Other non-operating, net
    36,986       47,664       97,279  
 
                 
 
                       
Total expenses
    11,569,975       13,128,768       12,492,871  
 
                 
 
                       
Other income:
                       
Gain on sale of equity investments
          31,635       620  
Equity income (loss)
    (190,022 )     (94,547 )     74,730  
 
                 
 
                       
Income (loss) from continuing operations before income taxes
    (2,496,903 )     1,082,728       2,277,014  
Income taxes (benefit)
    (222,486 )     393,082       840,126  
 
                 
 
                       
Income (loss) from continuing operations
    (2,274,417 )     689,646       1,436,888  
Income (loss) from discontinued operations
    18,662       (2,175 )     55,025  
 
                 
 
                       
Net income (loss)
  $ (2,255,755 )   $ 687,471     $ 1,491,913  
 
                 
 
                       
Per share data:
                       
Basic:
                       
Income (loss) from continuing operations
  $ (9.02 )   $ 2.73     $ 5.62  
Income (loss) from discontinued operations
    0.07       (0.01 )     0.22  
 
                 
 
                       
Net income (loss)
  $ (8.94 )   $ 2.73     $ 5.84  
 
                 
 
                       
Assuming dilution:
                       
Income (loss) from continuing operations
  $ (9.02 )   $ 2.67     $ 5.47  
Income (loss) from discontinued operations
    0.07       (0.01 )     0.21  
 
                 
 
                       
Net income (loss)
  $ (8.94 )   $ 2.66     $ 5.68  
 
                 
 
                       
Cash dividends declared
  $ 0.16     $ 0.16     $ 0.13  
 
                 
 
                       
Number of shares used in calculation:
                       
Basic:
                       
Weighted-average common shares outstanding
    252,192       252,200       255,492  
Assuming dilution:
                       
Effect of dilutive securities — stock options and restricted stock grants
          6,421       7,309  
 
                 
Adjusted weighted-average common shares and effect of dilutive securities
    252,192       258,621       262,801  
 
                 
See Notes to Consolidated Financial Statements.

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PULTE HOMES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
For the years ended December 31, 2007, 2006, and 2005
($000’s omitted, except per share data)
                                                 
                            Accumulated              
            Additional           Other              
    Common     Paid-in     Unearned     Comprehensive     Retained        
    Stock     Capital     Compensation     Income (Loss)     Earnings     Total  
Shareholders’ Equity, December 31, 2004
  $ 2,558     $ 1,114,739     $ (44 )   $ (14,380 )   $ 3,419,401     $ 4,522,274  
 
                                               
Stock option exercises
    30       31,218                         31,248  
Tax benefit from stock option exercises and restricted stock vesting
          34,095                         34,095  
Restricted stock awards
    18       (18 )                        
Restricted stock award amortization
                44                   44  
Cash dividends declared — $0.13 per share
                            (33,550 )     (33,550 )
Stock repurchases
    (36 )     (16,566 )                 (126,644 )     (143,246 )
Stock-based compensation
          45,680                         45,680  
Comprehensive income:
                                               
Net income
                            1,491,913       1,491,913  
Change in fair value of derivatives, net of income tax benefit of $2,481, net of reclassification for net realized losses on derivatives of $138 included in net income
                      (4,048 )           (4,048 )
Foreign currency translation adjustments
                      12,932             12,932  
 
                                             
 
                                               
Total comprehensive income
                                            1,500,797  
 
                                   
 
                                               
Shareholders’ Equity, December 31, 2005
  $ 2,570     $ 1,209,148     $     $ (5,496 )   $ 4,751,120     $ 5,957,342  
 
                                               
Stock option exercises
    13       8,337                         8,350  
Tax benefit from stock option exercises and restricted stock vesting
          6,696                         6,696  
Restricted stock awards
    7       (7 )                        
Cash dividends declared — $0.16 per share
                            (40,879 )     (40,879 )
Stock repurchases
    (37 )     (17,653 )                 (104,605 )     (122,295 )
Stock-based compensation
          78,166                         78,166  
Comprehensive income:
                                               
Net income
                            687,471       687,471  
Change in fair value of derivatives, net of income tax expense of $760, net of reclassification for net realized losses on derivatives of $18 included in net income
                      1,240             1,240  
Foreign currency translation adjustments
                      1,270             1,270  
 
                                             
 
                                               
Total comprehensive income
                                            689,981  
 
                                   
 
                                               
Shareholders’ Equity, December 31, 2006
  $ 2,553     $ 1,284,687     $     $ (2,986 )   $ 5,293,107     $ 6,577,361  
 
                                               
Adoption of FASB Interpretation No. 48 (FIN 48)
                            (31,354 )     (31,354 )
Stock option exercises
    7       7,855                         7,862  
Tax benefit from stock option exercises and restricted stock vesting
          523                         523  
Restricted stock awards
    13       (13 )                        
Cash dividends declared — $0.16 per share
                            (40,997 )     (40,997 )
Stock repurchases
    (2 )     (1,243 )                 (5,000 )     (6,245 )
Stock-based compensation
          70,695                         70,695  
Comprehensive income (loss):
                                               
Net income (loss)
                            (2,255,755 )     (2,255,755 )
Change in fair value of derivatives, net of income tax benefit of $1,080, net of reclassification for net realized gains on derivatives of $978 included in net income
                      (1,762 )           (1,762 )
Foreign currency translation adjustments
                      (135 )           (135 )
 
                                             
 
                                               
Total comprehensive income (loss)
                                            (2,257,652 )
 
                                   
 
                                               
Shareholders’ Equity, December 31, 2007
  $ 2,571     $ 1,362,504     $     $ (4,883 )   $ 2,960,001     $ 4,320,193  
 
                                   
See Notes to Consolidated Financial Statements.

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PULTE HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2007, 2006, and 2005
($000’s omitted)
                         
    2007     2006     2005  
Cash flows from operating activities:
                       
Net income (loss)
  $ (2,255,755 )   $ 687,471     $ 1,491,913  
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
                       
Write-down of land and deposits and other related costs
    2,042,618       409,523       29,997  
Goodwill impairments
    370,023              
Gain on sale of equity investments
          (31,635 )     (620 )
Loss on sale of subsidiaries
                13,124  
Amortization and depreciation
    83,852       83,675       61,512  
Stock-based compensation expense
    70,695       78,166       45,724  
Deferred income taxes
    73,164       (157,832 )     33,695  
Equity (income) loss from unconsolidated entities
    190,022       94,547       (75,350 )
Distributions of earnings from unconsolidated entities
    4,429       6,590       86,020  
Other, net
    2,315       2,657       (180 )
Increase (decrease) in cash due to:
                       
Inventories
    622,359       (1,151,972 )     (1,699,373 )
Residential mortgage loans available-for-sale
    395,425       167,156       (341,429 )
Other assets
    (4,936 )     98,776       (154,531 )
Accounts payable, accrued and other liabilities
    (396,541 )     (380,985 )     477,372  
Income taxes
    20,585       (173,663 )     50,830  
 
                 
 
                       
Net cash provided by (used in) operating activities
    1,218,255       (267,526 )     18,704  
 
                 
 
                       
Cash flows from investing activities:
                       
Distributions from unconsolidated entities
    60,201       67,444       107,978  
Investments in unconsolidated entities
    (217,541 )     (58,229 )     (161,926 )
Investments in subsidiaries, net of cash acquired
          (65,779 )     (31,172 )
Increase in loans held for investment
    (13,728 )            
Proceeds from the sale of subsidiaries and equity investments
          49,216       142,866  
Proceeds from the sale of fixed assets
    19,767       19,091       5,858  
Capital expenditures
    (70,116 )     (98,629 )     (88,887 )
 
                 
 
                       
Net cash used in investing activities
    (221,417 )     (86,886 )     (25,283 )
 
                 
 
                       
Cash flows from financing activities:
                       
Net borrowings (repayments) under Financial Services credit arrangements
    (374,096 )     (78,294 )     275,586  
Proceeds from other borrowings
          150,000       695,358  
Repayment of other borrowings
    (74,687 )     (19,757 )     (125,000 )
Excess tax benefits from share-based awards
    523       6,696        
Issuance of common stock
    7,862       8,350       31,248  
Stock repurchases
    (6,245 )     (122,295 )     (143,246 )
Dividends paid
    (40,997 )     (40,879 )     (33,550 )
 
                 
 
                       
Net cash provided by (used in) financing activities
    (487,640 )     (96,179 )     700,396  
 
                 
 
                       
Effect of exchange rate changes on cash and equivalents
    (179 )     (385 )     333  
 
                       
Net increase (decrease) in cash and equivalents
    509,019       (450,976 )     694,150  
Cash and equivalents at beginning of year
    551,292       1,002,268       308,118  
 
                 
 
                       
Cash and equivalents at end of year
  $ 1,060,311     $ 551,292     $ 1,002,268  
 
                 
 
                       
Supplemental Cash Flow Information:
                       
Cash paid during the year for:
                       
Interest, net of amounts capitalized
  $ 14,533     $ 17,483     $ 42,789  
 
                 
Income taxes paid (received), net
  $ (72,364 )   $ 718,695     $ 747,325  
 
                 
See Notes to Consolidated Financial Statements.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
     Basis of presentation
     The consolidated financial statements include the accounts of Pulte Homes, Inc., all of its direct and indirect subsidiaries (the “Company”) and variable interest entities in which the Company is deemed to be the primary beneficiary. The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”), and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (“International”), and other subsidiaries that are engaged in the homebuilding business. The Company also has a mortgage banking company, Pulte Mortgage LLC (“Pulte Mortgage”), which is a subsidiary of Pulte Home Corporation.
     Use of estimates
     The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
     Reclassification
     Certain prior period amounts have been reclassified to conform to the current year presentation.
     Foreign currency
     The financial statements of the Company’s foreign subsidiaries in Argentina and Mexico were measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries were translated at exchange rates as of the balance sheet date. Revenues and expenses were translated at average exchange rates in effect during the year. Realized foreign currency transaction gains and losses have been included in the Consolidated Statements of Operations. Realized foreign currency transaction (gains) losses were not significant during the years ended December 31, 2007 and 2006. For the year ended December 31, 2005, realized foreign currency transaction gains were $1.6 million and were recorded in income from discontinued operations.
     Cash and equivalents
     Cash and equivalents includes commercial paper and time deposits with a maturity of three months or less when acquired. Additionally, the Company holds cash that is restricted as to its use. Restricted cash primarily consists of customer deposits on home sales which are temporarily restricted by regulatory requirements until title transfers to the homebuyer. At December 31, 2007 and 2006, the balance of restricted cash was $20 million and $17.3 million, respectively.
     Investments in unconsolidated entities
     The equity method of accounting is used for joint ventures and associated entities over which the Company has significant influence; generally this represents partnership equity or common stock ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, the Company recognizes its pro rata share of the profits and losses of these entities. Certain of these entities sell land to the Company. Profits from such activities are deferred by the Company until the time the related homes are sold.
     The cost method of accounting is used for investments in which the Company has less than a 20% ownership interest and does not have the ability to exercise significant influence.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Goodwill
     Goodwill, which represents the cost of acquired companies in excess of the fair value of the net assets at the acquisition date, has been recorded in prior years in connection with various acquisitions. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, annually in the fourth quarter and when events or changes in circumstances indicate the carrying amount may not be recoverable, management evaluates the recoverability of goodwill by comparing the carrying value of the Company’s reporting units to their fair value.
     Due to a significant deterioration in market conditions, a continuation of significant impairments and land-related charges, and a steep decline in the market price of the Company’s common stock to a level significantly below its book value, the Company performed a detailed evaluation of goodwill as of September 30, 2007. Management evaluated the recoverability of goodwill by comparing the carrying value of the Company’s reporting units to their fair value. Fair value was determined based on discounted future cash flows supplemented by a market-based assessment of fair value for each reporting unit. These cash flows are significantly impacted by estimates related to current market valuations, current and future economic conditions in each of the Company’s geographical markets, and the Company’s strategic plans within each of its markets. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates. Additionally, future changes in any of these factors could result in future impairments of the remaining goodwill.
     The evaluation as of September 30, 2007 resulted in an impairment charge of $335.6 million. During the fourth quarter of 2007, the Company performed its annual goodwill impairment test and determined that goodwill related to the Florida segment had become impaired as the result of continued deterioration in market conditions. This resulted in an additional impairment charge of $34.4 million. The Company’s goodwill balances by reporting segment as of December 31, 2007 and 2006 were as follows ($000’s omitted):
                         
    Balance at             Balance at  
    December 31,             December 31,  
    2006     Impairments     2007  
Northeast
  $ 2,729     $ (2,729 )   $  
Southeast
    4,954             4,954  
Florida
    34,414       (34,414 )      
Midwest
    18,316       (18,316 )      
Central
    4,493       (4,493 )      
Southwest
    218,966       (218,966 )      
California
    91,105       (91,105 )      
Financial Services
    700             700  
 
                 
 
                       
Total goodwill
  $ 375,677     $ (370,023 )   $ 5,654  
 
                 

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Intangible assets
     Intangible assets consist primarily of trademarks and tradenames acquired in connection with the 2001 acquisition of Del Webb and are included in the assets of the Company’s Homebuilding operations. These intangible assets were valued at the acquisition date utilizing proven valuation procedures and are being amortized on a straight-line basis over a 20-year life. The acquired cost and accumulated amortization of the Company’s intangible assets were $163 million and $52.3 million, respectively, at December 31, 2007 and $163.5 million and $44.5 million, respectively, at December 31, 2006. Amortization expense was $8.2 million in each of the years ended December 31, 2007, 2006, and 2005. Amortization expense for trademarks and tradenames is expected to be $8.2 million in each of the next five years.
     Intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. If impairment indicators exist, an assessment of undiscounted future cash flows for the assets related to these intangibles is evaluated accordingly. If the results of the analysis indicate impairment, the assets are adjusted to fair market value. During the years ended December 31, 2007, 2006, and 2005, there were no impairments of intangible assets.
     Fixed assets and depreciation
     Fixed assets are recorded at cost. Maintenance and repair costs are charged to earnings as incurred. Depreciation is computed principally by the straight-line method based upon estimated useful lives as follows: vehicles, three to seven years, model and office furniture, two to three years, and equipment, three to ten years. Fixed assets are included in Other Assets and totaled $123.9 million net of accumulated depreciation of $217.1 million at December 31, 2007 and $164.7 million net of accumulated depreciation of $180.2 million at December 31, 2006. Total depreciation expense for the years ended December 31, 2007, 2006, and 2005 was $75.6 million, $75.4 million, and $53.3 million, respectively.
     Advertising cost
     The Company expenses advertising costs as incurred. For the years ended December 31, 2007, 2006, and 2005, the Company incurred advertising costs of approximately $104.3 million, $106 million, and $94.1 million, respectively.
     Employee benefits
     The Company maintains a defined contribution plan that covers substantially all of the Company’s employees. Company contributions pursuant to the plan were approximately $21 million, $23.5 million, and $19.8 million for the years ended December 31, 2007, 2006, and 2005, respectively.
     Insurance
     The Company has, and requires the majority of its subcontractors to have, general liability, property, errors and omissions, workers’ compensation, and other business insurance. These insurance policies protect the Company against a portion of its risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. Through its captive insurance subsidiaries, the Company reserves for costs to cover its self-insured and deductible amounts under those policies and for any costs of claims and lawsuits, based on an analysis of the Company’s historical claims, which includes an estimate of claims incurred but not yet reported. The Company’s total reserves for such items were $352.5 million and $215.7 million at December 31, 2007 and 2006, respectively. Expenses, including estimates for claims not yet reported, were $141.2 million, $89.1 million, and $64.4 million for the years ended December 31, 2007, 2006, and 2005, respectively. The Company experienced increases in insurance-related expenses in 2007 and 2006 primarily due to the development of general liability product claims.
     Since January 1, 2006, the Company is self-insured for certain of its medical and dental claims and reserves for costs to cover its liability for such claims, based on analysis of historical claims, which include an estimate of claims incurred but not yet reported. The Company’s total reserves for such items were $4.2 million and $6.3 million at December 31, 2007 and 2006, respectively.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Earnings per share
     Basic earnings per share is computed by dividing income available to common shareholders (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and non-vested shares of restricted stock. Any options that have an exercise price greater than the average market price are considered to be anti-dilutive, and are excluded from the diluted earnings per share calculation. For the year ended December 31, 2007, all stock options and non-vested restricted stock were excluded from the calculation as they were anti-dilutive due to the net loss recorded during the period. The Company excluded from the calculation 4,707,900 and 161,109 anti-dilutive outstanding stock options for the years ended December 31, 2006 and 2005, respectively.
     Fair values of financial instruments
The carrying amounts of cash and equivalents approximate their fair values due to their short-term nature.
     The fair value of residential mortgage loans available-for-sale is estimated using quoted market prices for securities backed by similar loans. Fair value exceeded cost by approximately $7.9 million and $7.3 million at December 31, 2007 and 2006, respectively.
     Carrying amounts for financial derivative instruments reported in the balance sheet approximate fair value as the amounts reported are based on current market prices. The estimated fair values of financial instruments were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret the market data and develop the estimated fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Changes in the fair value of these instruments would not have a significant impact on the Company’s results of operations. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. At December 31, 2007, derivative assets, included in Other Assets in the Consolidated Balance Sheets, totaled $2.5 million and derivative liabilities, included in Accrued and Other Liabilities, totaled $4.8 million. At December 31, 2006, derivative assets totaled $5.2 million and derivative liabilities totaled $3.2 million.
     The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues.
     Disclosures about the fair value of financial instruments are based on pertinent information available to management as of December 31, 2007. Although management is not aware of any factors that would significantly affect the reasonableness of the fair value amounts, such amounts were not comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
     Stock-based compensation
     Prior to January 1, 2006, the Company accounted for its stock-based awards under the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under the prospective method, the Company recognized compensation expense on an accelerated basis over the vesting period based on the fair value provisions of SFAS No. 123.
     As of January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS Statement No. 95, “Statement of Cash Flows.” The Company adopted SFAS 123(R) using the modified prospective method of transition. Accordingly, prior periods have not been restated. The adoption of SFAS 123(R) did not have a significant effect on basic and diluted earnings per share for the year ended December 31, 2006.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Stock-based compensation (continued)
     Prior to the adoption of SFAS No. 123(R), the Company presented all benefits of the tax deductions resulting from the exercise of share-based compensation as operating cash flows in its Consolidated Statements of Cash Flows. SFAS 123(R) requires classification of the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) as financing cash flows. As a result, the Company classified $523 thousand and $6.7 million of excess tax benefits as financing cash inflows for the years ended December 31, 2007 and 2006, respectively.
     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) to all stock-based employee compensation for the year ended December 31, 2005 (000’s omitted, except per share data):
         
Net income, as reported
  $ 1,491,913  
 
       
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
    14,705  
 
       
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (16,119 )
 
     
 
       
Pro forma net income
  $ 1,490,499  
 
     
 
       
Earnings per share:
       
 
       
Basic — as reported
  $ 5.84  
 
     
Basic — pro forma
  $ 5.83  
 
     
 
       
Diluted — as reported
  $ 5.68  
 
     
Diluted — pro forma
  $ 5.67  
 
     
     The Company also recorded compensation expense for restricted stock awards, net of related tax effects, of $13.3 million for the year ended December 31, 2005. These amounts have been excluded from the reconciliation above, as they would have no impact on pro forma net income presented.
     The Company measures compensation cost for its stock options at fair value on the date of grant and recognizes compensation cost on the graded vesting method over the vesting period, generally four years. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in greater expense in earlier years than the straight-line method. The fair value of the Company’s stock options is determined using the Black-Scholes valuation model. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company’s common stock. Compensation expense related to the Company’s share-based awards is generally included in selling, general, and administrative expense within the Company’s Consolidated Statements of Operations.
     Restructuring
     In response to the challenging operating environment, the Company initiated a restructuring plan in May 2007 designed to reduce ongoing overhead costs and improve operating efficiencies. The restructuring included the closure of selected divisional offices, the disposal of related property and equipment, and a reduction in the Company’s workforce of approximately 1,700 employees. Included below is a summary of charges incurred related to the restructuring for the year ended December 31, 2007 ($000’s omitted):
         
    2007  
Employee severance benefits
  $ 32,023  
Asset impairments
    5,362  
Lease terminations and other exit costs
    8,320  
 
     
 
  $ 45,705  
 
     

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Restructuring (continued)
     Substantially all of these costs have been included in the Consolidated Statements of Operations within Homebuilding expense. The Company expects cash expenditures related to this restructuring plan to total approximately $40 million. The majority of these cash expenditures relates to employee severance benefits and were incurred during 2007. The remaining cash expenditures will be incurred over the remaining terms of the affected office leases, some of which continue through 2014. Liabilities related to these exited leases totaled $6.0 million at December 31, 2007. The restructuring costs related to each of the Company’s reportable segments and were not material to any one segment.
     In connection with the closure of its production facility located in Virginia, the Company recorded an $18.5 million charge during 2006, which primarily includes the write-down of long-lived assets of $6.7 million, lease termination costs of $10.7 million, and other exit costs of $1.1 million. These costs have been included in the Consolidated Statements of Operations within Homebuilding expense. Exit activities related to the plant closure continued during 2007 resulting in additional charges of $2.3 million. Exit liabilities related to the closure totaled $7.3 million at December 31, 2007.
     New accounting pronouncements
     In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB No. 109, which revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments,” specifically states that the expected net future cash flows related to the associated servicing of a loan should be included in the measurements of all written loan commitments that are recorded at fair value through earnings. The provisions of SAB 109 are applicable to written loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company is currently evaluating the effects of SAB 109 on its consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159), which permits entities to measure various financial instruments and certain other items at fair value at specified election dates. The election must be made at initial recognition of the financial instrument, and any unrealized gains or losses must be reported at each reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effects of SFAS 159 on its consolidated financial statements.
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position FAS 157-2 (FSP FAS 157-2) that delays, by one year, the effective date of SFAS 157 for the majority of non-financial assets and non-financial liabilities. The Company is still required to adopt SFAS 157 as of January 1, 2008 for certain assets and liabilities of its Financial Services operations. The Company is currently evaluating the effects of SFAS 157 and FSP FAS 157-2 on its consolidated financial statements.
     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which provides an approach to simplify efforts to obtain hedge-like (offset) accounting.  This new Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities.  The Company adopted SFAS 156 effective January 1, 2007. Due to the short period of time the Company’s servicing rights are held, the adoption of SFAS 156 did not have a significant impact on the Company’s consolidated financial statements.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Homebuilding
     Revenue recognition
     Homebuilding revenue and related profit are generally recognized at the time of the closing of the sale, when title to and possession of the property are transferred to the buyer. In situations where the buyer’s financing is originated by Pulte Mortgage, the Company’s wholly-owned mortgage subsidiary, and the buyer has not made an adequate initial or continuing investment as required by SFAS No. 66, “Accounting for Sales of Real Estate,” the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor has been completed. At December 31, 2007 and 2006, the Company had deferred profit on such sales in the amounts of $3.8 million and $40.7 million, respectively.
     Inventories
     Inventories are stated at accumulated cost unless certain facts indicate such cost would not be recovered from the cash flows generated by future disposition. In this instance, such inventories are measured at fair value in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (SFAS 144). Accumulated cost includes costs associated with land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction.
     Sold units are expensed on a specific identification basis. Under the specific identification basis, cost of sales includes the construction cost of the home, an average lot cost based on expected land acquisition and development costs for the project, as well as closing costs and commissions applicable to the home. Construction cost of the home includes amounts paid through the closing date of the home, plus an appropriate accrual for costs incurred but not yet paid, based on an analysis of budgeted construction cost. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Total project land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. Adjustments to estimated total land acquisition and development costs for the project affect the amounts costed for the project’s remaining lots.
     Land, not owned, under option agreements
     In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, the Company will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended by FIN 46-R issued in December 2003 (collectively referred to as “FIN 46”), if the entity holding the land under option is a variable interest entity, the Company’s deposit represents a variable interest in that entity. Creditors of the variable interest entities have no recourse against the Company.
     In applying the provisions of FIN 46, the Company evaluated all land option agreements and determined that the Company was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, the Company is required to consolidate variable interest entities at a fair value. At December 31, 2007 and 2006, the Company classified $20.8 million and $43.6 million, respectively, as land, not owned, under option agreements in the Consolidated Balance Sheets, representing the fair value of land under contract, including deposits of $169 thousand and $6 million, respectively. The corresponding liability has been classified within accrued and other liabilities in the Consolidated Balance Sheets.
     Land option agreements that did not require consolidation under FIN 46 at December 31, 2007 and 2006 had a total purchase price of $1.6 billion and $4.3 billion, respectively. In connection with these agreements, the Company had deposits and advanced costs of $226 million and $363.5 million, included in Other Assets at December 31, 2007 and 2006, respectively.
     Land held for sale
     Land held for sale is recorded at the lower of cost or fair value less costs to sell.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Homebuilding (continued)
     Allowance for warranties
     Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. The Company estimates the costs to be incurred under these warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded allowance for warranties and adjusts the amount as necessary.
     Changes to the Company’s allowance for warranties for the years ended December 31, 2007 and 2006 were as follows ($000’s omitted):
                 
    2007     2006  
January 1
  $ 117,260     $ 124,371  
 
               
Warranty reserves provided
    71,778       164,770  
Payments and other adjustments
    (98,121 )     (171,881) )
 
           
 
               
December 31
  $ 90,917     $ 117,260  
 
           
     Start-up costs
     Costs and expenses associated with entry into new homebuilding markets and opening new communities in existing markets are expensed when incurred.
     Financial Services
     Mortgage servicing rights
     The Company records the fair value of its rights to service a mortgage loan on the date the loan is sold. Fair value is determined based on values in the Company’s servicing sales contract.
     The Company sells its servicing rights monthly on a flow basis through fixed price servicing sales contracts. Due to the short period of time the servicing rights are held, the Company does not amortize the servicing asset. Furthermore, there are no impairment issues since the servicing rights are recorded based on the value in the servicing sales contracts. The servicing sales contracts provide for the reimbursement of payments made by the purchaser if loans prepay within specified periods of time, usually 90 days after sale or securitization. The Company establishes reserves for this liability at the time the sale is recorded. Such reserves totaled $5.1 million and $5.5 million at December 31, 2007 and 2006, respectively, and are included in accrued and other liabilities. During 2007, 2006, and 2005, total servicing rights recognized were $46 million, $43.5 million, and $31.7 million, respectively.
     Residential mortgage loans available-for-sale
     Residential mortgage loans available-for-sale are stated at the lower of aggregate cost or market value. Unamortized net mortgage discounts totaled $3 million and $6.9 million at December 31, 2007 and 2006, respectively. These discounts are not amortized as interest revenue during the period the loans are held for sale.
     Gains and losses from sales of mortgage loans are recognized when the loans are sold. The Company hedges its residential mortgage loans available-for-sale. Gains and losses from closed commitments and forward contracts are matched against the related gains and losses on the sale of mortgage loans. During 2007, 2006, and 2005, net gains from the sale of mortgages were $75.5 million, $110.8 million, and $81.1 million, respectively, which have been included in Financial Services revenue.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Financial Services (continued)
     Loans held for investment
     The Company originates interim financing mortgage loans for certain of the Company’s customers and also has a portfolio of loans that either have been repurchased from investors or were not saleable upon closing. These loans are carried at cost and reviewed for impairment when recoverability becomes doubtful. Loans held for investment are included in Other Assets and totaled $42.6 million (net of reserves of $2.9 million) at December 31, 2007.
     Interest income on mortgage loans
     Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan.
     Mortgage servicing, origination, and commitment fees
     Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing, and are credited to income when related mortgage payments are received. Loan origination fees, commitment fees, and certain direct loan origination costs on funded loans are deferred as an adjustment to the cost of the related mortgage loan until such loan is sold.
     Title services
     Revenues associated with the Company’s title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. The Company maintains only limited risk associated with issued title insurance policies.
     Derivative instruments and hedging activities
     The Company recognizes all of its derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge.
     For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.
     Market risks arise from commitments to lend, movements in interest rates and cancelled or modified commitments to lend. In order to reduce these risks, the Company uses derivative financial instruments. These financial instruments include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury futures contracts, and options on cash forward placement contracts on mortgage-backed securities. The Company does not use any derivative financial instruments for trading purposes. A commitment to lend at a specified interest rate is a derivative instrument (interest rate is locked to the borrower). When the Company commits to lend to the borrower, the Company enters into one of the aforementioned derivative financial instruments to economically hedge the rate lock derivative. The changes in the value of the loan commitment and the derivative financial instrument are recognized in current earnings during the period of change. At December 31, 2007, commitments by the Company to originate mortgage loans totaled $122.5 million at interest rates prevailing at the date of commitment.
     Since the Company can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. The Company evaluates the creditworthiness of these transactions through its normal credit policies.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of significant accounting policies (continued)
     Financial Services (continued)
     Derivative instruments and hedging activities (continued)
     Cash forward placement contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price and may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. Options on treasury futures contracts and options on mortgage-backed securities grant the purchaser, for a premium payment, the right to either purchase or sell a specified treasury futures contract or a specified mortgage-backed security, respectively, for a specified price within a specified period of time or on a specified date from or to the writer of the option.
     Mandatory cash forward contracts on mortgage-backed securities are the predominant derivative financial instruments used to minimize the market risk during the period from when the Company extends an interest rate lock to a loan applicant until the time the loan is sold to an investor. Whole loan investor commitments are obligations of the investor to buy loans at a specified price within a specified time period. At December 31, 2007, the Company had unexpired cash forward contracts and whole loan investor commitments of $537.7 million. Options on cash forward contracts on mortgage-backed securities are used in the same manner as mandatory cash forward contracts, but provide protection from interest rates rising, while still allowing an opportunity for profit if interest rates fall. Options on the treasury futures contracts are used on various loan product types to protect the Company from unexpected increases, cancellations, or modifications in lending commitments. There were no outstanding options on treasury futures contracts at December 31, 2007.
     The Company enters into derivative instruments to hedge portions of its forecasted cash flow from sales of mortgage-backed securities. At December 31, 2007, the maximum length of time that the Company was exposed to the variability in future cash flows of derivative instruments was approximately 75 days. During the year ended December 31, 2007, the Company did not recognize any material net gains or losses related to an ineffective portion of the hedging instrument. In addition, the Company did not recognize any material net gains or losses during the year ended December 31, 2007 for cash flow hedges that were discontinued because the forecasted transaction did not occur. At December 31, 2007, the Company expects to reclassify $1 million, net of taxes, of net losses on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months as sales of mortgage-backed securities occur.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Inventory and land held for sale
     Major components of the Company’s inventory at December 31, 2007 and 2006 were ($000’s omitted):
                 
    2007     2006  
Homes under construction
  $ 2,115,102     $ 2,606,613  
Land under development
    3,656,623       5,478,244  
Land held for future development
    1,255,786       1,289,478  
 
           
 
               
 
  $ 7,027,511     $ 9,374,335  
 
           
     The Company capitalizes interest cost into homebuilding inventories. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated over the period based on the cyclical timing of unit settlements. Interest expense for the years ended December 31, 2007 and 2006 includes $110.8 million and $16 million, respectively, of capitalized interest related to inventory impairments. For the year ended December 31, 2005, the Company did not record interest expense related to inventory impairments. Information related to interest capitalized into homebuilding inventory is as follows ($000’s omitted):
                         
    Years Ended December 31,  
    2007     2006     2005  
Interest in inventory at beginning of period
  $ 235,596     $ 229,798     $ 223,591  
Interest capitalized
    240,000       261,486       185,792  
Interest expensed
    (314,998 )     (255,688 )     (179,585 )
 
                 
 
                       
Interest in inventory at end of period
  $ 160,598     $ 235,596     $ 229,798  
 
                 
 
                       
Interest incurred *
  $ 243,864     $ 266,561     $ 234,024  
 
                 
 
*   Interest incurred includes interest on our senior debt, short-term borrowings, and other financing arrangements and excludes interest incurred by our financial services operations.
     Land valuation adjustments and write-offs
     Impairment of long-lived assets
     In accordance with SFAS 144, the Company records valuation adjustments on land inventory and related communities under development when events and circumstances indicate that they may be impaired and when the cash flows estimated to be generated by those assets are less than their carrying amounts. Such indicators include gross margin or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. For communities that are not yet active, a significant additional consideration includes an evaluation of the regulatory environment related to the probability, timing, and cost of obtaining necessary approvals from local municipalities and any potential concessions that may be necessary in order to obtain such approvals. The Company also considers potential changes to the product offerings in a community and any alternative strategies for the land, such as the sale of the land either in whole or in parcels. The weakened market conditions that arose during 2006 persisted through 2007 and resulted in lower than expected net new orders, revenues, and gross margins and higher than expected cancellation rates during 2007. As a result, a portion of the Company’s land inventory and communities under development demonstrated potential impairment indicators and were accordingly tested for impairment. As required by SFAS 144, the Company compared the expected undiscounted cash flows for these communities to their carrying value. For those communities whose carrying values exceeded the expected undiscounted cash flows, the Company calculated the fair value of the community. Impairment charges are required to be recorded if the fair value of the community’s inventory is less than its carrying amount. The Company determined the fair value of the community’s inventory using a discounted cash flow model. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sale incentives, expected sales paces and cancellation rates, expected land development construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, and the long life cycles of many communities, actual results could differ significantly from such estimates. The Company’s determination of fair value also requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with each of the assets and related estimated cash flow streams. The discount rate used in determining each community’s fair value depends on the stage

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Inventory and land held for sale (continued)
     Land valuation adjustments and write-offs (continued)
     Impairment of long-lived assets (continued)
of development of the community and other specific factors that increase or decrease the inherent risks associated with the community’s cash flow streams. For example, communities that are entitled and near completion will generally require a lower discount rate than communities that are not entitled and consist of multiple phases spanning several years of development and construction activity.
     The table below provides, as of the date indicated, the number of communities in which the Company recognized impairment charges, the fair value of those communities at such date (net of impairment charges), and the amount of impairment charges recognized ($000’s omitted).
                                                 
    2007     2006  
            Fair Value of                     Fair Value of        
            Communities                     Communities        
    Number of     Impaired, Net             Number of     Impaired, Net        
    Communities     of Impairment     Impairment     Communities     of Impairment     Impairment  
Quarter Ended   Impaired     Charges     Charges     Impaired     Charges     Charges  
March 31
    35     $ 161.9     $ 62.4       1     $ 0.1     $ 0.1  
June 30
    139       695.8       603.1       3       9.1       9.3  
September 30
    169       822.4       615.9       27       144.1       48.4  
December 31
    120       483.4       322.3       53       286.0       146.0  
 
                                           
 
                                               
 
                  $ 1,603.7                     $ 203.8  
 
                                           
     The Company recorded these valuation adjustments in its Consolidated Statements of Operations within Homebuilding expense. For the year ended December 31, 2007, the Company reviewed each of its land positions for potential impairment indicators and performed detailed impairment calculations for over 400 communities. The discount rate used in the Company’s determination of fair value for the impaired communities ranged from 8% to 21% with an aggregate average of 12%. The communities impaired during 2007 included approximately 50 of the Company’s long-lived active adult communities. In the event that market conditions or the Company’s operations deteriorate in the future or the current difficult market conditions extend beyond its expectations, additional impairments may be necessary in the future.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Inventory and land held for sale (continued)
     Land valuation adjustments and write-offs (continued)
     Net realizable value adjustments – land held for sale
     In accordance with SFAS 144, the Company values long-lived assets held for sale at the lower of carrying amount or fair value less costs to sell. The Company records these net realizable value adjustments in its Consolidated Statements of Operations within Homebuilding expense. As a result of changing market conditions in the real estate industry, a portion of the Company’s land held for sale was written down to net realizable value. During the years ended December 31, 2007, 2006, and 2005, the Company recognized net realizable value adjustments related to land held for sale of $199.3 million, $54.6 million, and $3.1 million, respectively. The Company’s land held for sale balance at December 31, 2007 and 2006 was as follows ($000’s omitted):
                 
    2007     2006  
Land held for sale, gross
  $ 347,758     $ 507,134  
Net realizable value reserves
    (95,195 )     (41,311 )
 
           
 
               
Land held for sale, net
  $ 252,563     $ 465,823  
 
           
     Write-off of deposits and other related costs
     From time to time, the Company writes off certain deposits and other costs related to land option contracts the Company no longer plans to pursue. Such decisions take into consideration changes in national and local market conditions, the willingness of land sellers to modify terms of the related purchase agreement, the timing of required land takedowns, the availability and best use of necessary incremental capital, and other factors. The Company wrote off deposits and other related costs in the amount of $239.7 million, $151.2 million, and $19.2 million during the years ended December 31, 2007, 2006, and 2005, respectively. The Company records these write-offs of deposits and other related costs for land option contracts the Company no longer plans to pursue in its Consolidated Statements of Operations within Homebuilding expense.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment information
     The Company’s Homebuilding operating segments are engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for first-time, first and second move-up, and active adult home buyers. Home sale revenues for detached and attached homes were $6.9 billion and $2 billion in 2007, $11 billion and $3 billion in 2006, and $11.2 billion and $3.2 billion in 2005, respectively.
     The Company has determined that its Homebuilding operating segments are its Areas, which are aggregated into seven reportable segments based on similarities in the economic and geographic characteristics of the Company’s homebuilding operations. During 2007, the Company realigned the organizational structure for certain of its markets. The operating data by segment provided in this note have been reclassified to conform to the current presentation. Accordingly, the Company’s reportable Homebuilding segments are as follows:
     
Northeast:
  Northeast Area includes the following states:
 
  Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
New York, Pennsylvania, Virginia
 
   
Southeast:
  Southeast Area includes the following states:
 
  Georgia, North Carolina, South Carolina, Tennessee
 
   
Florida:
  Florida Area includes the following state:
 
  Florida
 
   
Midwest:
  Great Lakes Area includes the following states:
 
  Colorado, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Ohio
 
   
Central:
  Texas Area includes the following state:
 
  Texas
 
   
Southwest:
  Southwest Area includes the following states:
 
  Arizona, Nevada, New Mexico
 
   
*California:
  Northern California and Southern California Areas include the following state:
 
  California
 
*   The Company’s homebuilding operations located in Reno, Nevada are reported in the California segment, while its Nevada homebuilding operations are reported in the Southwest segment.
     The Company also has one reportable segment for its financial services operations which consists principally of mortgage banking and title operations conducted through Pulte Mortgage and other Company subsidiaries. The Company’s Financial Services segment operates generally in the same markets as the Company’s Homebuilding segments.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment information (continued)
     Evaluation of segment performance is based on operating earnings from continuing operations before provision for income taxes which, for the Homebuilding segments, is defined as home sales (settlements) and land sale revenues less home cost of sales, land cost of sales, and certain selling, general, and administrative and other expenses, plus equity income from unconsolidated entities, which are incurred by or allocated to the Homebuilding segments. Operating earnings for the Financial Services segment is defined as revenues less costs associated with the Company’s mortgage operations and certain selling, general, and administrative expenses incurred by or allocated to the Financial Services segment.
     Each reportable segment generally follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements.
                         
    Operating Data by Segment ($000’s omitted)  
    Years Ended December 31,  
    2007     2006     2005  
Revenues:
                       
Northeast
  $ 1,121,636     $ 1,663,123     $ 1,868,900  
Southeast
    1,175,467       1,260,393       994,785  
Florida
    1,180,170       2,212,867       2,271,050  
Midwest
    1,189,638       1,651,885       2,056,707  
Central
    611,384       935,890       839,484  
Southwest
    2,367,597       3,700,488       3,277,424  
California
    1,475,838       2,650,602       3,219,886  
 
                 
 
                       
Total Homebuilding
    9,121,730       14,075,248       14,528,236  
 
                       
Financial Services
    134,769       194,596       161,414  
 
                       
Corporate and unallocated (a)
    6,595       4,564       4,885  
 
                 
 
                       
Consolidated revenues
  $ 9,263,094     $ 14,274,408     $ 14,694,535  
 
                 
 
                       
Income (loss) from continuing operations before income taxes:
                       
 
                       
Northeast
  $ (149,793 )   $ 127,376     $ 326,399  
Southeast
    72,799       88,162       86,683  
Florida
    (347,587 )     381,924       475,939  
Midwest
    (339,193 )     (90,695 )     140,232  
Central
    (121,351 )     16,038       10,560  
Southwest
    (249,173 )     714,185       745,163  
California
    (545,369 )     107,368       654,940  
Financial Services (b)
    42,980       115,460       70,586  
 
                 
 
                       
Total segment income (loss) before income taxes
    (1,636,687 )     1,459,818       2,510,502  
 
                       
Corporate and unallocated (c)
    (860,216 )     (377,090 )     (233,488 )
 
                 
 
                       
Consolidated income (loss) from continuing operations before income taxes (d)
  $ (2,496,903 )   $ 1,082,728     $ 2,277,014  
 
                 
 
(a)   Corporate and unallocated includes interest income earned from short-term investments of cash and equivalents.
 
(b)   Financial Services income from continuing operations before income taxes includes interest expense of $16.5 million, $23.7 million, and $16 million for 2007, 2006, and 2005, respectively, and interest income of $21.8 million, $33.5 million, and $26 million for 2007, 2006, and 2005, respectively.
 
(c)   Corporate and unallocated includes amortization of capitalized interest of $315 million, $255.7 million, and $179.6 million for 2007, 2006, and 2005, respectively; goodwill impairment of $370 million for 2007; and shared services that benefit all operating segments, the costs of which are not allocated to the operating segments reported above.
 
(d)   Consolidated income (loss) from continuing operations before income taxes includes selling, general, and administrative expenses of $1.2 billion, $1.3 billion, and $1.2 billion for 2007, 2006, and 2005, respectively.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment information (continued)
                         
    Valuation Adjustments and Write-Offs by Segment  
    ($000’s omitted)  
    Years Ended December 31,  
    2007     2006     2005  
Land and community valuation adjustments:
                       
Northeast
  $ 116,418     $ 22,206     $  
Southeast
    17,089       1,083        
Florida
    283,919       22,715        
Midwest
    240,380       73,152       7,110  
Central
    97,615       3,269       608  
Southwest
    335,044       9,774        
California
    398,717       55,569        
Corporate and unallocated (a)
    114,473       16,000        
 
                 
Total valuation adjustments
  $ 1,603,655     $ 203,768     $ 7,718  
 
                 
 
                       
Net realizable value adjustments (NRV) — land held for sale:
                       
Northeast
  $ 16,051     $ 3,204     $  
Southeast
    6,652             14  
Florida
    27,633       5,596        
Midwest
    103,374       29,784       314  
Central
    19,140       8,679       2,756  
Southwest
    14,859       7,014        
California
    11,538       293        
 
                 
Total NRV adjustments – land held for sale
  $ 199,247     $ 54,570     $ 3,084  
 
                 
 
                       
Write-off of deposits and other related costs (b):
                       
Northeast
  $ 60,863     $ 33,798     $ 2,931  
Southeast
    3,114       4,514       2,194  
Florida
    46,763       25,108       1,119  
Midwest
    10,940       31,644       7,590  
Central
    5,302       3,987       1,767  
Southwest
    54,870       21,013       2,283  
California
    57,864       33,102       2,548  
Corporate and unallocated
          (1,981 )     (1,237 )
 
                 
Total write-off of deposits and other related costs
  $ 239,716     $ 151,185     $ 19,195  
 
                 
 
                       
Impairments of investments in unconsolidated joint ventures:
                       
Southwest
  $ 59,075     $     $  
California
    128,303       95,400        
Corporate and unallocated (c)
    2,485              
 
                 
Total joint venture impairments
  $ 189,863     $ 95,400     $  
 
                 
 
(a)   Includes $110.8 million and $16 million, respectively, of write-offs of capitalized interest related to land and community valuation adjustments recorded during the years ended December 31, 2007 and 2006 and $3.7 million of land and community valuation adjustments related to our Puerto Rico operations.
 
(b)   Includes settlements related to costs previously in dispute and considered non-recoverable.
 
(c)   Includes impairments of $2.5 million related to joint ventures located in Puerto Rico.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment information (continued)
                         
    Operating Data by Segment ($000’s omitted)  
    Years Ended December 31,  
    2007     2006     2005  
Depreciation and amortization:
                       
Northeast
  $ 4,170     $ 4,674     $ 3,382  
Southeast
    5,255       3,169       2,185  
Florida
    11,421       10,351       6,737  
Midwest
    5,068       5,919       4,348  
Central
    3,406       3,705       2,611  
Southwest
    15,531       11,657       7,411  
California
    10,547       10,342       8,110  
Financial Services
    9,559       8,686       6,565  
Corporate and unallocated (a)
    18,895       25,172       20,163  
 
                 
Consolidated depreciation and amortization
  $ 83,852     $ 83,675     $ 61,512  
 
                 
 
(a)   Corporate and unallocated depreciation and amortization includes depreciation of corporate fixed assets and amortization of intangible assets.
                         
    Operating Data by Segment ($000’s omitted)  
    Years Ended December 31,  
    2007     2006     2005  
Equity income (loss) (a):
                       
Northeast
  $ 30     $     $ 466  
Southeast
                 
Florida
                 
Midwest
                 
Central
                 
Southwest
    (56,941 )     (997 )     20,757  
California
    (131,254 )     (95,958 )     (539 )
Financial Services
    361       32,331       2,745  
Corporate and unallocated (b)
    (2,218 )     1,712       51,921  
 
                 
Consolidated equity income (loss)
  $ (190,022 )   $ (62,912 )   $ 75,350  
 
                 
 
(a)   Includes impairments related to investments in unconsolidated joint ventures totaling $189.9 million and $95.4 million in 2007 and 2006, respectively.
 
(b)   For the year ended December 31, 2005, corporate and unallocated includes approximately $44.2 million of earnings related to the Company’s 50% joint venture that supplied and installed basic building components and operating systems. Effective January 2006, the Company exercised its option to purchase the remaining 50% interest in this entity.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Segment information (continued)
                 
    Assets     Inventory  
As of December 31, 2007:
               
Northeast
  $ 1,245,240     $ 1,053,403  
Southeast
    835,085       733,556  
Florida
    1,223,222       1,020,433  
Midwest
    678,638       622,779  
Central
    426,432       345,569  
Southwest
    2,173,718       2,032,818  
California
    1,190,970       1,062,277  
Financial Services
    559,915        
 
           
Total segment
    8,333,220       6,870,835  
Corporate and unallocated (a)
    1,892,483       156,676  
 
           
 
               
Consolidated
  $ 10,225,703     $ 7,027,511  
 
           
 
               
As of December 31, 2006:
               
Northeast
  $ 1,530,238     $ 1,167,454  
Southeast
    734,001       640,199  
Florida
    1,742,839       1,464,691  
Midwest
    1,239,968       1,071,216  
Central
    651,926       536,353  
Southwest
    2,811,614       2,500,739  
California
    1,953,240       1,761,000  
Financial Services
    951,206        
 
           
Total segment
    11,615,032       9,141,652  
Corporate and unallocated (a)
    1,561,842       232,683  
 
           
 
               
Consolidated
  $ 13,176,874     $ 9,374,335  
 
           
 
(a)   Corporate and unallocated primarily includes cash and equivalents; goodwill and intangibles; land, not owned, under option agreements; capitalized interest; and other corporate items that are not allocated to the operating segments.
4. Discontinued operations
First Heights
     In 2005, the Company completed the disposal of First Heights, its former bank subsidiary. During the years ended December 31, 2006 and 2005, after-tax income was $189 thousand and $56.5 million, respectively, and is included in income from discontinued operations. Income from discontinued operations for the year ended December 31, 2005 includes $7.8 million related to the recognition of income tax benefits resulting from the favorable resolution of certain tax matters. The Company also received payment in December 2005 of a $48.7 million judgment resulting from litigation related to First Heights’ 1988 acquisition from the Federal Savings and Loan Insurance Corporation and First Heights’ ownership of five failed thrifts. The payment was recorded as income from discontinued operations.
Mexico Homebuilding Operations
     In January 2005, the minority shareholders of Pulte Mexico S. de R.L. de C.V. (“Pulte Mexico”) exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to the Company, the consummation of which resulted in the Company owning 100% of Pulte Mexico. In March 2005, the Company purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million in cash. In June 2005, the Company purchased the remaining 40% of the minority interest of Pulte Mexico for approximately $12.5 million in cash. The Company assigned approximately $17.6 million of the purchase price premium to house and land inventory, which was amortized through cost of sales as homes were sold. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed, of $5.3 million, was recorded as goodwill.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Discontinued operations (continued)
Mexico Homebuilding Operations (continued)
     In December 2005, the Company sold substantially all of its Mexico homebuilding operations to a consortium of purchasers involved in residential and commercial real estate development. The Company realized cash of $131.5 million related to the sale. The sale of these operations did not include the Company’s investment in the capital stock of a mortgage company in Mexico as well as various non-operating entities, which are not considered to be material to the Company’s results of operations or its financial position.
     Revenues of these discontinued operations were $201 million for the year ended December 31, 2005. For the year ended December 31, 2005, discontinued Mexico homebuilding operations reported total after-tax losses of $1.5 million. For the year ended December 31, 2005, Mexico reported pre-tax operating income of $4.6 million.
     For the year ended December 31, 2005, the Company recognized a pre-tax loss of $6.6 million (after-tax loss of $13.1 million) related to the sale of its Mexico homebuilding operations. The pre-tax loss on sale includes the accounting recognition of the economic losses related to accumulated foreign currency translation adjustments of $7.6 million, as well as the write-off of $5.3 million of goodwill related to the January 2005 acquisition of the minority shareholder interests. For the year ended December 31, 2005, the Mexico operations have been presented as discontinued operations in the consolidated financial statements.
     Concurrent with the sale of its Mexico homebuilding operations, the Company elected to repatriate all of its earnings from its Mexico operations in accordance with the American Jobs Creation Act of 2004 (Internal Revenue Code Section 965, Temporary Dividends Received Deduction) and recorded $4.8 million of related income taxes, which have been included in the Mexico loss on sale from discontinued operations.
     For the year ended December 31, 2006, loss from discontinued operations included a provision of $2.3 million, net of taxes, which resulted from a contractual adjustment related to the December 2005 disposition of the Company’s Mexico homebuilding operations. For the year ended December 31, 2007, income from discontinued operations represents $18.7 million in refundable income taxes related to the Company’s investment in its discontinued Mexico homebuilding operations.
Argentina Operations
     In January 2005, the Company sold all of its Argentina operations to an Argentine company involved in residential and commercial real estate development. For the year ended December 31, 2006, loss from discontinued operations included a provision of $111 thousand, net of taxes, resulting from a contractual adjustment related to the disposition.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments in unconsolidated entities
     The Company participates in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop, and/or sell land and homes in the United States and Puerto Rico. A summary of the Company’s joint ventures is presented below ($000’s omitted):
                 
    December 31,  
    2007     2006  
Number of joint ventures with limited recourse guarantees
    4       5  
Number of joint ventures with debt non-recourse to Pulte
    4       3  
Number of other active joint ventures
    12       14  
 
           
Total number of active joint ventures
    20       22  
 
               
Investments in joint ventures with limited recourse guarantees
  $ 54,223     $ 68,361  
Investments in joint ventures with debt non-recourse to Pulte
    35,767       37,743  
Investments in other active joint ventures
    15,489       44,581  
 
           
Total investments in unconsolidated entities
  $ 105,479     $ 150,685  
 
               
Pulte’s proportionate share of joint venture debt:
               
Joint venture debt with limited recourse guarantees
  $ 124,529     $ 304,115  
Joint venture debt non-recourse to Pulte
    9,442       8,639  
 
           
Pulte’s total proportionate share of joint venture debt
  $ 133,971     $ 312,754  
 
               
Total joint venture debt
  $ 602,507     $ 935,888  
     The Company has committed through limited recourse guarantees that certain of the joint ventures will maintain specified loan to value ratios. Certain other joint venture agreements require the Company to guarantee the completion of a project if the joint venture does not perform the required development. Additionally, in the case of most joint ventures, the Company has agreed to indemnify the joint venture’s lenders for certain environmental contingencies, and most guarantee arrangements provide that the Company is responsible for its proportionate share of the outstanding debt if the joint venture voluntarily files for bankruptcy. The Company would not be responsible under these guarantees unless the joint venture was unable to meet its contractual borrowing obligations or in instances of fraud, misrepresentation, or other bad faith actions by the Company. The Company has made additional capital contributions to certain joint ventures in order to maintain loan to value requirements. To date, the Company has not been requested to perform under either the bankruptcy or environmental guarantees.
     In addition to the joint ventures with limited recourse guarantees, the Company has investments in other unconsolidated entities, some of which have debt. These investments include the Company’s three joint ventures in Puerto Rico, which are in the final stages of liquidation, as well as other entities, the majority of which are not engaged in homebuilding activities. The Company’s proportionate share of debt associated with these entities totaled $9.4 million and $8.6 million at December 31, 2007 and 2006, respectively. The Company does not have any significant financing exposures related to these entities.
     During the years ended December 31, 2007 and 2006, the Company made capital contributions of $217.5 million and $58.2 million, respectively, to its joint ventures and received capital and earnings distributions of $64.6 million and $74 million, respectively, from its joint ventures. The significant decline in joint venture debt and the majority of capital contributions in 2007 are primarily the result of one joint venture in Sacramento, California to which the Company and the other partners contributed additional capital to allow the joint venture to fully repay the outstanding debt. This action provided the Company and the other joint venture partners more flexibility in operating the joint venture. During 2007, the Company made significant efforts to reduce its exposure to future capital requirements under its joint venture arrangements, including the actions noted above. If additional capital infusions are required and approved, the Company would need to contribute its pro rata portion of those capital needs in order not to dilute its ownership in the joint ventures. While additional capital contributions may be required in the future, the Company believes the total amount of such contributions are limited. The Company’s financial exposure related to joint ventures is unlikely to exceed the combined investment and limited recourse guarantee totals.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments in unconsolidated entities (continued)
     The timing of the repayment obligation under the joint venture debt agreements varies by lender and in certain instances is contingent upon the joint venture’s sale of its land holdings. The Company anticipates making capital contributions to certain of its joint ventures in early to mid-2008 to repay joint venture debt at original scheduled maturity dates. The Company’s proportionate share of such debt totaled approximately $46 million at December 31, 2007.
     For the years ended December 31, 2007, 2006, and 2005, the Company recognized equity income (loss) from its unconsolidated joint ventures of $(190) million, $(62.9) million, and $75.4 million, respectively. The equity loss recognized during the years ended December 31, 2007 and 2006 includes impairments related to land valuation adjustments totaling $189.9 million and $95.4 million, respectively.
     In January 2006, the Company exercised its option and acquired the remaining 50% interest in an entity that supplies and installs basic building components and operating systems. The Company’s initial investment was made in January 2004 to secure a dedicated building supply trade base for its construction activities in Arizona and Nevada. The aggregate stepped purchase price exceeded the preliminary estimated fair value of the underlying assets acquired and liabilities assumed by approximately $68 million, which was recorded as goodwill. The Company accounted for its initial 50% investment under the equity method. Since January 2006, the Company has consolidated this wholly-owned subsidiary in its financial statements.
     In February 2006, Pulte Mortgage sold its investment in Hipotecaria Su Casita (“Su Casita”), a Mexico-based mortgage banking company. Remaining shareholders of Su Casita, who exercised their right of first refusal to acquire the shares, purchased Pulte Mortgage’s 16.7% interest for net proceeds of $49.2 million. As a result of this transaction, the Company recognized a pre-tax gain of $31.6 million in 2006. During February 2005, 25% of the Company’s investment in the capital stock of Su Casita was redeemed for a pre-tax gain of $620 thousand and the Company’s remaining ownership interest of 16.7% was accounted for under the cost method.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Debt
     The Company’s senior notes at book value are summarized as follows ($000’s omitted):
                 
    December 31,  
    2007     2006  
4.875% unsecured senior notes, issued by Pulte Homes, Inc. due 2009, not redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    338,545       399,475  
 
               
8.125% unsecured senior notes, issued by Pulte Homes, Inc. due 2011, not redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    199,614       199,492  
 
               
7.875% unsecured senior notes, issued by Pulte Homes, Inc. due 2011, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    496,934       496,479  
 
               
6.25% unsecured senior notes, issued by Pulte Homes, Inc. due 2013, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    298,529       298,244  
 
               
5.25% unsecured senior notes, issued by Pulte Homes, Inc. due 2014, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    499,790       499,756  
 
               
5.2% unsecured senior notes, issued by Pulte Homes, Inc. due 2015, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    349,537       349,472  
 
               
7.625% unsecured senior notes, issued by Pulte Homes, Inc. due 2017, not redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    148,940       148,831  
 
               
7.875% unsecured senior notes, issued by Pulte Homes, Inc. due 2032, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    298,934       298,891  
 
               
6.375% unsecured senior notes, issued by Pulte Homes, Inc. due 2033, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    398,122       398,049  
 
               
6.0% unsecured senior notes, issued by Pulte Homes, Inc. due 2035, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    299,285       299,258  
 
               
7.375% unsecured senior notes, issued by Pulte Homes, Inc. due 2046, callable at par on or after June 1, 2011, redeemable prior to maturity, guaranteed on a senior basis by Pulte Homes, Inc. and certain of its 100% owned subsidiaries
    150,000       150,000  
 
           
 
               
Total senior notes
  $ 3,478,230     $ 3,537,947  
 
           
 
               
Estimated fair value
  $ 2,962,634     $ 3,584,523  
 
           
     Refer to Note 13 for supplemental consolidating financial information of the Company.
     Total senior note maturities during the five years after 2007 are as follows: 2008 — $0; 2009 — $339 million; 2010 — $0; 2011 — $699 million; 2012 — $0; and thereafter — $2.5 billion.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Debt (continued)
     The Company repurchased $61.2 million of its 4.875% senior notes due 2009 during the year ended December 31, 2007. These repurchases resulted in a net gain of approximately $500 thousand which is included in the Consolidated Statements of Operations within Other non-operating, net expenses.
     In May 2006, the Company sold $150 million of 7.375% senior notes, which mature on June 1, 2046, and are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of the Company’s other unsecured and unsubordinated indebtedness. The notes are redeemable at any time on or after June 1, 2011, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest thereon to the redemption date. Proceeds from the sale were used to repay the indebtedness of the Company’s revolving credit facility and for general corporate purposes, including continued investment in the Company’s business.
7. Other financing arrangements
Corporate/Homebuilding
     The Company amended its unsecured revolving credit facility twice during 2007, decreasing the borrowing capacity from $2.01 billion to $1.86 billion and extending the maturity date from October 2010 to June 2012. In February 2008, the Company amended the credit facility again and decreased the borrowing capacity to $1.6 billion. Under the terms of the credit facility, the Company has the capacity to issue letters of credit totaling up to $1.125 billion. Borrowing availability is reduced by the amount of letters of credit outstanding. The credit facility includes a borrowing base limitation when the Company does not have an investment grade senior unsecured debt rating from at least two of Fitch Ratings, Moody’s Investor Service, and Standard and Poor’s Corporation. Under the borrowing base limitation, the sum of the Company’s senior debt and the amount drawn on the revolving credit facility may not exceed an amount based on certain percentages of various categories of the Company’s unencumbered inventory.
     The credit facility contains certain financial covenants. The Company is required to not exceed a debt-to-total capitalization ratio of 55%, and it is also required to meet a tangible net worth minimum each quarter. The credit facility no longer contains an interest coverage ratio covenant that could create an event of default for the Company, but if the interest coverage ratio (as defined in the credit facility) is less than 2 to 1, LIBOR margin and letter of credit pricing under the credit facility can increase in increments ranging from 0.125% to 0.375% and the debt-to-total capitalization ratio covenant threshold can decrease in increments of 2.5%. The credit facility’s uncommitted accordion feature remains unchanged at $2.25 billion. As of December 31, 2007, the Company had no borrowings outstanding and $1.41 billion available for borrowing under this facility.
     The following is a summary of aggregate borrowing information related to this facility ($000’s omitted):
                         
    2007   2006   2005
Available credit lines at year-end
  $ 1,860,000     $ 2,010,000     $ 1,660,000  
Unused credit lines at year-end (a)
  $ 1,413,000     $ 1,451,000     $ 1,168,000  
Maximum amount outstanding at the end of any month (b)
  $ 200,000     $ 754,000     $ 47,000  
Average monthly indebtedness (c)
  $ 52,000     $ 407,000     $ 22,000  
Range of interest rates during the year
  5.56 to     5.30 to     3.22 to  
 
    8.25 %     8.25 %     7.00 %
Weighted-average rate at year-end
    6.51 %     5.95 %     5.24 %
 
(a)   Reduced by letters of credit outstanding of $447 million and $559 million at December 31, 2007 and 2006, respectively.
 
(b)   Excludes letters of credit outstanding of $486 million for 2007 and $583 million for 2006, respectively.
 
(c)   Excludes letters of credit outstanding, which averaged $485 million and $573 million for 2007 and 2006, respectively.
     At December 31, 2007, other financing included non-recourse collateralized financing arrangements totaling $9.4 million. These financing arrangements have maturities ranging primarily from one to three years, a weighted-average interest rate of 5.93%, are generally collateralized by certain land positions, and have no recourse to any other assets. These arrangements have been classified as Accrued and Other Liabilities in the Consolidated Balance Sheets.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Other financing arrangements (continued)
Financial Services
     Notes payable to banks (collateralized short-term debt) are secured by residential mortgage loans available-for-sale. The carrying amounts of such borrowings approximate fair value.
     Pulte Mortgage supports its operations through the use of a revolving credit facility and an asset-backed commercial paper program. At December 31, 2007, Pulte Mortgage had committed credit arrangements of $705 million comprised of a $405 million bank revolving credit facility which expires May 2009, and a $300 million asset-backed commercial paper program which expires September 2008. The asset-backed commercial paper program is subject to being withdrawn at the option of the participating banks if the credit rating on Pulte’s senior unsecured debt falls below certain ratings. The credit agreements require Pulte Mortgage to meet a tangible net worth minimum each month and funded debt cannot exceed 15 times tangible net worth. At December 31, 2007, Pulte Mortgage had $440.6 million outstanding under its committed credit arrangements.
     Due to reduced origination volume and unfavorable changes in the asset-backed commercial paper market, Pulte Mortgage amended its commercial paper program twice during 2007, which, among other things, reduced the amount of capacity from $550 million to $300 million at December 31, 2007. In February 2008, Pulte Mortgage further amended the commercial paper program to reduce capacity to $150 million. Due to reduced origination volume, the Company does not anticipate needing any additional capacity in the near term.
     During the three years ended December 31, 2007, Pulte Mortgage provided compensating balances, in the form of escrows and other custodial funds, in order to further reduce interest rates.
     The following is aggregate borrowing information ($000’s omitted):
                         
    2007   2006   2005
Available credit lines at year-end
  $ 705,000     $ 955,000     $ 990,000  
Unused credit lines at year-end
  $ 264,000     $ 140,000     $ 97,000  
Maximum amount outstanding at the end of any month
  $ 441,000     $ 815,000     $ 893,000  
Average monthly indebtedness
  $ 291,000     $ 452,000     $ 423,000  
Range of interest rates during the year
  0.53 to     0.53 to     0.65 to  
 
    6.66 %     6.17 %     5.12 %
Weighted-average rate at year-end
    5.47 %     5.81 %     4.89 %
8. Shareholders’ equity
     Pursuant to the two $100 million stock repurchase programs authorized by the Board of Directors in October 2002 and 2005, and the $200 million stock repurchase authorization in February 2006 (for a total stock repurchase authorization of $400 million), the Company has repurchased a total of 9,688,900 shares for a total of $297.7 million. At December 31, 2007, the Company had remaining authorization to purchase $102.3 million of common stock.
     Accumulated other comprehensive income (loss)
     The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):
                 
    December 31,  
    2007     2006  
Foreign currency translation adjustments:
               
Mexico
  $ (451 )   $ (316 )
Fair value of derivatives, net of income taxes of $2,717 in 2007 and $1,637 in 2006
    (4,432 )     (2,670 )
 
           
 
  $ (4,883 )   $ (2,986 )
 
           

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Stock compensation plans and management incentive compensation
     The Company has fixed stock option plans for both employees (the “Employee Plans”) and for non-employee directors (the “Director Plan”). Information related to the active plans as of December 31, 2007 is as follows:
                 
    Shares   Shares Available
Plan Name   Authorized   For Grant
Employee Plans
               
 
               
Pulte Homes, Inc. 2004 Stock Incentive Plan
    12,000,000       4,771,150  
Pulte Homes, Inc. 2002 Stock Incentive Plan
    12,000,000       33,830  
Pulte Corporation 2000 Stock Incentive Plan for Key Employees
    10,000,000       479,736  
     The Employee Plans primarily provide for the grant of options (both non-qualified options and incentive stock options as defined in each respective plan), stock appreciation rights, and restricted stock to key employees of the Company or its subsidiaries (as determined by the Compensation Committee of the Board of Directors) for periods not exceeding ten years. Options granted under the Employee Plans vest incrementally in periods ranging from six months to four years. Under the Director Plan, non-employee directors are entitled to an annual distribution of 3,600 shares of common stock and options to purchase an additional 7,000 shares. All options granted under the Director Plan are non-qualified, vest immediately, and are exercisable on the date of grant. Options granted under the Director Plan are exercisable for ten years from the grant date.
     A summary of the status of the Company’s stock options for the years ended December 31, 2007, 2006, and 2005 is presented below (000’s omitted except per share data):
                                                 
    2007     2006     2005  
            Weighted-             Weighted-             Weighted-  
            Average             Average             Average  
            Per Share             Per Share             Per Share  
    Shares     Exercise Price     Shares     Exercise Price     Shares     Exercise Price  
Outstanding, beginning of year
    18,237     $ 21       16,850     $ 19       17,802     $ 15  
Granted
    2,884       12       2,451       34       2,543       40  
Exercised
    (683 )     (10 )     (562 )     (13 )     (3,136 )     (10 )
Forfeited
    (554 )     (33 )     (502 )     (30 )     (359 )     (21 )
 
                                         
Outstanding, end of year
    19,884     $ 20       18,237     $ 21       16,850     $ 19  
 
                                   
 
                                               
Options exercisable at year-end
    13,471     $ 17       11,972     $ 14       9,937     $ 12  
 
                                   
 
                                               
Weighted-average per share fair value of options granted during the year
  $ 4.32             $ 13.90             $ 17.31          
 
                                         

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Stock compensation plans and management incentive compensation (continued)
     The following table summarizes information about the weighted-average remaining contractual lives of stock options outstanding and exercisable at December 31, 2007:
                                         
    Options Outstanding   Options Exercisable
            Weighted-   Weighted-           Weighted-
          Range of   Number   Average   Average   Number   Average
         Per Share   Outstanding   Remaining   Per Share   Exercisable   Per Share
    Exercise Prices   (000’s omitted)   Contract Life   Exercise Price   (000’s omitted)   Exercise Price
$  0.01 to $13.00
    10,453       5.4     $ 10       7,702     $ 10  
$13.01 to $20.00
    212       5.0     $ 15       212     $ 15  
$20.01 to $31.00
    4,854       6.4     $ 24       4,404     $ 24  
$31.01 to $41.00
    4,341       8.4     $ 37       1,128     $ 40  
$41.01 to $60.00
    24       7.7     $ 43       24     $ 43  
     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
                         
    Weighted-average assumptions
    Year Ended December 31,
    2007   2006   2005
Expected life of options in years
    5.5       5.2       5.6  
Expected stock price volatility
    40 %     38.9 %     40.1 %
Expected dividend yield
    1.5 %     0.5 %     0.4 %
Risk-free interest rate
    3.4 %     4.8 %     4.6 %
     The Company has estimated the expected life of its share options using employees’ historical exercise behavior and the contractual term of these instruments in determining the fair value of its share options.
     In connection with stock option awards, the Company recognized compensation expense, net of related tax effects, of $28.2 million, $24.1 million, and $15.6 million for the years ended December 31, 2007, 2006, and 2005, respectively. Total compensation cost related to non-vested stock option awards not yet recognized was $27.6 million at December 31, 2007. These costs will be expensed over a weighted-average period of approximately three years. The aggregate intrinsic value of both stock options outstanding and exercisable at December 31, 2007 was $7.1 million. The aggregate intrinsic value of stock options that were exercised during 2007, 2006, and 2005 was $8.8 million, $11.7 million, and $90 million, respectively. The aggregate intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
     A summary of the Company’s restricted stock activity for the year ended December 31, 2007, is presented below (000’s omitted, except per share data):
                 
            Weighted-Average Per Share
    Shares   Grant Date Fair Value
Non-vested at December 31, 2006
    3,717     $ 35.25  
Granted (a)
    1,616     $ 19.78  
Vested
    (689 )   $ 27.44  
Forfeited
    (309 )   $ 34.95  
 
               
Non-vested at December 31, 2007
    4,335     $ 30.75  
 
               
 
(a)   The weighted-average grant-date fair value for non-vested shares was $36.27 and $38.07 for the years ended December 31, 2006 and 2005, respectively.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Stock compensation plans and management incentive compensation (continued)
     The Company awarded 1,615,612, 1,589,357, and 1,761,334 shares of restricted stock to certain key employees during 2007, 2006, and 2005, respectively, under the Employee Plans. During 2007, 2006, and 2005, the total fair value of shares vested during the year was $18.9 million, $10.9 million, and $3.5 million, respectively. In connection with the restricted stock awards, of which a majority cliff vest at the end of three years, the Company recorded compensation expense, net of related tax effects, of $42.5 million, $25.7 million, and $13.3 million during 2007, 2006, and 2005, respectively. Total compensation cost related to restricted stock awards not yet recognized was $59.3 million at December 31, 2007. These costs will be expensed over a weighted-average period of approximately 2.0 years.
     The Company’s stock option participant agreements provide continued vesting for certain eligible employees who have achieved a predetermined level of service based on their combined age and years of service. For awards granted prior to January 1, 2006, the Company recognized the related compensation cost ratably over the nominal vesting period. For awards granted after the adoption of SFAS No. 123(R), the Company records the related compensation cost over the period through the date the employee first achieves the minimum level of service that would no longer require them to provide services to earn the award. For the years ended December 31, 2007 and 2006, the Company recorded $4.5 million and $4.8 million, respectively, of compensation expense related to stock option grants made to employees that have achieved this level of service, as well as those who will achieve this level of service during the vesting period.
10. Income taxes
     Components of current and deferred income tax expense (benefit) for continuing operations are as follows ($000’s omitted):
                         
    Current     Deferred     Total  
Year ended December 31, 2007
                       
Federal
  $ (261,921 )   $ 61,043     $ (200,878 )
State and other
    (33,729 )     12,121       (21,608 )
 
                 
 
  $ (295,650 )   $ 73,164     $ (222,486 )
 
                 
 
                       
Year ended December 31, 2006
                       
Federal
  $ 514,691     $ (155,530 )   $ 359,161  
State and other
    36,223       (2,302 )     33,921  
 
                 
 
  $ 550,914     $ (157,832 )   $ 393,082  
 
                 
 
                       
Year ended December 31, 2005
                       
Federal
  $ 749,450     $ 29,231     $ 778,681  
State and other
    56,981       4,464       61,445  
 
                 
 
  $ 806,431     $ 33,695     $ 840,126  
 
                 
     The following table reconciles the statutory federal income tax rate to the effective income tax rate for continuing operations:
                         
    2007   2006   2005
Income taxes at federal statutory rate
    35.00 %     35.00 %     35.00 %
Effect of state and local income taxes, net of federal tax
    3.00       1.84       2.25  
Domestic production activities deduction
          (1.63 )     (0.88 )
Deferred tax asset valuation allowance
    (25.00 )            
Goodwill impairment
    (4.24 )            
Settlement of state tax issues and other
    0.15       1.09       0.53  
 
                       
Effective rate
    8.91 %     36.30 %     36.90 %
 
                       

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Income taxes (continued)
     The Company’s net deferred tax asset (liability) is as follows ($000’s omitted):
                 
    At December 31,  
    2007     2006  
Deferred tax liabilities:
               
Capitalized items, principally real estate basis differences, deducted for tax, net
  $ (176,995 )   $ (108,356 )
Trademarks and tradenames
    (42,068 )     (45,165 )
 
           
 
    (219,063 )     (153,521 )
 
           
 
               
Deferred tax assets:
               
Non-deductible reserves and other
    237,911       192,651  
Inventory valuation reserves
    689,035       129,979  
Net operating loss carryforwards
    29,907       11,359  
 
           
 
    956,853       333,989  
 
           
Valuation allowance
    (631,884 )     (9,950 )
 
           
 
               
Net deferred tax asset
  $ 105,906     $ 170,518  
 
           
     The Company has various state net operating losses aggregating $847.9 million that expire in years 2009 through 2027. Net operating losses are generally available to offset the Company’s taxable income in certain prior and future years.
     In accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), the Company evaluates its deferred tax assets, including net operating losses, to determine if a valuation allowance is required. SFAS 109 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. SFAS 109 provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable and also restricts the amount of reliance on projections of future taxable income to support the recovery of deferred tax assets. Given the continued downturn in the homebuilding industry during 2007, resulting in additional inventory impairments, the Company now anticipates being in a three-year cumulative pre-tax loss position during the years 2006 — 2008. Therefore, during the fourth quarter of 2007, the Company recorded a valuation allowance of $621.9 million against its deferred tax assets. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The deferred tax assets for which there are no valuation allowances relate to amounts that are expected to be realized through net operating loss carry backs to tax year 2006 or through subsequent reversals of existing taxable temporary differences. The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.
     The American Jobs Creation Act of 2004 provided a 3% tax deduction on the lesser of taxable income or qualified domestic production activities income for the years ended December 31, 2006 and 2005. The deduction increases to 6% for years ending after December 31, 2006 and to 9% for years ending after December 31, 2009. Based on the guidance provided by FASB Staff Position 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”, this deduction was accounted for as a special deduction under SFAS 109 and reduced income tax expense for the years ended December 31, 2006 and 2005.
     The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), effective January 1, 2007. FIN 48 creates a single model to address accounting for uncertainty in tax positions and clarifies accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Income taxes (continued)
     The January 1, 2007 adoption of FIN 48 resulted in a $31.4 million increase in income tax liabilities and a corresponding charge to beginning retained earnings.
     As of adoption, the Company had $86.7 million of gross unrecognized tax benefits, all of which, if recognized, would affect the effective tax rate. Additionally, the Company had $24.5 million of accrued interest and $13.3 million of accrued penalties as of January 1, 2007.
     At December 31, 2007 the Company had $86.2 million of gross unrecognized tax benefits, all of which, if recognized, would affect the effective tax rate. Additionally, the Company had $21.1 million of accrued interest and $12.1 million of accrued penalties at December 31, 2007.
     Effective in 2007, the Company recognizes interest and penalties related to income taxes in income tax expense. Such amounts totaled $7.3 million of income tax benefit in 2007. Interest related to income taxes was previously included in interest expense.
     A reconciliation of the change in the unrecognized tax benefits from January 1, 2007 to December 31, 2007 is as follows ($000’s omitted):
         
Balance at January 1, 2007
  $ 86,663  
 
       
Increases related to tax positions taken during a prior period
    1,708  
Decreases related to tax positions taken during a prior period
    (12,135 )
Increases related to tax positions taken during the current period
    11,610  
Decreases related to settlements with taxing authorities
    (142 )
Reductions as a result of a lapse of the applicable statute limitations
    (1,495 )
 
     
 
       
Balance at December 31, 2007
  $ 86,209  
 
     
     The Company is currently under examination by various taxing jurisdictions and anticipates finalizing the examinations with certain jurisdictions within the next twelve months. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for tax years 1998-2006.
11. Leases
     The Company leases certain property and equipment under non-cancelable leases. Office and equipment leases are generally for terms of three to five years. The future minimum lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year are as follows ($000’s omitted):
         
Years Ending December 31,        
2008
  $ 56,118  
2009
    48,700  
2010
    33,014  
2011
    22,242  
2012
    16,646  
After 2012
    62,817  
 
     
Total minimum lease payments
  $ 239,537  
 
     
     Net rental expense for the years ended December 31, 2007, 2006, and 2005 was $70.7 million, $78.5 million, and $73.1 million, respectively. Certain leases contain renewal or purchase options and generally provide that the Company shall pay for insurance, taxes, and maintenance.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and contingencies
     In the normal course of business, the Company acquires rights under options or option-type agreements to purchase land to be used in homebuilding operations at future dates. The total purchase price applicable to land under option that has been approved for purchase approximated $1.5 billion and $3.9 billion at December 31, 2007 and 2006, respectively. The total purchase price applicable to land under option that has not been approved for purchase approximated $95.1 million and $450.3 million at December 31, 2007 and 2006, respectively. At December 31, 2007 and 2006, the Company, in the normal course of business, had outstanding letters of credit and performance bonds of $2 billion and $2.4 billion, respectively.
     The Company could be required to repurchase loans sold to investors that experience early payment default or that have not been underwritten in accordance with the investor guidelines (“defective loans”). The Company, in the normal course of business, also indemnifies investors for defective loans that they have purchased. The Company assesses the overall risk of loss on loans that the Company may be required to repurchase and establishes reserves for them. At December 31, 2007 and 2006, reserves for potential losses on repurchased loans are reflected in accrued and other liabilities and amounted to $2.1 million and $135 thousand, respectively.
     The Company is involved in various litigation incidental to its continuing business operations. Management does not believe that this litigation will have a material adverse impact on the results of operations, financial position, or cash flows of the Company.
     In April 2004, the Company received a request for information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request seeks information about storm water discharge practices in connection with homebuilding projects completed or underway by the Company. The Company has provided the EPA with this information. Although the matter has since been referred to the United States Department of Justice (“DOJ”) for enforcement, the EPA has asked that the Company engage in “pre-filing” negotiations to resolve the matter short of litigation. The Company continues to participate actively in these negotiations. If the negotiations fail and the DOJ alleges that the Company has violated regulatory requirements applicable to storm water discharges, the government may seek injunctive relief and penalties. The Company believes that it has defenses to any such allegations. At this time, however, the Company can neither predict the outcome of this inquiry nor can it currently estimate the costs that may be associated with its eventual resolution.
13. Supplemental Guarantor information
     At December 31, 2007, Pulte Homes, Inc. had the following outstanding senior note obligations: (1) $339 million, 4.875% due 2009, (2) $200 million, 8.125%, due 2011, (3) $499 million, 7.875%, due 2011, (4) $300 million, 6.25%, due 2013, (5) $500 million, 5.25%, due 2014, (6) $350 million, 5.2%, due 2015, (7) $150 million, 7.625%, due 2017, (8) $300 million, 7.875%, due 2032, (9) $400 million, 6.375%, due 2033, (10) $300 million, 6%, due 2035 and (11) $150 million, 7.375%, due 2046. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by Pulte Homes, Inc.’s 100%-owned Homebuilding subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional.
     Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Supplemental Guarantor information (continued)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2007
($000’s omitted)
                                         
    Unconsolidated              
    Pulte     Guarantor     Non-Guarantor     Eliminating     Consolidated  
    Homes, Inc.     Subsidiaries     Subsidiaries     Entries     Pulte Homes, Inc.  
ASSETS
                                       
Cash and equivalents
  $     $ 715,411     $ 344,900     $     $ 1,060,311  
Unfunded settlements
          37,674       1,040             38,714  
House and land inventories
          7,021,018       6,493             7,027,511  
Land held for sale
          252,563                   252,563  
Land, not owned, under option agreements
          20,838                   20,838  
Residential mortgage loans available-for- sale
                447,089             447,089  
Investments in unconsolidated entities
    1,448       93,392       10,639             105,479  
Goodwill
          4,954       700             5,654  
Intangible assets
          110,704                   110,704  
Other assets
    307,142       629,895       113,897             1,050,934  
Deferred income tax asset
    82,679       48       23,179             105,906  
Investment in subsidiaries
    8,407,720       83,703       5,709,912       (14,201,335 )      
 
                             
 
  $ 8,798,989     $ 8,970,200     $ 6,657,849     $ (14,201,335 )   $ 10,225,703  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Liabilities:
                                       
Accounts payable, accrued and other liabilities
  $ 157,703     $ 1,354,652     $ 347,556     $     $ 1,859,911  
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets
                440,611             440,611  
Income taxes
    126,758                         126,758  
Senior notes
    3,478,230                         3,478,230  
Advances (receivable) payable — subsidiaries
    716,105       (804,897 )     88,792              
 
                             
Total liabilities
    4,478,796       549,755       876,959             5,905,510  
 
                             
 
                                       
Shareholders’ Equity:
                                       
Common stock
    2,571       104       578       (682 )     2,571  
Additional paid-in capital
    1,362,504       7,326,496       4,944,567       (12,271,063 )     1,362,504  
Accumulated other comprehensive loss
    (4,883 )     (1,029 )     (1,480 )     2,509       (4,883 )
Retained earnings
    2,960,001       1,094,874       837,225       (1,932,099 )     2,960,001  
 
                             
 
                                       
Total shareholders’ equity
    4,320,193       8,420,445       5,780,890       (14,201,335 )     4,320,193  
 
                             
 
                                       
 
  $ 8,798,989     $ 8,970,200     $ 6,657,849     $ (14,201,335 )   $ 10,225,703  
 
                             

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Supplemental Guarantor information (continued)
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
($000’s omitted)
                                         
    Unconsolidated              
    Pulte     Guarantor     Non-Guarantor     Eliminating     Consolidated  
    Homes, Inc.     Subsidiaries     Subsidiaries     Entries     Pulte Homes, Inc.  
ASSETS
                                       
Cash and equivalents
  $     $ 318,309     $ 232,983     $     $ 551,292  
Unfunded settlements
          68,757       3,840             72,597  
House and land inventories
          9,363,933       10,402             9,374,335  
Land held for sale
          465,823                   465,823  
Land, not owned, under option agreements
          43,609                   43,609  
Residential mortgage loans available-for-sale
                871,350             871,350  
Investments in unconsolidated entities
    1,448       133,195       16,042             150,685  
Goodwill
          374,977       700             375,677  
Intangible assets
          118,954                   118,954  
Other assets
    46,490       814,136       121,408             982,034  
Deferred income tax asset
    155,178       65       15,275             170,518  
Investment in subsidiaries
    10,198,353       85,444       7,159,877       (17,443,674 )      
 
                             
 
  $ 10,401,469     $ 11,787,202     $ 8,431,877     $ (17,443,674 )   $ 13,176,874  
 
                             
 
                                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                       
Liabilities:
                                       
Accounts payable, accrued and other liabilities
  $ 178,687     $ 1,692,037     $ 309,868     $     $ 2,180,592  
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets
                814,707             814,707  
Income taxes
    66,267                         66,267  
Senior notes
    3,537,947                         3,537,947  
Advances (receivable) payable — subsidiaries
    41,207       (144,645 )     103,438              
 
                             
Total liabilities
    3,824,108       1,547,392       1,228,013             6,599,513  
 
                             
 
                                       
Shareholders’ Equity:
                                       
Common stock
    2,553       103       303       (406 )     2,553  
Additional paid-in capital
    1,284,687       7,503,793       4,783,751       (12,287,544 )     1,284,687  
Accumulated other comprehensive loss
    (2,986 )     978       662       (1,640 )     (2,986 )
Retained earnings
    5,293,107       2,734,936       2,419,148       (5,154,084 )     5,293,107  
 
                             
 
                                       
Total shareholders’ equity
    6,577,361       10,239,810       7,203,864       (17,443,674 )     6,577,361  
 
                             
 
                                       
 
  $ 10,401,469     $ 11,787,202     $ 8,431,877     $ (17,443,674 )   $ 13,176,874  
 
                             

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Supplemental Guarantor information (continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 2007
($000’s omitted)
                                         
    Unconsolidated              
    Pulte     Guarantor     Non-Guarantor     Eliminating     Consolidated  
    Homes, Inc.     Subsidiaries     Subsidiaries     Entries     Pulte Homes, Inc.  
Revenues:
                                       
Homebuilding
  $     $ 9,121,730     $     $     $ 9,121,730  
Financial Services
          20,802       113,967             134,769  
Other non-operating
    12       3,178       3,405             6,595  
 
                             
 
                                       
Total revenues
    12       9,145,710       117,372             9,263,094  
 
                             
Expenses:
                                       
Homebuilding:
                                       
Cost of sales
          9,747,531                   9,747,531  
Selling, general, and administrative and other expense
    32,178       1,584,743       76,387             1,693,308  
Financial Services
    634       8,543       82,973             92,150  
Other non-operating, net
    89,247       (34,215 )     (18,046 )           36,986  
Intercompany interest
    164,933       (164,933 )                  
 
                             
 
                                       
Total expenses
    286,992       11,141,669       141,314             11,569,975  
 
                             
Other Income:
                                       
Equity income (loss)
          (187,805 )     (2,217 )           (190,022 )
 
                             
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries
    (286,980 )     (2,183,764 )     (26,159 )           (2,496,903 )
Income taxes (benefit)
    (20,294 )     (194,240 )     (7,952 )           (222,486 )
 
                             
 
                                       
Income (loss) from continuing operations before equity in income of subsidiaries
    (266,686 )     (1,989,524 )     (18,207 )           (2,274,417 )
Income (loss) from discontinued operations
    18,662                         18,662  
 
                             
Income (loss) before equity in net income of subsidiaries
    (248,024 )     (1,989,524 )     (18,207 )           (2,255,755 )
Equity in net income (loss) of subsidiaries:
                                       
Continuing operations
    (2,007,731 )     19,013       (1,567,843 )     3,556,561        
 
                             
 
                                       
Net income
  $ (2,255,755 )   $ (1,970,511 )   $ (1,586,050 )   $ 3,556,561     $ (2,255,755 )
 
                             

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Supplemental Guarantor information (continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 2006
($000’s omitted)
                                         
    Unconsolidated              
    Pulte     Guarantor     Non-Guarantor     Eliminating     Consolidated  
    Homes, Inc.     Subsidiaries     Subsidiaries     Entries     Pulte Homes, Inc.  
Revenues:
                                       
Homebuilding
  $     $ 14,075,248     $     $     $ 14,075,248  
Financial Services
          29,833       164,763             194,596  
Other non-operating
    374       2,154       2,036             4,564  
 
                             
 
                                       
Total revenues
    374       14,107,235       166,799             14,274,408  
 
                             
Expenses:
                                       
Homebuilding:
                                       
Cost of sales
          11,683,433                   11,683,433  
Selling, general, and administrative and other expense
    36,883       1,233,381       15,939             1,286,203  
Financial Services
    697       9,913       100,858             111,468  
Other non-operating, net
    94,324       (34,296 )     (12,364 )           47,664  
Intercompany interest
    104,193       (104,193 )                  
 
                             
 
                                       
Total expenses
    236,097       12,788,238       104,433             13,128,768  
 
                             
Other Income:
                                       
Gain on sale of equity investments
                31,635             31,635  
Equity income (loss)
          (96,259 )     1,712             (94,547 )
 
                             
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries
    (235,723 )     1,222,738       95,713             1,082,728  
Income taxes (benefit)
    (86,662 )     443,937       35,807             393,082  
 
                             
 
                                       
Income (loss) from continuing operations before equity in income of subsidiaries
    (149,061 )     778,801       59,906             689,646  
Income (loss) from discontinued operations
    248             (2,423 )           (2,175 )
 
                             
Income (loss) before equity in net income of subsidiaries
    (148,813 )     778,801       57,483             687,471  
 
                             
Equity in net income (loss) of subsidiaries:
                                       
Continuing operations
    838,707       59,395       448,712       (1,346,814 )      
 
                                       
Discontinued operations
    (2,423 )                 2,423        
 
                             
 
                                       
 
    836,284       59,395       448,712       (1,344,391 )      
 
                             
 
                                       
Net income
  $ 687,471     $ 838,196     $ 506,195     $ (1,344,391 )   $ 687,471  
 
                             

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Supplemental Guarantor information (continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 2005
($000’s omitted)
                                         
    Unconsolidated              
    Pulte     Guarantor     Non-Guarantor     Eliminating     Consolidated  
    Homes, Inc.     Subsidiaries     Subsidiaries     Entries     Pulte Homes, Inc.  
Revenues:
                                       
Homebuilding
  $     $ 14,528,236     $     $     $ 14,528,236  
Financial Services
          29,496       131,918             161,414  
Other non-operating
    289       3,682       914             4,885  
 
                             
 
                                       
Total revenues
    289       14,561,414       132,832             14,694,535  
 
                             
Expenses:
                                       
Homebuilding:
                                       
Cost of sales
          11,144,968                   11,144,968  
Selling, general, and administrative and other expense
    18,011       1,139,129       (90 )           1,157,050  
Financial Services, principally interest
    2,146       8,632       82,796             93,574  
Other non-operating, net
    128,461       (21,545 )     (9,637 )           97,279  
Intercompany interest
    162,552       (162,552 )                  
 
                             
 
                                       
Total expenses
    311,170       12,108,632       73,069             12,492,871  
 
                             
Other Income:
                                       
Gain on sale of equity investments
                620             620  
Equity income
          66,902       7,828             74,730  
 
                             
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries
    (310,881 )     2,519,684       68,211             2,277,014  
Income taxes (benefit)
    (119,172 )     933,434       25,864             840,126  
 
                             
 
                                       
Income (loss) from continuing operations before equity in income of subsidiaries
    (191,709 )     1,586,250       42,347             1,436,888  
Income (loss) from discontinued operations
    57,898             (2,873 )           55,025  
 
                             
Income (loss) before equity in net income of subsidiaries
    (133,811 )     1,586,250       39,474             1,491,913  
 
                             
Equity in net income (loss) of subsidiaries:
                                       
Continuing operations
    1,628,597       31,163       594,348       (2,254,108 )      
 
                                       
Discontinued operations
    (2,873 )                 2,873        
 
                             
 
                                       
 
    1,625,724       31,163       594,348       (2,251,235 )      
 
                             
 
                                       
Net income
  $ 1,491,913     $ 1,617,413     $ 633,822     $ (2,251,235 )   $ 1,491,913  
 
                             

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PULTE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Supplemental Guarantor information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2007
($000’s omitted)
                                         
    Unconsolidated              
    Pulte     Guarantor     Non-Guarantor     Eliminating     Consolidated  
    Homes, Inc.     Subsidiaries     Subsidiaries     Entries     Pulte Homes, Inc.  
Net cash provided by (used in) operating activities
  $ (747,713 )   $ 1,501,969     $ 463,999     $     $ 1,218,255  
 
                             
 
                                       
Distributions from unconsolidated entities
          57,154       3,047             60,201  
Investments in unconsolidated entities
          (217,541 )                 (217,541 )
Dividends received from subsidiaries
    51       24,000               (24,051 )      
Investment in subsidiaries
    (219,304 )     (4,510 )     (127,093 )     350,907        
Increase in loans held for investment
                (13,728 )           (13,728 )
Proceeds from sale of fixed assets
            19,758       9             19,767  
Capital expenditures
          (66,551 )     (3,565 )           (70,116 )
 
                             
 
                                       
Net cash provided by (used in) investing activities
    (219,253 )     (187,690 )     (141,330 )     326,856       (221,417 )
 
                             
 
                                       
Cash flows from financing activities:
                                       
Net repayments under Financial Services credit arrangements
                (374,096 )           (374,096 )
Repayment of other borrowings
    (61,189 )     (13,498 )                 (74,687 )
Excess tax benefits from share-based awards
    523                         523  
Capital contributions from parent
          153,294       197,613       (350,907 )      
Advances (to) from affiliates
    1,067,012       (1,056,922 )     (10,090 )            
Issuance of common stock
    7,862                         7,862  
Stock repurchases
    (6,245 )                       (6,245 )
Dividends paid
    (40,997 )     (51 )     (24,000 )     24,051       (40,997 )
 
                             
Net cash provided by (used in) financing activities
    966,966       (917,177 )     (210,573 )     (326,856 )     (487,640 )
 
                             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                (179 )           (179 )
 
                                       
Net increase in cash and equivalents
          397,102       111,917             509,019  
Cash and equivalents at beginning of year
          318,309       232,983             551,292  
 
                 <