UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

or

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 1-6776

CENTEX CORPORATION

2728 N. Harwood, Dallas, Texas 75201
(Address of principal executive offices) (Zip Code)

(214) 981-5000
(Registrant’s telephone number, including area code)

     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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on July 22, 2008: 123,572,889 shares of common stock, par value $ .25 per share.

Centex Corporation and Subsidiaries

Form 10-Q Table of Contents

June 30, 2008

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Centex Corporation and Subsidiaries

See Notes to Consolidated Financial Statements.

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Centex Corporation and Subsidiaries

See Notes to Consolidated Financial Statements.

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Centex Corporation and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(Dollars in thousands)
(unaudited)

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Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited)

See Notes to Consolidated Financial Statements.

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Centex Corporation and Subsidiaries
Statements of Consolidated Cash Flows with Consolidating Details
(Dollars in thousands)
(unaudited)

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Centex Corporation and Subsidiaries

(A)     SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The consolidated interim financial statements include the accounts of Centex Corporation and all subsidiaries and other entities in which Centex Corporation has a controlling interest (the “Company”). Also, included in the consolidated financial statements are certain variable interest entities, as discussed in Note (D), “Inventories.” All significant intercompany balances and transactions have been eliminated. The unaudited statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States have been condensed or omitted.

     Balance sheet and cash flow data is presented in the following categories:

     In the opinion of the Company’s management, all adjustments (consisting of normal, recurring adjustments) necessary to present fairly the information in the consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of results for the full year. The Company suggests that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes to consolidated financial statements included in the Company’s latest Annual Report on Form 10-K.

     Certain operations have been classified as discontinued. For additional information, refer to Note (L), “Discontinued Operations.” Associated results of operations and financial position are separately reported for all periods presented. Information in these Notes to Consolidated Financial Statements, unless otherwise noted, does not include the accounts of discontinued operations.

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Interest Expense

     Interest expense relating to the Financial Services segment is included in Financial Services’ costs and expenses. Home Building capitalizes interest incurred as a component of housing projects’ inventory cost. Capitalized interest is included in Home Building’s costs and expenses as related housing inventories are sold or otherwise charged to costs and expenses.

Income Taxes

     The Company accounts for income taxes on the deferral method whereby deferred tax assets and liabilities are provided for the tax effect of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In accordance with the provisions set forth by the Financial Accounting Standards Board (“FASB”) under Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS 109”), the Company assesses, on a quarterly basis, the realizability of its deferred tax assets. A valuation allowance must be established when, based upon the evaluation of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. For additional information regarding the Company’s valuation allowance, please refer to Note (J), “Income Taxes.”

     On April 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). The cumulative effect of the adoption of FIN 48 was recorded as a $208.3 million reduction to beginning retained earnings in the first quarter of fiscal year 2008. Please refer to Note (J), “Income Taxes,” for additional information relating to FIN 48.

     In accordance with the provisions of FIN 48, the Company recognizes in its financial statements the impact of a tax position if a tax return’s position or future tax position is “more likely than not” to prevail (defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical merits of the tax position). Tax positions that meet the “more likely than not” threshold are measured (using a probability weighted approach) at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement.

     The Company’s estimated liability for unrecognized tax benefits is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, certain changes and/or developments with respect to audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from the Company’s estimates. As each audit is concluded, adjustments, if any, are appropriately recorded in the Company’s financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Company to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.

     The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the financial statements as a component of the income tax provision. The Company’s liability for accrued interest and penalties, net of unrecognized tax benefits, is reflected as a component of accrued liabilities.

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Stock-Based Employee Compensation Arrangements

     The Company accounts for its stock-based compensation arrangements in accordance with the provisions of SFAS No. 123(R) entitled “Share-Based Payment” (“SFAS 123R”). The following information represents the Company’s grants of stock-based compensation to employees and directors during the three months ended June 30, 2008 and the year ended March 31, 2008:

     The Company recognizes compensation expense of a stock-based award over the vesting period based on the fair value of the award on the grant date, net of forfeitures. The fair value of stock units and restricted stock are based on the fair market value of the Company’s stock on the date of grant, while the fair value of stock options granted is calculated under the Black-Scholes option-pricing model.

     In addition to the stock-based awards in the above table, the Company issued to officers and employees during the first quarter of fiscal years 2009 and 2008 long-term performance awards that vest after three years. These awards will be settled in cash and adjusted based on the Company’s performance relative to its peers in total shareholder return (fiscal year 2009 awards) and in earnings per share growth and return on equity (fiscal year 2008 awards), as well as changes in the Company’s stock price between the date of grant and the end of the performance period. Those awards granted during the first quarter of fiscal year 2009 had an initial aggregate value of $28.3 million and were adjusted to an aggregate value of $20.8 million as of June 30, 2008. Those awards granted during the first quarter of fiscal year 2008 were adjusted to an aggregate value of $4.8 million as of June 30, 2008. In accordance with the provisions of SFAS 123(R), these awards are accounted for as liability awards for which compensation expense will be recognized over the vesting period with a corresponding increase in accrued liabilities.

Statements of Consolidated Cash Flows – Supplemental Disclosures

     In accordance with the provisions of SFAS No. 95, “Statement of Cash Flows,” the Statements of Consolidated Cash Flows have not been restated for discontinued operations. For further information on the sale of the Company’s home services operations and the Company’s construction services operations (“Construction Services”), see Note (L), “Discontinued Operations.” Accordingly, all of the Company’s home services operations and Construction Services cash flows prior to disposal are included with the Centex cash flows.

     The following table provides supplemental disclosures related to the Statements of Consolidated Cash Flows:

     As explained in Note (D), “Inventories,” pursuant to the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as revised (“FIN 46”), as of June 30, 2008 and March 31, 2008, the Company consolidated $62.8 million and $75.3 million, respectively, of land as inventory under the caption “land held under option agreements not owned.” The Company also recorded $44.8 million and $38.1 million as of June 30, 2008 and March 31, 2008, respectively, of lot option agreements for which the Company’s deposits exceeded certain thresholds.

     In addition to the items noted above, the Company’s adoption of FIN 48, effective April 1, 2007, was treated as a non-cash item in the Statements of Consolidated Cash Flows. The adoption of FIN 48 resulted in a $116.0 million

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increase to deferred income taxes, a $329.2 million increase in accrued liabilities and a $213.2 million reduction in stockholders’ equity in the first quarter of fiscal year 2008. Transfers of mortgage loans between categories have been treated as non-cash items.

Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), that serves to define fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Company adopted SFAS 157 effective April 1, 2008. For additional information, refer to Note (H), “Fair Values of Financial Instruments.” In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items to which this FSP applies include, but are not limited to, reporting units measured at fair value in the first step of a goodwill impairment test and long-lived assets (asset groups) measured at fair value for an impairment assessment (i.e., inventory impairment assessments). This FSP defers the effective date for nonfinancial assets and nonfinancial liabilities of SFAS 157 for the Company to April 1, 2009. The Company is currently evaluating the impact, if any, of SFAS 157 related to nonfinancial assets and nonfinancial liabilities on the Company’s results of operations or financial position.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). Under the provisions of SFAS 159, companies may elect to measure specified financial instruments, warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings. The election, called the “fair value option,” enables companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently, and it is simpler than using the complex hedge-accounting requirements in FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to achieve similar results. The Company adopted SFAS 159 effective April 1, 2008. For additional information, refer to Note (H), “Fair Values of Financial Instruments.”

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”). Under the provisions of SFAS 160, a noncontrolling interest in a subsidiary, or minority interest, must be classified as equity and the amount of consolidated net income specifically attributable to the minority interest must be clearly identified in the statement of consolidated operations. SFAS 160 also requires consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling interest retained in a deconsolidation. SFAS 160 will be effective for the Company as of April 1, 2009. The Company does not expect the adoption of SFAS 160 to have a material impact on its financial statements.

Reclassifications

     Certain prior year balances have been reclassified to be consistent with the June 30, 2008 presentation, including reclassifications of discontinued operations.

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(B)     STOCKHOLDERS’ EQUITY

     A summary of changes in stockholders’ equity is presented below:

(C)     MORTGAGE LOANS RECEIVABLE AND REAL ESTATE OWNED

     Mortgage loans receivable consist of mortgage loans held for sale and other mortgage loans, net of their related allowances. Mortgage loans held for sale represent mortgage loans originated by Financial Services, which will be sold to third parties. Other mortgage loans include performing and nonperforming construction loans and other nonperforming mortgage loans. Real estate owned is foreclosed property that once served as the underlying collateral for a mortgage loan receivable. Real estate owned is reflected as a component of other inventory in the Consolidated Balance Sheets. Mortgage loans receivable and real estate owned consist of the following:

     Changes in the allowance for losses on mortgage loans receivable and real estate owned for the three months ended June 30, 2008 and the year ended March 31, 2008 were as follows:

     As of June 30, 2008, Financial Services is committed, under existing construction loan agreements, to fund an additional $15.4 million. During the year ended March 31, 2008, Financial Services ceased originating new construction loans; however, it intends to fulfill its existing funding commitments.

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     The Company has established a liability for anticipated losses associated with mortgage loans originated and sold. Please refer to Note (G),“Commitments and Contingencies,” for information on this reserve at June 30, 2008 and March 31, 2008.

(D)     INVENTORIES

Housing Projects

     A summary of housing projects is provided below:

     For the three months ended June 30, 2008 and 2007, the Company recorded $50.1 million and $142.6 million, respectively, in land-related impairments due to challenging market conditions.

Land Held Under Option Agreements Not Owned and Land Held for Development and Sale

     The Company enters into land option purchase agreements. Under the option agreements, the Company pays a stated deposit or issues a letter of credit in consideration for the right to purchase land at a future time, usually at predetermined prices. These options generally do not contain performance requirements from the Company nor obligate the Company to purchase the land, and expire on various dates. At June 30, 2008, the Company had 99 land option agreements.

     In accordance with the provisions of FIN 46, the Company is the primary beneficiary of certain option agreements to purchase land, for which the remaining purchase price of land was $62.8 million and $75.3 million as of June 30, 2008 and March 31, 2008, respectively. Land consolidated under FIN 46 is recorded under the caption “land held under option agreements not owned,” with a corresponding increase to minority interests. At June 30, 2008, 12 land option agreements were consolidated pursuant to FIN 46.

     In addition to land options recorded pursuant to FIN 46, the Company determined that 10 land option agreements represent financing arrangements pursuant to the provisions of SFAS 49, “Product Financing Arrangements” (“SFAS 49”). As a result, the Company recorded $44.8 million and $38.1 million as of June 30, 2008 and March 31, 2008, respectively, of land, which represents the remaining purchase price of the land. Land consolidated pursuant to SFAS 49 is recorded under the caption “land held under option agreements not owned,” with a corresponding increase to accrued liabilities.

     A summary of the Company’s deposits for land options and the total purchase price of such options is provided below:

     In addition to deposits, the Company capitalizes pre-acquisition development costs related to land held under option agreements. As of June 30, 2008 and March 31, 2008, pre-acquisition development costs classified as “land

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held under option agreements not owned” were $4.7 million and $1.1 million, respectively, and classified as “land held for development and sale” were $9.0 million and $10.8 million, respectively. Included in “land held for development and sale” is owned land that is not currently anticipated to be developed for more than two years and land that the Company plans to sell in its current condition within one year, which amounted to $625.7 million and $527.2 million as of June 30, 2008 and March 31, 2008, respectively.

     The Company writes off deposits and pre-acquisition costs when it determines that it is probable the property will not be acquired. Write-offs of land deposits and pre-acquisition costs amounted to $10.1 million for the three months ended June 30, 2008 and $22.9 million for the three months ended June 30, 2007.

(E)     GOODWILL

     A summary of goodwill by segment for the three months ended June 30, 2008 is presented below:

(F)     INDEBTEDNESS

     A summary of the Company’s debt, net of unamortized discounts as applicable, is presented below:

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     The weighted-average interest rates for the Company’s debt during the three months ended June 30, 2008 and 2007 were:

     Maturities of the Company’s senior notes and other are as follows:

     The Company is required to maintain compliance with certain financial covenants in the Company’s multi-bank revolving credit facility. Material covenants include a maximum leverage ratio, a minimum tangible net worth and a borrowing base limitation on the availability of borrowings. The Company’s credit facility also includes an interest coverage ratio. This ratio is a determinant of the maximum leverage ratio covenant and certain of the credit facility’s pricing provisions. In addition, Financial Services’ committed mortgage warehouse credit facilities contain various affirmative and negative covenants that are generally customary for facilities of this type. At June 30, 2008, the Company was in compliance with its financial covenants.

Credit Facilities

     The Company’s existing credit facilities and available borrowing capacity as of June 30, 2008 are summarized below:

     The Company maintains a $1.35 billion unsecured, committed credit facility, maturing in July 2010, that provides funding for general corporate purposes and letters of credit up to a sub limit of $600 million. The multi-bank credit facility includes a borrowing base limitation when the Company does not have an investment grade senior unsecured debt rating from at least two of the following rating agencies: Standard & Poor’s (“S&P”), Moody’s

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Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”). The Company currently does not have investment grade ratings and is therefore subject to the borrowing base limitation. The Company’s long-term debt ratings are currently BB, Ba2 and BB+ from S&P, Moody’s and Fitch, respectively. Given the uncertainty of current market conditions, the Company anticipates operating under the borrowing base limitation for the foreseeable future. Under the borrowing base limitation, the sum of the net senior debt (as defined in the credit agreement), any amounts drawn on the revolving credit facility and outstanding financial letters of credit may not exceed an amount calculated based on applying certain percentages to various categories of unencumbered homebuilding inventory and other assets. The Company had no amounts drawn on the revolving credit facility at June 30, 2008 or at any time during the three months then ended. As of June 30, 2008, the Company had $393.2 million of outstanding letters of credit under its facility, including $163.1 million of financial letters of credit. Financial letters of credit are generally issued as a form of financial or payment guaranty. Available capacity amounts for the revolving credit facility shown above reflect the borrowing base limitation, but they are further subject to certain limitations by features in the Company’s credit facility commonly referred to as anti-cash hoarding provisions.

Funding of Mortgage Loans

     CTX Mortgage Company, LLC historically funded its origination of mortgage loans through the sale of such mortgage loans to Harwood Street Funding I, LLC (“HSF-I”) and, to a lesser extent, through borrowings under more traditional committed mortgage warehouse credit facilities and mortgage loan sale agreements. As a result of the significant disruptions in the mortgage and asset-backed commercial paper markets, beginning in the second quarter of fiscal year 2008, HSF-I was unable to finance the purchase of mortgage loans from CTX Mortgage Company, LLC. In November 2007, HSF-I and the related swap arrangements were terminated and all outstanding obligations were redeemed.

     CTX Mortgage Company, LLC is currently funding its mortgage originations primarily through borrowings under two committed mortgage warehouse credit facilities with commitments of $375 million and $150 million. Borrowings under the warehouse facilities constitute short-term debt of Financial Services. The warehouse facilities generally allow CTX Mortgage Company, LLC to sell to the banks, on a revolving basis, mortgage loans up to an aggregate specified amount. Simultaneously, the banks have entered into an agreement to transfer such mortgage loans back to CTX Mortgage Company, LLC on a specified date or on the Company’s demand for subsequent sale by CTX Mortgage Company, LLC to third parties. Mortgage loans eligible for sale by CTX Mortgage Company, LLC under the warehouse facilities are conforming loans, FHA/VA eligible loans, and jumbo loans meeting conforming underwriting guidelines except as to the size of the loan. Under the $375 million committed mortgage warehouse credit facility, the bank has the option to convert the facility to an amortizing loan based on the ultimate sale of the underlying collateral and not to purchase any additional mortgage loans under the warehouse facility if the Company’s long-term unsecured debt ratings fall below BB by S&P and Fitch or below Ba2 by Moody’s. This warehouse facility was amended in July 2008. Please refer to Note (M), “Subsequent Events,” for additional information.

     CTX Mortgage Company, LLC bears the credit risk associated with loans originated until such loans are sold to third parties. In connection with the loans it originates and sells to third parties, CTX Mortgage Company, LLC makes representations and warranties to the effect that each mortgage loan sold satisfies the criteria of the sale agreement. CTX Mortgage Company, LLC may be required to repurchase mortgage loans sold to third parties if such mortgage loans are determined to breach the representations and warranties of CTX Mortgage Company, LLC, as seller. CTX Mortgage Company, LLC establishes a loan origination reserve for its estimated losses for these obligations.

     CTX Mortgage Company, LLC and its related companies sold $1.61 billion and $2.35 billion of mortgage loans to investors during the three months ended June 30, 2008 and 2007, respectively. CTX Mortgage Company, LLC and its related companies recognized gains on sales of mortgage loans and related derivative activity of $30.3 million and $38.6 million during the three months ended June 30, 2008 and 2007, respectively.

(G)     COMMITMENTS AND CONTINGENCIES

Joint Ventures

     The Company conducts a portion of its land acquisition, development and other activities through its participation in joint ventures in which the Company holds less than a majority interest. These land-related activities typically require substantial capital, and partnering with other homebuilders or developers and, to a lesser extent, financial partners, allows Home Building to share the risks and rewards of ownership and to provide broader strategic advantages.

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     A summary of the Company’s Home Building joint ventures is presented below:

     Total joint venture debt outstanding as of June 30, 2008 and March 31, 2008 was $350.5 million and $423.2 million, respectively. Debt agreements for joint ventures vary by lender in terms of structure and level of recourse. For certain of the joint ventures, the Company is also liable on a contingent basis, through other guarantees, letters of credit or other arrangements, with respect to a portion of the construction debt. Additionally, the Company has agreed to indemnify the construction lender for certain environmental liabilities in the case of most joint ventures, and most guarantee arrangements provide that the Company is liable for its proportionate share of the outstanding debt if the joint venture files for voluntary bankruptcy. To date, the Company has not been requested to perform under the environmental liabilities or voluntary bankruptcy guarantees for any of its joint ventures.

     Three of the Company’s joint ventures are in default of their joint venture debt agreements as of June 30, 2008. In addition, the Company expects four other joint ventures to be in default of their joint venture debt agreements subsequent to June 30, 2008. The Company’s share of the total debt of these joint ventures that are either in default, or expected to be in default, is $87.0 million and is included in the table above. The Company is in discussions with the joint venture partners and lenders with respect to each joint venture. For all of the Company’s joint ventures, recourse under debt agreements is limited to either the underlying collateral or completion obligations of the joint venture partners.

     A summary of the estimated maturities of the Company’s share of joint ventures’ debt is provided below. The Company has estimated the debt maturities with the assumption that all payments are first applied to pay down the outstanding debt balances as of June 30, 2008.

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Letters of Credit and Surety Bonds

     In the normal course of business, the Company issues letters of credit and surety bonds: (1) pursuant to certain performance related obligations, (2) as security for certain land option purchase agreements of Home Building, and (3) under various insurance programs. The Company also previously issued surety bonds, which are reflected as discontinued operations in the table below, pursuant to construction obligations of Construction Services prior to the sale of this segment on March 30, 2007. No event has occurred that has led the Company to believe that these letters of credit or bonds will be drawn upon.

     A summary of the Company’s outstanding letters of credit and surety bonds as of June 30, 2008 and March 31, 2008 is presented below (dollars in millions):

Community Development and Other Special District Obligations

     A Community Development District or similar development authority (“CDD”) is a unit of local government created under various state statutes that utilizes bond financing to finance the construction or acquisition of infrastructure assets of a development. A portion of the liability associated with the bonds including principal and interest is assigned to each parcel of land within the development. This debt is typically paid by subsequent special assessments levied by the CDD on the landowners. In accordance with EITF 91-10, “Accounting for Special Assessments and Tax Increment Financing,” the Company records a liability for future assessments, which are fixed or determinable for a fixed or determinable period. In addition and in accordance with SFAS No. 5, “Accounting for Contingencies,” the Company evaluates whether it is contingently liable for any of the debt related to the bond issuance. This is typically the case where bonds issued by the CDD have maturity dates of ten years or less that will be paid by the Company as the developer and current landowner and not by future homeowners. At June 30, 2008 and March 31, 2008, the Company had recorded $349.0 million and $351.9 million, respectively, in accrued liabilities for outstanding CDD obligations.

Warranties and Guarantees

     In the normal course of its business, the Company issues certain warranties and guarantees or makes certain representations related to its home sales, land sales and mortgage loan originations. The Company believes that it has established the necessary accruals for these warranties, guarantees and representations. See further discussion of the Company’s warranty liability below.

     Home Building offers a ten-year limited warranty for most homes constructed and sold. The warranty covers defects in materials or workmanship in the first two years of the customers’ ownership of the home and certain designated components or structural elements of the home in the third through tenth years. Home Building estimates the costs that may be incurred under its warranty program for which it will be responsible and records a liability at the time each home is closed. Factors that affect Home Building’s warranty liability include the number of homes closed,

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historical and anticipated rates of warranty claims, and cost per claim. Home Building periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.

     Changes in Home Building’s contractual warranty liability are as follows for the three months ended June 30, 2008 and the year ended March 31, 2008:

     Financial Services has established a liability for anticipated losses associated with mortgage loans originated. Changes in Financial Services’ liability are as follows for the three months ended June 30, 2008 and the year ended March 31, 2008:

Insurance Accruals

     The Company has certain self-insured retentions and deductible limits under its workers’ compensation, automobile and general liability insurance policies. The Company establishes reserves for its self-insured retentions and deductible limits based on an analysis of historical claims and an estimate of claims incurred but not yet reported. Projection of losses concerning these liabilities is subject to a high degree of variability due to factors such as claim settlement patterns, litigation trends and legal interpretations, among others. On an annual basis, the Company engages actuaries to assist in the evaluation and development of claim rates and required reserves for self insurance including reserves related to construction defects and general liability claims. The Company periodically assesses the adequacy of its insurance accruals and adjusts the amounts as necessary.

     Although the Company considers the insurance accruals reflected in its Consolidated Balance Sheets to be adequate, there can be no assurance that this accrual will prove to be sufficient over time to cover ultimate losses. Expenses associated with insurance claims up to the Company’s deductible limits for the three months ended June 30, 2008 were $8.0 million and $47.0 million for fiscal year 2008. As of June 30, 2008 and March 31, 2008, accrued insurance included in accrued liabilities in the accompanying Consolidated Balance Sheets was $233.5 million and $221.0 million, respectively, and consisted primarily of general liability retentions associated with construction defects.

Forward Trade and Interest Rate Lock Commitments

     Forward trade commitments represent contracts with investors for delayed delivery of mortgage loans for which the Company agrees to make delivery at a specified future date at a specified price. The Company utilizes such delayed delivery contracts to hedge market risk based upon the number of commitments issued to borrowers that are expected to close. At June 30, 2008, the Company had $219.7 million of commitments to deliver mortgages to investors against interest rate lock commitments. These forward trade commitments are recorded on the balance sheet in other assets or accrued liabilities. In addition, at June 30, 2008, the Company had commitments to deliver

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approximately $292.8 million of mortgage loan inventory to investors. These forward trade commitments are recorded on the balance sheet together with the mortgage loan receivables they hedge.

     Interest rate lock commitments (“IRLCs”) represent individual borrower agreements that commit the Company to lend at a specified price for a specified period as long as there is no violation of any condition established in the commitment contract. IRLCs are recorded on the balance sheet in other assets or accrued liabilities. At June 30, 2008, the Company had loan commitments to prospective borrowers of $242.3 million.

     For additional information on forward trade commitments and interest rate lock commitments, please refer to Note (H), “Fair Values of Financial Instruments,” and Note (K), “Derivatives and Hedging.”

Litigation and Related Matters

     In the normal course of its business, the Company is named as a defendant in certain suits filed in various state and federal courts, including construction defect claims, contract disputes and employee-related matters. Management believes that none of the litigation matters in which the Company is involved, including those described below, would have a material adverse effect on the consolidated financial condition or operations of the Company.

     Beginning in January 2003, the United States Department of Justice (the “Justice Department”), acting on behalf of the United States Environmental Protection Agency (“EPA”), has asserted that certain of Home Building’s neighborhoods violated regulatory requirements applicable to storm water discharges, and that injunctive relief and civil penalties may be warranted. Although Home Building disputes the Justice Department’s assertions, to settle the matter, in May 2008, Home Building signed a consent decree with the EPA and various states with respect to the Company’s prior and future storm water pollution prevention practices at all of Home Building’s sites. The Justice Department filed suit on June 11, 2008, in Federal Court in accordance with the accepted practice in matters of this nature, at which time it submitted the proposed consent decree for approval by the Court. The Court entered the consent decree on July 30, 2008. Under the consent decree, Home Building will pay a civil penalty of $1.5 million, and agrees to implement certain management, record keeping and reporting practices related to controlling storm water discharges at all of Home Building’s sites.

(H)     FAIR VALUES OF FINANCIAL INSTRUMENTS

     The Company adopted SFAS 157 on April 1, 2008 for its financial instruments measured at fair value. SFAS 157 establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:

     Mortgage loans held for sale and forward trade commitments are valued based upon quoted market prices for similar instruments. The servicing asset is valued based upon servicing sales contracts entered into with third parties. Interest rate lock commitments are valued at quoted market prices, plus the related service release premium, multiplied by a projected customer close ratio. The service release premium is based upon the Company’s servicing sales contracts, and the projected customer close ratio is based upon the Company’s historical customer fall-out rate.

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     The following table presents for each hierarchy level the Company’s financial instruments measured at fair value on a recurring basis at June 30, 2008: