e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9804

PULTE HOMES, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

Number of shares of common stock outstanding as of July 31, 2006: 255,029,052

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PULTE HOMES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)


	June 30,		December 31,
	2006		2005
	(Unaudited)		(Note)
ASSETS

Cash and equivalents	$	104,459	$	1,002,268
Unfunded settlements		54,794		156,663
House and land inventory		10,676,352		8,756,093
Land held for sale		397,818		257,724
Land, not owned, under option agreements		61,526		76,671
Residential mortgage loans available-for-sale		521,508		1,038,506
Investments in unconsolidated entities		222,228		301,613
Goodwill		377,040		307,693
Intangible assets, net		123,079		127,204
Other assets		1,084,889		1,023,739


Total assets	$	13,623,693	$	13,048,174


LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable, including book overdrafts of $416,346 and $405,411 in 2006 and 2005, respectively	$	938,718	$	789,399
Customer deposits		423,046		392,041
Accrued and other liabilities		1,157,354		1,402,620
Unsecured short-term borrowings		614,500		—
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets		477,028		893,001
Income taxes		81,721		219,504
Deferred income tax liability		9,479		7,740
Senior notes and unsubordinated notes		3,537,237		3,386,527


Total liabilities		7,239,083		7,090,832

Shareholders’ equity		6,384,610		5,957,342


	$	13,623,693	$	13,048,174

Note: The condensed consolidated balance sheet at December 31, 2005, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenues:
Homebuilding	$	3,318,055		$	3,213,430		$	6,232,807		$	5,699,724
Financial services		40,467			36,258			85,324			66,534
Other non-operating		445			1,257			3,412			2,505


Total revenues		3,358,967			3,250,945			6,321,543			5,768,763


Expenses:
Homebuilding, principally cost of sales		2,935,896			2,737,434			5,474,281			4,877,630
Financial Services		25,536			21,174			52,776			42,692
Other non-operating, net		8,598			30,363			20,948			54,367


Total expenses		2,970,030			2,788,971			5,548,005			4,974,689


Other income:
Gain on sale of equity investment		—			—			31,635			620
Equity income (loss)		(1,212	)		23,848			96			38,025

Income from continuing operations before income taxes		387,725			485,822			805,269			832,719

Income taxes		143,873			180,635			298,772			309,985


Income from continuing operations		243,852			305,187			506,497			522,734

Loss from discontinued operations		(833	)		(1,476	)		(833	)		(781	)


Net income	$	243,019		$	303,711		$	505,664		$	521,953


Per share data:
Basic:
Income from continuing operations	$	.97		$	1.19		$	2.00		$	2.05
Loss from discontinued operations		—			(.01	)		—			—


Net income	$	.96		$	1.19		$	2.00		$	2.04


Assuming dilution:
Income from continuing operations	$	.94		$	1.16		$	1.95		$	1.99
Loss from discontinued operations		—			(.01	)		—			—


Net income	$	.94		$	1.15		$	1.95		$	1.98


Cash dividends declared	$	.04		$	.025		$	.08		$	.05


Number of shares used in calculation:
Basic:
Weighted-average common shares outstanding		252,618			255,874			253,148			255,373
Assuming dilution:
Effect of dilutive securities – stock options and restricted stock grants		6,329			7,803			6,704			7,880

Adjusted weighted-average common shares and effect of dilutive securities		258,947			263,677			259,852			263,253

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($000’s omitted)
(Unaudited)


										Accumulated
										Other
				Additional						Comprehensive
	Common			Paid-in			Unearned			Income			Retained
	Stock			Capital			Compensation			(Loss)			Earnings			Total
Shareholders’ Equity, December 31, 2005	$	2,570		$	1,209,148		$	—		$	(5,496	)	$	4,751,120		$	5,957,342
Stock option exercise, including tax benefit of $3,333		2			6,783			—			—			—			6,785
Restricted stock award		7			(7	)		—			—			—			—
Cash dividends declared — $.08 per share		—			—			—			—			(20,494	)		(20,494	)
Stock repurchases		(29	)		(13,841	)		—			—			(85,744	)		(99,614	)
Stock-based compensation		—			33,476			—			—			—			33,476
Comprehensive income (loss):
Net income		—			—			—			—			505,664			505,664
Change in fair value of derivatives		—			—			—			226			—			226
Foreign currency translation adjustments		—			—			—			1,225			—			1,225


Total comprehensive income																	507,115


Shareholders’ Equity, June 30, 2006	$	2,550		$	1,235,559		$	—		$	(4,045	)	$	5,150,546		$	6,384,610


Shareholders’ Equity, December 31, 2004	$	2,558		$	1,114,739		$	(44	)	$	(14,380	)	$	3,419,401		$	4,522,274
Stock option exercise, including tax benefit of $24,143		24			47,290						—			—			47,314
Restricted stock award		8			(8	)		—			—			—			—
Cash dividends declared -$.05 per share		—			—			—			—			(12,963	)		(12,963	)
Stock repurchases		(6	)		(2,515	)		—			—			(18,598	)		(21,119	)
Stock-based compensation		—			23,144			—			—			—			23,144
Restricted stock award amortization		—			—			44			—			—			44
Comprehensive income (loss):
Net income		—			—			—			—			521,953			521,953
Change in fair value of derivatives		—			—			—			(324	)		—			(324	)
Foreign currency translation adjustments		—			—			—			4,163			—			4,163


Total comprehensive income																	525,792


Shareholders’ Equity, June 30, 2005	$	2,584		$	1,182,650		$	—		$	(10,541	)	$	3,909,793		$	5,084,486

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)


	For The Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	505,664		$	521,953
Adjustments to reconcile net income to net cash flows
Provided by (used in) operating activities:
Write-down of land and deposits and pre-acquisition costs		67,326			6,505
Gain on sale of equity investments		(31,635	)		(620	)
Amortization and depreciation		37,987			28,698
Stock-based compensation expense		33,476			23,188
Deferred income taxes		(55	)		30,834
Distributions in excess of (less than) earnings of affiliates		5,216			(2,760	)
Other, net		1,490			1,267
Increase (decrease) in cash due to:
Inventories		(2,104,010	)		(1,308,685	)
Residential mortgage loans available-for-sale		516,998			177,527
Other assets		112,491			1,570
Accounts payable, accrued and other liabilities		(63,955	)		201,165
Income taxes		(134,451	)		(21,577	)


Net cash used in operating activities		(1,053,458	)		(340,935	)


Cash flows from investing activities:
Distributions from unconsolidated entities		31,336			123,180
Investments in unconsolidated entities		(20,744	)		(92,042	)
Investment in subsidiaries, net of cash acquired		(65,779	)		(31,172	)
Proceeds from sale of subsidiaries		—			3,000
Proceeds from sale of investments		49,216			8,366
Proceeds from sale of fixed assets		534			3,251
Capital expenditures		(54,393	)		(37,666	)


Net cash used in investing activities		(59,830	)		(23,083	)


Cash flows from financing activities:
Proceeds from borrowings		764,500			672,011
Repayment of borrowings		(433,492	)		(161,608	)
Excess tax benefits from share-based awards		1,794			—
Issuance of common stock		3,452			23,171
Stock repurchases		(99,614	)		(21,119	)
Dividends paid		(20,494	)		(12,963	)


Net cash provided by financing activities		216,146			499,492


Effect of exchange rate changes on cash and equivalents		(667	)		210


Net increase (decrease) in cash and equivalents		(897,809	)		135,684

Cash and equivalents at beginning of period		1,002,268			308,118


Cash and equivalents at end of period	$	104,459		$	443,802


Supplemental disclosure of cash flow information—cash paid during the period for:

Interest, net of amounts capitalized	$	6,257		$	18,308

Income taxes	$	432,183		$	301,903

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of presentation and significant accounting policies

		Basis of presentation

		The consolidated financial statements include the accounts of Pulte Homes, Inc. and all of its direct and indirect subsidiaries (the “Company”) and variable interest entities in which the Company is deemed to be the primary beneficiary. The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (“International”) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s former thrift subsidiary, First Heights Holding Corp, LLC (“First Heights”) is classified as a discontinued operation. The Company also has a mortgage banking company, Pulte Mortgage LLC (“Pulte Mortgage”), which is a subsidiary of Pulte Home Corporation.

		Certain amounts previously reported in the 2005 financial statements and notes thereto were reclassified to conform to the 2006 presentation. The Mexico homebuilding operations, which were sold in December 2005, have been presented as discontinued operations in the Company’s Consolidated Statement of Operations. Additionally, all share and per share amounts have been restated to retroactively reflect the Company’s two-for-one stock split effected September 1, 2005.

		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. These financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

		Land, not owned, under option agreements

		In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, the Company will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended by FIN 46-R issued in December 2003 (collectively referred to as “FIN 46”), if the entity holding the land under option is a variable interest entity, the Company’s deposit represents a variable interest in that entity. Creditors of the variable interest entities have no recourse against the Company.

		In applying the provisions of FIN 46, the Company evaluated all land option agreements and determined that the Company was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, the Company is required to consolidate variable interest entities at fair value. At June 30, 2006 and December 31, 2005, the Company classified $61.5 million and $76.7 million, respectively, as land, not owned, under option agreements on the balance sheet, representing the fair value of land under contract, including deposits of $10.9 million and $13.4 million, respectively. The corresponding liability has been classified within accounts payable, accrued and other liabilities on the balance sheet.

		Land option agreements that did not require consolidation under FIN 46 at June 30, 2006 and December 31, 2005, had a total purchase price of $6.8 billion and $7.5 billion, respectively. In connection with these agreements, the Company had refundable and non-refundable deposits and pre-acquisition costs of $477.4 million and $431.4 million, included in other assets at June 30, 2006 and December 31, 2005, respectively.

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

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

		Allowance for warranties

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

		Changes to the Company’s allowance for warranties are as follows ($000’s omitted):


	Six Months Ended
	June 30,
	2006			2005
Allowance for warranties at beginning of period	$	112,297		$	83,397

Warranty reserves provided		73,152			59,535
Payments and other adjustments		(82,440	)		(59,309	)


Allowance for warranties at end of period	$	103,009		$	83,623

Stock-based compensation

The Company currently has several stock-based compensation plans for its employees (“Employee Plans”) and nonemployee directors (the “Director Plan”). At June 30, 2006, the Company had 31.4 million shares authorized for issuing various equity-based incentives including stock options, stock appreciation rights and restricted stock, including 11.6 million shares available for future grants.

Prior to January 1, 2006, the Company accounted for its stock-based awards under the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Issued to Employees.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under the prospective method, the Company recognized compensation expense on an accelerated basis over the vesting period based on the fair value provisions of SFAS No. 123. Grants made prior to January 1, 2003 were accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With the exception of certain variable stock option grants, no stock-based employee compensation cost was reflected in net income for grants made prior to January 1, 2003, as all options granted in those years had an exercise price equal to the market value of the underlying common stock on the date of grant.

As of January 1, 2006, the Company adopted SFAS No. 123(R), “Share Based Payments,” which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS Statement No. 95, “Statement of Cash Flows.” The Company adopted SFAS 123(R) using the modified prospective method of transition. Accordingly, prior periods have not been restated. The adoption of SFAS 123(R) was not significant and had no effect on basic and diluted earnings per share for the three and six months ended June 30, 2006.

Prior to the adoption of SFAS No. 123(R), the Company presented all benefits of the tax deductions resulting from the exercise of share-based compensation as operating cash flows in its Consolidated Statements of Cash Flows. SFAS 123(R) requires classification of the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) as financing cash flows. As a result, the Company classified $1.8 million of excess tax benefits as financing cash inflows for the six months ended June 30, 2006.

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

Basis of presentation and significant accounting policies (continued)

Stock-based compensation (continued)

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123(R) to all stock based employee compensation for the three and six months ended June 30, 2005 (000’s omitted, except per share data):


	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
Net income, as reported	$	303,711		$	521,953

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		2,761			8,016

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ($000’s omitted)		(2,930	)		(8,313	)


Pro forma net income	$	303,542		$	521,656


Earnings per share:
Basic-as reported	$	1.19		$	2.04

Basic-pro forma	$	1.19		$	2.04


Diluted-as reported	$	1.15		$	1.98

Diluted-pro forma	$	1.15		$	1.98

The Company measures compensation cost for its stock options at fair value on the date of grant and recognizes compensation cost on the graded vesting method over the vesting period, generally four years. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in greater expense in earlier years than the straight-line method. The fair value of the Company’s stock options is determined using the Black-Scholes valuation model. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company’s common stock. Compensation expense related to the Company’s share-based awards is generally included in selling, general and administrative expense within the Company’s Consolidated Statements of Operations.

The Company’s stock option participant agreements provide continued vesting for certain retirement eligible employees who have achieved a predetermined level of service based on their combined age and years of service. For awards granted prior to January 1, 2006, the Company recognized the related compensation cost ratably over the nominal vesting period. For awards granted after the adoption of SFAS No. 123(R), the Company now records related compensation cost over the period through the date the employee first becomes eligible to retire and is no longer required to provide services to earn the award.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants made during the six months ended June 30, 2006 and 2005.


	Weighted-average assumptions
	Six Months Ended June 30,
	2006			2005
Expected life of options in years		5.2			6.1 - 6.2
Expected stock price volatility		34	%		35.3 - 36.0	%
Expected dividend yield		0.4	%		0.23 -0.27	%
Risk-free interest rate		5.1	%		3.9% - 4.2	%
Fair value per option granted	$	14.47 - $14.85		$	12.89 - $15.95

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

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

		Stock-based compensation (continued)

		A summary of the status of the Company’s stock options for the six months ended June 30, 2006 is presented below (000’s omitted, except per share data):


				Weighted-Average			Weighted-Average
				Per Share			Remaining	Aggregate
	Shares			Exercise Price			Contractual Term	Intrinsic Value
Outstanding at December 31, 2005		16,850		$	19
Granted		33			39
Exercised		(242	)		(14	)
Forfeited		(264	)		(29	)

Outstanding at June 30, 2006		16,377		$	19		6.6 years	$	189,989


Options exercisable at June 30, 2006		9,700		$	12		5.5 years	$	162,564

In connection with stock option awards, the Company recognized compensation expense of $7.9 million and $14.3 million for the three and six months ended June 30, 2006, respectively. Total compensation cost related to nonvested stock option awards not yet recognized was $42.9 million at June 30, 2006. These costs will be expensed over a weighted average period of approximately 3 years. The aggregate intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $5.5 million and $62.8 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

A summary of the Company’s restricted stock activity for the six months ended June 30, 2006, is presented below (000’s omitted, except per share data):


				Weighted-Average
				Per Share
				Grant Date
	Shares			Fair Value
Nonvested at December 31, 2005		3,023		$	31.44
Granted		759		$	39.02
Vested		(215	)	$	15.60
Forfeited		(119	)	$	33.32

Nonvested at June 30, 2006		3,448		$	34.03

In connection with restricted stock awards, of which a majority cliff vest at the end of three years, the Company recognized compensation expense of $9.7 million and $5 million for the three months ended June 30, 2006 and 2005 and $19.1 million and $9.1 million for the six months ended June 30, 2006 and 2005, respectively. Total compensation cost related to restricted stock awards not yet recognized was $75.6 million at June 30, 2006. These costs will be expensed over a weighted average period of approximately 2.3 years.

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

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

		New accounting pronouncements

		In June 2006, the FASB issued FASB Interpretation No. 48, “An Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 reflects the benefit recognition approach, where a tax benefit is recognized when it is “more likely than not” to be sustained based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of FIN No. 48 on its consolidated financial statements.

		In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This new Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. Due to the short period of time the Company’s servicing rights are held, generally less than four months, the Company does not expect SFAS No. 156 will have a significant impact on its consolidated financial statements.

		The FASB has revised its guidance on SFAS No. 133 Implementation Issues as of March 2006. Several Implementation Issues were revised to reflect the issuance of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140,” in February 2006. SFAS No. 155 allows any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” to be carried at fair value in its entirety, with changes in fair value recognized in earnings. In addition, SFAS No. 155 requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or contain an embedded derivative. SFAS No. 155 also eliminates a prior restriction on the types of passive derivatives that a qualifying special purpose entity is permitted to hold. SFAS No. 155 is applicable to new or modified financial instruments in fiscal years beginning after September 15, 2006, though the provisions related to fair value accounting for hybrid financial instruments can also be applied to existing instruments. The Company does not expect SFAS No. 155 will have a significant impact on its consolidated financial statements.

		In December 2004, the FASB issued Staff Position 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP 109-1). The American Jobs Creation Act, which was signed into law in October 2004, provides a 3% tax deduction on qualified domestic production activities income for 2005 and 2006. When fully phased-in, the deduction will be 9% of the lesser of “qualified production activities income” or taxable income. Based on the guidance provided by FSP 109-1, this deduction was accounted for as a special deduction under SFAS No. 109 and reduced tax expense. Tax benefits resulting from this deduction have resulted in a reduction in the Company’s federal income tax rate.

2.		Segment information

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

		The Company’s Homebuilding segment is engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for first-time, first and second move-up, and active adult home buyers. The Company’s Homebuilding segment is the aggregation of its related operating segments.

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

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

2. Segment information (continued)


	Operating Data by Segment ($000’s omitted)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenues:
Homebuilding	$	3,318,055		$	3,213,430		$	6,232,807		$	5,699,724
Financial services		40,467			36,258			85,324			66,534


Total segment revenues		3,358,522			3,249,688			6,318,131			5,766,258


Cost of sales (a):
Homebuilding		2,640,503			2,458,880			4,887,612			4,336,107


Selling, general and administrative:
Homebuilding		265,404			267,327			550,153			521,758
Financial services		20,690			17,905			42,629			36,622


Total segment selling, general and administrative		286,094			285,232			592,782			558,380


Interest:
Financial services		4,846			3,269			10,147			6,070


Other expense, net:
Homebuilding		29,989			11,227			36,516			19,765


Total costs and expenses		2,961,432			2,758,608			5,527,057			4,920,322


Gain on sale of equity investment:
Financial services		—			—			31,635			620


Equity income (loss):
Homebuilding		(1,337	)		23,406			(121	)		36,877
Financial services		125			442			217			1,148


Total equity income		(1,212	)		23,848			96			38,025


Income before income taxes:
Homebuilding		380,822			499,402			758,405			858,971
Financial services		15,056			15,526			64,400			25,610


Total segment income before income taxes		395,878			514,928			822,805			884,581

Other non-operating expenses, net		(8,153	)		(29,106	)		(17,536	)		(51,862	)


Consolidated income before income taxes	$	387,725		$	485,822			805,269		$	832,719


^(a)		Homebuilding interest expense, which represents the amortization of capitalized interest, of $55.9 million and $41.1 million for the three months ended June 30, 2006 and 2005 and $97.1 million and $71.6 million for the six months ended June 30, 2006 and 2005, has been included as part of homebuilding cost of sales.

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

Segment information (continued)


			Financial
	Homebuilding		Services		Total
At June 30, 2006:
Inventory	$	10,676,352	$	—	$	10,676,352

Assets:
Segment		12,921,377		591,893		13,513,270
Other non-operating		—		—		110,423

Consolidated assets					$	13,623,693


At December 31, 2005:
Inventory	$	8,756,093	$	—	$	8,756,093

Assets:
Segment		11,757,925		1,052,578		12,810,503
Other non-operating		—		—		237,671

Consolidated assets					$	13,048,174

3.		Inventory

		Major components of the Company’s inventory were as follows ($000’s omitted):


	June 30,		December 31,
	2006		2005
Homes under construction	$	4,464,413		3,136,708
Land under development		5,532,265		4,844,913
Land held for future development		679,674		774,472


Total	$	10,676,352	$	8,756,093

4.		Investments in unconsolidated entities

		The Company participates in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop and/or sell land and homes in the United States and Puerto Rico. If additional capital infusions are required and approved, the Company would need to contribute its pro-rata portion of those capital needs in order not to dilute its ownership in the joint ventures.

		At June 30, 2006 and December 31, 2005, aggregate outstanding debt of unconsolidated joint ventures was $908.5 million and $882.2 million, respectively. At June 30, 2006 and December 31, 2005, the Company’s proportionate share of its joint venture debt was approximately $307.2 million and $293.8 million, respectively. At June 30, 2006, the Company provided limited recourse guarantees for its proportionate share of joint venture debt of $307.2 million while the Company provided limited recourse debt guarantees of approximately $288.2 million at December 31, 2005. Accordingly, the Company may be liable, on a contingent basis, through limited guarantees with respect to a portion of the secured land acquisition and development debt. However, the Company would not be liable other than in instances of fraud, misrepresentation or other bad faith actions by the Company, unless the joint venture was unable to perform its contractual borrowing obligations. As of June 30, 2006, the Company does not anticipate the Company will incur any significant costs under these guarantees.

		For the six months ended June 30, 2006, the Company made additional capital contributions to these joint ventures totaling approximately $20.7 million and received capital and earnings distributions from these entities totaling approximately $36.6 million. At June 30, 2006 and December 31, 2005, the Company had approximately $222.2 million and $301.6 million, respectively, invested in these joint ventures. These investments are included in the assets of the Company’s Homebuilding segment and are primarily accounted for under the equity method.

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

5.		Acquisitions and divestitures

		In February 2006, Pulte Mortgage sold its investment in Hipotecaria Su Casita (“Su Casita”), a Mexico-based mortgage banking company. Remaining shareholders of Su Casita, who exercised their right of first refusal to acquire the shares, purchased Pulte Mortgage’s 16.7% interest for net proceeds of approximately $49.2 million. As a result of this transaction, the Company recognized a pre-tax gain of approximately $31.6 million ($19.9 million after-tax) for the three months ended March 31, 2006. During February 2005, 25% of the Company’s investment in the capital stock of Su Casita was redeemed for a pre-tax gain of approximately $620 thousand.

		In January 2006, the Company exercised its option and acquired the remaining 50% interest in an entity that supplies and installs basic building components and operating systems. The Company’s initial investment was made in January 2004 to secure a dedicated building supply trade base for its construction activities in Arizona and Nevada. The aggregate stepped purchase price exceeded the preliminary estimated fair value of the underlying assets acquired and liabilities assumed by approximately $69 million, which was recorded as goodwill. The Company accounted for its initial 50% investment under the equity method. Since January 2006, the Company has consolidated this wholly-owned subsidiary in its financial statements.

		In December 2005, the Company sold substantially all of its Mexico homebuilding operations. For the three and six months ended June 30, 2005, the Mexico operations have been presented as discontinued operations.

		In January 2005, the Company sold all of its Argentina operations, as reflected in the Company’s consolidated statements of cash flows for the six months ended June 30, 2005. The Argentina operations were presented as discontinued operations in 2004.

6.		Senior notes and unsubordinated notes

		In May 2006, the Company sold $150 million of 7.375% senior notes, which mature on June 1, 2046, and are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of the Company’s other unsecured and unsubordinated indebtedness. The notes are redeemable at any time on or after June 1, 2011, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest thereon to the redemption date. Proceeds from the sale were used to repay the indebtedness of the Company’s revolving credit facility and for general corporate purposes, including continued investment in the company’s business.

7.		Shareholders’ equity

		Pursuant to the two $100 million stock repurchase programs authorized by our Board of Directors in October 2002 and 2005, and the $200 million stock repurchase authorization in February 2006 (for a total stock repurchase authorization of $400 million), the Company has repurchased a total of 8,987,600 shares for a total of $277.8 million. At June 30, 2006, the Company had remaining authorization to purchase common stock aggregating $122.2 million.

		Accumulated other comprehensive income (loss)

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


	June 30,			December 31,
	2006			2005
Foreign currency translation adjustments:
Mexico	$	(361	)	$	(1,586	)
Fair value of derivatives, net of income taxes of $2,258 in 2006 and $2,397 in 2005		(3,684	)		(3,910	)


	$	(4,045	)	$	(5,496	)

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

8.		Supplemental Guarantor information

		At June 30, 2006, Pulte Homes, Inc. had the following outstanding senior note obligations: (1) $400 million, 4.875% due 2009, (2) $200 million, 8.125%, due 2011, (3) $499 million, 7.875%, due 2011, (4) $300 million, 6.25%, due 2013, (5) $500 million, 5.25%, due 2014, (6) $350 million, 5.2%, due 2015, (7) $150 million, 7.625%, due 2017, (8) $300 million, 7.875%, due 2032, (9) $400 million, 6.375%, due 2033, (10) $300 million, 6%, due 2035, and (11) $150 million, 7.375%, due 2046. Such obligations to pay principal, premium (if any), and interest are guaranteed jointly and severally on a senior basis by Pulte Homes, Inc.’s 100%-owned Homebuilding subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional.

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

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

8. Supplemental Guarantor information (continued)

CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2006
($000’s omitted)


	Unconsolidated
	Pulte		Guarantor			Non-Guarantor			Eliminating			Consolidated
	Homes, Inc.		Subsidiaries			Subsidiaries			Entries			Pulte Homes, Inc.
ASSETS
Cash and equivalents	$	—	$	65,157		$	39,302		$	—		$	104,459
Unfunded settlements		—		51,954			2,840			—			54,794
House and land inventory		—		10,664,216			12,136			—			10,676,352
Land held for sale		—		397,818			—			—			397,818
Land, not owned, under option agreements		—		61,526			—			—			61,526
Residential mortgage loans available-for-sale		—		—			521,508			—			521,508
Investments in unconsolidated entities		1,448		202,933			17,847			—			222,228
Goodwill		—		376,340			700			—			377,040
Intangible assets, net		—		123,079			—			—			123,079
Other assets		47,903		951,478			85,508			—			1,084,889
Investment in subsidiaries		11,991,124		77,356			3,639,517			(15,707,997	)		—


	$	12,040,475	$	12,971,857		$	4,319,358		$	(15,707,997		$	13,623,693


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued and other liabilities	$	192,809	$	2,114,249		$	221,539		$	—		$	2,528,597
Unsecured short-term borrowings		614,500		—			—						614,500
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets		—		—			477,028			—			477,028
Income taxes		81,721		—			—			—			81,721
Senior notes and unsubordinated notes		3,537,237		—			—			—			3,537,237
Advances (receivable) payable — subsidiaries		1,229,598		(1,168,116	)		(61,482	)		—			—


Total liabilities		5,655,865		946,133			637,085			—			7,239,083

Shareholders’ equity		6,384,610		12,025,724			3,682,273			(15,707,997	)		6,384,610


	$	12,040,475	$	12,971,857		$	4,319,358		$	(15,707,997	)	$	13,623,693

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

8. Supplemental Guarantor information (continued)

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2005
($000’s omitted)


	Unconsolidated
	Pulte		Guarantor			Non-Guarantor			Eliminating			Consolidated
	Homes, Inc.		Subsidiaries			Subsidiaries			Entries			Pulte Homes, Inc.
ASSETS
Cash and equivalents	$		$	839,764		$	162,504		$	—		$	1,002,268
Unfunded settlements		—		226,417			(69,754	)		—			156,663
House and land inventory		—		8,742,573			13,520			—			8,756,093
Land held for sale		—		257,724			—			—			257,724
Land, not owned, under option agreements		—		76,671			—			—			76,671
Residential mortgage loans available-for-sale		—		—			1,038,506			—			1,038,506
Investments in unconsolidated entities		1,448		264,257			35,908			—			301,613
Goodwill		—		306,993			700			—			307,693
Intangible assets, net		—		127,204			—			—			127,204
Other assets		41,873		870,238			111,628			—			1,023,739
Investment in subsidiaries		11,154,107		88,972			3,142,458			(14,385,537	)		—

	$	11,197,428	$	11,800,813		$	4,435,470		$	(14,385,537	)	$	13,048,174


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, accrued and other liabilities	$	190,640	$	2,161,257		$	239,903		$	—		$	2,591,800
Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets		—		—			893,001			—			893,001
Income taxes		219,504		—			—			—			219,504
Senior notes and unsubordinated notes		3,386,527		—			—			—			3,386,527
Advances (receivable) payable - subsidiaries		1,443,415		(1,550,745	)		107,330			—			—

Total liabilities		5,240,086		610,512			1,240,234			—			7,090,832

Shareholders’ equity		5,957,342		11,190,301			3,195,236			(14,385,537	)		5,957,342


	$	11,197,428	$	11,800,813		$	4,435,470		$	(14,385,537	)	$	13,048,174

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2006
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Revenues:
Homebuilding	$	—		$	3,318,055		$	—		$	—		$	3,318,055
Financial services		—			6,826			33,641			—			40,467
Other non-operating		37			(42	)		450			—			445


Total revenues		37			3,324,839			34,091			—			3,358,967


Expenses:
Homebuilding:
Cost of sales		—			2,640,503			—			—			2,640,503
Selling, general and administrative and other expense		8,344			287,315			(266	)		—			295,393
Financial Services, principally interest		761			2,306			22,469			—			25,536
Other non-operating expenses, net		20,009			(8,447	)		(2,964	)		—			8,598
Intercompany interest		40,623			(40,623	)		—			—			—


Total expenses		69,737			2,881,054			19,239			—			2,970,030


Other Income:
Equity income		—			(1,773	)		561			—			(1,212	)

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(69,700	)		442,012			15,413			—			387,725
Income taxes (benefit)		(24,790	)		163,564			5,099			—			143,873

Income (loss) from continuing operations before equity in income of subsidiaries		(44,910	)		278,448			10,314			—			243,852
Income (loss) from discontinued operations		—						(833	)		—			(833	)

Income (loss) before equity in income of subsidiaries		(44,910	)		278,448			9,481			—			243,019

Equity in income (loss) of subsidiaries:
Continuing operations		288,762			6,959			98,298			(394,019	)		—
Discontinued operations		(833	)		—			—			833			—


		287,929			6,959			98,298			(393,186	)		—


Net income	$	243,019		$	285,407		$	107,779		$	(393,186	)	$	243,019

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2006
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Revenues:
Homebuilding	$	—		$	6,232,807		$	—		$	—		$	6,232,807
Financial services		—			12,681			72,643			—			85,324
Other non-operating		76			1,948			1,388			—			3,412


Total revenues		76			6,247,436			74,031			—			6,321,543


Expenses:
Homebuilding:
Cost of sales		—			4,887,612			—			—			4,887,612
Selling, general and administrative and other expense		16,117			572,337			(1,785	)		—			586,669
Financial Services, principally interest		1,520			4,650			46,606			—			52,776
Other non-operating expenses, net		40,465			(15,262	)		(4,255	)		—			20,948
Intercompany interest		80,307			(80,307	)		—			—			—


Total expenses		138,409			5,369,030			40,566			—			5,548,005


Other Income:
Gain on sale of equity investment		—			—			31,635			—			31,635
Equity income		—			(801	)		897			—			96

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(138,333	)		877,605			65,997			—			805,269
Income taxes (benefit)		(51,315	)		325,627			24,460			—			298,772

Income (loss) from continuing operations before equity in income of subsidiaries		(87,018	)		551,978			41,537			—			506,497
Income (loss) from discontinued operations		—			—			(833	)		—			(833	)

Income (loss) before equity in income of subsidiaries		(87,018	)		551,978			40,704			—			505,664

Equity in income (loss) of subsidiaries:
Continuing operations		593,515			35,827			195,136			(824,478	)		—

Discontinued operations		(833	)		—			—			833			—

		592,682			35,827			195,136			(823,645	)		—


Net income	$	505,664		$	587,805		$	235,840		$	(823,645	)	$	505,664

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 2005
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Revenues:
Homebuilding	$	—		$	3,213,430		$	—		$	—		$	3,213,430
Financial services		—			6,404			29,854			—			36,258
Other non-operating		12			1,198			47			—			1,257


Total revenues		12			3,221,032			29,901			—			3,250,945


Expenses:
Homebuilding:
Cost of sales		—			2,458,880			—			—			2,458,880
Selling, general and administrative and other expense		4,660			275,278			(1,384	)		—			278,554
Financial Services, principally interest		(258	)		2,251			19,181			—			21,174
Other non-operating expenses, net		35,208			(2,128	)		(2,717	)		—			30,363
Intercompany interest		44,499			(44,499	)		—			—			—


Total expenses		84,109			2,689,782			15,080			—			2,788,971


Other Income:
Equity income (loss)		—			21,999			1,849			—			23,848

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(84,097	)		553,249			16,670			—			485,822
Income taxes (benefit)		(31,811	)		207,143			5,303			—			180,635

Income (loss) from continuing operations before equity in income of subsidiaries		(52,286	)		346,106			11,367			—			305,187
Income (loss) from discontinued operations		(42	)		—			(1,434	)		—			(1,476	)

Income (loss) before equity in income of subsidiaries		(52,328	)		346,106			9,933			—			303,711

Equity in income (loss) of subsidiaries:
Continuing operations		357,473			7,244			110,609			(475,326	)		—
Discontinued operations		(1,434	)		—			—			1,434			—


		356,039			7,244			110,609			(473,892	)		—


Net income	$	303,711		$	353,350		$	120,542		$	(473,892	)	$	303,711

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 2005
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Revenues:
Homebuilding	$	—		$	5,699,724		$	—		$	—		$	5,699,724
Financial services		—			12,143			54,391			—			66,534
Other non-operating		70			2,255			180			—			2,505


Total revenues		70			5,714,122			54,571			—			5,768,763


Expenses:
Homebuilding:
Cost of sales		—			4,336,107			—			—			4,336,107
Selling, general and administrative and other expense		8,843			533,258			(578	)		—			541,523
Financial services		1,039			4,185			37,468			—			42,692
Other non-operating expenses, net		66,275			(7,044	)		(4,864	)		—			54,367
Intercompany interest		87,289			(87,289	)		—			—			—


Total expenses		163,446			4,779,217			32,026			—			4,974,689


Other Income:
Gain on sale of equity investment		—			—			620			—			620
Equity income		—			34,651			3,374			—			38,025

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(163,376	)		969,556			26,539			—			832,719
Income taxes (benefit)		(61,129	)		361,676			9,438			—			309,985

Income (loss) from continuing operations before equity in income of subsidiaries		(102,247	)		607,880			17,101			—			522,734
Income (loss) from discontinued operations		(106	)		—			(675	)		—			(781	)

Income (loss) before equity in income of subsidiaries		(102,353	)		607,880			16,426			—			521,953

Equity in income (loss) of subsidiaries:
Continuing operations		624,981			11,025			161,291			(797,297	)		—
Discontinued operations		(675	)		—			—			675			—


		624,306			11,025			161,291			(796,622	)		—


Net income	$	521,953		$	618,905		$	177,717		$	(796,622	)	$	521,953

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2006
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Cash flows from operating activities:
Net income	$	505,664		$	587,805		$	235,840		$	(823,645	)	$	505,664
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Equity in income of subsidiaries		(592,682	)		(35,827	)		(195,136	)		823,645			—
Write-down of land and deposits and pre-acquisition costs		—			67,326			—			—			67,326
Gain on sale of equity investments		—			—			(31,635	)		—			(31,635	)
Amortization and depreciation		—			33,791			4,196			—			37,987
Stock-based compensation expense		33,476			—			—			—			33,476
Deferred income taxes		3,481			—			(3,536	)		—			(55	)
Distributions in excess of earnings of affiliates		—			2,382			2,834			—			5,216
Other, net		710			983			(203	)		—			1,490
Increase (decrease) in cash due to:
Inventory		—			(2,105,395	)		1,385			—			(2,104,010	)
Residential mortgage loans available-for-sale		—			—			516,998			—			516,998
Other assets		(6,029	)		164,736			(46,216	)		—			112,491
Accounts payable, accrued and other liabilities		(1,999	)		(43,343	)		(18,613	)		—			(63,955	)
Income taxes		(301,819	)		163,564			3,804			—			(134,451	)

Net cash provided by (used in) operating activities		(359,198	)		(1,163,978	)		469,718			—			(1,053,458	)


Cash flows from investing activities:
Distributions from unconsolidated entities		—			31,336			—			—			31,336
Investments in unconsolidated entities		—			(20,744	)		—			—			(20,744	)
Dividends received from subsidiaries		—			51,000			28			(51,028	)		—
Investment in subsidiaries		(247,066	)		(68,739	)		(224,303	)		474,329			(65,779	)
Proceeds from sale of investments		—			—			49,216			—			49,216
Proceeds from sale of fixed assets		—			533			1			—			534
Capital expenditures		—			(50,069	)		(4,324	)		—			(54,393	)

Net cash provided by (used in) investing activities		(247,066	)		(56,683	)		(179,382	)		423,301			(59,830	)

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS (continued)
For the six months ended June 30, 2006
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Cash flows from financing activities:
Proceeds from borrowings		764,500			—			—			—			764,500
Repayment of borrowings		—			(17,519	)		(415,973	)		—			(433,492	)
Capital contributions from parent		—			246,828			227,501			(474,329	)		—
Advances (to) from affiliates		(43,374	)		216,745			(173,371	)		—			—
Excess tax benefits from share-based awards		1,794			—			—			—			1,794
Issuance of common stock		3,452			—			—			—			3,452
Stock repurchases		(99,614	)		—			—			—			(99,614	)
Dividends paid		(20,494	)		—			(51,028	)		51,028			(20,494	)

Net cash provided by (used in) financing activities		606,264			446,054			(412,871	)		(423,301	)		216,146


Effect of exchange rate changes on cash and equivalents		—			—			(667	)		—			(667	)

Net increase (decrease) in cash and equivalents		—			(774,607	)		(123,202	)		—			(897,809	)
Cash and equivalents at beginning of period		—			839,764			162,504			—			1,002,268


Cash and equivalents at end of period	$	—		$	65,157		$	39,302		$	—		$	104,459

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2005
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Cash flows from operating activities:
Net income	$	521,953		$	618,905		$	177,717		$	(796,622	)	$	521,953
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Equity in income of subsidiaries		(624,306	)		(11,025	)		(161,291	)		796,622			—
Write-down of land and deposits of pre-acquisition costs		—			6,505			—			—			6,505
Gain on sale of equity investments		—			—			(620	)		—			(620	)
Amortization and depreciation		—			24,469			4,229			—			28,698
Stock-based compensation expense		23,188			—			—			—			23,188
Deferred income taxes		34,028			(3	)		(3,191	)		—			30,834
Distributions in excess of (less than) earnings of affiliates		—			147			(2,907	)		—			(2,760	)
Other, net		705			240			322			—			1,267
Increase (decrease) in cash due to:
Inventory		—			(1,310,099	)		1,414			—			(1,308,685	)
Residential mortgage loans available-for-sale		—			—			177,527			—			177,527
Other assets		(11,522	)		15,405			(2,313	)		—			1,570
Accounts payable, accrued and other liabilities		15,098			189,974			(3,907	)		—			201,165
Income taxes		(235,578	)		207,279			6,722			—			(21,577	)

Net cash provided by (used in) operating activities		(276,434	)		(258,203	)		193,702			—			(340,935	)


Cash flows from investing activities:
Distributions from unconsolidated entities		—			122,480			700			—			123,180
Investments in unconsolidated entities		—			(92,042	)		—			—			(92,042	)
Dividends received from subsidiaries		1,362			18,000			—			(19,362	)		—
Investment in subsidiaries		(36,217	)		(1,106	)		(31,172	)		37,323			(31,172	)
Proceeds from the sale of subsidiaries		—			—			3,000			—			3,000
Proceeds from sales of investments		—			—			8,366			—			8,366
Proceeds from sales of fixed assets		—			3,033			218			—			3,251
Capital expenditures		—			(32,037	)		(5,629	)		—			(37,666	)

Net cash provided by (used in) investing activities		(34,855	)		18,328			(24,517	)		17,961			(23,083	)

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

8. Supplemental Guarantor information (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS (continued)
For the six months ended June 30, 2005
($000’s omitted)


	Unconsolidated												Consolidated
	Pulte			Guarantor			Non-Guarantor			Eliminating			Pulte
	Homes, Inc.			Subsidiaries			Subsidiaries			Entries			Homes, Inc.
Cash flows from financing activities:
Proceeds from borrowings		648,557			23,454			—			—			672,011
Repayment of borrowings		—			—			(161,608	)		—			(161,608	)
Capital contributions from parent		—			7,943			29,380			(37,323	)		—
Advances (to) from affiliates		(326,357	)		441,254			(114,897	)		—			—
Issuance of common stock		23,171			—			—			—			23,171
Stock repurchases		(21,119	)		—			—			—			(21,119	)
Dividends paid		(12,963	)		(1,362	)		(18,000	)		19,362			(12,963	)

Net cash provided by (used in) financing activities		311,289			471,289			(265,125	)		(17,961	)		499,492


Effect of exchange rate changes on cash and equivalents		—			—			210			—			210

Net increase (decrease) in cash and equivalents		—			231,414			(95,730	)		—			135,684
Cash and equivalents at beginning of period		—			185,375			122,743			—			308,118


Cash and equivalents at end of period	$	—		$	416,789		$	27,013		$	—		$	443,802

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Overview

The following is a summary of our operating results by business segment for the three and six months ended June 30, 2006 ($000’s omitted):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Pre-tax income (loss):
Homebuilding operations	$	380,822		$	499,402		$	758,405		$	858,971
Financial services operations		15,056			15,526			64,400			25,610
Other non-operating		(8,153	)		(29,106	)		(17,536	)		(51,862	)


Income from continuing operations before income taxes		387,725			485,822			805,269			832,719
Income taxes		143,873			180,635			298,772			309,985


Income from continuing operations		243,852			305,187			506,497			522,734
Loss from discontinued operations		(833	)		(1,476	)		(833	)		(781	)


Net income	$	243,019		$	303,711		$	505,664		$	521,953


Per share data – assuming dilution:
Income from continuing operations	$	0.94		$	1.16		$	1.95		$	1.99
Loss from discontinued operations		—			(.01	)		—			—


Net income	$	0.94		$	1.15			1.95		$	1.98

		The following is a comparison of pre-tax income for the three and six months ended June 30, 2006 and 2005:

•		Homebuilding pre-tax income decreased 24% and 12% for the three and six months ended June 30, 2006, respectively, compared with the same periods in the prior year. Homebuilding settlement revenues increased 5% and 10%, respectively, for the three and six months ended June 30, 2006 compared with the same periods in the prior year. The decrease in pre-tax income is due to lower gross margins from geographic and product mix shifts, increased selling incentives and increased construction, land and land development costs. Pre-tax income also declined due to $62 million of charges resulting from adjustments to land inventory ($9.3 million), land held for sale ($22 million), and the write-off of deposits and pre-acquisition costs associated with land transactions we no longer plan to pursue ($30.8 million). These decreases were offset partially by improvements in selling, general and administrative expenses as a percent of home settlement revenues.

•		Pre-tax income from our financial services business segment decreased 3% for the three months ended June 30, 2006 compared with the prior year period. Pre-tax income increased $38.8 million for the six months ended June 30, 2006 compared with the prior year period, as we recognized a one-time gain of $31.6 million related to the sale of our investment in Su Casita, a Mexican mortgage banking company, during the first quarter of 2006. The capture rates were 91.0% and 88.0% for the three months ended June 30, 2006 and 2005, respectively, and 90.2% and 88.3% for the six months ended June 30, 2006 and 2005, respectively.

•		The decrease in non-operating expenses for the three and six months ended June 30, 2006, compared with the same period in the prior year, was due primarily to an increase in the amount of interest capitalized into homebuilding inventory.

•		Loss from discontinued operations included a provision of $800 thousand, net of taxes, for the three and six months ended June 30, 2006 resulting from a contractual adjustment related to the December 2005 disposition of our Mexico homebuilding operations. Loss from discontinued operations for the three and six months ended June 30, 2005 primarily relates to our Mexico homebuilding operations.

Homebuilding Operations

The Homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of first-time, first and second move-up, and active adult homebuyers. We conduct our operations in 53 markets, located throughout 27 states, presented geographically as follows:


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

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

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

Central:		Colorado, New Mexico, Texas

West:		Arizona, California, Nevada

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Unit settlements:
Northeast		819		868		1,535		1,406
Southeast		3,018		2,952		5,522		5,283
Midwest		1,044		1,147		1,848		2,048
Central		1,627		1,538		3,057		2,464
West		3,371		3,689		6,519		7,012

		9,879		10,194		18,481		18,213


Net new orders – units:
Northeast		790		1,228		1,518		2,256
Southeast		2,635		3,717		6,010		7,434
Midwest		1,113		1,710		2,433		3,229
Central		1,754		2,291		3,482		3,911
West		3,163		4,635		6,737		8,818

		9,455		13,581		20,180		25,648

Net new orders – dollars ($000’s omitted)	$	3,121,000	$	4,406,000	$	6,804,000	$	8,239,000


Unit backlog:
Northeast						1,576		2,333
Southeast						6,153		7,456
Midwest						1,972		2,458
Central						2,642		2,524
West						7,173		8,580

						19,516		23,351

Backlog at June 30 – dollars ($000’s omitted)					$	6,911,000	$	7,775,000

Homebuilding Operations (continued)

Unit settlements decreased 3% for the three months ended June 30, 2006, to 9,879 units and increased 1.5% for the six months ended June 30, 2006 to 18,481 units, compared with the same periods in 2005. The average selling price for homes closed increased 8% to $335,000 for the three months ended June 30, 2006 and increased 9% to $335,000 for the six months ended June 30, 2006, compared with the same periods in 2005. Changes in average selling price reflect a number of factors, including changes in market selling prices and the mix of product closed during each period. For the three months ended June 30, 2006, unit net new orders decreased 30% to 9,455 units, compared with the same period in 2005. For the six months ended June 30, 2006, unit net new orders decreased 21% to 20,180 units, compared with the same period in 2005. Net new orders were impacted by the closeout of several large, established communities, where the replacement communities are still in the early phases of development. In addition, rising home prices, higher interest rates, and increased resale home inventories have affected demand for new homes. Cancellation rates for the quarter were approximately 28%, compared with 15% for the same period in 2005, while year to date cancellations were 25% for the six months ended June 30, 2006, compared with 15% for the same period in 2005. Most markets have experienced a substantial increase in resale home inventory, and this, combined with declining consumer confidence, has resulted in higher cancellation rates and reduced new order rates during 2006. The dollar value of net new orders decreased 29% for the three months ended June 30, 2006 and decreased 17% for the six months ended June 30, 2006, respectively, compared with the same periods in 2005. However, while net new order dollars decreased year-over-year, selling prices remained stable in many of our markets. For the quarter ended June 30, 2006, we had 722 active selling communities, an increase of 11% from the same period in the prior year. Ending backlog, which represents orders for homes that have not yet closed, was 19,516 units at June 30, 2006 with a dollar value of $6.9 billion.

The following table presents markets that represent 10% or more of total Homebuilding unit new orders, unit settlements, and settlement revenues for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Unit net new orders:
Phoenix		12	%			*		11	%		11	%

Unit settlements:
Phoenix			*		14	%			*		15	%
Las Vegas		12	%			*		12	%			*

Settlement revenues:
Phoenix			*		14	%			*		14	%
Las Vegas		13	%			*		13	%			*


*		Represents less than 10%.

Homebuilding Operations (continued)

The following table presents states that represent 10% or more of unit settlements and settlement revenues for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Unit settlements :
Arizona		11	%		15	%		11	%		16	%
California		11	%		13	%		12	%		14	%
Florida		19	%		19	%		19	%		19	%
Nevada		12	%			*		13	%			*
Texas		12	%		11	%		12	%			*

Settlement revenues:
Arizona		11	%		14	%		11	%		15	%
California		17	%		22	%		19	%		22	%
Florida		17	%		16	%		17	%		16	%
Nevada		14	%			*		14	%		10	%


*		Represents less than 10%.

At June 30, 2006 and December 31, 2005, our Homebuilding operations controlled approximately 325,500 and 362,600 lots, respectively. Approximately 181,000 and 173,800 lots were owned, and approximately 113,500 and 133,400 lots were under option agreements approved for purchase at June 30, 2006 and December 31, 2005, respectively. In addition, there were approximately 31,000 and 55,400 lots under option agreements, pending approval, at June 30, 2006 and December 31, 2005, respectively. We believe that the strength of our land supply, and our entitlement expertise, will enable us to continue opening new communities during the course of 2006 and beyond.

The following table presents lots controlled by our Homebuilding operations as of June 30, 2006 and December 31, 2005:


	As of		As of
	June 30, 2006		December 31, 2005
Controlled Lots:

Northeast		40,831		44,088
Southeast		91,607		102,297
Midwest		28,786		38,674
Central		30,731		37,611
West		133,581		139,945

		325,536		362,615

The total purchase price related to approved land under option for use by our Homebuilding operations at future dates approximated $5.8 billion at June 30, 2006. In addition, total purchase price related to land under option pending approval was valued at $1.1 billion at June 30, 2006. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits and pre-acquisition costs totaling $488.3 million, of which $42.5 million are refundable. This balance excludes $131.9 million of contingent payment obligations which may or may not become actual obligations of the Company.

Controlled lots, at June 30, 2006, decreased by 37,000 lots or 10% from December 31, 2005. The decrease in controlled lots can be attributed to actions we have taken to reduce our incremental land investment as a result of current conditions affecting the homebuilding industry. During the second quarter of 2006, we delayed entering into new land option contracts, renegotiated certain land option contracts, and cancelled certain other land option contracts. We continue to review land option contracts to ensure that the terms meet our investment criteria and strategic goals in the current business environment.

Homebuilding Operations (continued)

The following table presents a summary of pre-tax income for our Homebuilding operations for the three and six months ended June 30, 2006 and 2005 ($000’s omitted):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Home sale revenue (settlements)	$	3,304,960		$	3,155,898		$	6,193,794		$	5,618,007
Land sale revenue		13,095			57,532			39,013			81,717
Home cost of sales (a)		(2,608,042	)		(2,405,353	)		(4,834,008	)		(4,261,821	)
Land cost of sales		(32,461	)		(53,527	)		(53,604	)		(74,286	)
Selling, general and administrative expense		(265,404	)		(267,327	)		(550,153	)		(521,758	)
Equity income (expense)		(1,337	)		23,406			(121	)		36,877
Other income (expense), net		(29,989	)		(11,227	)		(36,516	)		(19,765	)


Pre-tax income	$	380,822		$	499,402		$	758,405		$	858,971


Average sales price	$	335		$	310		$	335		$	308


^(a)		Homebuilding interest expense, which represents the amortization of capitalized interest, of $55.9 million and $41.1 million for the three months ended June 30, 2006 and 2005 and $97.1 million and $71.6 million for the six months ended June 30, 2006 and 2005, has been included as part of homebuilding cost of sales.

Homebuilding gross profit margins from home settlements decreased 270 basis points to 21.1% for the three months ended June 30, 2006, compared with 23.8% for the same period in the prior year. For the six months ended June 30, 2006, homebuilding gross profit margins decreased 210 basis points to 22.0%, compared with 24.1% for the same period in 2005. The decrease in gross profit margins is attributable to an unfavorable shift in geographic and product mix, increased selling incentives and higher material, labor, land and land development costs. In addition, a $9.3 million charge was taken during the second quarter of 2006 related to land and community impairments primarily as a result of development cost overruns in certain Midwest markets. The overall decrease in gross profit margins was partially offset by margin improvements of 75 basis points for the three months ended June 30, 2006 and 64 basis points for the six months ended June 30, 2006, respectively, compared with the same periods in 2005, from our January 2006 acquisition of the remaining 50% interest in an entity that supplies and installs basic building components and operating systems. During 2005, income from this entity was recorded as equity income and had no impact on homebuilding gross profit margins.

We consider land acquisition and entitlement among our core competencies. We acquire land primarily for the construction of our homes for sale to homebuyers. We will often sell select parcels of land within or adjacent to our communities to retail and commercial establishments. On occasion, we also will sell lots within our communities to other homebuilders. Gross profits from land sales for the three months ended June 30, 2006 had a negative margin contribution of $19.4 million, compared with a positive margin contribution of $4 million for the same period in 2005. Gross profits from land sales for the six months ended June 30, 2006 had a negative margin contribution of $14.6 million, compared with a positive margin contribution of $7.4 million for the same period in 2005. The gross profit contribution from specific land sales transactions was approximately $3 million for the three months ended June 30, 2006 and $7.4 million for the six months ended June 30, 2006. During the second quarter of 2006, land cost of sales also included a $22 million fair market value adjustment related to commercial and residential land held for disposition, primarily in markets in the Midwest and Central. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of land sales. We continue to evaluate our existing land positions to ensure the most effective use of capital. As of June 30, 2006, we had $397.8 million of land held for sale.

Selling, general and administrative expenses as a percentage of home settlement revenues declined to 8% for the three months ended June 30, 2006 compared with 8.5% for the same period in the prior year. For the six months ended June 30, 2006, selling, general and administrative expenses as a percentage of home settlement revenues declined to 8.9% from 9.3% for the same period in the prior year. This improvement can be attributed to increased leverage on revenues and our internal initiatives focused on controlling overhead costs in the current business environment.

Homebuilding Operations (continued)

The decrease in equity income of $24.7 million and $37 million for the three and six months ended June 30, 2006, compared with the prior year periods, is primarily the result of our January 2006 acquisition of the remaining 50% interest in an entity that supplies and installs basic building components and operating systems. As a result of this acquisition, we own 100% of this entity, which is consolidated in our financial statements. For the three and six months ended June 30, 2005, earnings from this investment were recorded in equity income. In addition, earnings from our 50% investment in a Nevada-based joint venture, related to the sale of commercial and residential properties, decreased as the venture substantially completed its operations during 2005.

Net expenses, as shown in Other income (expense), net, increased $18.8 million and $16.8 million, respectively, for the three and six months ended June 30, 2006 compared with the same periods in 2005. This increase in net expenses was primarily due to $30.8 million of write-offs recognized during the second quarter of 2006 related to deposits and pre-acquisition costs for land option contracts we no longer plan to exercise.

Financial Services Operations

We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. Pre-tax income of our financial services operations for the three and six months ended June 30, 2006 was $15.1 million and $64.4 million, respectively, compared with $15.5 million and $25.6 million, respectively, for the prior year periods. During February 2006, we sold our investment in Su Casita, a Mexico-based mortgage banking company. As a result of this transaction, we recognized a pre-tax gain of approximately $31.6 million ($19.9 million after-tax) for the six months ended June 30, 2006. Excluding the gain related to the sale of Su Casita, pre-tax income increased $7.2 million for the six months ended June 30, 2006, compared with the same period in the prior year. For the six months ended June 30, 2005, Su Casita contributed pre-tax income from operations of $700 thousand. During February 2005, 25% of our investment in the capital stock of Su Casita was redeemed for a pre-tax gain of approximately $620 thousand.

The following table presents mortgage origination data for our Financial Services operations:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Total originations:
Loans		9,498		9,445		17,589		17,037

Principal ($000’s omitted)	$	2,022,600	$	1,829,200	$	3,766,800	$	3,318,600


Originations for Pulte customers:
Loans		9,442		9,235		17,502		16,450

Principal ($000’s omitted)	$	2,008,900	$	1,790,700	$	3,745,400	$	3,218,600

Capture rates for the three and six months ended June 30, 2006, were 91.0% and 90.2%, respectively, compared with 88.0% and 88.3%, respectively, for the three and six months ended June 30, 2005. For the three months ended June 30, 2006, mortgage origination units were comparable with the same period in the prior year. For the three months ended June 30, 2006, mortgage principal volume increased 11% compared with the same period in the prior year. For the six months ended June 30, 2006, mortgage origination unit and principal volume increased 3% and 14%, respectively, over the same period in 2005. The growth of mortgage origination units for the six months ended June 30, 2006, is the result of higher capture rate and homebuilding production volumes. The growth in principal volume is due to an increase in the average loan size due to higher average selling prices and higher homebuilding production volumes. Our Homebuilding customers continue to account for the majority of total loan production, representing 99% and almost 100% of total Pulte Mortgage unit production for the three and six months ended June 30, 2006, respectively, compared with 98% and 97% for the same periods in 2005. At June 30, 2006, loan application backlog decreased to $4.1 billion compared with $5.2 billion at June 30, 2005.

Financial Services Operations (continued)

During the quarter and six months ended June 30, 2006, there was a shift away from adjustable rate mortgage (ARM) products, which generally have a lower profit per loan than fixed rate products. ARMs represented 33% of total funded origination dollars and 26% of total funded origination units for the three months ended June 30, 2006, compared with 48% and 43% in the prior year period, respectively. For the six months ended June 30, 2006, ARMs represented 34% of total funded origination dollars and 27% of total funded origination units compared with 50% and 45% in the prior year period, respectively. Interest only mortgages, a component of ARMs, represented 76% of ARMs origination dollars and 80% of ARMs origination units for the three months ended June 30, 2006, compared with 63% and 52% in the prior year period, respectively. For the six months ended June 30, 2006, interest only mortgages represented 77% of ARMs origination dollars and 80% of ARMs origination units, compared with 63% and 51% in the prior year period, respectively.

Income from our title operations for the three months ended June 30, 2006 was comparable with the same period in the prior year at $4.5 million. For the six months ended June 30, 2006, income from our title operations decreased to $8 million from $8.7 million for the six months ended June 30, 2005.

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

Other non-operating

Other non-operating expenses are incurred for financing, developing and implementing strategic initiatives centered on new business development and operating efficiencies, and providing the necessary administrative support associated with being a publicly traded entity listed on the New York Stock Exchange. Accordingly, these results will vary from year to year as these strategic initiatives evolve.

The following table presents other non-operating expenses for the three and six months ended June 30, 2006 and 2005 ($000’s omitted):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2005		2006			2005
Net interest expense (income)	$	(1,569	)	$	14,903		(2,659	)	$	28,650
Other expenses, net		9,722			14,203		20,195			23,212

Loss before income taxes	$	8,153		$	29,106	$	17,536		$	51,862

Net interest income for the three and six months ended June 30, 2006, compared with net interest expense for the same periods in 2005, is the result of an increase in the amount of interest capitalized into homebuilding inventory. The decrease in other corporate expenses, net for the three and six months ended June 30, 2006, is due primarily to decreased compensation-related expense.

Interest capitalized into homebuilding inventory is charged to home cost of sales based on the cyclical timing of our unit settlements over a period that approximates the average life cycle of our communities. Interest in homebuilding inventory increased due to increased amounts of interest capitalized into homebuilding inventory, based on our homebuilding inventory and debt levels, and is consistent with the growth of the Company. Information related to Corporate interest capitalized into homebuilding inventory is as follows ($000’s omitted):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Interest in inventory at beginning of period	$	245,253		$	233,711		$	229,798		$	223,591
Interest capitalized		65,100			43,810			121,724			84,474
Interest expensed		(55,899	)		(41,103	)		(97,068	)		(71,647	)


Interest in inventory at end of period	$	254,454		$	236,418		$	254,454		$	236,418


Interest incurred *	$	66,984		$	59,972		$	125,466		$	115,631


*		Interest incurred includes interest on our senior debt, short-term borrowings, and other financing arrangements and excludes interest incurred by our financial services operations.

Liquidity and Capital Resources

We finance our homebuilding land acquisitions, development and construction activities from internally generated funds, existing credit agreements, and the sale of securities.

At June 30, 2006, we had cash and equivalents of $104.5 million and $3.5 billion of senior and unsubordinated notes outstanding. Other financing included limited recourse collateralized financing totaling $22.1 million. Sources of our working capital include our cash and equivalents, our $1.66 billion committed unsecured revolving credit facility and Pulte Mortgage’s $955 million committed credit arrangements.

Our debt-to-total capitalization, excluding our collateralized debt, was approximately 39.4% at June 30, 2006, and was approximately 38.8% net of cash and equivalents. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings.

Our unsecured revolving credit facility includes an uncommitted accordion feature, under which the credit facility may be increased to $2.25 billion. We have the capacity to issue letters of credit up to $1.125 billion. Borrowing availability is reduced by the amount of letters of credit outstanding. The credit facility contains restrictive covenants, the most restrictive of which requires us not to exceed a debt-to-total capitalization ratio of 60% as defined in the agreement. At June 30, 2006 we had $614.5 million of borrowings outstanding and $418.6 million available for borrowing under this facility.

Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements. At June 30, 2006, Pulte Mortgage had committed credit arrangements of $955 million comprised of a $405 million bank revolving credit facility and a $550 million asset-backed commercial paper program. At June 30, 2006, Pulte Mortgage had $477 million outstanding under its committed credit arrangements.

Pursuant to the two $100 million stock repurchase programs authorized by our Board of Directors in October 2002 and 2005, and the $200 million stock repurchase authorization in February 2006 (for a total stock repurchase authorization of $400 million), we have repurchased a total of 8,987,600 shares for a total of $277.8 million. At June 30, 2006, we have remaining authorization to purchase common stock aggregating $122.2 million.

At June 30, 2006, our effective tax rate was 37.1% compared with 37.2% at June 30, 2005. We anticipate that our effective tax rate for the remainder of 2006 will be approximately 37.1%.

Our net cash used in operating activities for the six months ended June 30, 2006 was $1.1 billion, compared with $340.9 million for the six months ended June 30, 2005. Net income for both years was offset primarily by significant investments in land and house inventory necessary to support our continuing business operations.

Cash used in investing activities was $59.8 million for the six months ended June 30, 2006, compared with $23.1 million for the six months ended June 30, 2005. During the six months ended June 30, 2006, we invested approximately $65.8 million, net of cash acquired, to purchase the remaining 50% of an entity that installs basic building components and operating systems. In addition, we received cash of $49.2 million for the sale of our investment in Su Casita, a Mexico-based mortgage banking company. Also, we made $20.7 million of capital contributions to and received $31.3 million in capital distributions from our unconsolidated joint ventures for the six months ended June 30, 2006. Further, we incurred approximately $54.4 million in capital expenditures.

Net cash provided by financing activities totaled $216.1 million for the six months ended June 30, 2006, compared with $499.5 million for the six months ended June 30, 2005. Proceeds from borrowings for the six months ended June 30, 2006 totaled $764.5 million and was comprised of $614.5 million for our unsecured revolving credit facility and issuance of $150 million of senior notes. For the six months ended June 30, 2006, the net decrease in Pulte Mortgage’s credit arrangements was approximately $416 million. Additionally, we paid $99.6 million for stock repurchases and paid $20.5 million in dividends for the six months ended June 30, 2006.

In May 2006, we sold $150 million of 7.375% senior notes, which mature on June 1, 2046, which are guaranteed by us and certain of our 100%-owned subsidiaries. These notes are unsecured and rank equally with all of our other unsecured and unsubordinated indebtedness. The notes are redeemable at any time on or after June 1, 2011, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest thereon to the redemption date. Proceeds from the sale were used to repay the indebtedness of our revolving credit facility and for general corporate purposes, including continued investment in our business.

Inflation

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

Off-Balance Sheet Arrangements

At June 30, 2006 and December 31, 2005, the aggregate outstanding debt of our unconsolidated joint ventures was $908.5 million and $882.2 million, respectively. At June 30, 2006 and December 31, 2005, our proportionate share of our joint venture debt was approximately $307.2 million and $293.8 million, respectively. At June 30, 2006, we provided limited recourse guarantees for our proportionate share of joint venture debt of $307.2 million while we provided limited recourse debt guarantees of approximately $288.2 million at December 31, 2005. Accordingly, we may be liable, on a contingent basis, through limited guarantees with respect to a portion of the secured land acquisition and development debt. However, we would not be liable other than in instances of fraud, misrepresentation or other bad faith actions by us, unless the joint venture was unable to perform its contractual borrowing obligations. As of June 30, 2006, we do not anticipate we will incur any significant costs under these guarantees.

New Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, “An Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 reflects the benefit recognition approach, where a tax benefit is recognized when it is “more likely than not” to be sustained based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006. We are evaluating the impact of FIN No. 48 on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This new Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. Due to the short period of time our servicing rights are held, generally less than four months, we do not expect SFAS No. 156 will have a significant impact on our consolidated financial statements.

The FASB has revised its guidance on SFAS No. 133 Implementation Issues as of March 2006. Several Implementation Issues were revised to reflect the issuance of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140,” in February 2006. SFAS No. 155 allows any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” to be carried at fair value in its entirety, with changes in fair value recognized in earnings. In addition, SFAS No. 155 requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or contain an embedded derivative. SFAS No. 155 also eliminates a prior restriction on the types of passive derivatives that a qualifying special purpose entity is permitted to hold. SFAS No. 155 is applicable to new or modified financial instruments in fiscal years beginning after September 15, 2006, though the provisions related to fair value accounting for hybrid financial instruments can also be applied to existing instruments. We do not expect SFAS No. 155 will have a significant impact on our consolidated financial statements.

New Accounting Pronouncements (continued)

In December 2004, the FASB issued Staff Position 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (FSP 109-1). The American Jobs Creation Act, which was signed into law in October 2004, provides a 3% tax deduction on qualified domestic production activities income for 2005 and 2006. When fully phased-in, the deduction will be 9% of the lesser of “qualified production activities income” or taxable income. Based on the guidance provided by FSP 109-1, this deduction was accounted for as a special deduction under SFAS No. 109 and reduced tax expense. Tax benefits resulting from this deduction have resulted in a reduction in our federal income tax rate.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2006 compared with those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2005.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative disclosure:

We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following table sets forth, as of June 30, 2006, our rate-sensitive financing obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair market values ($000’s omitted):


	As of June 30, 2006 for the
	years ended December 31,
															There-						Fair
	2006			2007			2008			2009			2010		after			Total			Value
Rate sensitive liabilities:

Fixed interest rate debt:

Senior notes	$	—		$	—		$	—		$	400,000		$	—	$	3,148,563		$	3,548,563		$	3,377,050
Average interest rate		—			—			—			4.88	%		—		6.62	%		6.42	%

Limited recourse collateralized financing	$	10,554		$	5,620		$	2,122		$	3,824		$	—	$	—		$	22,120		$	22,120
Average interest rate		.32	%		2.38	%		1.63	%		2.26	%		—		—			1.3	%

Qualitative disclosure:

There has been no material change to the qualitative disclosure found in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Special Notes Concerning Forward-Looking Statements

As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2., Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 3., Quantitative and Qualitative Disclosures About Market Risk, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (1) general economic and business conditions; (2) interest rate changes and the availability of mortgage financing; (3) the relative stability of debt and equity markets; (4) competition; (5) the availability and cost of land and other raw materials used in our homebuilding operations; (6) the availability and cost of insurance covering risks associated with our business; (7) shortages and the cost of labor; (8) weather related slowdowns; (9) slow growth initiatives and/or local building moratoria; (10) governmental regulation, including the interpretation of tax, labor and environmental laws; (11) changes in consumer confidence and preferences; (12) required accounting changes; (13) terrorist acts and other acts of war; and (14) other factors over which we have little or no control. See our Annual Report on Form 10-K for the year ended December 31, 2005 and our other public filings with the Securities and Exchange Commission for a further discussion of these and other risks and uncertainties applicable to our business. We undertake no duty to update any forward-looking statement whether as a result of new information, future events or changes in our expectations.

Item 4. Controls and Procedures

Management, including our President & Chief Executive Officer and Executive Vice President & Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2006. Based upon, and as of the date of that evaluation, our President & Chief Executive Officer and Executive Vice President & Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2006.

There was no change in our internal control over financial reporting during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities (1)


							(d)
							Approximate dollar
					(c)		value of shares
					Total number of		that may yet be
	(a)		(b)		shares purchased		purchased under
	Total Number		Average		as part of publicly		the plans or
	of shares		price paid		announced plans		programs
	purchased		per share		or programs		($000’s omitted)
April 1, 2006 through April 30, 2006		—		—		—	$	172,140	(1)


May 1, 2006 through May 31, 2006		690,300	$	34.82		690,300	$	148,106	(1)


June 1, 2006 through June 30, 2006		925,000	$	27.98		925,000	$	122,224	(1)


Total		1,615,300	$	30.90		1,615,300


(1)		Pursuant to the two $100 million stock repurchase programs authorized and announced by our Board of Directors in October 2002 and 2005 and the $200 million stock repurchase authorized and announced in February 2006 (for a total stock repurchase authorization of $400 million), the Company has repurchased a total of 8,987,600 shares for a total of $277.8 million. There are no expiration dates for the programs.

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

Our Annual Meeting of Shareholders was held on May 11, 2006. The following matters were considered and acted upon, with the results indicated below.


	Shares		Shares
	Voted For		Withheld
Election of Directors - Nominees to Serve a Two Year Term Expiring at the 2008 Annual Meeting:

Brian P. Anderson		224,878,704		10,669,583
Patrick J. O’Leary		224,874,275		10,674,012

Election of Directors - Nominees to Serve a Three Year Term Expiring at the 2009 Annual Meeting:

Debra J. Kelly-Ennis		224,624,140		10,924,147
Bernard W. Reznicek		224,864,955		10,683,332
Alan E. Schwartz		217,367,767		18,180,520

Item 4. Submission of Matters to a Vote of Security Holders (continued)

The following directors have terms of office that will expire in 2007 or 2008 and accordingly, were not up for election at our Annual Meeting of Shareholders held on May 11, 2006:


	2007		2008
	William J. Pulte		D. Kent Anderson
	Richard J. Dugas, Jr.		John J. Shea
	David N. McCammon		William B. Smith
	Francis J. Sehn

Shares

Voted

Shares

Voted For

Against

Abstaining

Ratification of the appointment of the Company’s independent accountants by shareholders

232,326,664

2,138,148

1,083,475


			Shares
	Shares		Voted		Shares		Broker
	Voted For		Against		Abstaining		Non-Votes
Election of Directors by a majority, rather than plurality, vote		95,372,989		116,250,014		1,620,692		22,304,592

Declassification of the Board of Directors		134,631,115		77,404,119		1,208,461		22,304,592

Cumulative voting in the election of Directors		103,820,333		107,018,210		2,405,152		22,304,592

Use of performance-based options		107,148,205		104,850,458		1,245,032		22,304,592

Item 6. Exhibits

(a) Exhibits

Exhibit Number and Description


10(a)		Fifth Amended and Restated Security and Collateral Agreement by and among Pulte Mortgage LLC, JP Morgan Chase Bank, N.A., as administrative agent, and LaSalle Bank National Association, as collateral agent, dated as of May 16, 2006.

10(b)		Sixth Amended and Restated Revolving Credit Agreement by and among Pulte Mortgage LLC, JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Securities, Inc., as lead arranger and sole bookrunner, and LaSalle Bank National Association, as collateral agent, dated as of May 16, 2006.

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

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

32		Certification Pursuant to 18 United States Code § 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934


		Page No.
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005		3

	Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005		4

	Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2006 and 2005		5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005		6

	Notes to Condensed Consolidated Financial Statements		7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3	Quantitative and Qualitative Disclosures About Market Risk		37

Item 4	Controls and Procedures		37

PART II	OTHER INFORMATION

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		38

Item 4	Submission of Matters to a Vote of Security Holders		38

Item 6	Exhibits		39

SIGNATURES			40
Fifth Amended & Restated Security & Collateral Agreement
Sixth Amended & Restated Revolving Credit Agreement
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification by Chief Executive Officer and Chief Financial Officer


	PULTE HOMES, INC.
	/s/ Roger A. Cregg
	Roger A. Cregg
	Executive Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized officer) Date: August 4, 2006

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Exhibit Number		Description
10(a)		Fifth Amended and Restated Security and Collateral Agreement by and among Pulte Mortgage LLC, JP Morgan Chase Bank, N.A., as administrative agent, and LaSalle Bank National Association, as collateral agent, dated as of May 16, 2006.

10(b)		Sixth Amended and Restated Revolving Credit Agreement by and among Pulte Mortgage LLC, JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Securities, Inc., as lead arranger and sole bookrunner, and LaSalle Bank National Association, as collateral agent, dated as of May 16, 2006.

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

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

32		Certification Pursuant to 18 United States Code § 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934