SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

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

For the fiscal year ended December 31, 2005

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

PULTE HOMES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Title of each class		Name of each exchange on which registered
Common Stock, par value $.01		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ     NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o     NO þ

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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

The aggregate market value of the registrant’s voting stock held by nonaffiliates of the registrant as of June 30, 2005, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $9,032,497,053.

As of February 28, 2006, the registrant had 257,778,034 shares of common stock outstanding.

Documents Incorporated by Reference

Applicable portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form.

 

 

PULTE HOMES, INC.
TABLE OF CONTENTS

Item				Page
No.				No.
		Part I
1		Business			4
1A		Risk Factors			11
1B		Unresolved Staff Comments			14
2		Properties			14
3		Legal Proceedings			14
4		Submission of Matters to a Vote of Security Holders			15
4A		Executive Officers of the Registrant			15
		Part II
5		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			16
6		Selected Financial Data			17
7		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
7A		Quantitative and Qualitative Disclosures About Market Risk			40
8		Financial Statements and Supplementary Data			42
9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			83
9A		Controls and Procedures			83
9B		Other Information			85
9C		CEO/CFO Certifications			85
		Part III
10		Directors and Executive Officers of the Registrant			85
11		Executive Compensation			85
12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			85
13		Certain Relationships and Related Transactions			85
14		Principal Accountant Fees and Services			85
		Part IV
15		Exhibits and Financial Statement Schedules			86
		Signatures			91
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a) Certification by Richard J. Dugas, Jr. President and Chief Executive Officer
Rule 13a-14(a) Certification by Roger A. Cregg, Executive Vice President and Chief Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350

PULTE HOMES, INC.
FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

Explanatory Paragraph

     This Annual Report on Form 10-K/A is filed for the purpose of restating Note 2 in our Notes to Consolidated Financial Statements for the fiscal years ended December 31, 2005, 2004 and 2003, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information.” The restatement has expanded our reportable segment footnote disclosure related to our homebuilding operations and has no impact on our consolidated balance sheets as of December 31, 2005 and 2004 or consolidated statements of operations and related earnings per share amounts, consolidated statements of cash flows or consolidated statements of shareholders’ equity for the years ended December 31, 2005, 2004 and 2003. Conforming changes have been made to the Business section in Item 1 and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K/A. See Note 2 in the Notes to Consolidated Financial Statements for further information relating to the restatement.

     For ease of reference, this Form 10-K/A restates the Form 10-K for the fiscal year ended December 31, 2005 in its entirety, except for certain exhibits, which have been incorporated by reference. In order to preserve the nature and character of the disclosures set forth in such items as originally filed, no attempt has been made in this amendment to modify or update the disclosures in the original Annual Report on Form 10-K except to give effect to the restatement discussed in Note 2 in our Notes to Consolidated Financial Statements and the discussion included within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. As a result, this Annual Report on Form 10-K/A contains forward-looking information which has not yet been updated for events subsequent to the date of the original filing. Accordingly, we direct you to our SEC filings made subsequent to the original filing date for additional information.

PART I

ITEM 1. BUSINESS

Pulte Homes, Inc.

     Pulte Homes, Inc. is a publicly held holding company whose subsidiaries engage in the homebuilding and financial services businesses. Pulte Homes, Inc. is a Michigan corporation and was organized in 1956. Our assets consist principally of the capital stock of our subsidiaries and our income primarily consists of dividends from our subsidiaries. Our direct subsidiaries include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”) and other subsidiaries engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (“International”) and other subsidiaries engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s non-operating thrift subsidiary, First Heights Holding Corp, LLC (“First Heights”), is classified as a discontinued operation (see Note 3 of our Consolidated Financial Statements). We also have a mortgage banking company, Pulte Mortgage LLC (“Pulte Mortgage”), which is a subsidiary of Pulte Home Corporation.

     In December 2005, we sold substantially all of our Mexico homebuilding operations, realizing cash of $131.5 million, as further described in Note 3 of our Consolidated Financial Statements. For 2005 and all prior periods reported, the Mexico operations have been presented as discontinued operations.

     In January 2005, we sold all of our Argentina operations, as further described in Note 3 of our Consolidated Financial Statements. At December 31, 2004 the Argentina operations were classified as held for sale. For 2004 and 2003, the Argentina operations have been presented as discontinued operations.

     Homebuilding, our core business, is engaged in the acquisition and development of land principally for residential purposes within the continental United States and Puerto Rico and the construction of housing on such land targeted for the first-time, first and second move-up, and active adult home buyers. We have determined our operating segments to be our Areas, which are aggregated into seven reportable segments based on similarities in the economic and geographic characteristics of our homebuilding operations. Accordingly, our reportable homebuilding segments are as follows:

Northeast:		Northeast and Mid-Atlantic Areas include the following states:
		Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey,
		New York, Pennsylvania, Virginia
Southeast:		Southeast Area includes the following states:
		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida Area includes the following state:
		Florida
Midwest:		Great Lakes Area includes the following states:
		Illinois, Indiana, Michigan, Ohio, Minnesota
Central:		Rocky Mountain and Texas Areas include the following states:
		Colorado, Kansas, Missouri, Texas
Southwest:		Arizona and Nevada Areas include the following states:
		Arizona, Nevada, New Mexico
*California:		Northern California and Southern California Areas include the following state:
		California

*Our homebuilding operations located in Reno, Nevada are reported in the California segment, while our remaining Nevada homebuilding operations are reported in the Southwest segment.

     We also have one reportable segment for our financial services operations which consists principally of mortgage banking and title operations conducted through Pulte Mortgage and our other subsidiaries. Our financial services segment operates generally in the same markets as our homebuilding segments.

     Financial information, including revenue, pre-tax income and total assets of each of our business segments is included in Note 2 of our Consolidated Financial Statements.

Available Information

     Our internet website address is www.pulte.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers, our corporate governance guidelines and the charters of the Audit, Compensation, and Nominating and Governance committees of our Board of Directors, are also posted on our website and are available in print upon request.

Homebuilding Operations

		Years Ended December 31,
		($000’s omitted)
		2005				2004				2003				2002				2001
Homebuilding settlement revenues		$	14,370,667			$	11,094,617			$	8,482,341			$	6,991,614			$	5,145,526
Homebuilding settlement units			45,630				38,612				32,693				28,903				22,915

     Consistent with our strategy of serving all major customer segments: first-time, first and second move-up and active adult, our communities offer a wide variety of home designs including single family detached, townhouses, condominiums and duplexes at different prices and with varying levels of options and amenities. Expanding the number of customer segments served within each of our markets has enabled us to approximately double our annual closings over the past five years to a record 45,630 homes closed in 2005. Over our 55-year history, we have delivered more than 453,000 homes throughout the United States.

     On July 31, 2001, we merged with Del Webb in a tax-free stock-for-stock transaction. This merger expanded and supported our leadership position. In particular, we believe the merger strengthened our position among active adult (age 55 and older) homebuyers, added important strategic land positions, provided operational savings from economies of scale, bolstered our purchasing leverage, and enhanced our overall competitive position. In accordance with our operational strategy, we continue to evaluate available strategic acquisition opportunities that are consistent with our long-range goals.

     As of December 31, 2005, our Homebuilding operations offered homes for sale in 662 communities at sales prices ranging from $62,000 to $2.4 million. Sales prices of homes currently offered for sale in 66% of our communities fall within the range of $100,000 to $350,000 with a 2005 average unit selling price of $315,000, compared with $287,000 in 2004, $259,000 in 2003, $242,000 in 2002, and $225,000 in 2001. Sales of single-family detached homes, as a percentage of total unit sales, decreased to 72% in 2005, from 80% in 2004, 83% in 2003, 86% in 2002, and 82% in 2001. This trend can be attributed to an increase in sales of townhouses, condominiums and duplexes, which are most popular among our first-time and active adult homebuyers. Our Homebuilding operations are geographically diverse and, as a result, better insulate us from demand changes in individual markets. As of December 31, 2005, our Homebuilding business operated in 54 markets spanning 27 states, with 17,817 units in backlog valued at approximately $6.3 billion.

Land acquisition and development

     We select locations for development of homebuilding communities after completing extensive market research, enabling us to match the location and product offering with our targeted consumer group. We consider factors such as proximity to developed areas, population and job growth patterns and, if applicable, estimated development costs. We historically have managed the risk of controlling our land positions through use of option contracts and outright acquisition. We typically control land with the intent to complete sales of housing units within 24 to 36 months from the date of opening a community, except in the case of certain Del Webb active adult developments and other selected large projects for which the completion of community build out requires a longer time period due to typically larger project sizes. As a result, land is generally purchased after it is properly zoned and developed or is ready for development. In addition, we dispose of owned land not required in the business through sales to appropriate end users. Where we develop land, we engage directly in many phases of the development process, including land and site planning, obtaining environmental and other regulatory approvals, as well as constructing roads, sewers, water and drainage facilities and other amenities. We use our staff and the services of independent engineers and consultants for land development activities. Land development work is performed primarily by independent contractors and local government authorities who construct sewer and water systems in some areas. At December 31, 2005, we controlled approximately 363,000 lots, of which 174,000 were owned and 189,000 were under option agreements.

Homebuilding Operations (continued)

Sales and marketing

     We are dedicated to improving the quality and value of our homes through innovative proprietary architectural and community designs and state-of-the-art customer marketing techniques. Analyzing various qualitative and quantitative data obtained through extensive market research, we segment our potential customers into well-defined buyer profiles. Segmentation analysis provides a method for understanding the business opportunities and risks across the full spectrum of consumer groups in each market. Once the demands of potential buyers are understood, we link our home design and community development efforts to the specific lifestyle of each targeted consumer group.

     To meet the demands of our various customers, we have established a solid design expertise for a wide array of product lines. We believe that we are an innovator in the design of our homes and we view design capacity as an integral aspect of our marketing strategy. Our in-house architectural services teams and management, supplemented by outside consultants, are successful in creating distinctive design features, both in exterior facades and interior options and features. In certain markets our strategy is to offer “the complete house” in which all features shown in the home are included in the sales price. Standard features typically offered include vaulted ceilings, appliances, and a variety of available flooring and carpet.

     Typically, our sales teams, together with outside sales brokers, are responsible for guiding the customer through the sales process. We are committed to industry-leading customer service through a variety of quality initiatives, including the customer care program, which ensures that homeowners are comfortable at every stage of the building process. Using a seven-step, interactive process, homeowners are kept informed during their homebuilding and home owning experience. The steps include (1) a pre-construction meeting with the superintendent; (2) pre-dry wall frame walk; (3) quality assurance inspection; (4) first homeowner orientation; (5) 30-day follow-up after the close of the home; (6) three-month follow-up; and (7) an 11-month quality list after the close of the home. Fully furnished and landscaped model homes are used to showcase our homes and their distinctive design features. We have great success with the first-time buyer in the low to moderate price range; in such cases, financing under United States Government-insured and guaranteed programs is often used and is facilitated through our mortgage company. We also enjoy strong sales to the move-up buyer and, in certain markets, offer semi-custom homes in higher price ranges.

     Through our Del Webb brand, we are better able to address the needs of active adults, among the fastest growing homebuying segments. We offer both destination communities and “in place” communities, for those buyers who prefer to remain in their current geographic area. These communities, with highly amenitized products such as golf courses, recreational centers and educational classes, offer the active adult buyer many options to maintain an active lifestyle.

     We have received recognition and awards as a result of our achievements as a homebuilder. In March 2005, Pulte was named as a Top-Ranked Homebuilder in BusinessWeek’s List of 50 Best Performers among the S&P 500, coming in at number 12. In April 2005, we were ranked 181 on the Fortune 500 List. Additionally, in May 2005 we were named to the Fortune Magazine List of Most Desirable MBA Employers for 2005. In July 2005, we also made our first appearance on the Fortune 40 List of “Best Stocks to Buy Now”.

     In addition, our Austin, Chicago, Dallas/Ft. Worth, Detroit, Ft. Myers/Naples, Houston, Jacksonville, Las Vegas, Minneapolis/St. Paul, North Inland Empire, Orlando, Palm Beach, Philadelphia, Tampa Bay, Tucson, and Washington, D.C. markets were recognized for ranking the highest in their markets in a national customer satisfaction study. Eight of our markets came in second place, while three obtained third place positions. The survey of thirty U.S. markets (with Pulte presence in twenty-seven of those markets) noted customer service, home readiness at the time of closing, and the company’s sales staff as the three factors that most heavily influenced the customer’s overall level of satisfaction. Developing the Pulte Homes brand and leveraging the strength of the “DiVosta,” “Del Webb” and “Sun City” tradenames helps to distinguish our communities from the competition, and can often be rewarded with the advantages of additional sales pace, choice community locations, and reduced overall customer acquisition costs.

     Our Homeowner for Life^TM philosophy has increased our business from those who have previously owned a Pulte home or have been referred by a Pulte homeowner by ensuring a positive home buying and home owning experience. We introduce our homes to prospective buyers through a variety of media advertising, illustrated brochures, Internet listings and link placements, and other advertising displays. In addition, our websites, www.pulte.com, www.delwebb.com, www.divosta.com, and www.espanol.pulte.com provide tools to help users find a home that meets their needs, investigate financing alternatives, communicate moving plans, maintain a home, learn more about us and communicate directly with us. Approximately 5.1 million potential customers visited our websites during 2005.

Homebuilding Operations (continued)

Construction

     The construction process for our homes begins with the in-house design of the homes we sell. The building phase is conducted under the supervision of our on-site construction superintendents. The construction work is usually performed by independent contractors under contracts that, in many instances, cover both labor and materials on a fixed-price basis. We believe that Pulte Preferred Partnerships (P³), an extension of our quality assurance program, continues to establish new standards for contractor relations. Using a selective process, we have teamed up with what we believe are premier contractors and suppliers to improve all aspects of the land development and house construction processes.

     We maintain efficient construction operations by using standard materials and components from a variety of sources and, when possible, by building on contiguous lots. To minimize the effects of changes in construction costs, the contracting and purchasing of building supplies and materials generally is negotiated at or near the time when related sales contracts are signed. In addition, we leverage our size by actively negotiating our materials needs on a national or regional basis to minimize production component cost. We are also working to establish a more integrated system that can effectively link suppliers, contractors and the production schedule through various strategic business partnerships and e-business initiatives.

     We cannot determine the extent to which necessary building materials will be available at reasonable prices in the future and have, on occasion, experienced shortages of skilled labor in certain trades and of building materials in some markets.

Competition and other factors

     Our operations are subject to building, environmental and other regulations of various federal, state, and local governing authorities. For our homes to qualify for Federal Housing Administration (“FHA”) or Veterans Administration (“VA”) mortgages, we must satisfy valuation standards and site, material and construction requirements of those agencies. Our compliance with federal, state, and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.

     Our dedication to customer satisfaction is evidenced by our consumer and value-based brand approach to product development, and is something that we believe distinguishes us in the homebuilding industry and contributes to our long-term competitive advantage. The housing industry in the United States, however, is highly competitive. In each of our market areas, there are numerous homebuilders with which we compete. We also compete with the resales of existing house inventory. Any provider of housing units, for-sale or to rent, including apartment builders, may be considered a competitor. Conversion of apartments to condominiums further provides certain segments of the population an alternative to traditional housing, as does manufactured housing. We compete primarily on the basis of price, reputation, design, location and quality of our homes. The housing industry is affected by a number of economic and other factors including: (1) significant national and world events, which impact consumer confidence; (2) changes in the costs of building materials and labor; (3) changes in interest rates; (4) changes in other costs associated with home ownership, such as property taxes and energy costs; (5) various demographic factors; (6) changes in federal income tax laws; (7) changes in government mortgage financing programs, and (8) availability of sufficient mortgage capacity. In addition to these factors, our business and operations could be affected by shifts in demand for new homes.

Financial Services Operations

     We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. Our mortgage bank arranges financing through the origination of mortgage loans primarily for the benefit of our homebuyers, but also services the general public. We also engage in the sale of such loans and the related servicing rights. We are a lender approved by the FHA and VA and are a seller/servicer approved by Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other investors. In our conventional mortgage lending activities we follow underwriting guidelines established by FNMA, FHLMC, and private investors.

Our mortgage underwriting, processing and closing functions are centralized in Denver, Colorado and Charlotte, North Carolina using a mortgage operations center (“MOC”) concept. We also use a centralized telephone loan officer concept where loan officers are centrally located at mortgage application centers (“MAC”) in Denver and Charlotte. Our sales representatives, who are the mortgage customers’ main contact, forward the loan applications to a MAC loan counselor who calls the customer to complete the loan application and then forwards it to the MOC for processing. We believe both the MOC and the MAC improve the speed and efficiency of our mortgage operations, thereby improving our profitability and allowing us to focus on creating attractive mortgage financing opportunities for our customers.

     In originating mortgage loans, we initially use our own funds and borrowings made available to us through various credit arrangements. Subsequently, we sell such mortgage loans and mortgage-backed securities to outside investors.

Financial Services Operations (continued)

     Our capture rate for the years ended December 31, 2005, 2004, and 2003 was approximately 89%, 88%, and 83%, respectively. Our capture rate represents loan originations from our homebuilding business as a percent of total loan opportunities, excluding cash settlements, from our homebuilding business. During the years ended December 31, 2005, 2004, and 2003, we originated mortgage loans for approximately 75%, 72%, and 65%, respectively, of the homes we sold. Such originations represented 98%, 92%, and 83%, respectively, of our total originations.

     We sell our servicing rights on a flow basis through fixed price servicing sales contracts to reduce the risks inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time, generally less than four months after the loan is originated, which substantially reduces the risk of impairment with respect to the fair value of these reported assets. The servicing sales contracts provide for the reimbursement of payments made when loans prepay within specified periods of time, usually 90 days after sale or securitization.

     The mortgage industry in the United States is highly competitive. We compete with other mortgage companies and financial institutions to provide attractive mortgage financing to both our homebuyers and to the general public. The Internet is also an important resource for homebuyers in obtaining financing as a number of companies provide online approval for their customers. These Internet-based mortgage companies may also be considered competitors.

     In originating and servicing mortgage loans, we are subject to rules and regulations of the FHA, VA, GNMA, FNMA and FHLMC. In addition to being affected by changes in these programs, our mortgage banking business is also affected by several of the same factors that impact our homebuilding business.

Financial Information About Geographic Areas

     We currently operate primarily within the United States and have some non-operating foreign entities, which are insignificant to our consolidated financial results.

Discontinued operations

Mexico Homebuilding Operations

     In January 2005, the minority shareholders of Pulte Mexico S. de R.L. de C.V. (“Pulte Mexico”) exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to us, the consummation of which resulted in our owning 100% of Pulte Mexico. In March 2005, we purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million in cash. In June 2005, we purchased the remaining 40% of the minority interest of Pulte Mexico for approximately $12.5 million in cash.

     In December 2005, we sold substantially all of our Mexico homebuilding operations to a consortium of purchasers involved in residential and commercial real estate development. The disposition of the Mexico homebuilding operations will enable us to invest additional resources in the U.S. housing market. We realized cash of $131.5 million related to the sale. The sale of these operations did not include our investment in the capital stock of a mortgage company in Mexico as well as various non-operating entities. For the year ended December 31, 2005, we recognized a pre-tax loss of $6.6 million (after-tax loss of $13.1 million) related to the sale of our Mexico homebuilding operations. For 2005 and all periods reported, the Mexico homebuilding operations have been presented as discontinued operations in our Consolidated Financial Statements, while in previous periods they were included in our Homebuilding operations.

Discontinued operations (continued)

Argentina

     In January 2005, we sold all of our Argentina operations to an Argentine company involved in residential and commercial real estate development. The disposition of these operations was the chosen action to improve our overall returns. At December 31, 2004 the Argentina operations were classified as held for sale. For 2004 and 2003, the Argentina operations have been presented as discontinued operations in our Consolidated Financial Statements.

First Heights

     During the first quarter of 1994, we adopted a plan of disposal for First Heights and announced our strategy to exit the thrift industry and increase our focus on housing and related mortgage banking. First Heights sold all but one of its 32 bank branches and related deposits to two unrelated purchasers. The sale was substantially completed during the fourth quarter of 1994. Although we expected to complete the plan of disposal within a reasonable period of time, contractual disputes precluded us from completing the disposal in accordance with our original plan.

     In August 2005, the United States Court of Appeals affirmed the United States Court of Federal Claims final judgment that we had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract in connection with the enactment of Section 13224 of the Omnibus Budget Reconciliation Act of 1993. In December 2005, we received payment of the judgment in the amount of $48.7 million, which was recorded as income from discontinued operations.

     In September 2005, First Heights received notice confirming the voluntary dissolution of the First Heights Bank. The Office of Thrift Supervision also canceled First Heights’ charter. Accordingly, the day-to-day activities of First Heights, which had been principally devoted to supporting residual regulatory compliance matters and the litigation with the United States government, have now ceased.

Other non-operating

     Other non-operating is comprised primarily of Pulte Homes, Inc. and Pulte Diversified Companies, Inc., both of which are holding companies. The primary purpose of these entities is to support the operations of our subsidiaries by acting as the internal source of financing, developing and implementing strategic initiatives centered around new business development and operating efficiencies. Business development activities include the pursuit of additional opportunities as well as the development of innovative building components and processes. Other non-operating also includes the activities associated with supporting a publicly traded entity listed on the New York Stock Exchange.

     Other non-operating assets include equity investments in subsidiaries, short-term financial instruments and affiliate advances. Liabilities include senior and subordinated debt and income taxes. Other non-operating revenues consist primarily of investment earnings of excess funds, while expenses include costs associated with supporting a publicly traded company and its subsidiaries’ operations, and investigating strategic initiatives.

Organization/Employees

     All subsidiaries and operating units operate independently with respect to daily operations. Homebuilding real estate purchases and other significant homebuilding, mortgage banking, financing activities and similar operating decisions must be approved by the business unit and/or corporate senior management.

     At December 31, 2005, we employed approximately 13,400 people. Our employees are not represented by any union. Contracted work, however, may be performed by union contractors. Homebuilding and mortgage banking management personnel are paid performance bonuses and incentive compensation. Performance bonuses are based on individual performance while incentive compensation is based on the performance of the applicable business unit or subsidiary. Our corporate management personnel are paid incentive compensation based on our overall performance. Each subsidiary is given autonomy regarding employment of personnel, although our senior corporate management acts in an advisory capacity in the employment of subsidiary officers. We consider our employee and contractor relations to be satisfactory.

ITEM 1A. RISK FACTORS

     Discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are, or may become subject. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

Downward changes in general economic, real estate construction or other business conditions could adversely affect our business or our financial results.

     The residential homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, availability of financing and interest rate levels. Adverse changes in any of these conditions generally, or in the markets where we operate, could decrease demand and pricing for new homes in these areas or result in customer cancellations of pending contracts, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes, either of which could result in a decrease in our revenues and earnings.

     Although the homebuilding business historically has been cyclical, it has not undergone an economic down cycle in a number of years. Further, in recent years, land and home prices rose significantly in many of our markets. This has led some people to assert that the prices of land, new homes and the stock prices of homebuilding companies may be inflated and may decline if the demand for land and new homes weakens. A decline in the prices for land and new homes could adversely affect both our revenues and margins. A decline in our stock price could make raising capital through stock issuances more difficult and expensive.

Future increases in interest rates, reductions in mortgage availability or increases in the effective costs of owning a home could prevent potential customers from buying our homes and adversely affect our business or our financial results.

     Most of our customers finance their home purchases through our mortgage bank. Interest rates have been at historical lows for several years. Many homebuyers have also chosen adjustable rate, interest only or mortgages that involve initial lower monthly payments. As a result, new homes have been more affordable. Increases in interest rates or decreases in availability of mortgage financing, however, could reduce the market for new homes. Potential homebuyers may be less willing or able to pay the increased monthly costs or to obtain mortgage financing that exposes them to interest rate changes. Lenders may increase the qualifications needed for mortgages or adjust their terms to address any increased credit risk. Even if potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their current homes to potential buyers who need financing. These factors could adversely affect the sales or pricing of our homes and could also reduce the volume or margins in our financial services business. Our financial services business could be impacted to the extent we are unable to match interest rates and amounts on loans we have committed to originate through the various hedging strategies we employ.

     In addition, we believe that the availability of FHA and VA mortgage financing is an important factor in marketing some of our homes. We also believe that the liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry is important to the housing market. However, the federal government has recently sought to reduce the size of the home-loan portfolios and operations of these two government-sponsored enterprises. Any limitations or restrictions on the availability of the financing or on the liquidity by them could adversely affect interest rates, mortgage financing and our sales of new homes and mortgage loans.

Our future growth may require additional capital, which may not be available.

     Our operations require significant amounts of cash. We may be required to seek additional capital, whether from sales of equity or debt or additional bank borrowings, for the future growth and development of our business. We can give no assurance as to the availability of such additional capital or, if available, whether it would be on terms acceptable to us. Moreover, the indentures for most of our outstanding public debt and the covenants of our revolving credit facility contain provisions that may restrict the debt we may incur in the future. If we are not successful in obtaining sufficient capital, it could reduce our sales and may adversely affect our future growth and financial results.

Competition for homebuyers could reduce our deliveries or decrease our profitability.

     The housing industry in the United States is highly competitive. We compete primarily on the basis of price, reputation, design, location and quality of our homes. We compete in each of our markets with numerous national, regional and local homebuilders. This competition with other homebuilders could reduce the number of homes we deliver, or cause us to accept reduced margins in order to maintain sales volume.

     We also compete with resales of existing used or foreclosed homes, housing speculators and available rental housing. Increased competitive conditions in the residential resale or rental market in the regions where we operate could decrease demand for new homes and increase cancellations of sales contracts in backlog.

Our success depends on our ability to acquire land suitable for residential homebuilding at reasonable prices, in accordance with our land investment criteria.

     The homebuilding industry is highly competitive for suitable land. The availability of finished and partially finished developed lots and undeveloped land for purchase that meet our internal criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, and zoning, allowable housing density and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact our results of operations.

     Our long-term ability to build homes depends on our acquiring land suitable for residential building at reasonable prices in locations where we want to build. Over the past few years, we have experienced an increase in competition for suitable land as a result of land constraints in many of our markets. As competition for suitable land increases, and as available land is developed, the cost of acquiring suitable remaining land could rise, and the availability of suitable land at acceptable prices may decline. Any land shortages or any decrease in the supply of suitable land at reasonable prices could limit our ability to develop new communities or result in increased land costs. We may not be able to pass through to our customers any increased land costs, which could adversely impact our revenues, earnings, and margins.

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

     The homebuilding industry is highly competitive for skilled labor and materials. Increased costs or shortages of skilled labor and/or lumber, framing, concrete, steel and other building materials could cause increases in construction costs and construction delays. We generally are unable to pass on increases in construction costs to those customers who have already entered into sale contracts, as those sales contracts generally fix the price of the home at the time the contract is signed, which may be well in advance of the construction of the home. Sustained increases in construction costs may, over time, erode our margins, and pricing competition for materials and labor may restrict our ability to pass on any additional costs, thereby decreasing our margins.

Government regulations could increase the cost and limit the availability of our development and homebuilding projects or affect our related financial services operations and adversely affect our business or financial results.

     Our operations are subject to building, environmental and other regulations of various federal, state, and local governing authorities. For our homes to qualify for FHA or VA mortgages, we must satisfy valuation standards and site, material and construction requirements of those agencies. Our compliance with federal, state, and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.

     New housing developments may be subject to various assessments for schools, parks, streets and other public improvements. These can cause an increase in the effective prices for our homes. In addition, increases in property tax rates by local governmental authorities, as recently experienced in response to reduced federal and state funding, can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes.

Government regulations could increase the cost and limit the availability of our development and homebuilding projects or affect our related financial services operations and adversely affect our business or financial results. (continued)

     We also are subject to a variety of local, state and federal laws and regulations concerning protection of health, safety and the environment. The impact of environmental laws varies depending upon the prior uses of the building site or adjoining properties and may be greater in areas with less supply where undeveloped land or desirable alternatives are less available. These matters may result in delays, may cause us to incur substantial compliance, remediation and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas.

     Our financial services operations are also subject to numerous federal, state and local laws and regulations. These include eligibility requirements for participation in federal loan programs and compliance with consumer lending and similar requirements such as disclosure requirements, prohibitions against discrimination and real estate settlement procedures. They may also subject our operations to examination by applicable agencies. These may limit our ability to provide mortgage financing or title services to potential purchasers of our homes.

Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.

     As a homebuilder, we are subject to home warranty and construction defect claims arising in the ordinary course of business. We record warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensations and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. Through our captive insurance subsidiaries, we reserve for costs to cover our self-insured and deductible amounts under these policies and for any costs of claims and lawsuits, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. Because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all our warranty and construction defect claims in the future. Contractual indemnities can be difficult to enforce, we may be responsible for applicable self-insured retentions and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly. We have responded to the recent increases in insurance costs and coverage limitations by increasing our self-insured retentions and claim reserves. There can be no assurance that coverage will not be further restricted and become more costly.

Natural disasters and severe weather conditions could delay deliveries, increase costs and decrease demand for new homes in affected areas.

     Our homebuilding operations are located in many areas that are subject to natural disasters and severe weather. The occurrence of natural disasters or severe weather conditions can delay new home deliveries, increase costs by damaging inventories, reduce the availability of materials and negatively impact the demand for new homes in affected areas. Furthermore, if our insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity or capital resources could be adversely affected.

Inflation may result in increased costs that we may not be able to recoup if demand declines.

     Inflation can have a long-term impact on us because increasing costs of land, materials and labor may require us to increase the sales prices of homes in order to maintain satisfactory margins. However, inflation is often accompanied by higher interest rates, which have a negative impact on housing demand, in which case we may not be able to raise home prices sufficiently to keep up with the rate of inflation and our margins could decrease.

Future terrorist attacks against the United States or increased domestic and international instability could have an adverse effect on our operations.

     A future terrorist attack against the United States could cause a sharp decrease in the number of new contracts signed for homes and an increase in the cancellation of existing contracts. Accordingly, adverse developments in the war on terrorism, future terrorist attacks against the United States, or increased domestic and international instability could adversely affect our business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     This Item is not applicable.

ITEM 2. PROPERTIES

     Our homebuilding and corporate headquarters are located at 100 Bloomfield Hills Parkway, Bloomfield Hills, Michigan 48304, where we lease 90,828 square feet of office space. We lease 54,380 square feet of office space at 1230 West Washington Street, Tempe, Arizona 85281 for certain corporate and business services. Pulte Mortgage’s offices are located at 7475 South Joliet Street, Englewood, Colorado 80112, 99 Inverness Drive East, Englewood, Colorado 80112, and 12300 East Arapahoe Road, Centennial, Colorado 80112. We lease approximately 61,436 square feet, 24,400 square feet and 43,050 square feet, respectively, of office space at these locations. In 2005, Pulte Mortgage leased 31,803 square feet of office space at 3700 Arco Corporate Drive, Charlotte, North Carolina 28273. Our homebuilding markets and mortgage branch operations generally lease office space for their day-to-day operations.

     Because of the nature of our homebuilding operations, significant amounts of property are held as inventory in the ordinary course of our homebuilding business. Such properties are not included in response to this Item.

ITEM 3. LEGAL PROCEEDINGS

     We are involved in various litigation incidental to our continuing business operations. We believe that none of this litigation will have a material adverse impact on our results of operations, financial position or cash flows.

Storm Water Discharge Practices

     In April 2004, we received a request for information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request seeks information about storm water discharge practices in connection with homebuilding projects completed or underway by us. We have provided the EPA with this information. Although the matter has since been referred to the United States Department of Justice (“DOJ”) for enforcement, the EPA has asked that we engage in “pre-filing” negotiations to resolve the matter short of litigation. We are actively engaged in these negotiations. If the negotiations fail and the DOJ alleges that we have violated regulatory requirements applicable to storm water discharges, the government may seek injunctive relief and penalties. We believe that we have defenses to any such allegations. At this time, however, we can neither predict the outcome of this inquiry, nor can we currently estimate the costs that may be associated with its eventual resolution.

First Heights-related litigation

     We were a party to a lawsuit relating to First Heights’ 1988 acquisition from the Federal Savings and Loan Insurance Corporation (“FSLIC”) and First Heights’ ownership of five failed Texas thrifts. The lawsuit was filed on December 26, 1996, in the United States Court of Federal Claims (Washington, D.C.) by Pulte Homes, Inc., Pulte Diversified Companies, Inc. and First Heights (collectively, “the Pulte Parties”) against the United States. We asserted breach of contract on the part of the United States in connection with the enactment of Section 13224 of the Omnibus Budget Reconciliation Act of 1993 (“OBRA”). That provision repealed portions of the tax benefits that we claim we were entitled to under the contract to acquire the failed Texas thrifts. We also asserted other claims concerning the contract, including that the United States (through the FDIC as receiver) improperly attempted to amend the failed thrifts’ pre-acquisition tax returns and that this attempt was made in an effort to deprive us of tax benefits for which they had contracted.

     On August 17, 2001, the United States Court of Federal Claims ruled that the United States government was liable to us for breach of contract by enacting Section 13224 of OBRA. In September 2003, the United States Court of Federal Claims issued final judgment that we had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract with us. The United States government and we appealed the final judgment to the United States Court of Appeals for the Federal Circuit in October 2003.

     In August 2005, the Appeals Court affirmed the United States Court of Federal Claims judgment, in its entirety. In December 2005, we received payment of the judgment in the amount of $48.7 million, which was recorded as income from discontinued operations.

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

     This Item is not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below is certain information with respect to our executive officers.

								Year Became
Name		Age				Position		An Officer
William J. Pulte			73			Chairman of the Board			1956
Richard J. Dugas, Jr.			40			President and Chief Executive Officer			2002
Steven C. Petruska			47			Executive Vice President and Chief Operating Officer			2004
Roger A. Cregg			49			Executive Vice President and Chief Financial Officer			1997
James R. Ellinghausen			47			Senior Vice President, Human Resources			2005
Peter J. Keane			40			Senior Vice President, Operations			2006
Steven M. Cook			47			Vice President, General Counsel and Secretary			2006
Vincent J. Frees			55			Vice President and Controller			1995
Gregory M. Nelson			50			Vice President and Assistant Secretary			1993
Bruce E. Robinson			44			Vice President and Treasurer			1998

The following is a brief account of the business experience of each officer during the past five years:

Mr. Pulte was appointed Chairman of the Board in December 2001. He has also served as Chairman of the Executive Committee of the Board of Directors since January 1999.

Mr. Dugas was appointed President and Chief Executive Officer in July 2003. Prior to that date, he served as Executive Vice President and Chief Operating Officer. He was appointed Chief Operating Officer in May 2002 and Executive Vice President in December 2002. Since 1994, he has served in a variety of management positions. Most recently, he was Coastal Region President with responsibility for our Georgia, North Carolina, South Carolina, and Tennessee operations.

Mr. Petruska was appointed Executive Vice President and Chief Operating Officer in January 2004. Since joining our company in 1984, he has held a number of management positions. Most recently, he was the President for both the Arizona Area and Nevada Area operations.

Mr. Cregg was appointed Executive Vice President in May 2003 and was named Chief Financial Officer effective January 1998.

Mr. Ellinghausen was appointed Senior Vice President, Human Resources, in April 2005. He most recently held the position of Head of Human Resources for Bristol Meyers Squibb’s Worldwide Businesses and was employed by Bristol Meyers Squibb since 1997.

Mr. Keane was appointed Senior Vice President, Operations, in January 2006. He joined Pulte in 1993 and has served in a variety of management positions, mostly in the Midwest region. Most recently, he was the President of the Great Lakes Area.

Mr. Cook was appointed Vice President, General Counsel and Secretary in February 2006. He most recently held the position of Vice President and Deputy General Counsel, Corporate, at Sears Holdings Corporation and was employed by Sears, Roebuck, and Co. since 1996.

Mr. Frees has been Vice President and Controller since May 1995.

Mr. Nelson has been Vice President and Assistant Secretary since August 1993.

Mr. Robinson has been Vice President and Treasurer since July 1998.

There is no family relationship between any of the officers. Each officer serves at the pleasure of the Board of Directors.

PART II

ITEM 5.		MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     Our common shares are listed on the New York Stock Exchange (Symbol: PHM).

Related Stockholder Matters

     The table below, which has been adjusted to retroactively reflect our two-for-one stock split announced July 27, 2005 and effected September 1, 2005, to the shareholders of record as of August 15, 2005, and sets forth, for the quarterly periods indicated, the range of high and low closing prices and cash dividends declared per share.

		2005												2004
										Declared												Declared
		High				Low				Dividends				High				Low				Dividends
1st Quarter		$	39.69			$	30.07			$	.025			$	29.08			$	20.00			$	.025
2nd Quarter			42.89				33.74				.025				28.25				22.38				.025
3rd Quarter			47.83				41.36				.040				32.04				24.44				.025
4th Quarter			43.16				35.15				.040				32.50				23.73				.025

     At December 31, 2005, there were 2,472 shareholders of record.

Issuer Purchases of Equity Securities (1)

														(d)
														Approximate dollar
										(c)				value of shares
										Total number of				that may yet be
		(a)				(b)				shares purchased				purchased under
		Total Number				Average				as part of publicly				the plans or
		of shares				price paid				announced plans				programs
		purchased (2)				per share (2)				or programs				($000’s omitted)
November 2, 2005 to November 23, 2005			1,455,500			$	38.32				1,455,500			$	65,920
December 1, 2005 to December 30, 2005			1,121,500			$	41.37				1,121,500			$	19,519	(1)
Total			2,577,000	(3)		$	39.65				2,577,000

ITEM 6. SELECTED FINANCIAL DATA

     Set forth below is selected consolidated financial data for each of the past five fiscal years. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and Notes thereto included elsewhere in this report.

		Years Ended December 31,
		($000’s omitted)
		2005				2004				2003				2002				2001 (a)
OPERATING DATA:
Homebuilding:
Revenues		$	14,528,236			$	11,400,008			$	8,701,661			$	7,167,915			$	5,274,660
Income before income taxes		$	2,298,822			$	1,635,580			$	1,000,513			$	717,931			$	514,049
Financial Services:
Revenues		$	161,414			$	112,719			$	115,847			$	106,628			$	77,222
Income before income taxes		$	70,586			$	47,429			$	68,846			$	66,723			$	36,948
Other non-operating:
Revenues		$	4,885			$	1,749			$	3,281			$	1,202			$	2,210
Loss before income taxes		$	(92,394	)		$	(90,685	)		$	(75,351	)		$	(61,968	)		$	(57,452	)
Consolidated results:
Revenues		$	14,694,535			$	11,514,476			$	8,820,789			$	7,275,745			$	5,354,092
Income from continuing operations before income taxes		$	2,277,014			$	1,592,324			$	994,008			$	722,686			$	493,545
Income taxes			840,126				598,751				376,460				280,587				186,892
Income from continuing operations			1,436,888				993,573				617,548				442,099				306,653
Income (loss) from discontinued operations (b), (c)			55,025				(7,032	)			7,086				11,546				(5,260	)
Net income		$	1,491,913			$	986,541			$	624,634			$	453,645			$	301,393

ITEM 6. SELECTED FINANCIAL DATA (Continued)

		Years Ended December 31,
		2005				2004				2003				2002				2001(a)
PER SHARE DATA (d):
Earnings per share — basic:
Income from continuing operations		$	5.62			$	3.93			$	2.53			$	1.83			$	1.56
Income (loss) from discontinued operations (b), (c)			.22				(.03	)			.03				.05				(.03	)
Net income		$	5.84			$	3.91			$	2.56			$	1.88			$	1.53
Weighted-average common shares outstanding (000’s omitted)			255,492				252,590				244,323				241,812				196,391
Earnings per share — assuming dilution:
Income from continuing operations		$	5.47			$	3.82			$	2.46			$	1.79			$	1.52
Income (loss) from discontinued operations (b), (c)			.21				(.03	)			.03				.05				(.03	)
Net income		$	5.68			$	3.79			$	2.48			$	1.84			$	1.50
Weighted-average common shares outstanding and effect of dilutive securities (000’s omitted)			262,801				260,234				251,460				246,985				201,294
Shareholders’ equity		$	23.18			$	17.68			$	13.78			$	11.29			$	9.61
Cash dividends declared		$	.13			$	.10			$	.05			$	.04			$	.04

										December 31,
		($000’s omitted)
		2005				2004				2003				2002				2001
BALANCE SHEET DATA:
House and land inventories		$	8,756,093			$	7,241,350			$	5,378,125			$	4,175,170			$	3,810,645
Total assets			13,048,174				10,406,897				8,072,151				6,872,087				5,710,893
Senior notes and subordinated notes			3,386,527				2,861,550				2,150,972				1,913,268				1,722,864
Shareholders’ equity			5,957,342				4,522,274				3,448,123				2,760,426				2,276,665

		Years Ended December 31,
		2005				2004				2002				2002				2001
OTHER DATA:
Homebuilding:
Total markets, at year-end			54				45				44				44				43
Total active communities			662				626				535				460				440
Total settlements — units			45,630				38,612				32,693				28,903				22,915
Total net new orders — units (a)			47,531				40,576				34,989				30,830				22,163
Backlog units, at year-end			17,817				15,916				13,952				10,605				8,678
Average unit selling price		$	315,000			$	287,000			$	259,000			$	242,000			$	225,000
Gross profit margin from home sales (b)			23.4	%			22.6	%			20.6	%			19.4	%			19.1	%

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

Restatement of Notes to Financial Statements

     As discussed in Note 2, subsequent to the issuance of our consolidated financial statements for the year ended December 31, 2005, we expanded our disclosure of reportable segments in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information.” We had historically aggregated our homebuilding operating segments into a single reportable segment, but have restated our segment disclosure to include seven homebuilding reportable segments for the years ended December 31, 2005, 2004 and 2003 (see Note 2). The restatement has no impact on our consolidated balance sheets as of December 31, 2005 and 2004, consolidated statements of operations and related earnings per share amounts, consolidated statements of cash flows or our consolidated statements of shareholders’ equity for the years ended December 31, 2005, 2004 and 2003. Our Homebuilding Segment Operations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to this restatement.

Overview

     A summary of our operating results for the years ended December 31, 2005, 2004, and 2003 is as follows ($000’s omitted, except per share data):

		Years Ended December 31,
		2005				2004				2003
Pre-tax income (loss):
Homebuilding		$	2,298,822			$	1,635,580			$	1,000,513
Financial Services			70,586				47,429				68,846
Other non-operating			(92,394	)			(90,685	)			(75,351	)
Income from continuing operations before income taxes			2,277,014				1,592,324				994,008
Income taxes			840,126				598,751				376,460
Income from continuing operations			1,436,888				993,573				617,548
Income (loss) from discontinued operations			55,025				(7,032	)			7,086
Net income		$	1,491,913			$	986,541			$	624,634
Per share data — assuming dilution:
Income from continuing operations		$	5.47			$	3.82			$	2.46
Income (loss) from discontinued operations			.21				(.03	)			.03
Net income		$	5.68			$	3.79			$	2.48

Overview (continued)

     Key financial highlights and events for the years ended December 31, 2005, 2004, and 2003 are as follows:

Homebuilding Operations

	•		Continued strong demand for new homes in many of our markets, market share gains, geographic and product mix shifts, average unit selling price increases and benefits from the ongoing initiatives to simplify processes and leverage construction costs throughout the operations contributed to increases in pre-tax income of our homebuilding business segment. Pre-tax income increased 41% for the year ended December 31, 2005, compared with the same period in the prior year. Pre-tax income increased 63% in 2004, compared with the year ended December 31, 2003.
	•		Homebuilding settlement gross margin percentages were up approximately 80 basis points to 23.4% for the year ended December 31, 2005 and 200 basis points to 22.6% for the year ended December 31, 2004, compared with the same periods in the prior years.
	•		Units in backlog increased to 17,817 units, valued at $6.3 billion at December 31, 2005, compared with 15,916 units, valued at $5.2 billion at December 31, 2004. There were 13,952 units in backlog at December 31, 2003 valued at $4.1 billion. The increase in backlog is primarily attributed to continued strong demand for new homes in many of our markets.
	•		In December 2005, we sold substantially all of our Mexico homebuilding operations, as further described in Note 3 of our Consolidated Financial Statements. For 2005 and all prior periods reported, the Mexico operations have been presented as discontinued operations.
	•		In January 2005, we sold all of our Argentina operations, as further described in Note 3 of our Consolidated Financial Statements. At December 31, 2004, the Argentina operations were classified as held for sale. For 2004 and 2003, the Argentina operations have been presented as discontinued operations.

Overview (continued)

Financial Services Operations

•

Mortgage origination units, origination principal and our capture rate increased during 2005, 2004 and 2003. Pre-tax income of our financial services business segment increased 49% from 2005 to 2004, due to a more favorable product mix to funded, from non-funded, originations. Pre-tax income for the year ended December 31, 2004 decreased 31% compared with 2003 due to a shift in our product mix, starting in the second half of 2003, toward adjustable rate mortgages (“ARMs”) versus fixed rate mortgages due to changes in customer mortgage product preference.

Other non-operating

•

Other non-operating expenses, net consists of income and expenses related to Corporate services provided to our subsidiaries. During 2005, net interest expense decreased due to an increase in the amount of interest capitalized into homebuilding inventory, as well as an increase in interest income. Other corporate expenses, net increased during 2005 as a result of higher compensation-related costs. During 2004, net interest expense increased due to higher debt levels as a result of our growth. Other expenses, net in 2004 were impacted by increased charitable contributions expense. In addition, income recognized during 2003 from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale did not recur in 2004, resulting in higher net expense.

Homebuilding Operations

The following table presents a summary of pre-tax income for our Homebuilding operations ($000’s omitted):

		Year Ended December 31,
		2005				2004				2003
Home sale revenue (settlements)		$	14,370,667			$	11,094,617			$	8,482,341
Land sale revenue			157,569				305,391				219,320
Home cost of sales (a)			(11,005,591	)			(8,583,551	)			(6,731,834	)
Land cost of sales			(139,377	)			(205,589	)			(153,415	)
Selling, general and administrative expenses			(1,107,816	)			(973,629	)			(820,951	)
Equity income			72,604				53,908				32,549
Other income (expense), net			(49,234	)			(55,567	)			(27,497	)
Pre-tax income		$	2,298,822			$	1,635,580			$	1,000,513
Unit settlements			45,630				38,612				32,693
Average selling price		$	315			$	287			$	259
Net new orders (b):
Units			47,531				40,576				34,989
Dollars		$	15,518,000			$	12,101,000			$	9,555,000
Backlog at December 31:
Units			17,817				15,916				13,952
Dollars		$	6,301,000			$	5,154,000			$	4,147,000

     Homebuilding gross profit margins from home sales in 2005 increased 80 basis points over 2004 to 23.4%, and in 2004 increased 200 basis points to 22.6% compared with 2003. The increases are due to strong consumer demand, positive home pricing, favorable shifts in product and geographic mix, the benefits of leverage-buy purchasing activities and effective production and inventory management. During the fourth quarter of 2005, homebuilding gross profit margins were 22.3% compared with 22.7% in the same period of 2004. This margin decrease of 40 basis points is attributable primarily to a 4% inflationary increase in land development costs, such as petroleum-based products and cement. Under our accounting policies, lot costs are expensed on an average project cost basis. Due to the significant cost increases experienced in the fourth quarter of 2005, we have adjusted our estimates accordingly. Such adjustments impacted the amount of lot costs recognized and will continue to affect lot costs prospectively.

     We consider land acquisition one of 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. We also will, on occasion, sell lots within our communities to other homebuilders. Gross profits from land sales were $18.2 million and $99.8 million for the years ended December 31, 2005 and 2004, respectively, representing a decrease of $81.6 million and an increase of $33.9 million, respectively, from the previous year’s total. 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. Included in other assets is approximately $257.7 million in land held for disposition as of December 31, 2005, as compared to $230.1 million and $251.2 million at December 31, 2004 and 2003, respectively.

     For the year ended December 31, 2005, selling, general and administrative expenses, as a percentage of home settlement revenues, decreased 110 basis points to 7.7% compared with 2004 after decreasing 90 basis points to 8.8% in 2004 compared with 2003. The conversion improvement in 2005 can be attributed to an increase in average selling prices, our internal initiatives focused on controlling costs and better overhead leverage as a result of volume increases. The improvement in 2004 can be attributed to greater leverage as a result of volume increases and the favorable pricing environment for our homes.

     Equity income for 2005 and 2004 includes earnings from our 50% investment in a Nevada-based joint venture, related to the sale of commercial and residential properties. Also included are earnings from our 50% joint venture that supplies and installs basic building components and operating systems, acquired in January 2004. In January 2006, we exercised our option to purchase the remaining 50% interest in the entity. In 2006, this investment will become a wholly-owned subsidiary of the Company and will be consolidated in our financial statements.

Homebuilding Operations (continued)

     Other income (expense), net includes the write-off of deposits and pre-acquisition costs resulting from decisions not to pursue certain land acquisitions and options, insurance-related expenses and settlements and other non-operating expenses. For the years ended December 31, 2005 and 2004, the changes in other income (expense), net are due primarily to write-offs of deposit and pre-acquisition costs. These write-offs vary in amount from year to year as we continue to evaluate potential land acquisitions for the most effective use of capital.

     Continued strong demand for new homes, an increase in the number of active selling communities and market share expansion, drove increases in net new orders, unit settlements and unit backlog. Net new orders increased 17% to a record 47,531 units for the year ended December 31, 2005. Net new orders for the year ended December 31, 2004 increased 16% to 40,576 units compared with 34,989 units for the year ended December 31, 2003.

     Home settlements set a record for the year ended December 31, 2005 at 45,630 units, an increase of 18% over the same period in 2004. In 2004, home settlements also reached a record high, increasing 18% to 38,612 units. Active communities increased from 535 in 2003 to 626 in 2004 to 662 in 2005.

     Changes in average selling price reflect a number of factors, including price increases, the mix of product closed during a period and the number of options purchased by customers. The average selling price for our homes increased 10% for the year ended December 31, 2005, to $315,000 compared with 2004 and increased to $287,000 in 2004 from $259,000 in 2003.

     Ending backlog, which represents orders for homes that have not yet closed, grew to a record 17,817 units at December 31, 2005 compared with 15,916 units at December 31, 2004 and 13,952 units at December 31, 2003. The dollar value of our backlog was up 22% to $6.3 billion at December 31, 2005, compared with $5.2 billion at December 31, 2004 and $4.1 billion at December 31, 2003.

     At December 31, 2005 and 2004, our Homebuilding operations controlled approximately 362,600 and 343,400 lots, respectively. Approximately 173,800 and 158,000 lots were owned and approximately 133,400 and 125,800 lots were under option agreements approved for purchase at December 31, 2005 and 2004, respectively. In addition, there were approximately 55,400 lots under option agreements at December 31, 2005, pending approval, that are under review and evaluation for future use by our Homebuilding operations. This compared to 59,600 lots at December 31, 2004.

     The total purchase price applicable to approved land under option for use by our homebuilding operations at future dates approximated $5.7 billion at December 31, 2005. In addition, the total purchase price applicable to land under option pending approval was valued at $1.9 billion at December 31, 2005. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits and advanced costs totaling $444.8 million, which are generally non-refundable.

     The following table presents markets that represent 10% or more of unit new orders, unit settlements, and settlement revenues for the years ended December 31, 2005, 2004 and 2003:

		Years December 31,
		2005				2004				2003
Unit net new orders:
Phoenix			10	%			16	%			14	%
Las Vegas			*				*				10	%
Unit settlements:
Phoenix			12	%			14	%			12	%
Settlement revenues:
Phoenix			11	%			12	%			11	%
Las Vegas			*				12	%			*

Homebuilding Segment Operations (as restated)

     The Homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of first-time, first and second move-up, and active adult homebuyers. We have determined our operating segments to be our Areas, which are aggregated into seven reportable segments based on similarities in the economic and geographic characteristics of our homebuilding operations. We conduct our operations in 54 markets, located throughout 27 states, and have presented our reportable homebuilding segments as follows:

Northeast:		Northeast and Mid-Atlantic Areas include the following states:
		Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey,
		New York, Pennsylvania, Virginia
Southeast:		Southeast Area includes the following states:
		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida Area includes the following state:
		Florida
Midwest:		Great Lakes Area includes the following states:
		Illinois, Indiana, Michigan, Ohio, Minnesota
Central:		Rocky Mountain and Texas Areas include the following states:
		Colorado, Kansas, Missouri, Texas
Southwest:		Arizona and Nevada Areas include the following states:
		Arizona, Nevada, New Mexico
*California:		Northern California and Southern California Areas include the following state:
		California

*Our homebuilding operations located in Reno, Nevada are reported in the California segment, while our remaining Nevada homebuilding operations are reported in the Southwest segment.

Homebuilding Segment Operations (as restated) (continued)

The following table presents selected financial information for our homebuilding reporting segments:

		Year Ended December 31,
		2005				2004				2003
Home sale revenue (settlements) ($000’s omitted):
Northeast		$	1,856,906			$	1,435,532			$	1,055,742
Southeast			950,792				758,994				726,825
Florida			2,247,513				1,270,797				934,792
Midwest			1,757,842				1,592,804				1,352,058
Central			1,090,914				938,966				925,301
Southwest			3,259,913				2,945,918				1,890,689
California			3,206,787				2,151,606				1,596,934
		$	14,370,667			$	11,094,617			$	8,482,341
Income (loss) before income taxes ($000’s omitted):
Northeast		$	326,399			$	267,494			$	161,978
Southeast			86,683				53,502				45,580
Florida			475,939				198,975				159,917
Midwest			149,063				175,845				162,846
Central			1,729				45,736				84,053
Southwest			745,163				647,179				287,644
California			654,940				379,765				238,810
Unallocated			(141,094	)			(132,916	)			(140,315	)
		$	2,298,822			$	1,635,580			$	1,000,513
Unit settlements:
Northeast			3,909				3,249				2,692
Southeast			4,127				3,719				3,700
Florida			8,784				5,643				4,534
Midwest			5,879				5,315				4,694
Central			6,424				5,576				5,212
Southwest			10,237				10,179				7,676
California			6,270				4,931				4,185
			45,630				38,612				32,693
Net new orders — units:
Northeast			4,019				3,197				3,098
Southeast			4,888				3,896				3,541
Florida			8,383				7,045				5,480
Midwest			5,928				5,219				4,466
Central			7,549				5,568				5,222
Southwest			10,723				10,353				8,762
California			6,041				5,298				4,420
			47,531				40,576				34,989
Unit backlog:
Northeast			1,593				1,483				1,535
Southeast			1,580				819				642
Florida			4,085				4,486				3,084
Midwest			1,283				1,234				1,330
Central			2,075				950				958
Southwest			4,902				4,416				4,242
California			2,299				2,528				2,161
			17,817				15,916				13,952

Homebuilding Segment Operations (as restated) (continued)

		Year Ended December 31,
		2005				2004				2003
Controlled Lots:
Northeast			44,088				41,405				33,535
Southeast			31,863				22,926				22,854
Florida			70,434				73,799				48,877
Midwest			36,334				38,578				41,347
Central			39,331				42,572				42,233
Southwest			97,290				82,630				42,513
California			43,275				41,508				27,762
			362,615				343,418				259,121

     Northeast:

     For the year ended December 31, 2005, our Northeast operations contributed positively to our Homebuilding operating results with increased revenues and higher average selling prices and profits compared with 2004 and 2003. During 2005, most of the markets in the Northeast experienced strong demand conditions, particularly in Lehigh Valley and Baltimore, which were offset by increased resale inventories and pricing pressures in Washington D.C. Net new orders increased 26% to 4,019 units for the year ended December 31, 2005 compared with the same period in 2004 while net new orders increased 3% to 3,197 units for the year ended December 31, 2004 compared with the same period in 2003. However, during the fourth quarter of 2005, net new orders decreased 10% to 697 units compared with the fourth quarter of 2004, while during the fourth quarter of 2004 net new orders increased 13% to 778 units compared with the fourth quarter of 2003. For the year ended December 31, 2005, cancellation rates were approximately 14% compared with 11% and 14% for the years ended December 31, 2004 and 2003, respectively. Cancellation rates for the fourth quarter of 2005 increased to 19% compared with 14% and 13% for the same periods in 2004 and 2003. As of December 31, 2005, we had 99 active selling communities, compared with 78 and 69 as of December 31, 2004 and 2003, respectively. In addition, the comparability of our Northeast operations were affected, year over year, by a significant land sale ($19.4 million of income before income taxes) in our Washington D.C. market during the year ended December 31, 2004.

     Southeast:

     During the year ended December 31, 2005, our Southeast operations contributed positively to our Homebuilding operating results with increased revenues and higher average selling prices and profits compared with 2004 and 2003. Most of the markets in the Southeast experienced strong demand conditions during 2005. Additionally, during 2005 we opened several new communities, including two new active adult communities in Atlanta and Raleigh. We expect to open an additional large active adult community in Charlotte during the first quarter of 2006. As of December 31, 2005, we had 64 active selling communities, compared with 74 and 63 as of December 31, 2004 and 2003, respectively. We will be opening replacement communities in the Southeast during 2006. For the year ended December 31, 2005, net new orders increased 25% to 4,888 units compared with the same period in 2004 while net new orders increased 10% to 3,896 units for the year ended December 31, 2004 compared with the same period in 2003. Cancellation rates for the year ended December 31, 2005 were approximately 18%, which was comparable with the same periods in 2004 and 2003. For the fourth quarter and year ended 2005, our Carolina operating results were negatively impacted by $7 million of lot cost adjustments recorded primarily in Hilton Head.

Homebuilding Segment Operations (as restated) (continued)

     Florida:

     During the year ended December 31, 2005, our Florida operations had increased revenues and higher average selling prices and profits compared with the same periods in 2004 and 2003. As of December 31, 2005, we had 73 active selling communities, compared with 65 and 39 as of December 31, 2004 and 2003, respectively. For the year ended December 31, 2005, net new orders increased 19% to 8,383 units compared with 2004, while net new orders increased 29% to 7,045 units for the year ended December 31, 2004 compared with 2003. During the fourth quarter of 2005, net new orders decreased 20% to 1,577 units compared with the prior year quarter, due primarily to a decreased community count of approximately 20% in Tampa and the fact that we are transitioning out of a recently completed active adult community in Ocala. The replacement communities in both of these markets are or will be opening shortly, so the decrease is a timing issue. Additionally, some of our Florida operations are beginning to experience weakened demand for new homes due to excess resale inventories and pricing pressures in Orlando and Naples/Ft. Myers. During the fourth quarter of 2004, net new orders increased 58% to 1,978 units compared with the prior year quarter. At December 31, 2005 unit backlog decreased 9% to 4,085 units compared with the same period in 2004 while at December 31, 2004 unit backlog increased 45% to 4,486 units compared with 2003. Cancellation rates for the year ended December 31, 2005 were approximately 12%, which was comparable with 2004 and 2003. In addition, for the year ended December 31, 2004, our Florida operations were affected by land sales (totaling $14.4 million of income before income taxes), which occurred primarily in our Tampa and Jacksonville markets.

Homebuilding Segment Operations (as restated) (continued)

     Midwest:

     For the year ended December 31, 2005, our Midwest operations realized increased revenues compared with the same periods in 2004 and 2003, primarily due to higher unit settlements. During the year ended December 31, 2005 average selling prices and profits decreased compared with the same period in 2004 while during the year ended December 31, 2004 average selling prices and profits increased compared with the same period in 2003. During 2005, some of our Midwest operations were impacted by weakened demand for new homes due to increased resale home inventories and challenging local economic conditions, especially in Michigan. However, other Midwest operations, such as Illinois, Indianapolis and Ohio experienced solid demand, as evidenced by increased net new orders. For the year ended December 31, 2005, net new orders increased 14% to 5,928 units compared with 2004, while net new orders increased 17% to 5,219 units for the year ended December 31, 2004 compared with 2003. During the fourth quarter of 2005, net new orders increased 11% to 1,240 units compared with the prior year period and during the fourth quarter of 2004, net new orders increased 8% to 1,113 units compared with the prior year period. In 2005, we opened large active adult communities in Detroit and Cleveland which contributed to the 2005 increase in net new orders. Cancellation rates for the year ended December 31, 2005 were approximately 13%, compared with 16% and 14% for the same periods in 2004 and 2003, respectively. For the fourth quarter of 2005, our Midwest operating results were negatively impacted by $4 million of land valuation adjustments recorded in Cleveland. There were no significant land valuation adjustments or write-offs taken during the years ended 2004 and 2003.

     Central:

     For the year ended December 31, 2005, our Central operations realized increased revenues primarily due to higher unit settlements, compared with the same periods in 2004 and 2003. During the year ended December 31, 2005 average selling prices increased compared with the same period in 2004, however, average selling prices decreased for the year ended December 31, 2004 compared with the same period in 2003. For the year ended December 31, 2005, net new orders increased 36% to 7,549 units compared with the same period in 2004, while net new orders increased 7% to 5,568 units for the year ended December 31, 2004 compared with the same period in 2003. During the fourth quarter of 2005, net new orders increased 53% to 1,801 units compared with the prior year period, however, during the fourth quarter of 2004 net new orders decreased 5% to 1,174 units, compared with the prior year period. During 2005, we realized increases in net new orders in Houston and San Antonio as well as Denver, which experienced significant increases from the successful grand opening of a large traditional/active adult community in November 2005. For the year ended December 31, 2005, our Central operations were negatively impacted by a shift in product mix as well as delays in the opening of certain new communities, compared with the prior year periods for 2004 and 2003. Cancellation rates for the year ended December 31, 2005 were approximately 23%, compared with 29% and 28% for the same periods in 2004 and 2003, respectively. For the fourth quarter of 2005, the cancellation rate was 31% compared with 38% and 33% for the same periods in 2004 and 2003, respectively. For both the fourth quarter and year ended December 31, 2005, our Central operating results were negatively impacted by $3.1 million of land valuation adjustments recorded in Kansas City, as well as higher sales incentives offered to homebuyers to reduce spec inventories in San Antonio and Houston. In addition, during the fourth quarter and year ended December 31, 2005, we recorded $2.5 million and $2.8 million, respectively, of net realizable value adjustments for land held for sale, primarily in Houston. There were no significant land valuation adjustments or write-offs taken during the years ended December 31, 2004 and 2003.

Homebuilding Segment Operations (as restated) (continued)

     Southwest:

     During the year ended December 31, 2005, our Southwest operations contributed positively to our Homebuilding operating results, evidenced by increased revenues and higher average selling prices and profits compared with 2004 and 2003. For the year ended December 31, 2005, net new orders increased 4% to 10,723 units compared with the same period in 2004 while net new orders increased 6% to 10,353 units for the year ended December 31, 2004 compared with the same period in 2003. During the fourth quarter of 2005, net new orders increased 33% to 2,447 units compared with the prior year period, while net new orders decreased 22% to 1,840 units during the fourth quarter of 2004 compared with the prior year period. As of December 31, 2005, the decrease in Arizona’s active community count, compared with the prior year, is attributable to the close-out of several communities, including a large, established active adult community located in Phoenix. We plan to open two large active adult communities, also located in Phoenix, during the first quarter of 2006 as replacement communities. In the fourth quarter of 2004, we lowered pricing in Las Vegas to better align pricing in our communities with pricing in the market. This action was in response to a period of slow sign-ups and increased cancellation rates, which we attributed to our then above-market pricing. Since the price reductions took effect in the fourth quarter of 2004, our communities in Las Vegas have experienced improved traffic and new order activity. Cancellation rates in the Southwest for the year ended December 31, 2005 were approximately 16%, which was comparable with the same periods in 2004 and 2003. During the fourth quarter of 2005, cancellation rates were 19% compared with 34% and 14% during the same periods in 2004 and 2003, respectively.

     California:

     During the year ended December 31, 2005, our California operations contributed positively to our Homebuilding operating results, evidenced by increased revenues and higher average selling prices and profits compared with 2004 and 2003. For the year ended December 31, 2005, net new orders increased 14% to 6,041 units compared with the same period in 2004 while net new orders increased 18% to 5,298 units for the year ended December 31, 2004 compared with 2003. For the fourth quarter of 2005, net new orders decreased 6% to 1,083 units compared with the prior year period, while net new orders remained comparable between the fourth quarter of 2004 and 2003. At December 31, 2005, unit backlog decreased 9% to 2,299 units compared with December 31, 2004, while at December 31, 2004 unit backlog increased 17% to 2,528 units compared with December 31, 2003. During the fourth quarter of 2005, our California operations were impacted by weakened demand for new homes evidenced by increased resale inventories and pricing pressures, especially in Sacramento. In addition, the closeout of a large, successful active adult community which contributed significantly to our operations impacted the California reporting segment during the fourth quarter of 2005 and contributed to the decrease in net new orders, closings and average selling price during this period. Cancellation rates for the current year were approximately 24%, compared with 15% and 13% for the years ended December 31, 2004 and 2003.

Financial Services Operations

     We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries.

     We originate mortgage loans using our own funds or borrowings made available through various credit arrangements, and then sell such mortgage loans to outside investors. Also, we sell our servicing rights on a flow basis through fixed price servicing sales contracts. Due to the short period of time the servicing rights are held, generally less than four months, we do not amortize the servicing asset. Since the servicing rights are recorded based on the value in the servicing sales contracts, there are no impairment issues related to these assets.

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

		Years Ended December 31,
		2005				2004				2003
Total originations:
Loans			42,994				35,232				28,655
Principal ($000’s omitted)		$	8,528,600			$	6,739,200			$	4,989,500
Originations for Pulte customers:
Loans			42,302				32,290				23,864
Principal ($000’s omitted)		$	8,397,600			$	6,268,100			$	4,179,100

     Pre-tax income of our financial services operations was $70.6 million, $47.4 million, and $68.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.

     Mortgage origination unit and principal volume for the year ended December 31, 2005, increased 22% and 27%, respectively, over 2004. Mortgage origination unit and principal volume for the year ended December 31, 2004, increased 23% and 35%, respectively, over 2003. This growth can be attributed to increases in the capture rate of 140 basis points to 89.2% in 2005 and 510 basis points to 87.8% in 2004, combined with the volume increases experienced in our homebuilding business and an increase in average loan size. Our capture rate represents loan originations from our homebuilding business as a percent of total loan opportunities, excluding cash settlements, from our homebuilding business. Our homebuilding customers continue to account for the majority of total loan production, representing 98% of Pulte Mortgage unit production for 2005, compared with 92% in 2004 and 83% in 2003.

     Adjustable rate mortgages (ARMs) represented 45% of total funded origination dollars and 39% of total funded origination units for the year ended December 31, 2005, compared with 43% and 42%, respectively, in 2004 and 24% and 22%, respectively, in 2003. Interest only mortgages, a component of ARMs, represented 65% of ARMs origination dollars and 56% of ARMs origination units for the year ended December 31, 2005, compared with 42% and 30% in 2004, and 13% and 8%, respectively, in 2003. Interest only mortgages represented 29%, 18%, and 3%, respectively, of total funded origination dollars for the years ended December 31, 2005, 2004 and 2003.

     Refinancings represented 1% of total loan production in 2005, compared with 3% in 2004 and 8% in 2003. Our customers’ average FICO scores for the years ended December 31, 2005, 2004, and 2003 were 741, 737, and 724, respectively. Combined Loan-to-Value was 81% for the years ended December 31, 2005, 2004, and 2003, respectively. At December 31, 2005, loan application backlog was $4.2 billion, compared with $3.5 billion and $2.2 billion at December 31, 2004 and 2003, respectively.

     Pre-tax income increased 49% for the year ended December 31, 2005, compared with 2004, due to increased volume and a favorable product mix shift to funded, from non-funded originations. In 2005, 26% of total origination dollars were from brokered loans, which are less profitable to us, compared with 36% in 2004. Mortgage origination fees of $20.7 million in 2005 were $0.2 million, or 1%, higher than the $20.5 million recorded for the same period in 2004. The 1% increase over the same period in 2004 is due to higher revenues per loan as brokered origination volume decreased 7% in 2005 when compared to 2004.

     The net gain from sale of mortgages of $81.1 million in 2005 was $30.8 million, or 61%, higher than the $50.3 million recorded for the same period in 2004. This favorable variance was due primarily to an increase in loans available for sale combined with a more favorable interest rate environment in 2005 when compared to 2004. Net interest income in 2005 was $10 million, or 3%, higher than the $9.7 million for the same period in 2004. The increase was due mainly to increased funded origination volume offset by a lower interest rate margin. Income from our title operations was $22.3 million in 2005, an increase of 27% over 2004. Selling, general and administrative expense increased $10 million, or 17%, from 2004, due primarily to an increase in origination volume.

Financial Services Operations

     Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income from operations of approximately $350 thousand for the year ended December 31, 2005. During February 2005, 25% of our investment in the capital stock of Su Casita was redeemed for a gain of approximately $620 thousand. Our remaining interest of 16.66% was accounted for under the cost method of accounting and therefore no income was recorded for periods subsequent to the sale. Income from Su Casita for the years ended December 31, 2004 and 2003, was $4 million and $4.4 million, respectively. In February 2006, we completed the sale of our remaining investment in Su Casita for approximately $50 million, and realized a pre-tax gain of approximately $30 million related to the transaction.

     Pre-tax income decreased 31% for the year ended December 31, 2004, compared with 2003, as increased volume was offset by changes in product mix to ARMs, which generally have a lower profit per loan than fixed rate products. The shift to ARMs is attributable to customer mortgage product preference. In addition, in 2004, 36% of total origination dollars were from brokered loans, which are less profitable to us, compared with 16% in 2003. Mortgage origination fees increased to $20.5 million for the year ended December 31, 2004, compared with $7.5 million in 2003, due to the increase in brokered loans. Gains from the sale of mortgages during 2004 decreased $14.1 million, or 22%, from $64.4 million in 2003, and net interest income decreased $5.5 million, to $9.7 million during 2004 as compared with $15.1 million in 2003. These decreases were due to the product mix shifts and an unfavorable interest rate environment in 2004 compared with 2003. Income from our title operations was $17.6 million in 2004, an increase of 30% over 2003. Selling, general and administrative expense for the year ended December 31, 2004, increased 41% to $57.5 million compared with 2003 due to increased origination volume.

     We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments. For the year ended December 31, 2005, we did not recognize any material net gains or losses related to an ineffective portion of the hedging instrument. We also did not recognize any material net gains or losses during 2005 for cash flow hedges that were discontinued because it is probable that the original forecasted transaction will not occur. At December 31, 2005, we expect to reclassify $18 thousand, net of taxes, of net losses on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months from sales of closed mortgage loans.

Other non-operating

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

     The following table presents results of operations ($000’s omitted):

		Years Ended December 31,
		2005				2004				2003
Net interest expense		$	43,344			$	47,372			$	39,364
Other expenses, net			49,050				43,313				35,987
Loss before income taxes		$	92,394			$	90,685			$	75,351

     Interest expense, net of interest capitalized into homebuilding inventory, decreased 9% to $43.3 million in 2005 and increased 20% to $47.4 million in 2004. The decrease for the year ended December 31, 2005, compared with the prior year, is due to an increase in the amount of interest capitalized into homebuilding inventory as well as an increase in interest income. The increase for the year ended December 31, 2004, compared with the prior year, is due to an increase in the debt levels necessary to support our growth.

     The increase in other expenses, net for the year ended December 31, 2005, compared with the prior year was due to higher compensation-related costs. Other expenses, net in 2004 increased $7.3 million compared with 2003 partially due to increased charitable contributions. Additionally, during 2004 and 2003 we recognized income from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale.

     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. During 2005, interest in homebuilding inventory increased primarily as a result of higher levels of inventory and debt consistent with the growth of our Company. During the fourth quarter of 2005, we increased the amount of interest capitalized into homebuilding inventory. The increase was 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):

		Years Ended December 31,
		2005				2004				2003
Interest in homebuilding inventory at beginning of year		$	223,591			$	200,584			$	142,984
Interest capitalized into homebuilding inventory			185,792				156,056				136,308
Interest expensed to homebuilding cost of sales			(179,585	)			(133,049	)			(78,708	)
Interest in homebuilding inventory at end of year		$	229,798			$	223,591			$	200,584
Interest incurred *		$	234,024			$	205,176			$	178,952

Discontinued Operations

     First Heights — In September 2003, the United States Court of Federal Claims issued final judgment that Pulte Homes, Inc., Pulte Diversified Companies, Inc. and First Heights (collectively, the Pulte Parties) had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract with them. The final judgment follows the Court’s August 17, 2001 ruling that the United States breached the contract related to the Pulte Parties’ 1988 acquisition of five savings and loan associations by enacting Section 13224 of the Omnibus Budget Reconciliation Act of 1993. The United States government and the Pulte Parties filed Notices of Appeal with the United States Court of Appeals for the Federal Circuit in October 2003.

     In August 2005, the United States Court of Appeals affirmed the United States Court of Federal Claims’ judgment, in its entirety, that we had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract in connection with the enactment of Section 13224 of the Omnibus Budget Reconciliation Act of 1993. In December 2005, we received payment of the judgment in the amount of $48.7 million, which was recorded as income from discontinued operations.

     W e also recorded non-cash, after-tax gains of $7.8 million, $10.8 million and $7.9 million, during the third quarter of 2005, 2004 and 2003, respectively, related to the favorable resolution of certain tax matters relating to our former thrift operation, which was discontinued in 1994.

     Mexico — In January 2005, the minority shareholders of Pulte Mexico S. de R.L. de C.V. (“Pulte Mexico”) exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to us, the consummation of which resulted in our owning 100% of Pulte Mexico. In March 2005, we purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million in cash. In June 2005, we purchased the remaining 40% of the minority interest of Pulte Mexico for approximately $12.5 million in cash. We assigned approximately $17.6 million of the purchase price premium to house and land inventory, which was amortized through cost of sales as homes were sold. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed, of $5.3 million, was recorded as goodwill.

     In December 2005, we sold substantially all of our Mexico homebuilding operations to a consortium of purchasers involved in residential and commercial real estate development. The disposition of the Mexico homebuilding operations will allow us to invest additional resources in the U.S. housing market. We realized cash of $131.5 million related to the sale. The sale of these operations did not include our investment in the capital stock of a mortgage company in Mexico as well as various non-operating entities, which are not considered to be material to our results of operations or our financial position.

     Revenues of these discontinued operations were $201 million, $185.8 million and $172.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. For the years ended December 31, 2005, 2004 and 2003, discontinued Mexico homebuilding operations reported total after-tax income (losses) of ($1.5) million, $4.4 million and $1.7 million, respectively. Results of Mexico homebuilding operations, for the years ended December 31, 2005, 2004 and 2003, resulted in pre-tax operating income of $4.6 million, $8.2 million and $4.6 million, respectively.

     For the year ended December 31, 2005, we recognized a pre-tax loss of $6.6 million (after-tax loss of $13.1 million) related to the sale of our Mexico homebuilding operations. The pre-tax loss on sale includes the accounting recognition of the economic losses related to accumulated foreign currency translation adjustments of $7.6 million, which had previously been reported in other comprehensive income, as well as the write-off of $5.3 million of goodwill related to the 2005 acquisition of the minority shareholder interests. At December 31, 2005, the Mexico homebuilding operations have been presented as discontinued operations in our Consolidated Financial Statements, while previously they were included in our Homebuilding operations. Certain amounts previously reported in the 2004 and 2003 financial statements and notes thereto were reclassified to conform to the 2005 presentation.

     Concurrent with the sale of the Mexico homebuilding operations, we elected to repatriate all of our earnings from our Mexico operations in accordance with the American Jobs Creation Act of 2004 (Internal Revenue Code Section 965, Temporary Dividends Received Deduction) and recorded $4.8 million of related income taxes, which have been included in the Mexico loss on sale from discontinued operations.

Discontinued Operations (continued)

     Argentina — In January 2005, we sold all of our Argentina operations to an Argentine company involved in residential and commercial real estate development. The disposition of these operations was the chosen action to improve our overall returns. At December 31, 2004, the Argentina operations were classified as held for sale and presented as discontinued operations in our Consolidated Financial Statements, while previously they were included in our Homebuilding operations.

     For the years ended December 31, 2004 and 2003, discontinued Argentine operations reported after-tax losses of $1.4 million and $1.9 million, respectively. In addition, we recognized a pre-tax loss of $33.2 million ($20.6 million after-tax) on the write-down of the Argentina operations to fair value less costs to sell. At December 31, 2004, foreign currency translation losses of $25.1 million, which were previously recorded as a component of accumulated other comprehensive income on the balance sheet, were recognized in the income statement in connection with the classification of these operations as held for sale. These translation losses were included in the overall pre-tax loss of $33.2 million on the write-down to fair value. For the year ended December 31, 2003, we recorded a foreign currency translation gain of $1.9 million for Argentina as a component of accumulated other comprehensive income on the balance sheet.

     Total assets to be disposed of at December 31, 2004 were $15.4 million, consisting primarily of cash and inventories. Total liabilities to be disposed of at December 31, 2004 were $13.7 million and consisted primarily of accounts payable and other accrued liabilities.

Liquidity and Capital Resources

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

     At December 31, 2005, we had cash and equivalents of $1 billion and $3.4 billion of senior notes outstanding. Other financing included limited recourse collateralized financing totaling $28.6 million. Sources of our working capital include our cash and equivalents, our $1.66 billion committed unsecured revolving credit facility and Pulte Mortgage’s $990 million committed credit arrangements.

     Our debt-to-total capitalization, excluding our collateralized debt, was approximately 36.2% at December 31, 2005, and approximately 28.6% 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.

     Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements. At December 31, 2005, Pulte Mortgage had committed credit arrangements of $990 million comprised of a $390 million bank revolving credit facility and a $600 million asset-backed commercial paper program. The asset-backed commercial paper program was temporarily increased to $600 million in December 2005 due to high year-end volume. It was reduced back to $550 million in January 2006.

     Our income tax liability and related effective tax rate are affected by a number of factors. In 2005, our effective tax rate was 36.9% compared to 37.6% in 2004 and 37.9% in 2003. The reduction in the effective tax rate for 2005 was principally due to the new manufacturing deduction established by the American Jobs Creation Act of 2004. The reduction in the effective tax rate for 2004 was principally due to the favorable resolution of certain state tax matters. We anticipate that our effective tax rate for 2006 will be approximately 37%.

     Our net cash provided by operating activities for the year ended December 31, 2005, amounted to $18.7 million, while net cash used in operating activities was $692.2 million for the year ended December 31, 2004. The increase from 2004 to 2005 was principally due to an increase in net income, which included $48.7 million of cash income received as a result of a favorable judgment for our former thrift operation. Our net cash used in operating activities for the year ended December 31, 2003, was $336.4 million. For the years ended December 31, 2004 and 2003, the increases in net income were offset primarily by significant investments in land necessary to support the continued growth of the business.

Liquidity and Capital Resources (continued)

     Cash used in investing activities was $25.3 million for the year ended December 31, 2005, compared with $198.6 million in the prior year. The change in net cash used in investing activities primarily relates to proceeds from the sale of subsidiaries during 2005 of $142.9 million, increases in distributions from unconsolidated entities of $41.9 million, offset by increases in capital expenditures of $13.7 million. During 2005, we invested approximately $37.3 million in three new joint ventures that develop and/or sell land within the United States. Also, we contributed $124.6 million of additional capital contributions to and received $108 million in capital distributions from our unconsolidated joint ventures for the year ended December 31, 2005. Further, we incurred approximately $88.9 million in capital expenditures to support the growth of our business. Cash used in investing activities was $198.6 million for the year ended December 31, 2004, compared with $4.3 million in the prior year. The change in net cash used in investing activities primarily relates to our investments in unconsolidated entities. During January 2004, we invested $35 million for a 50% ownership interest in an entity that supplies and installs basic building components and operating systems. During 2004, we invested approximately $117.8 million in three new joint ventures that develop and/or sell land in the United States. Also, we contributed $44.2 million of additional capital contributions to and received $66.1 million in capital distributions from our unconsolidated joint ventures for the year ended December 31, 2004.

     Net cash provided by financing activities totaled $700.4 million for the year ended December 31, 2005. Cash inflows from financing activities of $1 billion for the year ended December 31, 2005 are primarily attributed to proceeds from our $350 million, 5.2% senior notes and $300 million, 6% senior notes issued in February 2005, proceeds from Pulte Mortgage’s line of credit of approximately $275.6 million, proceeds from limited recourse collateralized financing arrangements of approximately $46.8 million, and proceeds from the exercise of stock options of $31.2 million. Cash outflows from financing activities for the year ended December 31, 2005 primarily relate to the repayment of our $125 million, 7.3% senior notes in October 2005, approximately $33.6 million of cash dividends paid to our shareholders, and $143.2 million used to repurchase our common stock.

     Net cash provided by financing activities totaled $809.6 million for the year ended December 31, 2004. Cash inflows from financing activities for the year ended December 31, 2004 are primarily attributed to proceeds received from our $500 million, 5.25% senior notes issued in January 2004 and our $400 million, 4.875% senior notes issued in July 2004 and $44 million of cash received from the exercise of stock options. Cash outflows from financing activities for the year ended December 31, 2004 primarily relate to the repayment of our $112 million, 8.375% senior notes in August 2004, redemption of the remaining $77 million of Del Webb 10.25% senior subordinated notes in February 2004, approximately $25.4 million of cash dividends paid to our shareholders, $44.9 million used to repay borrowings, and $14.7 million used to repurchase our common stock.

     Net cash provided by financing activities for the year ended December 31, 2003, was $128.9 million, reflecting proceeds from the $300 million senior notes issued in February and the $400 million senior notes issued in May and proceeds from employee stock option exercises, offset by the repayment of debt, dividends paid and stock repurchases.

     In February 2005, we sold $350 million of 5.2% senior notes, which mature on February 15, 2015, and $300 million of 6% senior notes, which mature on February 15, 2035, 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. 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.

     In October 2005, we restructured and amended the 5-year unsecured revolving credit facility, increasing the borrowing availability from $1.38 billion to $1.615 billion, and extending the maturity date from September 2009 to October 2010, with pricing more favorable to us. We subsequently increased the credit facility to $1.66 billion. The 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.

     Pursuant to the two $100 million stock repurchase programs authorized by our Board of Directors in October 2002 and 2005 (for a total stock repurchase authorization of $200 million), we have repurchased a total of 6,120,800 shares for $180.5 million. At December 31, 2005, we had remaining authorization to purchase common stock aggregating $19.5 million. In February 2006, our Board of Directors approved an increase to our stock repurchase authorization for an additional $200 million in open-market transactions or otherwise.

     In July 2005, our Board of Directors declared a two-for-one stock split effected in the form of a 100 percent stock dividend. The additional shares of common stock were distributed on September 1, 2005, to the shareholders of record as of August 15, 2005. In December 2003, we announced a two-for-one stock split effected in the form of a 100 percent stock dividend. The distribution was made on January 2, 2004. All share and per share amounts have been restated to retroactively reflect the stock splits.

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. For the three months ended December 31, 2005, our gross margins have been negatively impacted by approximately 40 basis points due to inflation, compared to the same period in the prior year. For the year ended December 31, 2005, 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.

Contractual Obligations and Commercial Commitments

     The following table summarizes our payments under contractual obligations as of December 31, 2005:

		Payments Due by Period
		($000’s omitted)
		Total				2006				2007-2008				2009-2010				After 2010
Contractual obligations:
Long-term debt (a)		$	6,333,755			$	216,776			$	433,552			$	814,052			$	4,869,375
Operating lease obligations			231,119				52,392				80,035				55,013				43,679
Other long-term liabilities (b)			29,318				18,302				10,006				1,010				—
Total contractual obligations (c)		$	6,594,192			$	287,470			$	523,593			$	870,075			$	4,913,054

     We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we are ready to build homes on them. This reduces our financial risks associated with long-term land holdings. At December 31, 2005, we had agreements to acquire approximately 189,000 homesites through option contracts and unconsolidated entities in which we have investments. At December 31, 2005 we had $444.8 million of non-refundable option deposits and advanced costs related to certain of these agreements.

     The following table summarizes our other commercial commitments as of December 31, 2005:

		Amount of Commitment Expiration by Period
		($000’s omitted)
		Total				2006				2007-2008				2009-2010				After 2010
Other commercial commitments:
Guarantor revolving credit facilities (a)		$	1,660,000			$	—			$	—			$	1,660,000			$	—
Non-guarantor revolving credit facilities (c)			990,000				990,000				—				—				—
Standby letters of credit (b)			39,794				39,794				—				—				—
Total commercial commitments (d)		$	2,689,794			$	1,029,794			$	—			$	1,660,000			$	—

Off-Balance Sheet Arrangements

     We use standby letters of credit and performance bonds to guarantee our performance under various contracts, principally in connection with the development of our projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. At December 31, 2005, we had outstanding letters of credit of $531.5 million. Performance bonds do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $1.79 billion at December 31, 2005, are typically outstanding over a period that approximates 3-5 years. We do not believe that we will be required to draw upon any such letters of credit or performance bonds.

     In the ordinary course of business, we enter into land option or option type agreements in order to procure land for the construction of houses in the future. At December 31, 2005, these agreements totaled approximately $7.6 billion. Pursuant to these land option agreements, we provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. If the entity holding the land under option is a variable interest entity, our deposit represents a variable interest in that entity. At December 31, 2005, we consolidated certain variable interest entities with assets totaling $76.7 million.

     At December 31, 2005 and 2004, aggregate outstanding debt of unconsolidated joint ventures was $882.2 million and $58.1 million, respectively. The increase in debt at December 31, 2005 is a result of the growth in the number of joint venture arrangements as well as increased land development activities for these entities. Our proportionate share of our joint venture debt as of December 31, 2005 was approximately $294 million, for which we provide limited recourse debt guarantees, of approximately $288 million. 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 December 31, 2005, we do not anticipate that we will incur any significant costs under these guarantees.

Critical Accounting Policies and Estimates

     The accompanying consolidated financial statements were prepared in conformity with United States generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 of Notes to Consolidated Financial Statements). Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality. The development and selection of the following critical accounting policies and estimates have been discussed with the Audit Committee of the Board of Directors.

Revenue recognition

     Homebuilding — Homebuilding revenues are recorded when the sales of homes are completed and ownership has transferred to the customer. Unfunded settlements are deposits in transit on homes for which the sale was completed. We do not engage in arrangements whereby we have ongoing relationships with our homebuyers that require us to repurchase our homes or provide homebuyers with the right of return.

     Financial Services — Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing, and are credited to income when related mortgage payments are received. Loan origination fees, commitment fees and certain direct loan origination costs are deferred as an adjustment to the cost of the related mortgage loan until such loan is sold. Gains and losses from sales of mortgage loans are recognized when the loans are sold. Interest income is accrued from the date a mortgage loan is originated until the loan is sold.

Inventory valuation

     Our finished inventories are stated at the lower of accumulated costs or net realizable value. Included in inventories are all direct development costs. Inventories under development or held for development are stated at accumulated cost, unless they are determined to be impaired, in which case these inventories are measured at fair value. If actual market conditions are less favorable than those projected by management, additional inventory adjustments may be required.

     We capitalize interest cost into homebuilding inventories. Interest capitalized each quarter is identified as a separate layer in our capitalized interest balance sheet pool. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated to the quarters over the amortization period based on the cyclical timing of unit settlements.

Critical Accounting Policies and Estimates (continued)

Inventory valuation (continued)

     Sold units are expensed on a specific identification basis. Under the specific identification basis, cost of sales includes the construction cost of the home, an average lot cost by project based on land acquisition and development costs, and closing costs and commissions. Construction cost of the home includes amounts paid through the closing date of the home, plus an accrual for costs incurred but not yet paid, based on an analysis of budgeted construction cost. This accrual is reviewed for accuracy based on actual payments made after closing compared to the amount accrued, and adjustments are made if needed. Total project land acquisition and development costs are based on an analysis of budgeted costs compared to actual costs incurred to date and estimates to complete. Adjustments to estimated total project land acquisition and development costs for the project affect the amount of future lots costed.

Residential mortgage loans available-for-sale

     Residential mortgage loans available-for-sale are stated at the lower of aggregate cost or market value. Gains and losses from sales of mortgage loans are recognized when the loans are sold. We hedge our residential mortgage loans available-for-sale. Gains and losses from closed commitments and futures contracts are matched against the related gains and losses on the sale of mortgage loans.

Goodwill and intangible assets

     We have recorded certain intangible assets and goodwill, most of which relate to the Del Webb merger in 2001. Intangible assets, primarily trademarks and tradenames, were valued using proven valuation procedures and are amortized over their estimated useful life. Goodwill is subject to annual impairment testing. The carrying value and ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows decrease significantly, intangible assets and goodwill may be impaired and the resulting charge to operations may be material. If we determine that the carrying value of intangible assets, long-lived assets and goodwill may not be recoverable based upon the existence of one or more indicators of impairment, we measure impairment based on one of three methods. For assets related to ongoing operations, we use a projected undiscounted cash flow method to determine if impairment exists and then measure impairment using discounted cash flows. For assets to be disposed of, we assess the fair value of the asset based on current market conditions for similar assets. For goodwill, we assess fair value by measuring discounted cash flows of our reporting units and measure impairment as the difference between the resulting implied fair value of goodwill and the recorded book value.

     The estimates of useful lives and expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates could result in significant revisions to the carrying value of these assets and material charges to the results of operations.

Allowance for warranties

     Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of recorded warranty liabilities and adjust the amounts as necessary. Although we have not made significant adjustments to the accrual in the past, actual warranty cost in the future could differ from our current estimate.

Insurance

     We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensation and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. Through our captive insurance subsidiaries, we reserve for costs to cover our self-insured and deductible amounts under those policies and for any costs of claims and lawsuits in excess of our coverage limits or not covered by such policies, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. Our total reserves for such items were $153.4 million and $115.6 million at December 31, 2005 and 2004, respectively. Expenses related to such claims were approximately $70.1 million, $58.4 million, and $40.9 million for the years ended December 31, 2005, 2004, and 2003, respectively.

Critical Accounting Policies and Estimates (continued)

Stock-based compensation

     On December 15, 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires that all share-based payments to employees, including grants of employee stock options, be accounted for at fair value. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123(R), we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. We previously adopted the fair-value-based method of accounting for share-based payments under SFAS No. 123 effective January 1, 2003 using the prospective method described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, the Company uses the Black-Scholes option pricing model to estimate the value of stock options granted to employees, and will continue to use this model upon adoption of SFAS 123(R). Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and we adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that was not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R). In addition, our 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. We currently recognize the related compensation cost ratably over the nominal vesting period. For awards granted after the adoption of SFAS No. 123(R), we will record 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. Because these amounts are not significant, the adoption of SFAS No. 123(R) is not expected to have a material impact on our results of operations or financial position. This statement is effective for fiscal periods beginning after December 15, 2005.

New Accounting Pronouncements

     In June 2005, the Financial Accounting Standards Board (“FASB”) ratified its Emerging Issues Task Force consensus in Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“Issue 04-5”). This guidance states that the general partner in a limited partnership is presumed to control that limited partnership, with limited exceptions. We do not expect the provisions of Issue 04-5 to impact our current accounting treatment for limited partnerships because we are not a general partner. Issue 04-5 is effective June 29, 2005 for new limited partnerships and existing limited partnerships where the partnership agreement has been modified and is otherwise effective for the first fiscal period beginning after December 15, 2005 for all other limited partnerships.

     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154). This Statement replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to financial statements of prior periods for changes in accounting principle. This Statement is effective January 1, 2006 and has been determined to have no impact on our results of operations or its financial position.

     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. 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 the new deduction were recorded during 2005, and resulted in a reduction in our federal income tax rate (see Note 9 to Consolidated Financial Statements).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following tables set forth, as of December 31, 2005 and 2004, our rate-sensitive financing obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair market value ($000’s omitted).

		As of December 31, 2005 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 and subordinated notes		$	—			$	—			$	—			$	400,000			$	—			$	2,998,563			$	3,398,563			$	3,421,959
Average interest rate			—				—				—				4.88	%			—				6.58	%			6.38	%			—
Limited recourse collateralized financing		$	18,051			$	5,700			$	3,949			$	933			$	—			$	—			$	28,633			$	28,633
Average interest rate			.89	%			1.80	%			1.27	%			8.25	%			—				—				1.36	%			—

		As of December 31, 2004 for the
		Years ended December 31,
																						There-								Fair
		2005				2006				2007				2008				2009				after				Total				Value
Rate sensitive liabilities:
Fixed interest rate debt:
Senior notes and subordinated notes		$	125,000			$	—			$	—			$	—			$	400,000			$	2,348,563			$	2,873,563			$	3,124,413
Average interest rate			7.3	%			—				—				—				4.88	%			6.86	%			6.6	%			—
Limited recourse collateralized financing		$	60,392			$	13,309			$	4,699			$	2,350			$	1,113			$	—			$	81,863			$	81,863
Average interest rate			1.48	%			1.97	%			4.17	%			5.25	%			5.25	%			—				1.87	%			—