HORTON D R INC /DE/ - 10-K Annual Report

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LETTER TO STOCKHOLDERS

Dear Fellow Stockholders:

Fiscal 2000 marks our Company's 23rd consecutive year of growth in revenues
and increased profitability. In 2000, we again achieved quarterly and fiscal
year records in new sales orders, sales backlog, revenues, homes delivered,
net income and earnings per share.

Key financial and operating accomplishments for 2000 include:

. Record new sales contracts signed of $3,676.4 million (19,223 homes), a
13% increase over our 1999 record of $3,266.2 million (18,911 homes);

. New sales orders in the third quarter of $1,001.6 million, the first
time in Company history that quarterly sales exceeded the $1 billion
mark;

. Record revenues of $3,653.7 million (19,144 homes delivered), a 16%
increase over our 1999 record of $3,156.2 million (18,395 homes
delivered);

. Record net income of $191.7 million, a 20% increase over our fiscal 1999
record of $159.8 million;

. Record earnings per share of $2.81, a 23% increase over our 1999 record
of $2.29;

. Record year-end sales backlog of $1,536.9 million (7,388 homes), up 13%
over our 1999 record of $1,356.5 million (7,309 homes);

. Homebuilding debt to total capitalization ratio of 56.2% at the end of
fiscal 2000, down from 57.7% at the end of 1999, and at its lowest year-
end level in the past five years;

. Record stockholders' equity of $969.6 million, up 22% from the 1999
level of $797.6 million;

. Return on beginning stockholders' equity of 24% and on average
stockholders' equity of 22%; and

. Our third consecutive year of generating more than $1,000,000 in
revenues per employee.

Although the housing market in fiscal 2000 was aided by the continuation of
the longest economic expansion in U.S. history, housing demand was adversely
affected in the first seven months of our fiscal year by credit tightening by
the Federal Reserve and the resulting increase in rates on mortgage loans.
Since April 2000, though, long-term fixed-rate mortgage rates have eased
considerably and housing demand appears as strong as ever. More importantly,
D.R. Horton's financial and operating strategies have allowed us to
differentiate our Company from others in the industry. Those strategies
continued to be successful in fiscal 2000, resulting in our 23rd consecutive
year of record results, a track record unmatched by any other company in the
industry.

The Company's strategic focus in fiscal 2000 was to grow its homebuilding
operations primarily in existing markets. We achieved this by taking advantage
of our proven ability to operate profitably as both a production and a custom
builder in any given market. This strategy permitted us to capture greater
market share in our more rapidly growing markets.

The Company's financial services division generated operating income in
fiscal 2000 of more than $767 per home delivered, up 8% from the 1999 amount
of $712. We expanded the operations of both our mortgage and title operations
to serve a larger share of our homebuyers and to provide to them a more
streamlined, enjoyable homebuying experience.

In March 2000, we announced the formation of Encore Venture Partners II.
Through that entity, along with Encore Venture Partners I, formed in July
1999, we invest in technology and emerging growth companies that have the
potential to become market leaders. Several of the Encore investments are in
businesses that allow us to leverage our homebuilding expertise and national
presence to better serve our homebuyers and to become more efficient managers
of our homebuilding supply chain. We intend to benefit in at least two ways
from our venture capital activities. First, as an equity owner we will share
the economic success of the investee businesses. Second, as a homebuilder we
will enjoy the enhanced revenues and reduced costs associated with using
technology to improve our homebuilding business practices.

Although we are extremely pleased with our financial and operating
performance this year, we continue to be disappointed with the performance of
our stock, the price of which does not adequately reflect our growth and
profitability records. Although at the end of fiscal 2000, the stock price was
up 45% over 1999, the ratio of price to trailing earnings per share amounted to
only 6.7. With compound annual growth rates in revenue and pre-tax earnings
since 1995 of 33% and 40%, respectively, growth rates that should be the envy
of many "growth" companies with much higher price-to-earnings multiples, we
continue to believe that our stock is significantly under-valued. In the early
part of fiscal 2000, we repurchased $14.5 million of our stock under the Board-
approved $100 million stock repurchase plan, bringing the total repurchased to
$36.9 million. Additionally, to improve the liquidity of our outstanding
shares, in September 2000 we declared and paid a 9% stock dividend. Finally,
the quarterly cash dividend, at $0.04 per share, represented a 33% increase
over the $0.03 per share amount paid in fiscal 1999.

As we enter the second year of the new millennium, our Company is extremely
well-positioned to take advantage of its leadership role in the homebuilding
industry. In fiscal 2000, our stockholders' equity increased 22%, to $969.6
million, and our homebuilding debt to total capitalization ratio decreased by
150 basis points, from 57.7% at September 30, 1999, to 56.2% at the end of
fiscal 2000. Our solid balance sheet, consistent financial performance, risk
averse operating strategies and reduced leverage will keep improving our
standing in the capital markets. To support planned future growth, we issued
$200 million of 10 1/2% senior unsecured notes in March 2000; and $150 million
of 9 3/4% senior subordinated unsecured notes in September 2000. The senior
notes are due in 2005 and the senior subordinated notes in 2010. We continue to
have in place an unsecured $775 million revolving credit facility for our
homebuilding operations, and a $175 million mortgage loan warehouse facility
for our financial services operations.

With our sales backlog at a record year-end level and our business model
fully intact, we feel that we are well-positioned to thrive in an industry that
offers many opportunities for long-term growth. Our history clearly
demonstrates our ability to grow through cycles and shows that we are the most
interest rate and recession proof homebuilder in the United States. We thank
all D.R. Horton stockholders for supporting the building of a company with a
solid foundation and an exciting future. In addition, we thank our dedicated
employees, suppliers and subcontractors. They are the backbone of this
organization and provide us the ability to react quickly and make sound
decisions. We look forward to a highly successful fiscal 2001 and anticipate
that D.R. Horton will enjoy its 24th consecutive year of growth and
profitability.

/s/ Donald R. Horton
Donald R. Horton
Chairman of the Board

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark
One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to

Commission File No. 1-14122
D.R. HORTON, INC.
(Exact name of registrant as specified in its charter)

Delaware 75-2386963
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

1901 Ascension Blvd., Suite 100 76006
Arlington, Texas (Zip Code)
(Address of principal executive
offices)

Registrant's telephone number, including area code 817/856-8200

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

Name of each exchange on
Title of each Class which registered
--------- -------------

Common Stock, par value $.01 per share The New York Stock Exchange
8 3/8% Senior Notes due 2004 The New York Stock Exchange
10 % Senior Notes due 2006 The New York Stock Exchange
8 % Senior Notes due 2009 The New York Stock Exchange
10 1/2% Senior Notes due 2005 The New York Stock Exchange
9 3/4% Senior Subordinated Notes due The New York Stock Exchange
2010
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

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 X No

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

As of December 5, 2000, there were 67,505,329 shares of Common Stock, par
value $.01 per share, issued and outstanding, and the aggregate market value
of these shares held by non-affiliates of the registrant was approximately
$1,076,902,000. Solely for purposes of this calculation, all directors and
executive officers were excluded as affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 25, 2001, are incorporated herein by
reference in Part III.

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- -------------------------------------------------------------------------------

PART I

ITEM 1. BUSINESS

D.R. Horton, Inc. (the "Company") is a national homebuilder. As such, we
construct and sell single-family homes in metropolitan areas of the Mid-
Atlantic, Midwest, Southeast, Southwest and West regions of the United States.
We offer high quality homes, designed principally for first-time and move-up
home buyers. Our homes generally range in size from 1,000 to 5,000 square feet
and range in price from $60,000 to $800,000. For the year ended September 30,
2000, we closed 19,144 homes with an average sales price approximating
$182,600.

On April 20, 1998, we acquired Continental Homes Holding Corp.
("Continental"), a geographically diversified homebuilder, through the merger
of Continental into the Company (the "Merger"). In the Merger, the Company
issued approximately 15.5 million shares of its common stock, and
Continental's outstanding convertible securities and options became
convertible into and exercisable for an additional 8.2 million shares. The
Merger was accounted for as a pooling of interests. Accordingly, all
information for prior periods has been restated to show the combined results
of the Company and Continental.

We are one of the largest and most geographically diversified homebuilders
in the United States, with operating divisions in 23 states and 39 markets as
of September 30, 2000. The markets we operate in include: Albuquerque,
Atlanta, Austin, Birmingham, Charleston, Charlotte, Chicago, Cincinnati,
Columbia, Dallas/Fort Worth, Denver, Greensboro, Greenville, Hilton Head,
Houston, Jacksonville, Killeen, Las Vegas, Los Angeles, Louisville,
Minneapolis/St. Paul, Myrtle Beach, Nashville, New Jersey, Newport News,
Orlando, Phoenix, Portland, Raleigh/Durham, Richmond, Sacramento, Salt Lake
City, San Antonio, San Diego, St. Louis, South Florida, Tucson, suburban
Washington, D.C. and Wilmington.

We build homes under the following names: D.R. Horton, Arappco, Cambridge,
Continental, Dobson, Mareli, Milburn, Regency, SGS, Torrey and Trimark.

Our financial reporting segments consist of homebuilding and financial
services. Our homebuilding operations comprise the most substantial part of
our business, with approximately 99% of consolidated revenues in fiscal 1998,
1999 and 2000. The homebuilding operations segment generates the majority of
its revenues from the sale of completed homes with a lesser amount from the
sale of land and lots. The financial services segment generates its revenues
from originating and selling mortgages and collecting fees for title insurance
agency and closing services. Financial information, including revenue, pre-tax
income and identifiable assets of both of our reporting segments are included
in the consolidated financial statements.

We were incorporated in Delaware on July 1, 1991, to acquire all of the
assets and businesses of 25 predecessor companies, which were residential home
construction and development companies owned or controlled by Donald R.
Horton.

Our principal executive offices are located at 1901 Ascension Blvd., Suite
100, Arlington, Texas 76006, and the telephone number is (817) 856-8200.

1

Operating Strategy

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

Geographic Diversity

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

Years Entered Markets
------------- -------

1987............ Phoenix
1988............ Atlanta, Orlando
1989............ Charlotte
1990............ Houston
1991............ Suburban Washington, D.C.
1992............ Chicago, Cincinnati, Raleigh/Durham, South Florida
1993............ Austin, Los Angeles, Salt Lake City, San Diego
1994............ Minneapolis/St. Paul, Las Vegas, San Antonio
1995............ Birmingham, Denver, Greensboro, St. Louis
1996............ Albuquerque
1997............ Greenville, Nashville, New Jersey, Tucson
1998............ Charleston, Hilton Head, Jacksonville, Killeen, Louisville,
Myrtle Beach, Newport News, Portland, Richmond, Sacramento,
Wilmington
1999............ Columbia

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

Acquisitions

As an integral component of our operational strategy of continued
expansion, we continually evaluate opportunities for strategic acquisitions.
We believe that expanding our operations through the acquisition of existing
homebuilding companies affords us several benefits not found in start-up
operations. Such benefits include:

. Established land positions and inventories;

. Existing relationships with land owners, developers, subcontractors and
suppliers;

. Brand name recognition; and

. Proven product acceptance by home buyers in the market.

In evaluating potential acquisition candidates, we seek homebuilding
companies that have an excellent reputation, a track record of profitability
and a strong management team with an entrepreneurial orientation. We limit the
risks associated with acquiring a going concern by conducting extensive
operational, financial and legal due diligence on each acquisition and by only
acquiring homebuilding companies that we believe will have an immediate
positive impact on our earnings. During the last seven fiscal years, we have
made 14 acquisitions. We will continue to evaluate potential future
acquisition opportunities that satisfy our acquisition criteria in both
existing and new markets.

2

Decentralized Operations

We decentralize our homebuilding activities to give more operating
flexibility to our local division presidents. We have 46 separate operating
divisions, some of which are in the same market area. Generally, each
operating division consists of a division president, an office manager and
staff, a sales manager and sales personnel, and a construction manager and
construction superintendents. We believe that division presidents, who are
intimately familiar with local conditions, make better decisions regarding
local operations. Our division presidents receive performance bonuses based
upon achieving targeted operating levels in their operating divisions.

Operating Division Responsibilities

Each operating division is responsible for:

. Site selection, which involves

-- A feasibility study;

-- Soil and environmental reviews;

-- Review of existing zoning and other governmental requirements; and

-- Review of the need for and extent of offsite work required to meet
local building codes.

. Negotiating lot option or similar contracts;

. Overseeing land development;

. Planning its homebuilding schedule;

. Selecting building plans and architectural schemes;

. Obtaining all necessary building approvals; and

. Developing a marketing plan.

Corporate Office Controls

The corporate office controls key risk elements through centralized:

. Financing;

. Cash management;

. Risk management;

. Accounting and management reporting;

. Payment of subcontractors' invoices;

. Administration of payroll and employee benefits;

. Final approval of land and lot acquisitions;

. Capital allocation; and

. Oversight of inventory levels.

Cost Management

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

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

3

Markets

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

Geographic Region Markets
----------------- -------

Mid-Atlantic............ Charleston, Charlotte, Columbia, Greensboro, Greenville,
Hilton Head, Myrtle Beach, New Jersey, Newport News,
Raleigh/Durham, Richmond, Suburban Washington, D.C.,
Wilmington
Midwest................. Chicago, Cincinnati, Louisville, Minneapolis/St. Paul,
St. Louis
Southeast............... Atlanta, Birmingham, Jacksonville, Nashville, Orlando,
South Florida
Southwest............... Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen,
Phoenix, San Antonio, Tucson
West.................... Denver, Las Vegas, Los Angeles, Portland, Sacramento,
Salt Lake City, San Diego

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

. Regional economic conditions;

. Job growth;

. Land availability;

. Local land development process;

. Consumer tastes;

. Competition; and

. Secondary home sales activity.

Our homebuilding revenues by geographic region are:

Year Ended September 30,
--------------------------
1998 1999 2000
-------- -------- --------
(In millions)

Mid-Atlantic..................................... $ 372.2 $ 540.6 $ 614.5
Midwest.......................................... 130.4 347.1 451.0
Southeast........................................ 384.5 429.6 491.5
Southwest........................................ 789.6 1,068.0 1,176.7
West............................................. 478.3 733.7 870.5
-------- -------- --------
Total........................................... $2,155.0 $3,119.0 $3,604.2
======== ======== ========

Land Policies

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

We also use lot option contracts, in which we purchase the right, but not
the obligation, to buy building lots at predetermined prices on a takedown
schedule commensurate with anticipated home closings. Lot option contracts
generally are on a nonrecourse basis, thereby limiting our financial exposure
to earnest money deposits given to property sellers. This enables us to
control significant lot positions with a minimal capital investment and
substantially reduces the risks associated with land ownership and
development. At September 30, 2000, about 43% of our total lot position of
84,377 lots was under option contracts.

4

A summary of our land/lot position at September 30, 2000 is:

Finished lots we own................................................. 10,228
Lots under development we own........................................ 37,599
------
Total lots owned..................................................... 47,827
Lots available under lot option and similar contracts................ 36,550
------
Total land/lot positions............................................. 84,377
======

We limit our exposure to real estate inventory risks by:

. Generally commencing construction of homes under contract only after
receipt of a satisfactory down payment and, where applicable, the
buyer's receipt of mortgage approval;

. Limiting the number of speculative homes (homes started without an
executed sales contract) built in each subdivision;

. Closely monitoring local market and demographic trends, housing
preferences and related economic developments, such as new job
opportunities, local growth initiatives and personal income trends;

. Utilizing lot option contracts, where possible; and

. Limiting the size of acquired land parcels to smaller tracts of land.

Construction

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

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

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

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

Marketing and Sales

We market and sell our homes through commissioned employees and independent
real estate brokers. We typically conduct home sales from sales offices
located in furnished model homes in each subdivision. At September 30, 2000,
we owned 751 model homes, which we generally do not offer for sale until the
completion of a subdivision. Our sales personnel assist prospective home
buyers by providing them with floor plans, price information, tours of model
homes and the selection of options and other custom features. We train and
inform our sales personnel as to the availability of financing, construction
schedules, and marketing and advertising plans.

5

In addition to using model homes, we typically build a limited number of
speculative homes in each subdivision to enhance our marketing and sales
activities. Construction of these speculative homes also is necessary to
satisfy the requirements of relocated personnel and independent brokers, who
often represent home buyers requiring a completed home within 60 days. We sell
a majority of these speculative homes while they are under construction or
immediately following completion. The number of speculative homes is
influenced by local market factors, such as new employment opportunities,
significant job relocations, growing housing demand and the length of time we
have built in the market. Depending upon the seasonality of each market, we
attempt to limit our speculative homes in each subdivision. At September 30,
2000, we averaged less than 5 speculative homes, in various stages of
construction, in each subdivision.

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

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

Customer Service and Quality Control

Our operating divisions are responsible for pre-closing, quality control
inspections and responding to customers' post-closing needs. We believe that
prompt and courteous response to home buyers' needs during and after
construction reduces post-closing repair costs, enhances our reputation for
quality and service, and ultimately leads to significant repeat and referral
business from the real estate community and home buyers. We provide our home
buyers with a limited one-year warranty on workmanship and building materials.
The subcontractors who perform most of the actual construction also provide us
with warranties on workmanship and are generally prepared to respond to us and
the homeowner promptly upon request. In most cases, we supplement our one-year
warranty by purchasing a ten-year limited warranty from a third party. To
cover our potential warranty obligations, we accrue an estimated amount for
future warranty costs.

Customer Financing

We provide mortgage financing services principally to purchasers of homes
we build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage
banking services in Arizona, Colorado, Florida, Georgia, Illinois, Maryland,
Minnesota, Nevada, New Mexico, North and South Carolina, Oregon and Texas.
D.R. Horton Mortgage Company, Ltd., a joint venture formed in 1998 with a
third party, presently provides services in California. On a combined basis,
our mortgage banking entities provided mortgage financing services for about
51% of the homes closed during the year ended September 30, 2000 in the
markets served. We anticipate expanding these mortgage activities to other
markets in which we conduct homebuilding operations.

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

6

Title Services

Through our subsidiaries, Century Title, Custom Title, DRH Title Company of
Texas, Ltd., DRH Title Company of Florida, Inc., DRH Title Company of
Minnesota, Inc., Metro Title Company and Travis County Title Company, we serve
as a title insurance agent by providing title insurance policies and closing
services to purchasers of homes we build in the Dallas/Fort Worth, Austin,
Orlando, Minneapolis, Phoenix, San Antonio, South Florida and suburban
Washington, D.C. markets. We assume no underwriting risk associated with these
title policies.

Employees

At September 30, 2000, we employed 3,631 persons, of whom 970 were sales
and marketing personnel, 1,100 were executive, administrative and clerical
personnel, 1,104 were involved in construction, and 457 worked in mortgage and
title operations. Fewer than 20 of our employees are covered by collective
bargaining agreements. Some of the subcontractors which we use are represented
by labor unions or are subject to collective bargaining agreements. We believe
that our relations with our employees and subcontractors are good.

Competition

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

Governmental Regulation and Environmental Matters

The housing, mortgage and title insurance industries are subject to
extensive and complex regulations. We and our subcontractors must comply with
various federal, state and local laws and regulations, including zoning,
density and development requirements, building, environmental, advertising and
consumer credit rules and regulations, as well as other rules and regulations
in connection with our development, homebuilding, sales and financial services
activities. These include requirements affecting the development process, as
well as building materials to be used, building designs and minimum elevation
of properties. Our homes are inspected by local authorities where required,
and homes eligible for insurance or guarantees provided by the FHA and VA are
subject to inspection by them. These regulations often provide broad
discretion to the administering governmental authorities. This can delay or
increase the cost of development or homebuilding.

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

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

ITEM 2. PROPERTIES

We own a 52,000 square foot office complex, consisting of three single-
story buildings of steel and brick construction, located in Arlington, Texas,
that serves as the principal executive offices and houses two of the
Dallas/Fort Worth divisions. We also lease approximately 333,072 square feet
of space for our operating divisions under leases expiring between November
2000 and June 2006.

7

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock (the "Common Stock") is listed on the New York Stock
Exchange under the symbol "DHI". The following table shows the high and low
sales prices for the Common Stock for the periods indicated, as reported by
the NYSE, adjusted for the 9% stock dividend of September 29, 2000.

Year Ended September 30,
---------------------------
1999 2000
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------

Quarter Ended December 31....................... $21.10 $ 9.75 $14.28 $ 9.17
Quarter Ended March 31.......................... 21.10 13.59 12.90 9.98
Quarter Ended June 30........................... 18.35 14.11 13.42 11.18
Quarter Ended September 30 ..................... 16.11 11.12 19.13 12.61

As of November 30, 2000, the closing price was $18.56, and there were
approximately 338 holders of record. We have declared quarterly cash dividends
of three cents per share for fiscal 1999 and four cents per share for fiscal
2000.

The declaration of cash dividends is at the discretion of our Board of
Directors and will depend upon, among other things, future earnings, cash
flows, capital requirements, our general financial condition and general
business conditions. We are required to comply with certain covenants
contained in the bank agreements and Senior Note and Senior Subordinated Note
indentures. The most restrictive of these requirements allows us to pay cash
dividends on common stock in an amount, on a cumulative basis, not to exceed
50% of consolidated net income, as defined, subject to certain other
adjustments. Pursuant to the most restrictive of these requirements, we had
approximately $242.8 million available for the payment of dividends and the
acquisition of our common stock at September 30, 2000.

9

ITEM 6. SELECTED FINANCIAL DATA

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

Year Ended September 30,
--------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------

Income Statement Data:(1)(2)
Revenues ($ millions)............ $1,147.7 $1,578.4 $2,176.9 $3,156.2 $3,653.7
Homebuilding revenues ($
millions)....................... 1,136.3 1,567.5 2,155.0 3,119.0 3,604.2
Net income from continuing
operations ($ millions)......... 53.2 65.0 93.4 159.8 191.7
Net income per share from
continuing operations:(4)(5)
Basic........................... 1.05 1.18 1.61 2.34 2.83
Diluted......................... 0.98 1.06 1.43 2.29 2.81
Cash dividends declared per
common share (3)................ -- .06 .09 .11 .15

As of September 30,
------------------------------------------
1996 1997 1998 1999 2000
------ -------- -------- -------- --------

Balance Sheet Data:(1)(2)
Inventories.......................... $690.2 $1,024.3 $1,358.0 $1,866.1 $2,191.0
Total Assets......................... 841.3 1,248.3 1,667.8 2,361.8 2,694.6
Notes Payable........................ 420.4 650.7 854.5 1,190.6 1,344.4
Stockholders' Equity................. 306.6 427.9 549.4 797.6 969.6

- --------
(1) See Note C to the audited financial statements for details concerning
acquisitions by the Company.

(2) On April 20, 1998, Horton and Continental consummated a merger pursuant to
which Continental was merged into the Company, with 2.25 shares of the
Company common shares being exchanged for each outstanding share of
Continental. Approximately 15.5 million Horton common shares were issued
to effect the merger. The merger with Continental was treated as a pooling
of interests for accounting purposes. Therefore, all financial amounts
have been restated as if Continental and the Company had been combined
throughout the periods presented.

Prior to the merger, Continental had a fiscal year end of May 31.
Accordingly, the Continental consolidated balance sheet as of May 31, 1996
has been combined with the Company's balance sheet as of September 30,
1996. The related Continental statements of income, stockholders' equity
and cash flows for the fiscal year ended May 31, 1996 have been combined
with the Company's statements of income, stockholders' equity and cash
flows for the fiscal year ended September 30, 1996, respectively.
Continental's balance sheet and the related statements of income,
stockholders' equity and cash flows have been restated to conform to the
Company's fiscal year end of September 30, 1997.

As permitted by regulations of the Securities and Exchange Commission,
Continental's four-month period ended September 30, 1996 has been omitted
from the financial statements. Continental's revenues, cost of sales,
income before taxes and net income for this four month period were
$234.4 million, $191.6 million, $18.8 million and $11.2 million,
respectively.

(3) Cash dividends per common share represent those dividends declared to D.R.
Horton, Inc. shareholders, unadjusted for the merger.

(4) In fiscal 1998, net income includes the net effect of a $7.1 million, net
of tax, provision for costs associated with the merger with Continental.
The earnings per share effects were $0.12 basic and $0.10 diluted.

(5) All basic and diluted net income per share amounts have been restated to
reflect the effects of the September 29, 2000 9% stock dividend.

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

RESULTS OF OPERATIONS--CONSOLIDATED

D.R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding
activities in 23 states and 39 markets through its 46 homebuilding divisions.
Through its financial services activities, the Company also provides mortgage
banking and title agency services in many of these same markets.

On April 20, 1998, D.R. Horton, Inc. ("Horton") acquired Continental Homes
Holding Corp. ("Continental"), a geographically diversified homebuilder,
through the merger of Continental into Horton (the "Merger"). In the Merger,
Horton issued approximately 15.5 million shares of its common stock, and
Continental's outstanding convertible securities and options became
convertible into or exercisable for an additional approximately 8.2 million
shares. The Merger was accounted for as a pooling of interests. Accordingly,
Horton's financial information for prior periods has been restated to show the
combined results of Horton and Continental. In the description of business
that follows, the business of Continental has been combined with Horton as
though Continental had been a part of Horton throughout the periods described.

Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

Consolidated revenues increased 15.8%, to $3,653.7 million in 2000 from
$3,156.2 million in 1999, due to increases in both home and land/lot sales
revenues, as well as financial services revenues.

Income before income taxes increased 17.2%, to $309.2 million in 2000 from
$263.8 million in 1999. As a percentage of revenues, income before income
taxes increased 0.1%, to 8.5%, from 8.4% in 1999, primarily due to an increase
in homebuilding gross profit as a percentage of revenues.

The consolidated provision for income taxes increased 13.0%, to $117.5
million in 2000, from $104.0 million in 1999, primarily due to the
corresponding increase in income before income taxes. The effective income tax
rate decreased 1.4%, to 38.0% in 2000, from 39.4% in 1999, primarily due to
changes in the estimated overall effective state income tax rate.

Year Ended September 30, 1999 Compared to Year Ended September 30, 1998

Consolidated revenues increased 45.0%, to $3,156.2 million in 1999 from
$2,176.9 million in 1998 due to increases in both home and land/lot sales
revenues as well as financial services revenues.

Excluding the nonrecurring merger costs in 1998, income before income taxes
increased 54.3% to $263.8 million in 1999 from $171.0 million in 1998. As a
percentage of revenues, income before income taxes increased 0.5%, to 8.4%,
from 7.9% in 1998 primarily due to the overall reduction in selling, general
and administrative expenses as a percentage of revenues.

The consolidated provision for income taxes increased 58.2%, to $104.0
million in 1999, from $65.7 million in 1998, due to the corresponding increase
in income before income taxes. The effective income tax rate was down 1.9% to
39.4% in 1999, compared to 41.3% in 1998, due primarily to the non-
deductibility of certain merger costs in 1998.

11

RESULTS OF OPERATIONS--HOMEBUILDING

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

Percentages of Homebuilding
Revenues
-------------------------------
Years Ended September 30,
-------------------------------
1998 1999 2000
--------- --------- ---------

Costs and expenses:
Cost of sales............................ 81.7% 81.7% 81.6%
Selling, general and administrative
expense................................. 10.3 9.9 10.0
Interest expense......................... 0.6 0.4 0.3
--------- --------- ---------
Total costs and expenses.................. 92.6 92.0 91.9
Other (income)............................ (0.2) -- (0.1)
--------- --------- ---------
Income before income taxes................ 7.6% 8.0% 8.2%
========= ========= =========

Homes Closed

Years Ended September 30,
-------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
Homes Homes Homes
Closed % Closed % Closed %
------ -------- ------ -------- ------ --------

Mid-Atlantic.............. 2,056 14.7% 2,986 16.2% 3,042 15.9%
Midwest................... 701 5.0% 1,733 9.4% 1,951 10.2%
Southeast................. 2,595 18.6% 2,648 14.4% 2,755 14.4%
Southwest................. 6,145 44.1% 7,640 41.6% 7,721 40.3%
West...................... 2,447 17.6% 3,388 18.4% 3,675 19.2%
------ -------- ------ -------- ------ --------
13,944 100.0% 18,395 100.0% 19,144 100.0%
====== ======== ====== ======== ====== ========

Net New Sales Contracts

Years Ended September 30,
-------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
Homes Homes Homes
Sold $ Sold $ Sold $
------ -------- ------ -------- ------ --------
($ millions)

Mid-Atlantic.............. 2,384 $ 440.6 3,145 $ 602.0 2,774 $ 576.2
Midwest................... 888 169.5 1,996 416.7 1,717 418.7
Southeast................. 2,608 395.2 2,751 452.5 2,906 501.8
Southwest................. 7,161 952.6 7,678 1,103.5 7,829 1,243.2
West...................... 2,911 575.3 3,341 691.5 3,997 936.5
------ -------- ------ -------- ------ --------
15,952 $2,533.2 18,911 $3,266.2 19,223 $3,676.4
====== ======== ====== ======== ====== ========

Sales Backlog

September 30,
-------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
Homes $ Homes $ Homes $
------ -------- ------ -------- ------ --------
($ millions)

Mid-Atlantic.............. 932 $ 180.9 1,091 $ 242.8 823 $ 207.6
Midwest................... 419 80.5 1,134 247.2 900 225.4
Southeast................. 733 116.3 836 140.6 987 177.8
Southwest................. 3,043 423.9 3,081 472.9 3,189 551.5
West...................... 1,214 251.3 1,167 253.0 1,489 374.6
------ -------- ------ -------- ------ --------
6,341 $1,052.9 7,309 $1,356.5 7,388 $1,536.9
====== ======== ====== ======== ====== ========

12

The Company's market regions consist of the following markets:

Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro, Greenville,
Hilton Head, Myrtle Beach, New Jersey, Newport News,
Raleigh/Durham, Richmond, Suburban Washington D.C. and
Wilmington
Midwest Chicago, Cincinnati, Louisville, Minneapolis/St. Paul, and St.
Louis
Southeast Atlanta, Birmingham, Jacksonville, Nashville, Orlando, and South
Florida
Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen,
Phoenix, San Antonio and Tucson
West Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City
and San Diego

Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

Revenues from homebuilding activities (including land/lot sales) increased
15.6%, to $3,604.2 million (19,144 homes closed) in 2000, from $3,119.0
million (18,395 homes closed) in 1999. Revenues from home sales increased in
all of the Company's market regions, with percentage increases ranging from
8.5% in the Southeast region to 28.7% in the Midwest region. The increases in
both revenues and homes closed were due to strong housing demand and the
increases attributable to the acquisition of Cambridge Homes in January 1999.
In markets where the Company operated throughout both twelve-month periods,
home sales revenues increased by 12.3%, to $3,426.6 million, and the number of
homes closed increased 2.4%, to 18,826 homes.

The average selling price of homes closed during 2000 was $182,600, up 9.9%
from $166,100 in 1999. The increase in average selling price was due to
changes in the mix of homes closed and, with the strong housing demand, the
Company's ability to sell more custom features with its homes and to raise
prices to cover increased costs.

The value of new net sales contracts increased 12.6%, to $3,676.4 million
(19,223 homes) in 2000, from $3,266.2 million (18,911 homes) in 1999. The
value of new net sales contracts increased in four of the Company's five
market regions, with percentage increases ranging from 0.5% in the Midwest to
35.4% in the West. The value of new net sales contracts declined 4.3% in the
Mid-Atlantic region. The overall increase in the value of new net sales
contracts was due in part to sales achieved by Cambridge Homes, acquired in
January 1999. In markets where the Company operated throughout both fiscal
years, the value of new net sales contracts increased 10.6%, to $3,607.7
million, and the number of new net sales contracts increased 0.4%, to 18,976
homes. The average price of a new net sales contract in 2000 was $191,300, up
10.8% over the $172,700 average in 1999. The increase in average selling price
was due to changes in the mix of homes closed and, with the strong housing
demand, the Company's ability to sell more custom features with its homes and
to raise prices to cover increased costs.

At September 30, 2000, the Company's backlog of sales contracts was
$1,536.9 million (7,388 homes), up 13.3% from the comparable amount at
September 30, 1999. The average sales price of homes in sales backlog was
$208,000 at September 30, 2000, up 12.1% from the $185,600 average at
September 30, 1999.

Cost of sales increased by 15.4%, to $2,941.1 million in 2000, from
$2,548.5 million in 1999. The increase in cost of sales was primarily
attributable to the increase in revenues. Cost of home sales as a percentage
of home sales revenues declined 0.2%, to 81.4% in 2000, from 81.6% in 1999, as
higher costs were more than offset by increased prices and savings achieved in
our national purchasing program. Cost of land/lot sales decreased to 87.6% of
land/lot sales revenues in 2000, from 88.2% in 1999. Total homebuilding cost
of sales was 81.6% of total homebuilding revenue, down 0.1% from 81.7% in
1999.

Selling, general and administrative (SG&A) expenses from homebuilding
activities increased by 16.4%, to $360.4 million in 2000, from $309.6 million
in 1999. As a percentage of revenues, SG&A expenses increased to 10.0% in
2000, from 9.9% in 1999.

Interest expense associated with homebuilding activities decreased to $10.2
million in 2000, from $12.0 million in 1999. As a percentage of homebuilding
revenues, homebuilding interest expense decreased to

13

0.3% in 2000, from 0.4% in 1999. Throughout 2000, inventory under construction
or development grew at a more rapid pace than interest-bearing debt.
Therefore, a larger proportion of total interest incurred was capitalized to
inventory than in 1999. The Company follows a policy of capitalizing interest
only on inventory under construction or development. During both periods, we
expensed the portion of incurred interest and other financing costs which
could not be charged to inventory. Capitalized interest and other financing
costs are included in cost of sales at the time of home closings.

Year Ended September 30, 1999 Compared to Year Ended September 30, 1998

Revenues from homebuilding activities (including land/lot sales) increased
44.7%, to $3,119.0 million (18,395 homes closed) in 1999, from $2,155.0
million (13,944 homes closed) in 1998. Revenues from home sales increased in
all of the Company's market regions, with percentage increases ranging from
11.4% in the Southeast region to 162.5% in the Midwest region. The increases
in both revenues and homes closed were due to strong housing demand, the
Company's entrance into new markets, and the increases attributable to the
acquisition of Cambridge Homes (January, 1999); C. Richard Dobson Builders,
Inc. (February, 1998); Mareli Development & Construction Co. (May, 1998); and
RMP Development, Inc. (June, 1998). In markets where the Company operated
during both fiscal years, homebuilding revenues increased by 32.9%, to
$2,828.1 million (17,206 homes closed).

The average selling price of homes closed during 1999 was $166,100, up 8.3%
from $153,300 in 1998. The increase in average selling price was due to
changes in the mix of homes closed and increased selling prices.

The value of new net sales contracts increased 28.9%, to $3,266.2 million
(18,911 homes) in 1999, from $2,533.2 million (15,952 homes) in 1998. The
value of new net sales contracts increased in all of the Company's market
regions, with increases ranging from 14.5% in the Southeast region to 145.9%
in the Midwest region. The overall increase in the value of new net sales
contracts was due in part to sales achieved by Cambridge and the 1998
acquisitions, while the value of new net sales contracts increased 15.9%, to
$2,935.3 million, in markets where the Company operated in both periods. The
average price of a new net sales contract in 1999 was $172,700, up 8.8% over
the $158,800 average in 1998. This increase was due to changes in the mix of
homes sold and increased selling prices.

At September 30, 1999, the Company's backlog of sales contracts was
$1,356.5 million (7,309 homes), up 28.8% from the comparable amount at
September 30, 1998. In markets in which the Company operated during both
fiscal years, the sales contract backlog was $1,195.4 million (6,585 homes),
up 11.4% from 1998. The average sales price of homes in sales backlog was
$185,600 at September 30, 1999, up 11.8% from the $166,000 average at
September 30, 1998.

Cost of sales increased by 44.8%, to $2,548.5 million in 1999, from
$1,760.1 million in 1998. The increase in cost of sales was primarily
attributable to the increase in revenues. Cost of home sales as a percentage
of home sales revenues was at 81.6% for both years. The application of
purchase accounting to homes acquired in the Cambridge acquisition, and closed
subsequent to the acquisition, caused an $8.4 million increase (0.3% of
revenues) in cost of goods sold for the year. Cost of land/lot sales decreased
to 88.2% of land/lot sales revenues in 1999, from 94.2% in 1998. Total
homebuilding cost of sales was 81.7% of total homebuilding revenues in both
years.

Selling, general and administrative (SG&A) expenses from homebuilding
activities increased by 39.5%, to $309.6 million in 1999, from $221.9 million
in 1998. As a percentage of revenues, SG&A expenses decreased to 9.9% in 1999,
from 10.3% in 1998. The decrease in SG&A expenses as a percentage of revenue
is primarily due to the Company's cost containment efforts and the increased
revenues that absorb the fixed elements of overhead. Included in SG&A expenses
in 1999, is a $5.2 million charge (0.2% of revenues) for severance benefits
associated with former Continental executives.

Interest expense associated with homebuilding activities decreased to $12.0
million in 1999, from $14.0 million in 1998. As a percentage of homebuilding
revenues, interest expense decreased to 0.4% in 1999, from

14

0.7% in 1998. The decrease in homebuilding interest expense resulted from a
slightly lower overall homebuilding effective interest rate in 1999, due to
the peak usage of the variable rate revolving line of credit facility
coinciding with the mid-year trough in the floating rate to which it is tied.
Homebuilding interest expense also declined due to the growth in active
inventory outpacing the growth in interest-bearing debt. That permitted us to
capitalize relatively higher amounts of incurred interest during 1999. The
Company follows a policy of capitalizing interest only on inventory under
construction or development. During 1999 and 1998, we expensed the portion of
incurred interest and other financing costs which could not be charged to
inventory. Capitalized interest and other financing costs are included in cost
of sales at the time of home closings.

RESULTS OF OPERATIONS--FINANCIAL SERVICES

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

Year Ended September
30,
-------------------------
Financial Services: 1998 1999 2000
------------------- ------- ------- -------

Number of loans originated...................... 6,047 8,528 9,151
------- ------- -------
Loan origination fees........................... $ 5,929 $ 8,702 $ 9,981
Sale of servicing rights and gains from sale of
mortgages...................................... 9,276 16,632 21,271
Other revenues.................................. 1,998 4,154 4,529
------- ------- -------
Total mortgage banking revenues................. 17,203 29,488 35,781
Title policy premiums, net...................... 4,689 7,763 13,741
------- ------- -------
Total revenues.................................. 21,892 37,251 49,522
General and administrative expenses............. 15,244 24,713 35,470
Interest expense................................ 2,220 4,433 5,616
Interest/other (income)......................... (2,668) (4,984) (6,257)
------- ------- -------
Income before income taxes...................... $ 7,096 $13,089 $14,693
======= ======= =======

Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

Revenues from the financial services segment increased 32.9%, to $49.5
million in 2000, from $37.3 million in 1999. The increase in financial
services revenues was due to the rapid expansion of the Company's mortgage
loan and title services provided to customers of the Company's homebuilding
segment. These activities are being expanded to additional markets served by
the homebuilding segment. General and administrative expenses associated with
financial services increased 43.5%, to $35.5 million in 2000, from $24.7
million in 1999. As a percentage of financial services revenues, general and
administrative expenses increased by 5.3%, to 71.6% in 2000, from 66.3% in
1999, due primarily to 2000 startup expenses in new markets with limited
revenues.

Year Ended September 30, 1999 Compared to Year Ended September 30, 1998

Revenues from financial services operations increased 70.2% to $37.3
million in 1999 from $21.9 million in 1998. The increase in financial services
revenues was due to the rapid expansion of the Company's title agency and
mortgage loan services provided to the Company's homebuilding customers.
Accordingly, general and administrative expenses associated with financial
services increased 62.1%, to $24.7 million in 1999 from $15.2 million in 1998.
As a percentage of financial services revenues, general and administrative
expenses decreased by 3.3% to 66.3% in 1999 from 69.6% in 1998, due primarily
to higher than normal 1998 startup expenses in new markets.

15

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2000, the Company had available cash and cash equivalents
of $72.5 million. Inventories (including finished homes, construction in
progress, and developed residential lots and other land) at September 30,
2000, had increased by $324.9 million from September 30, 1999, due to a
general increase in business activity and the expansion of operations in the
Company's market areas. The inventory increase was financed largely by issuing
senior notes and retaining earnings. The revolving credit facility was reduced
by $203 million during fiscal 2000. As a result, the Company's ratio of
homebuilding notes payable to total capital at September 30, 2000, decreased
1.5% to 56.2%, from 57.7% at September 30, 1999. The stockholders' equity to
total assets ratio increased 2.2%, to 36.0% at September 30, 2000, from 33.8%
at September 30, 1999.

The Company has an $825 million, unsecured revolving credit facility,
consisting of a $775 million four-year revolving loan and a $50 million four-
year letter of credit facility that matures in fiscal 2002. Additionally, the
Company has another $25 million standby letter of credit agreement and a $10.9
million non-renewable letter of credit facility. At September 30, 2000, the
Company had outstanding homebuilding debt of $1,245.6 million, of which $192
million represented advances under the revolving credit facility. Under the
debt covenants associated with the revolving credit facility, at September 30,
2000, the Company had additional homebuilding borrowing capacity of $583
million. The Company has entered into multi-year interest rate swap
agreements, aggregating $200 million, that fix the interest rate on a portion
of the variable rate revolving credit facility. An additional interest rate
swap agreement, with a notional amount of $148.5 million, was entered into in
December 1999. This agreement has the effect of converting part of the
Company's fixed rate debt to a variable rate, which is currently less than the
related fixed rate, and helps re-establish the Company's balance of fixed and
variable rate debt at historical levels.

During March and June 2000, under an existing universal shelf registration
statement, the Company issued $200 million aggregate principal amount of 10
1/2% Senior Notes, due 2005. During September 2000, the Company issued $150
million aggregate principal amount of 9 3/4% Senior Subordinated Notes due
2010. The proceeds of the notes were used to repay outstanding debt under our
revolving credit facility and for general corporate purposes. The Company has
$250 million remaining on its currently effective universal shelf registration
statement, which facilitates access to the capital markets.

At September 30, 2000, the financial services segment has mortgage loans
held for sale of $119.6 million and loan commitments for $75.6 million at
fixed rates. The Company hedges the interest rate market risk on these
mortgage loans held for sale and loan commitments through the use of best-
efforts whole loan delivery commitments, mandatory forward commitments to sell
mortgage-backed securities and the purchase of options on financial
instruments.

The financial services segment has a $175 million, one-year bank warehouse
facility that is secured by mortgage loans held for sale. The warehouse
facility is not guaranteed by the parent company. As of September 30, 2000,
$98.8 million had been drawn under this facility. In the future, it is
anticipated that all mortgage company activities will be financed under the
warehouse facility.

The Company's rapid growth and acquisition strategy require significant
amounts of cash. It is anticipated that future home construction, lot and land
purchases and acquisitions will be funded through internally generated funds
and existing credit facilities. Additionally, an effective shelf registration
contains about 7.4 million shares of common stock issuable to effect, in whole
or in part, possible future acquisitions. In the future, the Company intends
to maintain effective shelf registration statements that would facilitate
access to the capital markets.

During fiscal 2000, the Company's Board of Directors declared one quarterly
cash dividend of $0.03 per common share and three quarterly cash dividends of
$0.04 per common share, the last of which was paid on August 25, 2000.

In November 1998, the Company's Board of Directors approved stock and debt
repurchase programs for up to $100 million each. These programs are intended
to allow the Company to repurchase securities at attractive prices should
favorable market conditions occur. During the fiscal year 2000, the Company
repurchased in the

16

open market $14.5 million of its common stock, or 1,104,900 shares at an
average cost of $13.16. At September 30, 2000, the Company had repurchased
$36.9 million of its common stock, or 2,589,200 shares.

In July 1999, the Company formed GP-Encore, Inc. and Encore II, Inc., which
have since entered into three separate limited partnership agreements with the
purpose of investing in start-up and emerging growth companies whose
technology and business plans will permit the Company to leverage its size,
expertise and customer base in the homebuilding industry. The Company has
authorized investments of up to $125 million through these limited
partnerships over the next four years. These investments will be concentrated
primarily in e-commerce businesses that serve the homebuilding, real estate
and financial services industries, as well as in strategic opportunities that
allow for diversification of the Company's operations. As of September 30,
2000, the Company had made such investments totaling $29.3 million, which are
reported in homebuilding other assets.

Except for ordinary expenditures for the construction of homes, the
acquisition of land and lots for development and sale of homes, at September
30, 2000, the Company had no material commitments for capital expenditures.

INFLATION

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

SAFE HARBOR STATEMENT

Certain statements contained in this report, as well as in other materials
we have filed or will file with the Securities and Exchange Commission,
statements made by us in periodic press releases and oral statements made by
Company officials to analysts, stockholders and the press in the course of
presentations about the Company, may be construed as "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of
1995. Any or all of the forward-looking statements included in this report and
in any other reports or public statements of the Company may turn out to be
inaccurate due to known or unknown risks and uncertainties. As a result,
actual results may differ materially from the results discussed in and
anticipated by the forward-looking statements. The following cautionary
discussion of risks and uncertainties relevant to our business includes
factors we believe could adversely affect us. Other factors beyond those
listed below could also adversely affect us.

. General Economic, Real Estate and Other Conditions--The homebuilding
industry is cyclical and is significantly affected by changes in general
and local economic conditions, such as employment levels, availability of
financing for home buyers, interest rates, consumer confidence and housing
demand. Any oversupply of alternatives to new homes, such as rental
properties and used homes, could depress new home prices and reduce our
margins on the sale of new homes. Homebuilders are also subject to risks
related to the availability and cost of land suitable for homebuilding, the
availability and cost of materials and labor, adverse weather conditions
which can cause delays in construction schedules and cost overruns.

. Increases in Interest Rates or Decreases in Mortgage Availability--
Virtually all of our customers finance their homes through lenders
providing mortgage financing. Any future increases in interest rates or
decreases in the availability of mortgage financing could depress the
market for new homes by making our homes less affordable.

17

. Governmental Regulations and Environmental Matters--We are subject to
extensive and complex regulations that affect the development and
homebuilding process, including zoning, density and building standards.
Such regulations often provide broad discretion to the administering
governmental authorities. This can delay or increase the costs of
development or homebuilding. Laws and regulations relating to the
protection of the environment can cause delays, increased costs of
compliance and prohibitions or restrictions of development and homebuilding
activity in environmentally sensitive areas.

. Substantial Debt--We have a significant amount of debt. The amount of our
debt could limit our ability to obtain future financing for working
capital, capital expenditures, acquisitions, debt service requirements or
other requirements. It could also limit our flexibility in planning for, or
reacting to, changes in our business and make us more vulnerable in the
event of a downturn in our business or in general economic conditions.

. Competitive Conditions--The homebuilding industry is very competitive. In
each of the markets we serve, we compete with other homebuilders for home
buyers, desirable properties, financing, raw materials and skilled labor.
Competitive conditions in the homebuilding industry could result in
difficulty in acquiring suitable land at acceptable prices, the need for
increased selling incentives, lower sales or delays in construction.

. Availability of Capital--Our ability to grow our business and operations
profitably is substantially dependent upon our ability to obtain capital
from the sale of equity or debt or additional bank borrowings. Increases in
interest rates, changes in our debt ratings by the national credit rating
agencies, concerns by potential investors about the market or the economy,
changing lending objectives of financial institutions, or further
consolidation of financial institutions that lend to the homebuilding
industry could increase our costs of borrowing or reduce the availability
of funds necessary for us to achieve our strategic growth objectives.
Moreover, the indentures for our outstanding debt contain provisions that
may restrict the debt we may incur in the future.

. Growth Strategies--Since 1993, we have acquired and successfully integrated
many homebuilding companies. In the future, we may acquire additional
companies. Our prospects may be affected by our ability to successfully
identify and integrate future acquisitions. Our prospects may also be
affected by our ability to implement successfully our growth strategies in
the markets we currently serve.

. Diversification Efforts--Our prospects may be affected by the results of
our investments in e-commerce and technology initiatives related to
homebuilding.

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

18

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to interest rate risk on its long term debt. The
Company manages its exposure to changes in interest rates by optimizing the
use of variable and fixed rate debt. In addition, the Company hedges its
exposure to changes in interest rates on its variable rate bank debt by
entering into interest rate swap agreements to lock in a fixed interest rate
for a portion of these borrowings. Finally, in order to maintain a more
appropriate balance of variable and fixed rate debt, the Company entered into
an interest rate swap agreement exchanging a fixed rate interest payment for a
variable rate payment on a notional amount equal to the $148.5 million
principal amount of the 10% Senior Notes due 2006. The variable payment for
which the Company is obligated is fixed through the 10% Senior Notes' first
call date, April 15, 2001, and will ensure that the Company will have received
a net amount of $2.3 million as of that date. Thereafter, the variable payment
will be made through the 10% Senior Notes's maturity, April 15, 2006, and will
be based upon the 90-day LIBOR rate, plus 2.745%.

In connection with the Financial Services segment, mortgage loans held for
sale and the associated warehouse line are subject to interest rate risk. The
Company uses forward commitments to manage this interest rate risk. However,
all the financial services segment's obligations are short-term in duration
and repriced frequently. Accordingly, the Company does not believe that the
risks associated with this segment's financing activities are material.

The following table sets forth, as of September 30, 2000, the Company's
long term debt obligations, principal cash flows by scheduled maturity,
weighted average interest rates and estimated fair market value. In addition,
the table sets forth the notional amounts and weighted average interest rates
of the Company's interest rate swaps.

Year Ended September 30,
---------------------------------------------------------------------
($ in millions)
FMV @
2001 2002 2003 2004 2005 Thereafter Total 9/30/00
------ ------ ------ ------ ------ ---------- -------- --------

Debt:
Fixed rate............ $ 18.3 $ 6.2 $ -- $149.6 $200.2 $679.3 $1,053.6 $1,036.9
Average interest
rate................. 8.22% 7.29% -- 8.45% 10.52% 8.87% 9.11% --
Variable rate......... $ 98.8 $192.0 $ -- $ -- $ -- $ -- $ 290.8 $ 290.8
Average interest
rate................. 7.62% 7.41% -- -- -- -- 7.48% --
Interest Rate Swaps:
Variable to fixed..... $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $ -- $ 4.2
Average pay rate...... 5.10% 5.10% 5.10% 5.10% 5.10% 5.08% -- --
Average receive rate.. 90-day LIBOR
Fixed to Variable..... $148.5 $148.5 $148.5 $148.5 $148.5 $148.5 $ -- $ (0.8)
Average pay rate...... * * * * * *
Average receive rate.. 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% -- --

- --------
* - 8.745% until April 15, 2001; 90-day LIBOR + 2.745% thereafter

19

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Report of Independent Auditors........................................... 21
Consolidated Balance Sheets, September 30, 1999 and 2000................. 22
Consolidated Statements of Income for the three years ended September 30,
2000.................................................................... 23
Consolidated Statements of Stockholders' Equity for the three years ended
September 30, 2000...................................................... 24
Consolidated Statements of Cash Flows for the three years ended September
30, 2000................................................................ 25
Notes to Consolidated Financial Statements............................... 26

20

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
D.R. Horton, Inc.

We have audited the accompanying consolidated balance sheets of D.R.
Horton, Inc. and subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of D.R. Horton,
Inc. and subsidiaries at September 30, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States.

/s/ Ernst & Young
Fort Worth, Texas
November 9, 2000

21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of September 30,
----------------------
1999 2000
---------- ----------
(In thousands)

ASSETS
Homebuilding:
Cash.................................................. $ 122,208 $ 61,798
Inventories:
Finished homes and construction in progress.......... 952,015 1,095,636
Residential lots--developed and under development.... 909,586 1,092,571
Land held for development............................ 4,507 2,824
---------- ----------
1,866,108 2,191,031
Property and equipment (net).......................... 36,972 38,960
Earnest money deposits and other assets............... 96,807 148,983
Excess of cost over net assets acquired (net)......... 112,456 115,966
---------- ----------
2,234,551 2,556,738
---------- ----------
Financial Services:
Cash.................................................. 6,360 10,727
Mortgage loans held for sale.......................... 113,786 119,581
Other assets.......................................... 7,111 7,531
---------- ----------
127,257 137,839
---------- ----------
$2,361,808 $2,694,577
========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities................ $ 365,506 $ 370,389
Notes payable:
Unsecured:
Revolving credit facility due 2002................. 395,000 192,000
8 3/8% senior notes due 2004, net.................. 148,150 148,547
10 1/2% senior notes due 2005, net................. -- 199,343
10% senior notes due 2006, net..................... 147,278 147,398
8% senior notes due 2009, net...................... 382,941 383,089
9 3/4% senior subordinated notes due 2010, net..... -- 148,821
Other secured...................................... 12,904 26,388
---------- ----------
1,086,273 1,245,586
---------- ----------
1,451,779 1,615,975
---------- ----------
Financial Services:
Accounts payable and other liabilities................ 3,268 4,958
Notes payable to financial institutions............... 104,350 98,817
---------- ----------
107,618 103,775
---------- ----------
1,559,397 1,719,750
---------- ----------
Minority interest..................................... 4,802 5,264
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000 shares
authorized, no shares issued......................... -- --
Common stock, $.01 par value, 200,000,000 shares
authorized, 64,267,073 shares at September 30, 1999
and 70,074,110 shares at September 30, 2000, issued
and outstanding...................................... 643 701
Additional capital.................................... 419,259 537,145
Retained earnings..................................... 400,111 468,664
Treasury stock, 1,484,300 shares at September 30, 1999
and 2,589,200 shares at September 30, 2000, at cost.. (22,404) (36,947)
---------- ----------
797,609 969,563
---------- ----------
$2,361,808 $2,694,577
========== ==========

See accompanying notes to consolidated financial statements

22

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Year Ended September 30,
----------------------------------
1998 1999 2000
---------- ---------- ----------
(In thousands, except per share
data)

Homebuilding:
Revenues
Home sales............................... $2,138,203 $3,055,032 $3,496,091
Land/lot sales........................... 16,846 63,928 108,082
---------- ---------- ----------
2,155,049 3,118,960 3,604,173
Cost of sales
Home sales............................... 1,744,281 2,492,113 2,846,407
Land/lot sales........................... 15,867 56,383 94,702
---------- ---------- ----------
1,760,148 2,548,496 2,941,109
Gross profit
Home sales............................... 393,922 562,919 649,684
Land/lot sales........................... 979 7,545 13,380
---------- ---------- ----------
394,901 570,464 663,064
Selling, general and administrative
expense.................................. 221,906 309,598 360,404
Interest expense.......................... 14,020 12,018 10,227
Other (income)............................ (4,945) (1,889) (2,098)
---------- ---------- ----------
163,920 250,737 294,531
---------- ---------- ----------
Financial Services:
Revenues.................................. 21,892 37,251 49,522
General and administrative expense........ 15,244 24,713 35,470
Interest expense.......................... 2,220 4,433 5,616
Other (income)............................ (2,668) (4,984) (6,257)
---------- ---------- ----------
7,096 13,089 14,693
---------- ---------- ----------
Merger costs.............................. 11,917 -- --
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.............. 159,099 263,826 309,224
Provision for income taxes................ 65,719 103,999 117,505
---------- ---------- ----------
NET INCOME.............................. $ 93,380 $ 159,827 $ 191,719
========== ========== ==========
Basic earnings per common share........... $ 1.61 $ 2.34 $ 2.83
========== ========== ==========
Diluted earnings per common share......... $ 1.43 $ 2.29 $ 2.81
========== ========== ==========
Cash dividends per share.................. $ 0.0875 $ 0.1125 $ 0.15
========== ========== ==========

See accompanying notes to consolidated financial statements.

23

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Total
Common Additional Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
------- ---------- -------- -------- -------------
(In thousands, except common stock share data)

Balances at October 1,
1997..................... $ 527 $268,631 $158,708 $ -- $427,866
Net income................ -- -- 93,380 -- 93,380
Stock issued as partial
consideration for
acquisition (70,249
shares).................. 1 1,124 -- -- 1,125
Issuances under D.R.
Horton, Inc. employee
benefit plans (27,098
shares).................. -- 483 -- -- 483
Exercise of stock options
(374,514 shares)......... 4 4,429 -- -- 4,433
Conversion of convertible
subordinated notes
(2,586,174 shares)....... 26 26,836 -- -- 26,862
Cash dividends declared
($.0875 per share to D.R.
Horton stockholders)..... -- -- (4,713) -- (4,713)
------- -------- -------- -------- --------
Balances at September 30,
1998..................... $ 558 $301,503 $247,375 $ -- $549,436
Net income................ -- -- 159,827 -- 159,827
Stock issued as partial
consideration for
acquisition (2,555,911
shares).................. 26 54,974 -- -- 55,000
Issuances under D.R.
Horton, Inc. employee
benefit plans (11,217
shares).................. -- 150 -- -- 150
Exercise of stock options
(293,869 shares)......... 3 3,361 -- -- 3,364
Conversion of convertible
subordinated notes
(5,569,343 shares)....... 56 59,271 -- -- 59,327
Purchase of treasury stock
(1,484,300 shares)....... -- -- -- (22,404) (22,404)
Cash dividends declared
($.1125 per share)....... -- -- (7,091) -- (7,091)
------- -------- -------- -------- --------
Balances at September 30,
1999..................... $ 643 $419,259 $400,111 $(22,404) $797,609
Net income................ -- -- 191,719 -- 191,719
Issuances under D.R.
Horton, Inc.
employee benefit plans
(34,750 shares).......... -- 380 -- -- 380
Exercise of stock options
(200,305 shares)......... 2 3,684 -- -- 3,686
Purchase of treasury stock
(1,104,900 shares)....... -- -- -- (14,543) (14,543)
Cash dividends declared
($.15 per share)......... -- -- (9,288) -- (9,288)
9% stock dividend
(5,571,982 shares)....... 56 113,822 (113,878) -- --
------- -------- -------- -------- --------
Balances at September 30,
2000..................... $ 701 $537,145 $468,664 $(36,947) $969,563
======= ======== ======== ======== ========

See accompanying notes to consolidated financial statements

24

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended September 30,
-------------------------------
1998 1999 2000
--------- --------- ---------
(In thousands)

OPERATING ACTIVITIES
Net income.................................... $ 93,380 $ 159,827 $ 191,719
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............... 9,400 20,293 21,960
Amortization of debt premiums and fees...... 1,452 1,601 2,532
Expense associated with issuance of stock
under employee benefit plans............... 999 -- --
Changes in operating assets and liabilities:
Increase in inventories..................... (261,189) (385,552) (299,931)
Increase in earnest money deposits and other
assets..................................... (17,053) (10,584) (21,126)
Increase in mortgage loans held for sale.... (38,253) (41,461) (5,795)
Increase in accounts payable and other
liabilities................................ 87,552 88,949 3,093
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES......... (123,712) (166,927) (107,548)
--------- --------- ---------
INVESTING ACTIVITIES
Net purchases of property and equipment..... (13,167) (19,610) (15,789)
Net investments in venture capital
entities................................... -- (250) (29,032)
Net cash paid for acquisitions.............. (34,035) (6,951) (11,559)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES......... (47,202) (26,811) (56,380)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from notes payable................. 416,093 515,868 745,000
Repayment of notes payable.................. (246,856) (621,469) (963,695)
Issuance of senior and senior subordinated
notes payable.............................. -- 377,134 346,345
Repurchase of treasury stock................ -- (22,404) (14,543)
Proceeds from stock associated with certain
employee benefit plans..................... 483 150 380
Proceeds from exercise of stock options..... 4,433 3,364 3,686
Cash dividends paid......................... (4,713) (7,091) (9,288)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 169,440 245,552 107,885
--------- --------- ---------
INCREASE / (DECREASE) IN CASH................. (1,474) 51,814 (56,043)
Cash at beginning of year................... 78,228 76,754 128,568
--------- --------- ---------
Cash at end of year......................... $ 76,754 $ 128,568 $ 72,525
========= ========= =========
Supplemental cash flow information:
Interest paid, net of amounts capitalized.. $ 15,937 $ 16,279 $ 14,718
========= ========= =========
Income taxes paid.......................... $ 65,863 $ 99,784 $ 126,964
========= ========= =========
Supplemental disclosures of noncash
activities:
Notes payable assumed related to
acquisitions.............................. $ 61,377 $ 103,780 $ --
========= ========= =========
Conversion of subordinated notes to common
stock..................................... $ 26,862 $ 59,327 $ --
========= ========= =========
Issuance of common stock related to
acquisitions.............................. $ 1,125 $ 55,000 $ --
========= ========= =========
Notes payable issued for inventory......... $ 1,105 $ 13,075 $ 24,992
========= ========= =========

See accompanying notes to consolidated financial statements

25

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business: D. R. Horton, Inc. (the Company) is a national builder that is
engaged primarily in the construction and sale of single-family housing in 39
markets and 23 states in the United States. The Company designs, builds and
sells single-family houses on lots developed by the Company and on finished
lots which it purchases, ready for home construction. Periodically, the
Company sells lots it has developed. The Company also provides title agency
and mortgage brokerage services to its homebuyers. The Company does not retain
or service the mortgages that it originates but, rather, sells the mortgages
and related servicing rights to investors.

Merger: On April 20, 1998, the Company and Continental Homes Holding Corp.
(Continental) consummated a merger pursuant to which Continental was merged
into the Company, with 2.25 shares of the Company common shares exchanged for
each outstanding share of Continental. Approximately 15,459,500 of Company
common shares were issued to effect the merger. The merger with Continental
was treated as a pooling of interests for accounting purposes. Therefore, all
financial amounts have been presented as if Continental and the Company had
been combined at the earliest period presented.

Continental's statements of income, stockholders' equity and cash flows
have been restated to conform to the Company's fiscal year end of
September 30, 1997. The results of operations for the separate companies prior
to combination and the combined amounts presented in the consolidated
financial statements are (in thousands):

Six Months Ended
March 31, 1998
----------------

Revenue
D.R. Horton, Inc.......................................... $ 508,603
Continental............................................... 358,910
---------
Combined.................................................. $ 867,513
=========
Net income
D.R. Horton, Inc.......................................... $ 22,574
Continental............................................... 15,242
---------
Combined.................................................. $ 37,816
=========

Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned and majority-owned
subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation.

Accounting principles: The preparation of financial statements in
accordance with 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
materially from those estimates.

Cash: The Company considers all highly liquid investments with an initial
maturity of three months or less when purchased to be cash equivalents.
Amounts in transit from title companies for home closings are included in
cash.

Cost of sales: Cost of sales includes home warranty costs, purchased
discounts for customer financing, and sales commissions paid to third parties.

Excess of cost over net assets acquired: The excess of amounts paid for
business acquisitions over the net fair value of the assets acquired and
liabilities assumed is amortized using the straight-line method over the
estimated benefit period, ranging from ten to twenty years. Additional
consideration paid in subsequent periods under the terms of purchase
agreements are included as acquisition costs. Amortization expense was
$3,427,000, $9,481,000 and $8,193,000 in fiscal 1998, 1999 and 2000,
respectively. Accumulated amortization was $21,116,000 and $29,309,000 at
September 30, 1999 and 2000, respectively.

26

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Impairment of intangible assets is reviewed annually or when events and
circumstances warrant an earlier review. Impairment is determined when
estimated future undiscounted cash flows associated with an intangible asset
are less than the asset's carrying value.

Interest: The Company capitalizes interest during development and
construction. Capitalized interest is charged to cost of sales as the related
inventory is delivered to the home buyer. Interest costs are (in thousands):

Year Ended September 30,
----------------------------
1998 1999 2000
-------- -------- --------

Capitalized interest, beginning of year........ $ 28,952 $ 35,153 $ 41,525
Interest incurred--homebuilding................ 68,216 76,543 104,360
Interest expensed
Directly--homebuilding....................... (14,020) (12,018) (10,227)
Amortized to cost of sales................... (47,995) (58,153) (69,566)
-------- -------- --------
Capitalized interest, end of year.............. $ 35,153 $ 41,525 $ 66,092
======== ======== ========

Inventories: Finished inventories are stated at the lower of accumulated
cost or fair value less costs to sell. Inventories under development or held
for development are stated at accumulated costs, unless such costs would not
be recovered from the cash flows generated by future disposition. In this
instance, such inventories are measured at fair value, less costs of disposal.

Sold units are expensed on a specific identification basis as cost of
sales. Included in inventories are related interest and property taxes which
are capitalized in inventory during the development and construction periods.
Residential lots are transferred to construction in progress when building
permits are requested. Land and development costs are allocated to individual
lots on a prorata basis.

Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.

Minority interest: The Company has a joint venture arrangement on a land
project whereby the Company is entitled to 55% of the profits and/or losses
and is the managing partner. The financial position and results of operations
of the joint venture are consolidated for financial statement purposes and the
partners' equity position is disclosed as a minority interest.

Property and equipment: Property and equipment, including model home
furniture, are stated on the basis of cost. Major renewals and improvements
are capitalized. Repairs and maintenance are expensed as incurred.
Depreciation generally is provided using the straight-line method over the
estimated useful life of the asset. Accumulated depreciation was $30,563,000
and $38,285,000 as of September 30, 1999 and 2000, respectively.

Revenue recognition: Revenue is recognized at the time of the closing of a
sale, when title to and possession of the property transfer to the buyer.

Advertising cost: The Company expenses advertising costs as they are
incurred. Advertising expense was approximately $13,077,000, $22,182,000, and
$24,043,000 in fiscal 1998, 1999, and 2000, respectively.

Earnings per share: Basic earnings per share is based upon the weighted
average number of shares of common stock outstanding during each year.

Diluted earnings per share is based upon the weighted average number of
shares of common stock outstanding during each year, adjusted for the effects
of dilutive securities. Per share information has been restated for the effect
of the 9% stock dividend issued in September, 2000.

27

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table sets forth the computation of basic and diluted
earnings per share (in thousands):

Year Ended September 30,
-------------------------
1998 1999 2000
------- -------- --------

Numerator:
Net income...................................... $93,380 $159,827 $191,719
Effect of dilutive securities:
Interest expense associated with 6 7/8%
convertible subordinated notes, net.......... 3,322 -- --
------- -------- --------
Numerator for diluted earnings per share after
assumed conversions............................ $96,702 $159,827 $191,719
======= ======== ========
Denominator:
Denominator for basic earnings per share--
weighted-average shares........................ 58,128 68,427 67,629
Effect of dilutive securities:
6 7/8% convertible subordinated notes......... 8,320 359 --
Employee stock options........................ 1,226 925 589
------- -------- --------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed
conversions.................................. 67,674 69,711 68,218
======= ======== ========

Options to purchase 1,703,000 and 1,425,000 shares of common stock at
various prices were outstanding during 1999 and 2000, respectively, but were
not included in the computation of diluted earnings per share because the
exercise prices were greater than the average market price of the common
shares and, therefore, their effect would be antidilutive.

Segment information: Effective September 30, 1999, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS 131 establishes new
standards for segment reporting which is based on the way management organizes
segments within a company for making operating decisions and assessing
performance.

The Company's financial reporting segments consist of homebuilding and
financial services. The Company's homebuilding operations comprise the most
substantial part of its business, with approximately 99% of consolidated
revenues in fiscal 1998, 1999 and 2000. The homebuilding operations segment
generates the majority of its revenues from the sale of completed homes with a
lesser amount from the sale of land and lots. The financial services segment
generates its revenues from originating and selling mortgages and collecting
fees for title insurance agency and closing services. Expenditures for long-
lived assets and depreciation and amortization related to the financial
services segment for the years ended September 30, 1998, 1999 and 2000 were
not significant.

The accounting policies of the reportable segments are described throughout
this note. Assets, revenues and operating income of the Company's reportable
segments are included in the consolidated balance sheets and consolidated
statements of income.

Mortgage loans: Mortgage loans held for sale are reported net of discounts
and are stated at the lower of cost or market as determined in the aggregate,
based on sale commitments or current market quotes, net of any unrealized
market gains or losses on related hedge instruments. Any gain or loss on the
sale of loans is recognized at the time of sale. Loan origination fees, net of
the related direct origination costs, are deferred as an adjustment to the
carrying value of the related mortgage loans held for sale and are recognized
in income upon the sale of the mortgage loans.

28

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Loan commitments: To meet the financing needs of its customers, the Company
is party to commitments to extend credit at fixed rates. These loan
commitments have no carrying value on the balance sheet and expose the Company
to market risk as a result of increases in mortgage interest rates. These
risks are managed by the Company's hedging activities described below. At
September 30, 1999 and 2000, the Company had loan commitments of
$103.0 million and $75.6 million, respectively.

Financial services hedging strategy: The Company manages its interest rate
market risk on mortgage loans held for sale and its estimated future
commitments to originate and close mortgage loans at fixed prices through the
use of best-efforts whole loan delivery commitments, mandatory forward
commitments to sell mortgage-backed securities and the purchase of options on
financial instruments. The Company estimates the portion of the locked
mortgage loan pipeline that is expected to close in order to determine the
amount of hedging instruments. These hedging instruments are intended and
effective as hedges for interest rate market risk on mortgage loans held for
sale and estimated future commitments. Accordingly, gains and losses are
deferred until ultimate disposition of the contract. As of September 30, 1999
and 2000, the Company had approximately $104.0 million and $118.3 million,
respectively, of mandatory forward commitments outstanding and no options on
financial instruments outstanding.

Long-lived assets: Impairment of long-lived assets is reviewed annually or
when events and circumstances warrant an earlier review. In accordance with
SFAS No. 121, impairment is determined when estimated future undiscounted cash
flows associated with an asset are less than the asset's carrying value.

Stock-based compensation: The Company may, with the approval of its Board
of Directors, grant stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants. The Company
has adopted the disclosure-only provisions as specified by SFAS No. 123,
"Accounting for Stock-Based Compensation."

Impact of recently issued accounting standards: SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998.
This statement addresses the accounting for and disclosure of derivative
instruments, including derivative instruments imbedded in other contracts
(collectively referred to as "derivatives"), and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value. SFAS No. 137 was issued in June 1999 delaying the implementation
of SFAS 133 until fiscal 2001. Management has analyzed the implementation
requirements and does not anticipate that the adoption of the new statement
will have a significant effect on earnings or the financial position of the
Company.

NOTE B--NOTES PAYABLE

In April 1999, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission for up to $600 million of the
Company's debt and equity securities. The universal shelf registration
provides that securities may be offered from time to time in one or more
series and in the form of senior, senior subordinated or subordinated debt,
preferred stock and/or common stock. The Company has $250 million remaining
available on its currently effective universal shelf registration statement.

Homebuilding:

The Company has an $825 million unsecured revolving bank credit facility,
consisting of a $775 million four-year revolving loan and a $50 million four-
year letter of credit facility that matures in Apr