Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PULTEGROUP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010

($000’s omitted, except per share data)

	2011				2010
ASSETS
Cash and equivalents	$	1,083,071			$	1,483,390
Restricted cash	101,860				24,601
House and land inventory	4,636,468				4,781,813
Land held for sale	135,307				71,055
Land, not owned, under option agreements	24,905				50,781
Residential mortgage loans available-for-sale	258,075				176,164
Investments in unconsolidated entities	35,988				46,313
Income taxes receivable	27,154				81,307
Other assets	420,444				567,963
Intangible assets	162,348				175,448
Goodwill	—				240,541
	$	6,885,620			$	7,699,376
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, including book overdrafts of $48,380 and $63,594 in 2011 and 2010, respectively	$	196,447			$	226,466
Customer deposits	46,960				51,727
Accrued and other liabilities	1,411,941				1,599,940
Income tax liabilities	203,313				294,408
Senior notes	3,088,344				3,391,668
Total liabilities	4,947,005				5,564,209
Shareholders’ equity:
Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued	$	—			$	—
Common stock, $0.01 par value; 400,000,000 shares authorized, 382,607,543 and 382,027,940 shares issued and outstanding at December 31, 2011 and 2010, respectively	3,826				3,820
Additional paid-in capital	2,986,240				2,972,919
Accumulated other comprehensive loss	(1,306		)		(1,519		)
Accumulated deficit	(1,050,145		)		(840,053		)
Total shareholders’ equity	1,938,615				2,135,167
	$	6,885,620			$	7,699,376

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2011, 2010, and 2009

(000’s omitted, except per share data)

	2011				2010				2009
Revenues:
Homebuilding
Home sale revenues	$	3,950,743			$	4,419,812			$	3,869,297
Land sale revenues	82,853				27,815				97,292
	4,033,596				4,447,627				3,966,589
Financial Services	103,094				121,663				117,800
Total revenues	4,136,690				4,569,290				4,084,389
Homebuilding Cost of Revenues:
Home sale cost of revenues	3,444,398				4,006,385				4,274,474
Land sale cost of revenues	59,279				53,555				211,170
	3,503,677				4,059,940				4,485,644
Financial Services expenses	137,666				116,122				172,854
Selling, general and administrative expenses	519,583				895,102				672,434
Other expense (income), net	293,102				742,385				685,829
Interest income	(5,055		)		(9,531		)		(9,167		)
Interest expense	1,313				2,729				2,262
Equity in (earnings) loss of unconsolidated entities	(3,296		)		(2,911		)		49,652
Income (loss) before income taxes	(310,300		)		(1,234,546		)		(1,975,119		)
Income tax expense (benefit)	(99,912		)		(137,817		)		(792,552		)
Net income (loss)	$	(210,388	)		$	(1,096,729	)		$	(1,182,567	)
Per share data:
Net income (loss):
Basic	$	(0.55	)		$	(2.90	)		$	(3.94	)
Diluted	$	(0.55	)		$	(2.90	)		$	(3.94	)
Cash dividends declared	$	—			$	—			$	—
Number of shares used in calculation:
Basic:
Weighted-average common shares outstanding	379,877				378,585				300,179
Diluted:
Effect of dilutive securities	—				—				—
Adjusted weighted-average common shares	379,877				378,585				300,179

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, 2011, 2010, and 2009

(000’s omitted, except per share data)

	Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings (Accumulated Deficit)				Total
Shares			$
Shareholders' Equity, January 1, 2009	258,169			$	2,582			$	1,394,790			$	(4,099	)		$	1,442,425			$	2,835,698
Stock option exercises	756			8				4,774				—				—				4,782
Excess tax benefits (deficiencies) from stock-based compensation	—			—				(8,098		)		—				—				(8,098		)
Stock issued for Centex merger	122,178			1,222				1,502,594				—				—				1,503,816
Stock awards, net of cancellations	239			2				(2		)		—				—				—
Stock repurchases	(652	)		(7		)		(4,664		)		—				(2,713		)		(7,384		)
Stock-based compensation	—			—				46,343				—				—				46,343
Comprehensive income (loss):
Net income (loss)	—			—				—				—				(1,182,567		)		(1,182,567		)
Change in value of derivatives, net of income tax benefit of $0	—			—				—				714				—				714
Foreign currency translation adjustments	—			—				—				1,136				—				1,136
Total comprehensive income (loss)																				(1,180,717		)
Shareholders' Equity, December 31, 2009	380,690			$	3,807			$	2,935,737			$	(2,249	)		$	257,145			$	3,194,440
Stock option exercises	902			9				8,659				—				—				8,668
Stock awards, net of cancellations	884			9				(9		)		—				—				—
Stock repurchases	(448	)		(5		)		(3,549		)		—				(469		)		(4,023		)
Stock-based compensation	—			—				32,081				—				—				32,081
Comprehensive income (loss):
Net income (loss)	—			—				—				—				(1,096,729		)		(1,096,729		)
Change in value of derivatives, net of income tax benefit of $0	—			—				—				724				—				724
Foreign currency translation adjustments	—			—				—				6				—				6
Total comprehensive income (loss)																				(1,095,999		)
Shareholders' Equity, December 31, 2010	382,028			$	3,820			$	2,972,919			$	(1,519	)		$	(840,053	)		$	2,135,167
Stock awards, net of cancellations	944			10				(10		)		—				—				—
Stock repurchases	(364	)		(4		)		(3,128		)		—				296				(2,836		)
Stock-based compensation	—			—				16,459				—				—				16,459
Comprehensive income (loss):
Net income (loss)	—			—				—				—				(210,388		)		(210,388		)
Change in value of derivatives, net of income tax benefit of $0	—			—				—				213				—				213
Total comprehensive income (loss)																				(210,175		)
Shareholders' Equity, December 31, 2011	382,608			$	3,826			$	2,986,240			$	(1,306	)		$	(1,050,145	)		$	1,938,615

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2011, 2010, and 2009

($000’s omitted)

	2011				2010				2009
Cash flows from operating activities:
Net income (loss)	$	(210,388	)		$	(1,096,729	)		$	(1,182,567	)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Write-down of land and deposits and pre-acquisition costs	35,786				214,444				919,199
Goodwill impairments	240,541				656,298				562,990
Depreciation and amortization	32,098				45,660				54,246
Stock-based compensation expense	16,459				32,081				46,343
Loss on debt retirements	5,638				38,920				31,594
Deferred income taxes	—				—				37,587
Equity in (earnings) loss of unconsolidated entities	(3,296		)		(2,911		)		49,652
Distributions of earnings from unconsolidated entities	7,083				5,512				911
Other, net	6,718				5,862				2,510
Increase (decrease) in cash due to:
Restricted cash	5,940				7,775				8,339
Inventories	54,891				(28,754		)		494,026
Residential mortgage loans available-for-sale	(82,113		)		(7,991		)		263,167
Other assets	133,788				102,103				211,561
Accounts payable, accrued and other liabilities	(188,981		)		(188,779		)		(300,073		)
Income taxes receivable	54,153				873,879				(552,794		)
Income tax liabilities	(91,095		)		(66,513		)		82,664
Net cash provided by (used in) operating activities	17,222				590,857				729,355
Cash flows from investing activities:
Distributions from unconsolidated entities	4,531				4,231				8,612
Investments in unconsolidated entities	(4,603		)		(22,890		)		(35,144		)
Cash acquired with Centex merger, net of cash used	—				—				1,748,742
Net change in loans held for investment	325				12,603				8,802
Change in restricted cash related to letters of credit	(83,199		)		—				—
Proceeds from the sale of fixed assets	10,555				1,780				2,051
Capital expenditures	(21,238		)		(15,179		)		(39,252		)
Net cash provided by (used in) investing activities	(93,629		)		(19,455		)		1,693,811
Cash flows from financing activities:
Net repayments under Financial Services credit arrangements	—				(18,394		)		(219,166		)
Repayment of other borrowings	(321,076		)		(934,650		)		(2,005,205		)
Issuance of common stock	—				8,668				4,782
Stock repurchases	(2,836		)		(4,023		)		(7,384		)
Debt issuance costs	—				—				(3,058		)
Net cash provided by (used in) financing activities	(323,912		)		(948,399		)		(2,230,031		)
Net increase (decrease) in cash and equivalents	(400,319		)		(376,997		)		193,135
Cash and equivalents at beginning of period	1,483,390				1,860,387				1,667,252
Cash and equivalents at end of period	$	1,083,071			$	1,483,390			$	1,860,387
Supplemental Cash Flow Information:
Interest paid (capitalized), net	$	(9,623	)		$	18,367			$	42,362
Income taxes paid (refunded), net	$	(62,167	)		$	(941,283	)		$	(357,190	)

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of significant accounting policies

Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States, and our common stock trades on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also have mortgage banking operations, conducted principally through Pulte Mortgage LLC (“Pulte Mortgage”), and title operations.

On August 18, 2009, we completed the acquisition of Centex Corporation (“Centex”) through the merger of PulteGroup’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among PulteGroup, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of PulteGroup. Accordingly, the results of Centex are included in our consolidated financial statements from the date of the merger.

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of PulteGroup, Inc. and all of its direct and indirect subsidiaries and variable interest entities in which PulteGroup, Inc. is deemed to be the primary beneficiary. All significant intercompany accounts, transactions, and balances have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassification

Certain prior period amounts have been reclassified to conform to the current year presentation, including the reclassification to cash and equivalents of certain deposits in-transit previously classified separately as unfunded settlements (see Cash and equivalents below), the reclassification of certain accrued liabilities to self-insured liabilities (see Note 15), and a reclassification of our segment information (see Note 6).

Subsequent events

We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission ("SEC").

Cash and equivalents

Cash and equivalents include institutional money market investments and time deposits with a maturity of three months or less when acquired. Cash and equivalents at December 31, 2011 and 2010 also included $13.0 million and $12.8 million, respectively, of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit.

Restricted cash

We maintain certain cash balances that are restricted as to their use. Restricted cash consists primarily of deposits maintained with financial institutions under certain cash-collateralized letter of credit agreements (see Note 8). The remaining balances relate to certain other accounts with restrictions, including customer deposits on home sales that are temporarily restricted by regulatory requirements until title transfers to the homebuyer.

Investments in unconsolidated entities

We have investments in a number of unconsolidated entities, including joint ventures, with independent third parties. Many of these unconsolidated entities purchase, develop, and/or sell land and homes in the U.S. and Puerto Rico. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally this

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the profits and losses of these entities. Certain of these entities sell land to us. In these situations, we defer the recognition of profits from such activities until the time the related homes are sold. The cost method of accounting is used for investments in which we have less than a 20% ownership interest and do not have the ability to exercise significant influence.

We evaluate our investments in unconsolidated entities for recoverability in accordance with Accounting Standards Codification (“ASC”) 323, “Investments – Equity Method and Joint Ventures” (“ASC 323”). If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity in (earnings) loss of unconsolidated entities in the Consolidated Statements of Operations. Additionally, each unconsolidated entity evaluates its long-lived assets, such as inventory, for recoverability in accordance with ASC 360-10, “Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets” (“ASC 360-10”). Our proportionate share of any such impairments is also recorded to equity in (earnings) loss of unconsolidated entities in the Consolidated Statements of Operations. Evaluations of recoverability under both ASC 323 and ASC 360-10 are primarily based on projected cash flows. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates. See Note 7.

Notes receivable

In certain instances, we may accept consideration for land sales or other transactions in the form of a note receivable. The counterparties for these transactions are generally land developers or other real estate investors. We consider the creditworthiness of the counterparty when evaluating the relative risk and return involved in pursuing the applicable transaction. Due to the unique facts and circumstances surrounding each receivable, we actively monitor each individual receivable and assess the need for an allowance for each receivable on an individual basis. Factors considered as part of this assessment include the counterparty's payment history, the value of any underlying collateral, communications with the counterparty, knowledge of the counterparty's financial condition and plans, and the current and expected economic environment. Allowances are recorded in other expense (income), net when it becomes likely that some amount will not be collectible. Such receivables are reported net of allowance for credit losses within other assets. Notes receivable are written off when it is determined that collection efforts will no longer be pursued. Interest income is recognized as earned.

The following represents our notes receivable and related allowance for credit losses at December 31, 2011 and 2010 ($000’s omitted):

	December 31, 2011				December 31, 2010
Notes receivable, gross	$	78,834			$	77,853
Allowance for credit losses	(41,647		)		(20,877		)
Notes receivable, net	$	37,187			$	56,976

The increase in the allowance for credit losses during 2011 relates primarily to the recording of additional reserves. We also record other receivables from various parties in the normal course of business, including amounts due from municipalities, insurance companies, and vendors. Such receivables are generally non-interest bearing and non-collateralized, payable either on demand or upon the occurrence of a specified event, and are generally reported in other assets. See Residential mortgage loans available-for-sale in Note 1 for a discussion of our receivables related to mortgage operations.

Intangible assets

Intangible assets consist of trademarks and tradenames acquired in connection with the 2009 acquisition of Centex and the 2001 acquisition of Del Webb. These intangible assets were valued at the acquisition date utilizing proven valuation procedures and are being amortized over 20-year lives. The acquired cost and accumulated amortization of our intangible assets were $259.0 million and $96.7 million, respectively, at December 31, 2011, and $259.0 million and $83.6 million, respectively, at December 31, 2010. Amortization expense totaled $13.1 million in 2011, $13.1 million in 2010, and $14.0 million in 2009 (including $4.0 million related to the fair value of customer backlog acquired with the Centex merger that was fully amortized as of December 31, 2009). Amortization expense for trademarks and tradenames is expected to be $13.1 million in each of the next five years.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use. If we determine that the carrying values of intangible assets may not be recoverable based upon the existence of one or more indicators of impairment, we use a projected undiscounted cash flow method to determine if impairment exists. If the carrying values of the intangible assets exceed the expected undiscounted cash flows, then we measure impairment as the difference between the fair value of the asset and the recorded carrying value. If our expectations of future results and cash flows decrease significantly or if our strategy related to the use of such intangible assets changes, the related intangible assets may be impaired. There were no impairments of intangible assets during 2011, 2010, or 2009.

Goodwill

Goodwill, which represents the cost of acquired companies in excess of the fair value of the net assets of such companies at the acquisition date, had been recorded in connection with various acquisitions. All goodwill was written-off as of December 31, 2011. Recorded goodwill was allocated to our reporting units based on the relative fair value of each acquired reporting unit. In accordance with ASC 350, “Intangibles-Goodwill and Other”, we assessed the goodwill balance of each reporting unit for impairment annually in the fourth quarter and when events or changes in circumstances indicated the carrying amount might not be recoverable. See Note 3.

Fixed assets and depreciation

Fixed assets are recorded at cost. Maintenance and repair costs are expensed as incurred. Depreciation is computed by the straight-line method based upon estimated useful lives as follows: vehicles, three to seven years, model and office furniture, two to three years, and equipment, three to ten years. Fixed assets are included in other assets and totaled $53.2 million net of accumulated depreciation of $203.4 million at December 31, 2011 and $59.3 million net of accumulated depreciation of $237.0 million at December 31, 2010. Depreciation expense totaled $19.0 million, $32.5 million, and $40.2 million in 2011, 2010, and 2009, respectively.

Advertising costs

Advertising costs are expensed as incurred and totaled $55.1 million, $54.9 million, and $47.1 million, in 2011, 2010, and 2009, respectively.

Employee benefits

We maintain defined contribution retirement plans that cover substantially all of our employees. Company contributions to these plans were suspended during 2009 but have been reestablished effective in 2012. Company contributions pursuant to the plans totaled $0.2 million and $5.7 million in 2010 and 2009, respectively. There were no Company contributions during 2011.

Other expense (income), net

Other expense (income), net consists of the following ($000’s omitted):

	2011				2010				2009
Write-offs of deposits and pre-acquisition costs (Note 5)	$	10,002			$	5,594			$	54,256
Loss on debt retirements (Note 8)	5,638				38,920				31,594
Lease exit and related costs (Note 4) (a)	9,900				28,378				24,803
Amortization of intangible assets (Note 1)	13,100				13,100				14,008
Goodwill impairments (Note 3)	240,541				656,298				562,990
Miscellaneous expense (income), net	13,921				95				(1,822		)
	$	293,102			$	742,385			$	685,829

(a)	Excludes lease exit costs classified within Financial Services expenses of $0.1 million, $2.9 million, and $0.7 million in 2011, 2010, and 2009, respectively. See Note 4.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Earnings per share

Basic earnings per share is computed by dividing income (loss) available to common shareholders (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of stock options, restricted stock units, and non-vested shares of restricted stock. Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation. Due to the net loss recorded during the periods, all stock options and non-vested restricted stock and restricted stock units were excluded from the calculation for 2011, 2010, and 2009.

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Although our outstanding restricted stock and restricted stock units are considered participating securities, there were no earnings attributable to restricted shareholders during 2011, 2010, or 2009.

Stock-based compensation

We measure compensation cost for our stock options at fair value on the date of grant and recognize compensation expense on the graded vesting method over the vesting period. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in greater expense in earlier years than the straight-line method. The fair value of our stock options is determined using primarily the Black-Scholes valuation model. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock. We recognize compensation expense for restricted stock grants, the majority of which cliff vest at the end of three years, ratably over the vesting period. Compensation expense related to our share-based awards is included in selling, general, and administrative expense, except for a small portion recognized in Financial Services expenses. See Note 10.

Income taxes

The provision for income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the consolidated results of operations or financial position.

We follow the provisions of ASC 740, “Income Taxes” (“ASC 740”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Significant judgment is required to evaluate uncertain tax positions. Our evaluations of tax positions consider a variety of factors, including changes in facts or circumstances, changes in law, correspondence with taxing authorities, and effective settlements of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made. Interest and penalties related to unrecognized tax benefits are recognized in the consolidated financial statements as a component of income tax expense. See Note 11.

Homebuilding revenue recognition

Homebuilding revenue and related profit are generally recognized at the closing of the sale, when title to and possession of the property are transferred to the buyer. In situations where the buyer’s financing is originated by Pulte Mortgage and the buyer has not made an adequate initial or continuing investment as required by ASC 360-20, “Property, Plant, and Equipment - Real Estate Sales” (“ASC 360-20”), the profit on such sale is deferred until the sale of the related mortgage loan to a third-party investor has been completed, unless there is a loss on the sale in which case the loss on such sale is recognized at the time of closing. Such amounts were not material at either December 31, 2011 or December 31, 2010.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Sales incentives

When sales incentives involve a discount on the selling price of the home, we record the discount as a reduction of revenue at the time of house closing. If the sales incentive requires us to provide a free product or service to the customer, the cost of the free product or service is recorded as cost of revenues at the time of house closing. This includes the cost related to optional upgrades and seller-paid financing or closing costs. Sales incentives in the form of seller-paid homeowners’ association fees or merchandise are also recorded to cost of revenues.

Inventory

Inventory is stated at the lower of accumulated cost or fair value, as determined in accordance with ASC 360-10. Accumulated cost includes costs associated with land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction. For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred. Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community. The specific identification method is used to accumulate home construction costs.

Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and commissions and closing costs applicable to the home. The construction cost of the home includes amounts paid through the closing date of the home, plus an appropriate accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Total community land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. The development cycles for our communities range from under one year to in excess of ten years for certain master planned communities. Adjustments to estimated total land acquisition and development costs for the community affect the amounts costed for the community’s remaining lots. See Note 5.

Land, not owned, under option agreements

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under ASC 810, “Consolidation” (“ASC 810”), if the entity holding the land under option is a variable interest entity (“VIE”), our deposit represents a variable interest in that entity. If we are determined to be the primary beneficiary of the VIE, then we are required to consolidate the VIE.

The VIE is generally protected from the first dollar of loss under our land option agreement due to our deposit. Likewise, the VIE's gains are generally capped based on the purchase price within the land option agreement. However, we generally have little control or influence over the operations of these VIEs due to our lack of an equity interest in them. Additionally, creditors of the VIE have no recourse against us, and we do not provide financial or other support to these VIEs other than as stipulated in the land option agreements. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the applicable land option agreements. In recent years, we have canceled a significant number of land option agreements, which has resulted in significant write-offs of the related deposits and pre-acquisition costs but did not expose us to the overall risks or losses of the applicable VIEs. No VIEs required consolidation under ASC 810 at either December 31, 2011 or December 31, 2010.

Additionally, we determined that certain land option agreements represent financing arrangements pursuant to ASC 470-40, “Accounting for Product Financing Arrangements” (“ASC 470-40”), even though we generally have no obligation to pay these future amounts. As a result, we recorded $24.9 million and $50.8 million at December 31, 2011 and December 31, 2010, respectively, to land, not owned, under option agreements with a corresponding increase to accrued and other liabilities. Such amounts represent the remaining purchase price under the land option agreements, some of which are with VIEs, in the event we exercise the purchase rights under the agreements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following provides a summary of our interests in land option agreements as of December 31, 2011 and December 31, 2010 ($000’s omitted):

	December 31, 2011												December 31, 2010
	Deposits and Pre-acquisition Costs				Remaining Purchase Price				Land, Not Owned, Under Option Agreements				Deposits and Pre-acquisition Costs				Remaining Purchase Price				Land, Not Owned, Under Option Agreements
Consolidated VIEs	$	2,781			$	5,957			$	3,837			$	41,813			$	44,565			$	42,401
Unconsolidated VIEs	21,180				240,958				—				10,280				193,978				—
Other land option agreements	33,086				451,079				21,068				42,970				431,999				8,380
	$	57,047			$	697,994			$	24,905			$	95,063			$	670,542			$	50,781

Land held for sale

Land held for sale is recorded at the lower of cost or fair value less costs to sell. See Note 5.

Start-up costs

Costs and expenses associated with entry into new homebuilding markets and opening new communities in existing markets are expensed when incurred.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time the product revenue is recognized.

Self-insured risks

We maintain, and require the majority of our subcontractors to maintain, general liability insurance coverage, including coverage for certain construction defects. We also maintain property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits. However, we retain a significant portion of the overall risk for such claims. We reserve for these costs on an undiscounted basis at the time product revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims, which include estimates of claims incurred but not yet reported. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from its subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. See Note 15.

Residential mortgage loans available-for-sale

Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination. In accordance with ASC 825, “Financial Instruments” (“ASC 825”), we use the fair value option for residential mortgage loans available-for-sale. Election of the fair value option for these loans allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. We do not designate any derivative instruments as hedges or apply the hedge accounting provisions of ASC 815, “Derivatives and Hedging.” Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. See Note 15 for discussion of the risks retained related to mortgage loan originations.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. At December 31, 2011 and 2010, residential mortgage loans available-for-sale had an aggregate fair value of $258.1 million and $176.2 million, respectively, and an aggregate outstanding principal balance of $248.2 million and $175.9 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(0.4) million and $1.9 million for the years ended December 31, 2011 and 2010, respectively. These changes in fair value were mostly offset by changes in fair value of the corresponding hedging instruments. Net gains from the sale of mortgages during 2011, 2010, and 2009 were $59.1 million, $66.0 million, and $59.5 million, respectively.

Mortgage servicing rights

We sell the servicing rights for the loans we originate on a flow basis through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time. We recognize the fair value of our rights to service a mortgage loan as revenue at the time of entering into an interest rate lock commitment with a borrower. Due to the short period of time the servicing rights are held, we do not amortize the servicing asset. The servicing sales contracts provide for the reimbursement of payments made by the purchaser if loans prepay within specified periods of time, generally within 90 to 120 days after sale. We establish reserves for this liability at the time the sale is recorded. Such reserves were immaterial at December 31, 2011 and 2010 and are included in accrued and other liabilities. During 2011, 2010, and 2009, servicing rights recognized in Financial Services revenues totaled $16.0 million, $20.8 million, and $29.3 million, respectively.

Loans held for investment

We originate interim financing mortgage loans for certain customers and also have a portfolio of loans that either have been repurchased from investors or were not saleable upon closing. These loans are carried at cost and are reviewed for impairment when recoverability becomes doubtful. Loans held for investment are included in other assets and totaled $2.4 million and $3.1 million (net of reserves of $1.9 million and $3.1 million) at December 31, 2011 and 2010, respectively.

Interest income on mortgage loans

Interest income is recorded in Financial Services revenues, accrued from the date a mortgage loan is originated until the loan is sold, and totaled $5.0 million, $5.8 million, and $7.7 million in 2011, 2010, and 2009, respectively. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan. Mortgage discounts are not amortized as interest income due to the short period the loans are held until sale to third party investors. The fair value of mortgage loans held for sale at December 31, 2011 and 2010 reflects unamortized discounts of $0.7 million and $1.0 million, respectively.

Mortgage servicing, origination, and commitment fees

Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned. Loan origination costs related to residential mortgage loans available-for-sale are recognized as incurred in Financial Services expenses while the associated mortgage origination fees are recognized in Financial Services revenues as earned, generally upon loan closing.

Title services

Revenues associated with our title operations are recognized within Financial Services revenues as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. We have only limited risk associated with our title operations due to the low incidence of claims related to underwriting risk associated with issued title insurance policies and fiduciary risk resulting from closing services.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Derivative instruments and hedging activities

We are exposed to market risks from commitments to lend, movements in interest rates, and canceled or modified commitments to lend. A commitment to lend at a specific interest rate (an interest rate lock commitment) is a derivative financial instrument (interest rate is locked to the borrower). In order to reduce these risks, we use other derivative financial instruments to economically hedge the interest rate lock commitment, principally cash forward placement contracts on mortgage-backed securities and whole loan investor commitments. We do not use any derivative financial instruments for trading purposes. We enter into one of the aforementioned derivative financial instruments upon accepting interest rate lock commitments. Changes in the fair value of interest rate lock commitments and other derivative financial instruments are recognized in Financial Services revenues and the fair values are reflected in other assets or other liabilities, as applicable.

Fair values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. At December 31, 2011 and 2010, we had interest rate lock commitments in the total amount of $97.6 million and $99.0 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. We evaluate the creditworthiness of these transactions through our normal credit policies.

Forward contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price and may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. Whole loan investor commitments are obligations of the investor to buy loans at a specified price within a specified time period. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments used to minimize the market risk during the period from the time we extend an interest rate lock to a loan applicant until the time the loan is sold to an investor. Forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan investor commitments are based on market prices for similar instruments from the specific whole loan investor. At December 31, 2011, we had unexpired forward contracts and whole loan investor commitments of $311.5 million and $1.6 million, respectively, compared with cash forward contracts on mortgage-backed securities and whole loan investor commitments of $198.0 million and $59.0 million, respectively, at December 31, 2010.

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on interest rate lock commitments are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. At December 31, 2011, the maximum length of time that we were exposed to the variability in future cash flows of derivative instruments was approximately 60 days.

The fair value of derivative instruments and their location in the Consolidated Balance Sheet is summarized below ($000’s omitted):

	December 31, 2011								December 31, 2010
	Other Assets				Other Liabilities				Other Assets				Other Liabilities
Interest rate lock commitments	$	3,552			$	1			$	2,756			$	64
Forward contracts	44				3,514				4,217				673
Whole loan commitments	52				41				2,319				—
	$	3,648			$	3,556			$	9,292			$	737

New accounting pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement” (“ASU 2011-04”), which amends Accounting Standards Codification (ASC) 820 to clarify existing guidance and minimize differences between U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. ASU 2011-04 will be effective for our fiscal year beginning January 1, 2012 and is not expected to have a material impact on our financial statements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Statement of Comprehensive Income” (“ASU 2011-05”), which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 will not impact our reported results of operations but will impact our financial statement presentation as we currently present items of other comprehensive income in the statement of shareholders' equity. ASU 2011-05 will be effective for our fiscal year beginning January 1, 2012.

2. Centex merger

On August 18, 2009, we completed the acquisition of Centex through the merger of PulteGroup’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among PulteGroup, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of PulteGroup. Accordingly, the results of Centex are included in the consolidated financial statements from the date of the merger.

We acquired all of the outstanding shares of Centex common stock at the fixed exchange ratio of 0.975 shares of PulteGroup common stock for each share of Centex common stock. In addition, the majority of the restricted shares of Centex common stock and restricted stock units with respect to Centex common stock granted under Centex’s employee and director stock plans vested and were converted per the exchange ratio into PulteGroup common stock or units with respect to PulteGroup common stock. Each outstanding vested and unvested Centex stock option granted under Centex’s employee and director stock plans was converted into a vested option to purchase shares of PulteGroup common stock, with adjustments to reflect the exchange ratio.

For accounting purposes, PulteGroup was treated as the acquirer, and the consideration transferred was computed based on PulteGroup’s common stock closing price of $12.33 per share on August 18, 2009, the date the merger was consummated. The acquired assets and assumed liabilities were recorded by us at their estimated fair values, with certain limited exceptions. We determined the estimated fair values with the assistance of appraisals or valuations performed by independent third party specialists, discounted cash flow analyses, quoted market prices where available, and estimates made by management. To the extent the consideration transferred exceeded the fair value of net assets acquired, such excess was assigned to goodwill.

The following table summarizes the total consideration transferred and the final amounts recognized as of the merger date (000’s omitted):

Total consideration transferred	$	1,505,091
Assets acquired
Cash and equivalents	$	1,772,829
Inventory	2,053,329
Intangible assets	100,000
Goodwill	1,461,422
Other assets	577,229
Total assets acquired	5,964,809
Liabilities assumed
Senior notes	(3,085,316		)
Other liabilities	(1,374,402		)
Total liabilities assumed	(4,459,718		)
Total net assets acquired	$	1,505,091

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Of the $100.0 million of acquired intangible assets, $96.0 million related to tradenames that are being amortized over 20 years. The remaining $4.0 million of acquired intangible assets related to acquired backlog at August 18, 2009 that was amortized in 2009 as the related customer orders closed. Amortization expense for these assets totaled $5.0 million, $5.0 million, and $5.9 million in 2011, 2010, and 2009, respectively, and is included within other expense (income), net.

We completed the business combination accounting in the second quarter of 2010. This resulted in an increase to goodwill of $2.5 million related to the completion of a final valuation of self-insurance liabilities assumed with the Centex merger.

As of the merger date, goodwill largely consisted of the expected economic value attributable to Centex’s deferred tax assets and expected synergies resulting from the merger. Centex had $1.3 billion of deferred tax assets as of the merger date, which were substantially offset by a valuation allowance due to the uncertainty of realization. While the ultimate realization of these deferred tax assets is dependent upon the generation of taxable income during future periods, such assets have a significant economic value given their long life and our expectations regarding future operating results. As discussed in Note 11, a portion of the economic value of these deferred tax assets was recognized in the fourth quarter of 2009. The combined entity has also achieved significant savings in corporate and divisional overhead costs and interest costs and synergies in the areas of purchasing leverage and integrating the combined organization’s operational best practices. We also have experienced and anticipate future opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional brands.

Transaction and integration costs

Transaction and integration costs directly related to the Centex merger, excluding the impact of restructuring costs and acquisition accounting adjustments, totaled $40.9 million for 2009, the majority of which are included in the Consolidated Statements of Operations within selling, general, and administrative expenses. Such costs were expensed as incurred in accordance with ASC 805. See Note 4 for a discussion of restructuring costs incurred in connection with the Centex merger.

Supplemental pro forma information

The following represents pro forma operating results as if Centex had been included in the Condensed Consolidated Statements of Operations as of the beginning of the year ended December 31, 2009 ($000’s omitted, except per share data):

	2009
Revenue	$	5,785,880
Net loss	$	(1,633,836	)
Loss per common share -
Basic and diluted	$	(4.34	)

The supplemental pro forma operating results have been determined after adjusting the operating results of Centex to reflect additional amortization that would have been recorded assuming the fair value adjustments to intangible assets had been applied as of January 1, 2009. Certain other adjustments, including those related to conforming accounting policies and adjusting acquired inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts. Additionally, given the significant volatility in the homebuilding industry in recent periods, such a presentation would not be indicative of future operating results.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Goodwill

Goodwill, which represents the cost of acquired companies in excess of the fair value of the net assets at the acquisition date, has been recorded in connection with various acquisitions and is subject to annual impairment testing in the fourth quarter of each year or when events or changes in circumstances indicate the carrying amount may not be recoverable. As noted in Note 2, we recorded $1.5 billion of goodwill in connection with the Centex merger. All goodwill associated with prior transactions had been previously written-off. We evaluate the recoverability of goodwill by comparing the carrying value of our reporting units to their fair value. Fair value is determined using discounted cash flows supplemented by market-based assessments of fair value. Impairment is measured as the difference between the resulting implied fair value of goodwill and its recorded carrying value. The determination of fair value is significantly impacted by estimates related to current market valuations, current and future economic conditions in each of our geographical markets, and our strategic plans within each of our markets. Due to uncertainties in the estimation process and significant volatility in demand for new housing, actual results could differ significantly from such estimates.

As of December 31, 2011, all of the goodwill related to the Centex merger has been written-off as the result of a series of impairments. While the facts and circumstances at the date of each impairment varied, the primary drivers for the impairments were a significant decline in our market capitalization since the date of the Centex merger, in part due to overall volatility in the global financial markets, and ongoing challenges in market conditions for the homebuilding industry. In the third quarters of both 2011 and 2010, we performed event-driven assessments of the recoverability of goodwill. These assessments were necessary primarily due to sustained declines in our market capitalization. In performing the goodwill impairment analyses, we followed similar approaches using management's estimates of the future cash flows for each reporting unit, which are required to consider the decrease in our market capitalization. The results of these analyses determined that goodwill impairment charges of $240.5 million and $654.9 million in the third quarters of 2011 and 2010, respectively, were required. In the second quarter of 2010, we also recorded a goodwill impairment charge of $1.4 million in conjunction with the completion of business combination accounting for the Centex merger and disposed of $1.6 million of goodwill in connection with the sale of the retail title operations acquired with the Centex merger.

These impairments followed the initial impairment of goodwill related to the Centex merger that occurred as part of the annual goodwill impairment test performed in the fourth quarter of 2009. The determinations of fair value in allocating goodwill at the Centex merger date (August 18, 2009) and at the goodwill impairment assessment date (October 31, 2009) followed the same process using similar long-term assumptions. The primary difference was that the valuation at the merger date was based on only the acquired Centex operations reconciled to the purchase price for the Centex merger while the valuation at the assessment date was based on the integrated operations of each reporting unit reconciled to our overall market capitalization. This valuation approach at the assessment date was consistent with our operating structure following the merger in that all acquired Centex operations were integrated with the PulteGroup operations and managed and forecasted at the local market level, not according to legacy operations.

As a result of the goodwill impairment test as of October 31, 2009, we determined that $563.0 million of goodwill was impaired. This impairment resulted from a number of factors, including:

•	a significant decline in our overall market capitalization between the Centex merger date and the goodwill assessment date, which implied that the fair values of our reporting units had decreased;

•	the requirement under ASC 350 to allocate all goodwill to our reporting units even though a significant portion of the goodwill was attributable to the economic value of deferred tax assets and corporate and financing synergies that are not directly reflected in the fair values of the individual reporting units; and

•	the relationship of our market capitalization to our stockholders' equity.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Activity in our goodwill balances by reporting segment consisted of the following ($000's omitted):

	Reporting Segment
	Northeast				Southeast				Florida				Texas				North				Southwest				Financial Services				Total Goodwill
December 31, 2008	$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Additions	285,678				353,882				45,838				347,969				272,744				151,204				1,593				1,458,908
Impairments	(285,678		)		(26,849		)		(40,373		)		—				(112,649		)		(97,441		)		—				(562,990		)
December 31, 2009	—				327,033				5,465				347,969				160,095				53,763				1,593				895,918
Additions	494				610				79				600				468				263				—				2,514
Impairments	(494		)		(267,149		)		(5,544		)		(256,474		)		(95,207		)		(31,430		)		—				(656,298		)
Disposals	—				—				—				—				—				—				(1,593		)		(1,593		)
December 31, 2010	—				60,494				—				92,095				65,356				22,596				—				240,541
Impairments	—				(60,494		)		—				(92,095		)		(65,356		)		(22,596		)		—				(240,541		)
December 31, 2011	$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—

Our accumulated goodwill impairment losses totaled $1.8 billion and $1.6 billion at December 31, 2011 and 2010, respectively. This includes goodwill and impairments associated with the Centex merger as well as goodwill and impairments associated with previous acquisitions. The goodwill associated with such previous acquisitions was fully impaired as of December 31, 2008. Goodwill impairment charges are reflected in other expense (income), net.

4. Restructuring

We have taken a series of actions both in response to the challenging operating environment and in connection with the 2009 Centex merger that were designed to reduce ongoing operating costs and improve operating efficiencies. As a result of the combination of these actions, we incurred total restructuring charges as summarized below ($000’s omitted):

	Total Restructuring Actions
	2011				2010				2009*
Employee severance benefits	$	10,841			$	24,850			$	47,525
Lease exit costs	5,923				27,356				23,208
Other	4,089				3,929				2,283
	$	20,853			$	56,135			$	73,016

• Includes $65.4 million of restructuring costs related to the Centex merger.

Of the total restructuring costs reflected in the above table, $1.2 million in 2011, $5.4 million in 2010, and $8.6 million in 2009 are classified within Financial Services expenses. All other employee severance benefits are included within selling, general and administrative expense while lease exit and other costs are included in other expense (income), net. The remaining liability for employee severance benefits and exited leases totaled $2.6 million and $29.7 million, respectively, at December 31, 2011 and $8.0 million and $41.7 million, respectively, at December 31, 2010. Substantially all of the remaining liability for employee severance benefits will be paid within the next year, while cash expenditures related to the remaining liability for lease exit costs will be incurred over the remaining terms of the applicable office leases, which generally extend several years. The restructuring costs relate to each of the reportable segments and did not materially impact the comparability of any one segment.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Inventory and land held for sale

Major components of inventory at December 31, 2011 and 2010 were ($000’s omitted):

	2011				2010
Homes under construction	$	1,210,717			$	1,331,618
Land under development	2,610,501				2,541,829
Land held for future development	815,250				908,366
	$	4,636,468			$	4,781,813

We capitalize interest cost into inventory during the active development and construction of our communities. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated over the period based on the cyclical timing of home closings. Interest expensed to Homebuilding cost of revenues for 2011, 2010, and 2009 included $5.4 million, $27.6 million, and $68.2 million, respectively, of capitalized interest related to inventory impairments. During 2011 and 2009, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. During 2010, we capitalized all Homebuilding interest costs into inventory except $1.5 million that was expensed directly to interest expense due to our debt levels exceeding our active inventory levels for a portion of the year.

Information related to interest capitalized into inventory is as follows ($000’s omitted):

	Years Ended December 31,
	2011				2010				2009
Interest in inventory, beginning of period	$	323,379			$	239,365			$	170,020
Interest capitalized	221,071				264,932				234,700
Interest expensed	(189,382		)		(180,918		)		(165,355		)
Interest in inventory, end of period	$	355,068			$	323,379			$	239,365
Interest incurred*	$	221,071			$	266,474			$	234,700

*	Homebuilding interest incurred includes interest on senior debt and other financing arrangements and excludes interest incurred by the Financial Services segment and certain other interest costs.

Land valuation adjustments and write-offs

Impairment of inventory

In accordance with ASC 360, “Property, Plant, and Equipment” (“ASC 360”), we record valuation adjustments on land inventory and related communities under development when events and circumstances indicate that they may be impaired and when the cash flows estimated to be generated by those assets are less than their carrying amounts. Such indicators include gross margin or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. For communities that are not yet active, a significant additional consideration includes an evaluation of the probability, timing, and cost of obtaining necessary approvals from local municipalities and any potential concessions that may be necessary in order to obtain such approvals. We also consider potential changes to the product offerings in a community and any alternative strategies for the land, such as the sale of the land either in whole or in parcels. Communities that demonstrate potential impairment indicators are tested for impairment. We compare the expected undiscounted cash flows for these communities to their carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we calculate the fair value of the community in accordance with ASC 360. Impairment charges are required to be recorded if the fair value of the community's inventory is less than its carrying value.

We determine the fair value of a community's inventory using a combination of market comparable land transactions, where available, and discounted cash flow models. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

costs. The assumptions used in the discounted cash flow models are specific to each community tested for impairment and typically do not assume improvements in market conditions in the near term. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, and the long life cycles of many communities, actual results could differ significantly from such estimates. Our determination of fair value also requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with each of the assets and related estimated cash flow streams. The discount rate used in determining each community's fair value depends on the stage of development of the community and other specific factors that increase or decrease the inherent risks associated with the community's cash flow streams. For example, communities that are entitled and near completion will generally require a lower discount rate than communities that are not entitled and consist of multiple phases spanning several years of development and construction activity.

The table below provides, as of the date indicated, the number of communities for which we recognized impairment charges, the fair value of those communities at such date (net of impairment charges), and the amount of impairment charges recognized ($000’s omitted):

	2011											2010
Quarter Ended	Number of Communities Impaired			Fair Value of Communities Impaired, Net of Impairment Charges				Impairment Charges				Number of Communities Impaired			Fair Value of Communities Impaired, Net of Impairment Charges				Impairment Charges
March 31	1			$	483			$	103			10			$	7,233			$	4,537
June 30	6			6,665				3,300				16			35,122				25,546
September 30	3			6,416				1,494				28			33,407				57,453
December 31	25			23,766				11,043				73			70,862				82,186
								$	15,940										$	169,722

We recorded these valuation adjustments within Homebuilding home sale cost of revenues. In 2011, we reviewed each of our land positions for potential impairment indicators and performed detailed impairment calculations for approximately 100 communities. In determining the fair value for the impaired communities, we used discount rates ranging from 12% to 17%, with an aggregate average of 13%. During 2011, we experienced relative stability in market conditions generally consistent with our expectations, though at somewhat lower volumes, which resulted in total valuation adjustments significantly below those experienced in recent years. However, if conditions in the homebuilding industry or our local markets worsen in the future, if the current difficult market conditions extend beyond our expectations, or if our strategy related to certain communities changes, we may be required to evaluate our assets for future impairments or write-downs, which could result in future charges that might be significant.

Net realizable value adjustments – land held for sale

We acquire land primarily for the construction of homes for sale to customers but may periodically elect to sell select parcels of land to third parties for commercial or other development. Additionally, we may determine that certain land assets no longer fit into our strategic operating plans. Assuming the criteria in ASC 360 are met, we classify such land as land held for sale.

Land held for sale is valued at the lower of carrying value or fair value less costs to sell. In determining the fair value of land held for sale, we consider recent offers received, prices for land in recent comparable sales transactions, and other factors. During 2011, 2010, and 2009, we recognized net realizable value adjustments related to land held for sale of $9.8 million, $39.1 million, and $113.7 million, respectively. We record these net realizable value adjustments within Homebuilding land sale cost of revenues. During 2011, the land held for sale balance increased as the result of the reclassification from inventory of certain non-strategic parcels scheduled to be sold within the next year.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Land held for sale at December 31, 2011 and 2010 was as follows ($000’s omitted):

	2011				2010
Land held for sale, gross	$	190,099			$	124,919
Net realizable value reserves	(54,792		)		(53,864		)
Land held for sale, net	$	135,307			$	71,055

Write-off of deposits and pre-acquisition costs

We write off deposits and pre-acquisition costs related to land option contracts when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the willingness of land sellers to modify terms of the related purchase agreements, the timing of required land takedowns, the availability and best use of necessary incremental capital, and other factors. We wrote off (net of recoveries) deposits and pre-acquisition costs in the amount of $10.0 million, $5.6 million, and $54.3 million, during 2011, 2010, and 2009, respectively. We record these write-offs of deposits and pre-acquisition costs within other expense (income), net.

6. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. Home sale revenues for detached and attached homes were $3.1 billion and $841.3 million in 2011, $3.5 billion and $936.6 million in 2010, and $3.0 billion and $851.9 million in 2009, respectively.

For reporting purposes, our Homebuilding operations are aggregated into six reportable segments. During 2011, we realigned our organizational structure and reportable segment presentation. Accordingly, the segment information provided in this note has been reclassified to conform to the current presentation for all periods presented.

Northeast:		Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia
Southeast:		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida
Texas:		Texas
North:		Illinois, Indiana, Michigan, Minnesota, Missouri, Northern California, Ohio, Oregon, Washington
Southwest:		Arizona, Colorado, Hawaii, Nevada, New Mexico, Southern California

As part of the change in presentation, we removed the "Other non-operating" distinction. Amounts previously classified within "Other non-operating" have been reclassified to "Other homebuilding."

We also have one reportable segment for our Financial Services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.

Evaluation of segment performance is generally based on income before income taxes. Each reportable segment generally follows the same accounting policies described in Note 1 "Summary of Significant Accounting Policies" to the consolidated financial statements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000’s omitted) Years Ended December 31,
	2011				2010				2009
Revenues:
Northeast	$	717,839			$	760,403			$	653,209
Southeast	675,904				752,702				561,195
Florida	571,102				547,647				463,240
Texas	631,419				643,365				484,397
North	740,372				863,512				787,429
Southwest	696,960				879,998				1,017,119
	4,033,596				4,447,627				3,966,589
Financial Services	103,094				121,663				117,800
Consolidated revenues	$	4,136,690			$	4,569,290			$	4,084,389
Income (loss) before income taxes:
Northeast	$	29,320			$	34,619			$	(207,461	)
Southeast	45,060				23,454				(52,930		)
Florida	44,946				(51,995		)		(283,242		)
Texas	33,329				16,026				7,078
North	(12,376		)		571				(120,998		)
Southwest	36,647				(64,140		)		(356,643		)
Other homebuilding (a)	(452,756		)		(1,198,690		)		(905,885		)
	(275,830		)		(1,240,155		)		(1,920,081		)
Financial Services (b)	(34,470		)		5,609				(55,038		)
Consolidated income (loss) before income taxes	$	(310,300	)		$	(1,234,546	)		$	(1,975,119	)

(a)	Other homebuilding includes the amortization of intangible assets, goodwill impairment, amortization of capitalized interest, net losses related to the redemption of debt, and other costs not allocated to the operating segments.

(b)	Financial Services income (loss) before income taxes includes interest expense of $1.6 million and $2.3 million for 2010 and 2009, respectively, and interest income of $5.0 million, $5.8 million, and $7.7 million for 2011, 2010, and 2009, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Land-Related Charges by Segment ($000's omitted) Years Ended December 31,
	2011				2010				2009
Land and community valuation adjustments:
Northeast	$	534			$	4,907			$	150,407
Southeast	902				11,122				52,660
Florida	—				56,445				179,114
Texas	260				4,589				993
North	8,802				27,732				78,110
Southwest	—				36,797				221,730
Other homebuilding (a)	5,442				28,130				68,192
	$	15,940			$	169,722			$	751,206
Net realizable value adjustments (NRV) - land held for sale:
Northeast	$	720			$	—			$	19,310
Southeast	446				—				310
Florida	3,692				366				22,875
Texas	153				1,484				6,589
North	3,552				197				17,715
Southwest	1,281				37,081				46,938
	$	9,844			$	39,128			$	113,737
Write-off of deposits and pre-acquisition costs (b):
Northeast	$	3,704			$	(672	)		$	1,026
Southeast	1,081				3,019				1,235
Florida	307				22				48,261
Texas	415				741				3,450
North	2,513				147				269
Southwest	1,982				2,337				15
	$	10,002			$	5,594			$	54,256
Impairments of investments in unconsolidated joint ventures:
Northeast	$	—			$	—			$	31,121
Southeast	—				—				—
Florida	—				—				—
Texas	—				—				—
North	—				—				1,236
Southwest	—				1,908				19,305
Other homebuilding (c)	—				—				2,428
	$	—			$	1,908			$	54,090
Total land-related charges	$	35,786			$	216,352			$	973,289

(a)	Primarily write-offs of capitalized interest related to land and community valuation adjustments.

(b)	Includes settlements related to costs previously in dispute and considered non-recoverable.

(c)	Includes impairments related to joint ventures located in Puerto Rico.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2011				2010				2009
Depreciation and amortization:
Northeast	$	1,820			$	1,954			$	2,718
Southeast	1,414				2,904				4,750
Florida	2,045				2,031				3,838
Texas	2,002				2,027				2,165
North	1,614				1,883				2,879
Southwest	3,076				5,075				7,448
Other homebuilding (a)	17,329				25,817				25,682
	29,300				41,691				49,480
Financial Services	2,798				3,969				4,766
	$	32,098			$	45,660			$	54,246

(a)	Other homebuilding includes amortization of intangible assets.

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2011				2010				2009
Equity in (earnings) loss of unconsolidated entities (a):
Northeast	$	15			$	(209	)		$	28,011
Southeast	—				—				—
Florida	—				(1,326		)		68
Texas	—				—				—
North	(121		)		(1,580		)		1,528
Southwest	(2,561		)		197				16,635
Other homebuilding	(527		)		75				3,426
	(3,194		)		(2,843		)		49,668
Financial Services	(102		)		(68		)		(16		)
	$	(3,296	)		$	(2,911	)		$	49,652

(a)	Includes impairments related to investments in unconsolidated joint ventures.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment
	($000's omitted)
	December 31, 2011
	Homes Under Construction				Land Under Development				Land Held for Future Development				Total Inventory				Total Assets
Northeast	$	237,722			$	457,010			$	119,549			$	814,281			$	957,844
Southeast	166,302				315,208				123,209				604,719				626,506
Florida	137,900				321,841				110,040				569,781				637,418
Texas	136,325				294,814				77,125				508,264				568,974
North	268,011				360,202				91,260				719,473				803,174
Southwest	216,067				577,656				216,554				1,010,277				1,099,058
Other homebuilding (a)	48,390				283,770				77,513				409,673				1,904,847
	1,210,717				2,610,501				815,250				4,636,468				6,597,821
Financial Services	—				—				—				—				287,799
	$	1,210,717			$	2,610,501			$	815,250			$	4,636,468			$	6,885,620
	December 31, 2010
	Homes Under Construction				Land Under Development				Land Held for Future Development				Total Inventory				Total Assets
Northeast	$	236,298			$	460,789			$	129,733			$	826,820			$	993,918
Southeast	219,339				301,989				132,920				654,248				688,524
Florida	161,461				256,238				153,814				571,513				701,910
Texas	152,274				299,146				86,137				537,557				592,827
North	271,501				333,958				112,629				718,088				780,367
Southwest	246,926				629,302				216,478				1,092,706				1,186,618
Other homebuilding (a)	43,819				260,407				76,655				380,881				2,532,223
	1,331,618				2,541,829				908,366				4,781,813				7,476,387
Financial Services	—				—				—				—				222,989
	$	1,331,618			$	2,541,829			$	908,366			$	4,781,813			$	7,699,376
	December 31, 2009
	Homes Under Construction				Land Under Development				Land Held for Future Development				Total Inventory				Total Assets
Northeast	$	273,238			$	247,061			$	382,828			$	903,127			$	1,159,638
Southeast	213,216				347,278				68,408				628,902				779,269
Florida	167,206				345,616				139,574				652,396				802,371
Texas	151,393				322,290				89,677				563,360				608,167
North	305,601				318,748				73,453				697,802				768,619
Southwest	343,676				596,309				247,172				1,187,157				1,330,666
Other homebuilding (a)	38,564				193,574				75,476				307,614				4,351,664
	1,492,894				2,370,876				1,076,588				4,940,358				9,800,394
Financial Services	—				—				—				—				250,828
	$	1,492,894			$	2,370,876			$	1,076,588			$	4,940,358			$	10,051,222

(a)	Other homebuilding primarily includes capitalized interest, cash and equivalents, goodwill, income taxes receivable, intangibles, and other corporate items that are not allocated to the operating segments.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Investments in unconsolidated entities

We participate in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop, and/or sell land and homes in the U.S. and Puerto Rico. A summary of our joint ventures is presented below ($000’s omitted):

	December 31,
	2011				2010
Investments in joint ventures with limited recourse guaranties	$	—			$	122
Investments in joint ventures with debt non-recourse to PulteGroup	11,453				11,486
Investments in other active joint ventures	24,535				34,705
Total investments in unconsolidated entities	$	35,988			$	46,313
Total joint venture debt	$	11,107			$	15,467
PulteGroup proportionate share of joint venture debt:
Joint venture debt with limited recourse guaranties	$	1,202			$	1,444
Joint venture debt non-recourse to PulteGroup	2,009				3,696
PulteGroup's total proportionate share of joint venture debt	$	3,211			$	5,140

In 2011, 2010, and 2009, we recognized (income) expense from unconsolidated joint ventures of $(3.3) million, $(2.9) million, and $49.7 million, respectively. The (income) expense recognized during 2010 and 2009 includes impairments totaling $1.9 million,and $54.1 million, respectively. During 2011, 2010, and 2009, we made capital contributions of $4.6 million, $22.9 million, and $35.1 million, respectively, and received capital and earnings distributions of $11.6 million, $9.7 million, and $9.5 million, respectively.

The timing of cash obligations under the joint venture and any related financing agreements varies by agreement and in certain instances is contingent upon the joint venture's sale of its land holdings. If additional capital contributions are required and approved, we would need to contribute our pro rata portion of those capital needs in order to not dilute our ownership in the joint ventures. While future capital contributions may be required, we believe the total amount of such contributions will be limited. Our maximum financial loss exposure related to joint ventures is unlikely to exceed the combined investment and limited recourse guaranty totals.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Debt

Our senior notes are summarized as follows ($000’s omitted):

	December 31,
	2011				2010
8.125% unsecured senior notes due February 2011 (a)	$	—			$	13,900
5.45% unsecured senior notes due August 2012 (b)	96,795				104,823
6.25% unsecured senior notes due February 2013 (b)	62,677				62,617
5.125% unsecured senior notes due October 2013 (b)	117,197				160,212
5.25% unsecured senior notes due January 2014 (b)	255,882				335,848
5.70% unsecured senior notes due May 2014 (b)	311,900				309,048
5.20% unsecured senior notes due February 2015 (b)	207,906				244,839
5.25% unsecured senior notes due June 2015 (b)	270,551				397,700
6.50% unsecured senior notes due May 2016 (b)	469,147				466,644
7.625% unsecured senior notes due October 2017 (a)	149,373				149,265
7.875% unsecured senior notes due June 2032 (b)	299,108				299,065
6.375% unsecured senior notes due May 2033 (b)	398,418				398,344
6.00% unsecured senior notes due February 2035 (b)	299,390				299,363
7.375% unsecured senior notes due June 2046 (b)	150,000				150,000
Total senior notes – carrying value (c)	$	3,088,344			$	3,391,668
Estimated fair value	$	2,765,151			$	3,227,404

(a)	Not redeemable prior to maturity, guaranteed on a senior basis by certain wholly-owned subsidiaries

(b)	Redeemable prior to maturity, guaranteed on a senior basis by certain wholly-owned subsidiaries

(c)	The recorded carrying value reflects the impact of various discounts and premiums that are amortized to interest cost over the respective terms of the senior notes

Refer to Note 16 for supplemental consolidating financial information of the Company.

The indentures governing the senior notes impose certain restrictions on the incurrence of additional debt along with other limitations. At December 31, 2011, we were in compliance with all of the covenants and requirements under the senior notes.

Total senior note principal maturities during the five years after 2011 are as follows: 2012 - $96.4 million; 2013 - $182.2 million; 2014 - $574.6 million; 2015 - $492.5 million; 2016 - $480.0 million; and thereafter - $1.3 billion.

Debt retirement

During the last three years, we reduced our outstanding senior notes through a variety of transactions ($000’s omitted):

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Retirement Date	Series	Transaction Type	Principal Retired
November / December 2011	5.25% unsecured senior notes due January 2014	Open market repurchases	$	80,000
	5.20% unsecured senior notes due February 2015		37,000
	5.25% unsecured senior notes due June 2015		140,000
			257,000
June 2011	5.45% unsecured senior notes due August 2012	Open market repurchases	7,306
	5.125% unsecured senior notes due October 2013		45,690
			52,996
February 2011	8.125% unsecured senior notes due February 2011	Scheduled maturity	13,900
Total 2011			$	323,896
December 2010	7.875% unsecured notes due February 2011	Early redemption as	85,595
	7.875% unsecured notes due July 2011	provided within indenture	132,186
	7.50% unsecured notes due January 2012	agreements	110,262
			328,043
November 2010	5.45% unsecured notes due August 2012	Open market repurchases	23,000
October 2010	4.55% unsecured notes due November 2010	Scheduled maturity	47,427
October 2010	6.25% unsecured notes due February 2013	Tender offer	162,471
	5.125% unsecured notes due October 2013		104,749
	5.25% unsecured notes due January 2014		128,077
	5.70% unsecured notes due May 2014		31,329
	5.20% unsecured notes due February 2015		47,838
	5.25% unsecured notes due June 2015		25,536
			500,000
Total 2010			$	898,470
September 2009	4.55% unsecured notes due November 2010	Tender offer	252,573
	7.875% unsecured notes due February 2011		306,905
	8.125% unsecured notes due February 2011		186,098
	7.875% unsecured notes due July 2011		341,377
	7.50% unsecured notes due January 2012		214,662
	5.45% unsecured notes due August 2012		168,301
	5.125% unsecured notes due October 2013		30,084
			1,500,000
September 2009	5.80% unsecured notes due September 2009	Scheduled maturity	210,920
July 2009	4.875% unsecured notes due July 2009	Scheduled maturity	25,413
May / June 2009	7.875% unsecured notes due July 2011	Open market repurchases	25,000
	6.25% unsecured notes due February 2013		74,785
	5.25% unsecured notes due January 2014		36,004
	5.20% unsecured notes due February 2015		57,135
			192,924
Total 2009			$	1,929,257
Total for three-year period			$	3,151,623

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We recorded losses related to these transactions totaling $5.6 million, $38.9 million, and $31.6 million in 2011, 2010 and 2009, respectively. Losses on these transactions include the write-off of unamortized discounts, premiums, and transaction fees and are reflected in other expense (income), net.

Letter of credit facilities

As a cost-saving measure and to provide increased operational flexibility, we voluntarily terminated our $250.0 million unsecured revolving credit facility ("the Credit Facility") effective March 30, 2011. The Credit Facility was scheduled to expire in June 2012 and was being used solely to issue letters of credit ($221.6 million outstanding at December 31, 2010). No borrowings were outstanding under the Credit Facility during 2011, 2010, or 2009. We did not pay any penalties as a result of the termination. The termination of the Credit Facility also:

•	released $250.0 million of cash required to be maintained in liquidity reserve accounts; and

•	resulted in expense of $1.3 million related to the write-off of unamortized issuance costs, which is included within selling, general, and administrative expenses during 2011.

In connection with the termination of the Credit Facility, we entered into separate cash-collateralized letter of credit agreements with a number of financial institutions. These agreements provide capacity to issue letters of credit totaling up to $191.2 million, the majority of which is uncommitted. Letters of credit totaling $83.2 million were outstanding under these agreements at December 31, 2011. Under these agreements, we are required to maintain deposits with these financial institutions in amounts approximating the letters of credit outstanding. Such deposits are included in restricted cash.

We also maintain an unsecured letter of credit facility with a bank that expires in June 2014. This facility permits the issuance of up to $200.0 million of letters of credit for general corporate purposes in support of any wholly-owned subsidiary. At December 31, 2011 and 2010, $152.7 million and $167.2 million, respectively, of letters of credit were outstanding under this facility.

Financial Services

Pulte Mortgage provides mortgage financing for many of our home closings utilizing its own funds and funds available pursuant to a repurchase agreement with the Company. Pulte Mortgage uses these resources to finance its lending activities until the mortgage loans are sold to third party investors, generally within 30 days. Given our current liquidity position and the cost of third party financing relative to existing mortgage rates, Pulte Mortgage allowed each of its third party borrowing arrangements to expire during 2010 and began funding its operations using internal Company resources. In order to satisfy regulatory requirements in certain states, Pulte Mortgage maintains a $2.5 million repurchase lending agreement with a bank that expires in October 2012. There were no borrowings outstanding under this facility at December 31, 2011.

The following is aggregate borrowing information for our mortgage operations ($000’s omitted):

	2011				2010				2009
Available credit lines at year-end	$	2,500			$	2,500			$	175,000
Unused credit lines at year-end	$	2,500			$	2,500			$	157,000
Maximum amount outstanding at the end of any month	$	—			$	75,403			$	79,422
Average monthly indebtedness	$	—			$	17,241			$	44,522
Range of interest rates during the year:	N/A				4.25		%		0.53		%
					to				to
					4.50		%		4.75		%
Weighted-average rate at year-end	4.50		%		4.50		%		4.29		%

Borrowings under Pulte Mortgage’s credit lines are secured by residential mortgage loans available-for-sale. The carrying amounts of such borrowings approximate fair value.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Shareholders’ equity

Pursuant to the two $100.0 million stock repurchase programs authorized by the Board of Directors in October 2002 and October 2005, and the $200.0 million stock repurchase authorization in February 2006 (for a total stock repurchase authorization of $400.0 million), we have repurchased a total of 9,688,900 shares for a total of $297.7 million, though there were no repurchases under these programs during 2011, 2010, or 2009. At December 31, 2011, we had remaining authorization to purchase $102.3 million of common stock.

Under our stock-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of restricted stock, generally related to the payment of minimum tax obligations. During 2011, 2010, and 2009, we repurchased $2.8 million, $4.0 million, and $7.4 million, respectively, of shares from employees under these plans. Such repurchases are excluded from the $400.0 million stock repurchase authorization.

Accumulated other comprehensive income (loss)

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

	December 31,
	2011				2010
Foreign currency translation adjustments:
Mexico	$	—			$	51
Derivatives, net of income taxes of $2,086 in 2011 and 2010	(1,306		)		(1,570		)
	$	(1,306	)		$	(1,519	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Stock compensation plans

We maintain stock option plans for both employees and for non-employee directors. Information related to the active plans as of December 31, 2011 is as follows:

Plan Name	Shares Authorized			Shares Available for Grant
Employee Plans
PulteGroup, Inc. 2004 Stock Incentive Plan	22,000,000			7,935,519
PulteGroup, Inc. 2002 Stock Incentive Plan	12,000,000			64,655

The plans provide for the grant of a variety of equity awards, including options (generally non-qualified options), restricted stock, performance shares, and restricted stock units ("RSUs") to key employees (as determined by the Compensation Committee of the Board of Directors) for periods not exceeding ten years. Options granted to employees generally vest incrementally over four years. Restricted stock generally cliff vests after three years. Performance shares vest upon attainment of the stated performance goals and are converted into shares of common stock at distribution. RSUs represent the right to receive an equal number of shares of common stock and are converted into shares of common stock upon distribution.

Non-employee directors are entitled to an annual distribution of stock options, common stock, or restricted stock units. All options and RSUs granted to non-employee directors vest immediately and are exercisable on the grant date for ten years.

A summary of stock option activity for the three years ended December 31, 2011 is presented below (000’s omitted except per share data):

	2011								2010								2009
	Shares				Weighted- Average Per Share Exercise Price				Shares				Weighted- Average Per Share Exercise Price				Shares				Weighted- Average Per Share Exercise Price
Outstanding, beginning of year	24,004				$	21			26,193				$	21			20,059				$	19
Granted (a)	441				$	8			1,128				$	11			8,235				$	27
Exercised	—				$	—			(902		)		$	10			(756		)		$	6
Forfeited	(2,804		)		$	15			(2,415		)		$	21			(1,345		)		$	45
Outstanding, end of year	21,641				$	21			24,004				$	21			26,193				$	21
Options exercisable at year end	18,845				$	23			19,400				$	23			20,336				$	23
Weighted-average per share fair value of options granted during the year	$	4.46							$	6.43							$	2.19

(a)	2009 includes 5.3 million options issued in conjunction with the Centex merger.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes information about the weighted-average remaining contractual lives of stock options outstanding and exercisable at December 31, 2011:

	Options Outstanding										Options Exercisable
	Number Outstanding (000's omitted)			Weighted- Average Remaining Contract Life (in years)			Weighted- Average Per Share Exercise Price				Number Exercisable (000's omitted)			Weighted- Average Per Share Exercise Price
$0.01 to $11.00	2,683			6.5			$	10			2,242			$	11
$11.01 to $18.00	8,314			4.9			$	12			5,959			$	12
$18.01 to $25.00	3,830			1.9			$	22			3,830			$	22
$25.01 to $35.00	3,949			3.9			$	31			3,949			$	31
$35.01 to $60.00	2,865			3.1			$	44			2,865			$	44
	21,641			4.1			$	21			18,845			$	23

The fair value of each option grant is estimated on the date of grant using primarily the Black-Scholes option pricing model with the following weighted-average assumptions:

	Weighted-Average Assumptions Year Ended December 31,
	2011			2010			2009
Expected life of options in years	6.2			6.0			3.1
Expected stock price volatility	58	%		58	%		60	%
Expected dividend yield	0.0	%		0.0	%		0.0	%
Risk-free interest rate	2.7	%		2.7	%		1.2	%

We estimate the expected life of stock options using employees’ historical exercise behavior and the contractual terms of the instruments. Volatility is estimated using historical volatility with consideration for implied volatility.

In connection with stock option awards, we recognized compensation expense of $5.2 million, $15.0 million, and $22.1 million for the years ended December 31, 2011, 2010, and 2009, respectively. Total compensation cost related to non-vested stock option awards not yet recognized was $3.2 million at December 31, 2011. These costs will be expensed over a weighted-average vesting period of approximately two years. The stock option participant agreements provide continued vesting for certain eligible employees who have achieved a predetermined level of service based on their combined age and years of service. We record the related compensation cost for these awards over the period through the date the employee first achieves the minimum level of service that would no longer require them to provide services to earn the award, which is reflected in the weighted-average vesting period.

No stock options were exercised during 2011. The aggregate intrinsic value of stock options that were exercised during 2010 and 2009 was $1.8 million and $3.3 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. As of December 31, 2011, there were no outstanding options with intrinsic value.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of restricted stock activity for the three years ended December 31, 2011 is presented below (000’s omitted, except per share data):

	2011							2010							2009
	Shares			Weighted- Average Per Share Grant Date Fair Value				Shares			Weighted- Average Per Share Grant Date Fair Value				Shares			Weighted- Average Per Share Grant Date Fair Value
Non-vested at beginning of year	2,775			$	12			3,539			$	16			3,932			$	23
Granted	1,032			$	8			1,552			$	11			2,182			$	12
Vested	(1,242	)		$	13			(1,541	)		$	21			(1,957	)		$	25
Forfeited	(243	)		$	11			(775	)		$	12			(618	)		$	14
Non-vested at end of year	2,322			$	10			2,775			$	12			3,539			$	16

During 2011, 2010, and 2009, the total fair value of shares vested during the year was $15.9 million, $32.2 million, and $48.1 million, respectively. In connection with the restricted stock awards, we recorded compensation expense of $11.2 million, $17.1 million, and $24.2 million during 2011, 2010, and 2009, respectively. Total compensation cost related to restricted stock awards not yet recognized was $10.0 million at December 31, 2011. These costs will be expensed over a weighted-average period of approximately two years.

A summary of share unit (performance shares and RSUs) activity for the three years ended December 31, 2011 is presented below (000’s omitted, except per share data):

	2011							2010							2009
	Shares			Weighted- Average Grant Date Fair Value				Shares			Weighted- Average Grant Date Fair Value				Shares			Weighted- Average Grant Date Fair Value
Outstanding, beginning of year	140			$	12			123			$	12			—			$	—
Granted	772			$	7			133			$	12			632			$	12
Forfeited	—			$	—			—			$	—			(269	)		$	12
Distributed	(192	)		$	9			(116	)		$	12			(240	)		$	12
Outstanding, end of year	720			$	7			140			$	12			123			$	12
Vested, end of year	120			$	11			140			$	12			123			$	12

During 2011, we granted performance shares to certain individuals but did not recognize any expense as the applicable performance goals were not considered probable of achievement. The fair value of each performance share and RSU was calculated using the closing stock price on the date of grant. At December 31, 2011, there were 119,799 RSUs outstanding that had vested but had not yet been paid out because the payout date had been deferred by the holder.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. Income taxes

Components of current and deferred income tax expense (benefit) are as follows ($000’s omitted):

	2011				2010				2009
Current provision (benefit)
Federal	$	(71,796	)		$	(114,617	)		$	(812,744	)
State and other	(28,116		)		(23,200		)		(17,395		)
	$	(99,912	)		$	(137,817	)		$	(830,139	)
Deferred provision (benefit)
Federal	$	—			$	—			$	37,587
State and other	—				—				—
	$	—			$	—			$	37,587
Income tax expense (benefit)	$	(99,912	)		$	(137,817	)		$	(792,552	)

The following table reconciles the statutory federal income tax rate to the effective income tax rate:

	2011			2010			2009
Income taxes at federal statutory rate	35.0	%		35.0	%		35.0	%
Effect of state and local income taxes, net of federal tax	3.0			3.0			3.0
Deferred tax asset valuation allowance	(7.0	)		(12.4	)		18.4
Tax contingencies	28.4			5.0			(4.7	)
Goodwill impairment	(28.7	)		(19.7	)		(9.7	)
Other	1.5			0.3			(1.9	)
Effective rate	32.2	%		11.2	%		40.1	%

The net deferred tax asset (liability) is as follows ($000’s omitted):

	At December 31,
	2011				2010
Deferred tax assets:
Non-deductible reserves and other	$	446,605			$	312,186
Inventory valuation reserves	1,197,271				1,449,261
Net operating loss ("NOL") carryforwards:
Federal	663,733				592,345
State	299,292				287,458
Alternative minimum tax credits	25,193				25,193
Energy credit and charitable contribution carryforward	38,586				36,045
	2,670,680				2,702,488
Deferred tax liabilities:
Capitalized items, including real estate basis differences, deducted for tax, net	(91,399		)		(64,130		)
Trademarks and tradenames	(61,692		)		(66,671		)
	(153,091		)		(130,801		)
Valuation allowance	(2,517,589		)		(2,571,687		)
Net deferred tax asset (liability)	$	—			$	—

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Our income tax expense (benefit) was $(99.9) million, $(137.8) million, and $(792.6) million in 2011, 2010, and 2009, respectively. These amounts represent effective tax rates of 32.2%, 11.2%, and 40.1% for 2011, 2010, and 2009, respectively. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, our effective tax rates in 2011, 2010, and 2009 are not correlated to the amount of pretax loss. The income tax benefits for 2011 and 2010 resulted primarily from the favorable resolution of certain federal and state income tax matters. The income tax benefit for 2009 related primarily to the impact of the Worker, Homeownership, and Business Assistance Act of 2009 (the "Act"), which was enacted into law on November 6, 2009. The Act amended Section 172 of the Internal Revenue Code to allow NOLs realized in either tax year 2008 or 2009 to be carried back up to five years (previously limited to two years).

We had income taxes receivable of $27.2 million and $81.3 million at December 31, 2011 and 2010, respectively. The income taxes receivable at December 31, 2011 related primarily to amended federal and state income tax returns. The income taxes receivable at December 31, 2010 related primarily to federal income tax refunds from amended returns and state NOL carrybacks, the majority of which was received in 2011.

We had net deferred tax assets of $2.5 billion and $2.6 billion at December 31, 2011 and 2010. Based on our evaluation in accordance with ASC 740, we fully reserved the net deferred tax assets due to the uncertainty of realizing such deferred tax assets. The ultimate realization of these deferred tax assets is dependent upon the generation of taxable income during future periods. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The accounting for deferred taxes is based upon an estimate of future results. Differences between the estimated and actual results could have a material impact on our consolidated results of operations or financial position. To the extent that our results of operations improve, our deferred tax asset valuation allowance may be reduced.

As a result of the Centex merger, our ability to use certain of Centex’s pre-ownership change NOLs and built-in losses or deductions is limited by Section 382 of the Internal Revenue Code. Our Section 382 limitation is approximately $67.4 million per year for NOLs, losses realized on built-in loss assets that are sold within 60 months of the ownership change (i.e. before August 2014), and certain deductions. The limitation may result in a significant portion of Centex’s pre-ownership change NOL carryforwards and future recognized built-in losses or deductions not being available for use by the Company.

Our gross federal NOL carryforward is approximately $1.9 billion, a significant portion of which is subject to the provisions of Internal Revenue Code Section 382. We also have significant gross state NOLs in various tax jurisdictions. These NOLs may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2012 and 2031.

At December 31, 2011 we had $171.9 million of gross unrecognized tax benefits, of which $170.6 million would affect the effective tax rate if recognized. At December 31, 2010, we had $258.0 million of gross unrecognized tax benefits, of which $250.7 million would affect the effective rate if recognized. Additionally, we had accrued interest and penalties of $36.9 million and $48.4 million at December 31, 2011 and 2010, respectively. In 2011 and 2010, our income tax benefits included tax related interest and penalties. Such amounts totaled a benefit of $11.4 million in 2011 and $27.3 million in 2010.

We are currently under examination by the IRS and various state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The final outcome of these examinations is not yet determinable. It is reasonably possible, within the next twelve months, that unrecognized tax benefits may decrease by up to $26.5 million, excluding interest and penalties, primarily due to expirations of certain statutes of limitations and potential settlements. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 1998 to 2011.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted):

	2011				2010				2009
Unrecognized tax benefits, beginning of period	$	258,016			$	326,088			$	126,299
Assumed with Centex merger	—				—				121,667
Decreases related to tax positions taken during the current period	—				—				(10,029		)
Increases related to tax positions taken during a prior period	2,699				55,385				37,303
Decreases related to tax positions taken during a prior period	(79,719		)		(14,025		)		(10,414		)
Increases related to tax positions taken during the current period	1,620				1,441				82,973
Decreases related to settlements with taxing authorities	—				(94,779		)		(1,389		)
Reductions as a result of a lapse of the applicable statute of limitations	(10,753		)		(16,094		)		(20,322		)
Unrecognized tax benefits, end of period	$	171,863			$	258,016			$	326,088

12. Fair value disclosures

ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:

Level 1		Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2		Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
Level 3		Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques

Our financial instruments measured at fair value on a recurring basis at December 31, 2011 and 2010 are summarized below ($000’s omitted):

Financial Instrument		Fair Value Hierarchy		Fair Value
2011				2010
Residential mortgage loans available-for-sale		Level 2		$	258,075			$	176,164
Whole loan commitments		Level 2		11				2,319
Interest rate lock commitments		Level 2		3,551				2,692
Forward contracts		Level 2		(3,470		)		3,544

See Note 1 regarding the fair value of mortgage loans available-for-sale and derivative instruments and hedging activities.

In addition, certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. Assets measured at fair value on a non-recurring basis at December 31, 2011 and 2010 are summarized below ($000’s omitted):

		Fair Value Hierarchy		Fair Value
2011				2010
Loans held for investment		Level 2		$	2,324			$	3,002
House and land inventory		Level 3		23,766				70,862

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the current quarter. We measured certain loans held for investment at fair value since the cost of the loans exceeded their fair value. Fair value of the loans was determined based on the fair value of the underlying collateral. For inventory, see Note 5 for a more detailed discussion of the valuation methods used.

The carrying amounts of cash and equivalents approximate their fair values due to their short-term nature. The fair value of senior notes outstanding totaled $2.8 billion compared with the carrying value of $3.1 billion. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of collateralized short-term financing agreements approximates fair value.

13. Other assets and accrued and other liabilities

Other assets are presented below ($000’s omitted):

	December 31,
	2011				2010
Accounts and notes receivable	$	144,924			$	204,029
Deposits and pre-acquisition costs	57,047				95,063
Prepaid expenses	90,786				108,963
Property and equipment, net	53,182				59,263
Other	74,505				100,645
	$	420,444			$	567,963

Accrued and other liabilities are presented below ($000’s omitted):

	December 31,
	2011				2010
Self-insurance liabilities	$	741,383			$	785,562
Community development district obligations	38,440				73,334
Liabilities for land, not owned, under option agreements	24,905				50,781
Compensation-related	87,583				94,936
Loan origination liabilities	128,330				93,057
Warranty	68,025				80,195
Accrued interest	37,943				42,043
Lease exit liabilities	29,745				41,733
Other	255,587				338,299
	$	1,411,941			$	1,599,940

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

14. Leases

We lease certain property and equipment under non-cancelable operating leases. The future minimum lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2011 are as follows ($000’s omitted):

Years Ending December 31,
2012	$	32,590
2013	28,002
2014	23,988
2015	21,211
2016	14,627
Thereafter	24,531
Total minimum lease payments (a)	$	144,949

(a)	Minimum payments have not been reduced by minimum sublease rentals of $14.6 million due in the future under non-cancelable subleases.

Net rental expense for 2011, 2010, and 2009 was $26.7 million, $37.2 million, and $48.7 million, respectively, excluding lease exit costs presented in Note 4. Certain leases contain renewal or purchase options and generally provide that we pay for insurance, taxes, and maintenance.

15. Commitments and Contingencies

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If determined to be at fault, we either repurchase the loans from the investors or reimburse the investors' losses (a “make-whole” payment).

We sell a substantial majority of the loans we originate to investors each month, retaining limited risk related to such loans. Historically, our overall losses relating to this risk were not significant. Beginning in 2009, however, we experienced a significant increase in losses as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to us. To date, the significant majority of these losses relates to loans originated in 2006 and 2007, during which period inherently riskier loan products became more common in the mortgage origination market. In 2006 and 2007, we originated $39.5 billion of loans, excluding loans originated by Centex's former subprime loan business sold by Centex in 2006. Because we generally do not retain the servicing rights to the loans we originate, information regarding the current and historical performance, credit quality, and outstanding balances of such loans is limited. Estimating these loan origination liabilities is further complicated by uncertainties surrounding numerous external factors, such as various macroeconomic factors (including unemployment rates and changes in home prices), actions taken by third parties, including the parties servicing the loans, and the U.S. federal government in its dual capacity as regulator of the U.S. mortgage industry and conservator of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac, which own or guarantee the majority of mortgage loans in the U.S.

Most requests received to date relate to make-whole payments on loans that have been foreclosed, generally after a portion of the loan principal had been paid down, which reduces our exposure. Requests not immediately refuted by us undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine our liability. We establish liabilities for such anticipated losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Determining these estimates and the resulting liability requires a significant level of management judgment. We are generally able to cure or refute over 60% of the requests received from investors such that repurchases or make-whole payments are not required. For those requests requiring repurchases or make-whole payments, actual loss severities generally approximate 50% of the outstanding principal balance.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During 2011, 2010, and 2009, we recorded additional provisions for losses as a change in estimate primarily to reflect projected claim volumes in excess of previous estimates. Such provisions for losses are reflected in Financial Services expenses. Our current estimates assume that claim volumes will not decline to pre-2009 levels until after 2013, an extension of two years beyond our previous estimates as of December 31, 2010. Given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, it is reasonably possible that future losses may exceed our current estimates. Changes in these liabilities were as follows ($000's omitted):

	2011				2010				2009
Liabilities, beginning of period	$	93,057			$	105,914			$	3,240
Provision for losses	59,349				16,856				60,896
Liabilities assumed with Centex merger	—				—				56,293
Settlements	(24,076		)		(29,713		)		(14,515		)
Liabilities, end of period	$	128,330			$	93,057			$	105,914

As reflected above, we assumed loan origination liabilities totaling $56.3 million effective with the Centex merger.

We entered into an agreement in conjunction with the wind down of Centex's mortgage operations, which ceased loan origination activities in December 2009, that provides a guaranty for one major investor of loans originated by Centex. This guaranty provides that we will honor the potential repurchase obligations of Centex's mortgage operations related to breaches of representations and warranties in the origination of a certain pool of loans. Other than with respect to this pool of loans, our contractual repurchase obligations are limited to our mortgage subsidiaries, which are included in non-guarantor subsidiaries (see Note 16 for a discussion of non-guarantor subsidiaries).

The mortgage subsidiary of Centex also sold loans to a bank for inclusion in residential mortgage-backed securities (“RMBSs”) issued by the bank. In connection with these sales, Centex's mortgage subsidiary entered into agreements pursuant to which it may be required to indemnify the bank for losses incurred by investors in the RMBSs arising out of material errors or omissions in certain information provided by the mortgage subsidiary relating to the loans and loan origination process. The bank has notified us that it has been named defendant in two lawsuits alleging various violations of federal and state securities laws asserting that untrue statements of material fact were included in the registration statements used to market the sale of two RMBS transactions which included $162 million of loans originated by Centex's mortgage subsidiary. The plaintiffs seek unspecified compensatory and/or rescissory damages on behalf of persons who purchased the securities. Neither Centex's mortgage subsidiary nor the Company is named as a defendant in these actions. These actions are in their preliminary stage, and we cannot yet quantify Centex's mortgage subsidiary's potential liability as a result of these indemnification obligations. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or cash flows of the Company. We are aware of six other RMBS transactions with such indemnity provisions that include an aggregate $116 million of loans, and we are not aware of any current or threatened legal proceedings regarding those transactions.

Mortgage reinsurance liabilities

A subsidiary of Pulte Mortgage operates as a re-insurer for a portion of the mortgage insurance written on loans originated by Pulte Mortgage. Such reinsurance programs were discontinued effective January 1, 2009. At December 31, 2011 and 2010, reserves for potential claims under this program totaled $2.8 million and $7.6 million, respectively, and are reflected in accrued and other liabilities.

Community development and other special district obligations

A community development district or similar development authority (“CDD”) is a unit of local government created under various state statutes that utilizes the proceeds from the sale of bonds to finance the construction or acquisition of infrastructure assets of a development. A portion of the liability associated with the bonds, including principal and interest, is assigned to each parcel of land within the development. This debt is typically paid by subsequent special assessments levied by the CDD on the landowners. Generally, we are only responsible for paying the special assessments for the period in which we are the landowner of the applicable parcels. However, in certain limited instances we record a liability for future assessments that are fixed or determinable for a fixed or determinable period in accordance with ASC 970-470, “Real Estate Debt”. At December 31, 2011 and 2010, we had recorded $38.4 million and $73.3 million, respectively, in accrued liabilities for outstanding CDD obligations. During 2011 and 2010, we repurchased at a discount prior to their maturity CDD obligations with aggregate principal balances of $26.6 million and $124.1 million, respectively, in order to

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

improve the future financial performance of the related communities. The discounts of $5.2 million in 2011 and $12.9 million in 2010 are recognized as a reduction of cost of revenues over the lives of the applicable communities, which extend for several years.

Letters of credit and surety bonds

In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $235.9 million and $1.2 billion at December 31, 2011, respectively, and $388.9 million and $1.3 billion at December 31, 2010, respectively. In the event any such letter of credit or surety bonds are called, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be called. Our surety bonds generally do not have stated expiration dates. Rather, we are released from the surety bonds as the underlying performance is completed and accepted by the applicable counterparty. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

Litigation and regulatory matters

We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations.

We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to ten years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates.

Changes to warranty liabilities were as follows ($000’s omitted):

	2011				2010				2009
Warranty liabilities, beginning of period	$	80,195			$	96,110			$	58,178
Warranty reserves provided	43,875				54,164				34,019
Liabilities assumed with Centex merger	—				—				55,292
Payments	(54,766		)		(69,789		)		(44,600		)
Other adjustments	(1,279		)		(290		)		(6,779		)
Warranty liabilities, end of period	$	68,025			$	80,195			$	96,110

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Self-insured risks

We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.

Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to maintain higher per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or to participate in a project-specific insurance program provided by the Company. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by the Company. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. We are self-insured for a per occurrence deductible, which is capped at an overall aggregate retention level. Beginning with the first dollar, amounts paid on insured claims satisfy our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses relating to legal fees, expert fees, and claims handling expenses) on an undiscounted basis at the time product revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate an estimate of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims. These estimates make up a significant portion of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable.

Our recorded reserves for all such claims totaled $741.4 million and $785.6 million at December 31, 2011 and 2010, respectively, the vast majority of which relate to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 78% of the total general liability reserves at both December 31, 2011 and 2010. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. Because the majority of our recorded reserves relates to IBNR, adjustments to reserve amounts for individual existing claims generally do not impact the recorded reserves materially. However, changes in the frequency and timing of reported claims and the estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Because of the inherent uncertainty in estimating future losses related to these claims, actual costs could differ significantly from estimated costs.

We have experienced a high level of insurance-related expenses in recent years, primarily due to the adverse development of general liability claims, the frequency and severity of which have increased significantly over historical levels. During 2010, we experienced a greater than anticipated frequency of newly reported claims and a significant increase in specific case reserves related to certain known claims. The general nature of these claims was not out of the

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

ordinary, but the frequency and severity of the claims were in excess of our historical experience. As a result of these unfavorable trends, we recorded additional reserves totaling $280.4 million ($0.74 per basic and diluted share) within selling, general, and administrative expenses. Substantially all of this additional reserve related to general liability exposures, a large portion of which resulted from revising our actuarial assumptions surrounding the long-term frequency, severity, and development of claims. During the industry downturn over the last several years, and especially in 2010, we experienced adverse claim frequency and severity compared with longer term averages. In 2010, we deemed it appropriate to assume that the long-term future frequency, severity, and development of claims will most closely resemble the claims activity experienced in recent years.

Changes in these liabilities were as follows ($000's omitted):

	2011				2010				2009
Balance, beginning of period	$	785,562			$	551,020			$	323,227
Reserves provided	53,068				313,606				34,939
Liabilities assumed with Centex merger	—				2,514				271,071
Payments	(97,247		)		(81,578		)		(78,217		)
Balance, end of period	$	741,383			$	785,562			$	551,020

As reflected in the above table, we assumed insurance-related liabilities of $271.1 million effective with the Centex merger, which were increased by $2.5 million upon completion of a final valuation in 2010. The reserves provided reflected in the above table are classified within selling, general, and administrative expenses.

16. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by each of the Company's wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2011

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	119,287			$	875,561			$	88,223			$	—			$	1,083,071
Restricted cash	83,199				3,255				15,406				—				101,860
House and land inventory	—				4,632,337				4,131				—				4,636,468
Land held for sale	—				135,307				—				—				135,307
Land, not owned, under option agreements	—				24,905				—				—				24,905
Residential mortgage loans available- for-sale	—				—				258,075				—				258,075
Securities purchased under agreements to resell	127,327				—				(127,327		)		—				—
Investments in unconsolidated entities	1,527				31,836				2,625				—				35,988
Income taxes receivable	27,154				—				—				—				27,154
Other assets	20,983				364,747				34,714				—				420,444
Intangible assets	—				162,348				—				—				162,348
Deferred income tax assets	(15,517		)		23				15,494				—				—
Investments in subsidiaries and intercompany accounts, net	4,937,002				6,533,838				6,366,758				(17,837,598		)		—
	$	5,300,962			$	12,764,157			$	6,658,099			$	(17,837,598	)		$	6,885,620
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	70,690			$	1,310,972			$	273,686			$	—			$	1,655,348
Income tax liabilities	203,313				—				—				—				203,313
Senior notes	3,088,344				—				—				—				3,088,344
Total liabilities	3,362,347				1,310,972				273,686				—				4,947,005
Total shareholders’ equity	1,938,615				11,453,185				6,384,413				(17,837,598		)		1,938,615
	$	5,300,962			$	12,764,157			$	6,658,099			$	(17,837,598	)		$	6,885,620

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2010

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	10,000			$	1,106,623			$	366,767			$	—			$	1,483,390
Restricted cash	—				3,927				20,674				—				24,601
House and land inventory	—				4,777,681				4,132				—				4,781,813
Land held for sale	—				71,055				—				—				71,055
Land, not owned, under option agreements	—				50,781				—				—				50,781
Residential mortgage loans available- for-sale	—				—				176,164				—				176,164
Securities purchased under agreements to resell	74,500				—				(74,500		)		—				—
Investments in unconsolidated entities	1,523				42,261				2,529				—				46,313
Income taxes receivable	81,307				—				—				—				81,307
Other assets	24,476				499,075				44,412				—				567,963
Intangible assets	—				175,448				—				—				175,448
Goodwill	—				240,541				—				—				240,541
Deferred income tax assets	(34,192		)		27				34,165				—				—
Investments in subsidiaries and intercompany accounts, net	5,749,695				5,783,384				6,265,591				(17,798,670		)		—
	$	5,907,309			$	12,750,803			$	6,839,934			$	(17,798,670	)		$	7,699,376
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	86,066			$	1,166,805			$	625,262			$	—			$	1,878,133
Income tax liabilities	294,408				—				—				—				294,408
Senior notes	3,391,668				—				—				—				3,391,668
Total liabilities	3,772,142				1,166,805				625,262				—				5,564,209
Total shareholders’ equity	2,135,167				11,583,998				6,214,672				(17,798,670		)		2,135,167
	$	5,907,309			$	12,750,803			$	6,839,934			$	(17,798,670	)		$	7,699,376

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended December 31, 2011

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Revenues:
Homebuilding
Home sale revenues	$	—			$	3,950,743			$	—			$	—			$	3,950,743
Land sale revenues	—				82,853				—				—				82,853
	—				4,033,596				—				—				4,033,596
Financial Services	—				1,367				101,727				—				103,094
	—				4,034,963				101,727				—				4,136,690
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				3,444,398				—				—				3,444,398
Land sale cost of revenues	—				59,279				—				—				59,279
	—				3,503,677				—				—				3,503,677
Financial Services expenses	343				448				136,875				—				137,666
Selling, general and administrative expenses	33,144				488,746				(2,307		)		—				519,583
Other expense (income), net	5,581				288,298				(777		)		—				293,102
Interest income	(253		)		(4,443		)		(359		)		—				(5,055		)
Interest expense	1,313				—				—				—				1,313
Intercompany interest	39,060				(27,572		)		(11,488		)		—				—
Equity in (earnings) loss of unconsolidated entities	(5		)		(3,196		)		(95		)		—				(3,296		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(79,183		)		(210,995		)		(20,122		)		—				(310,300		)
Income tax expense (benefit)	(2,623		)		(99,635		)		2,346				—				(99,912		)
Income (loss) before equity in income (loss) of subsidiaries	(76,560		)		(111,360		)		(22,468		)		—				(210,388		)
Equity in income (loss) of subsidiaries	(133,828		)		(25,427		)		(88,998		)		248,253				—
Net income (loss)	$	(210,388	)		$	(136,787	)		$	(111,466	)		$	248,253			$	(210,388	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended December 31, 2010

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Revenues:
Homebuilding
Home sale revenues	$	—			$	4,419,812			$	—			$	—			$	4,419,812
Land sale revenues	—				27,815				—				—				27,815
	—				4,447,627				—				—				4,447,627
Financial Services	—				3,119				118,544				—				121,663
	—				4,450,746				118,544				—				4,569,290
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				4,006,385				—				—				4,006,385
Land sale cost of revenues	—				53,555				—				—				53,555
	—				4,059,940				—				—				4,059,940
Financial Services expenses	338				(1,462		)		117,246				—				116,122
Selling, general and administrative expenses	64,197				629,099				201,806				—				895,102
Other expense (income), net	38,899				707,647				(4,161		)		—				742,385
Interest income	—				(9,060		)		(471		)		—				(9,531		)
Interest expense	2,802				—				(73		)		—				2,729
Intercompany interest	169,158				(169,010		)		(148		)		—				—
Equity in (earnings) loss of unconsolidated entities	(11		)		(3,867		)		967				—				(2,911		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(275,383		)		(762,541		)		(196,622		)		—				(1,234,546		)
Income tax expense (benefit)	58,318				(136,741		)		(59,394		)		—				(137,817		)
Income (loss) before equity in income (loss) of subsidiaries	(333,701		)		(625,800		)		(137,228		)		—				(1,096,729		)
Equity in income (loss) of subsidiaries	(763,028		)		(5,009		)		(172,241		)		940,278				—
Net income (loss)	$	(1,096,729	)		$	(630,809	)		$	(309,469	)		$	940,278			$	(1,096,729	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS

For the year ended December 31, 2009

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
Revenues:
Homebuilding
Home sale revenues	$	—			$	3,869,297			$	—			$	—			$	3,869,297
Land sale revenues	—				97,292				—				—				97,292
	—				3,966,589				—				—				3,966,589
Financial Services	—				9,859				107,941				—				117,800
	—				3,976,448				107,941				—				4,084,389
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				4,274,474				—				—				4,274,474
Land sale cost of revenues	—				211,170				—				—				211,170
	—				4,485,644				—				—				4,485,644
Financial Services expenses	716				6,794				165,344				—				172,854
Selling, general and administrative expenses	77,227				542,622				52,585				—				672,434
Other expense (income), net	31,353				650,728				3,748				—				685,829
Interest income	(2		)		(7,782		)		(1,383		)		—				(9,167		)
Interest expense	1,810				537				(85		)		—				2,262
Intercompany interest	237,492				(237,492		)		—				—				—
Equity in (earnings) loss of unconsolidated entities	—				46,065				3,587				—				49,652
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(348,596		)		(1,510,668		)		(115,855		)		—				(1,975,119		)
Income tax expense (benefit)	(139,828		)		(625,250		)		(27,474		)		—				(792,552		)
Income (loss) before equity in income (loss) of subsidiaries	(208,768		)		(885,418		)		(88,381		)		—				(1,182,567		)
Equity in income (loss) of subsidiaries	(973,799		)		(80,196		)		(191,763		)		1,245,758				—
Net income (loss)	$	(1,182,567	)		$	(965,614	)		$	(280,144	)		$	1,245,758			$	(1,182,567	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2011

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	(86,057	)		$	520,024			$	(416,745	)		$	—			$	17,222
Cash flows from investing activities:
Distributions from unconsolidated entities	—				4,531				—				—				4,531
Investments in unconsolidated entities	—				(4,603		)		—				—				(4,603		)
Change in restricted cash related to letters of credit	(83,199		)		—				—				—				(83,199		)
Net change in loans held for investment	—				—				325				—				325
Proceeds from the sale of fixed assets	—				10,555				—				—				10,555
Capital expenditures	—				(18,331		)		(2,907		)		—				(21,238		)
Net cash provided by (used in) investing activities	(83,199		)		(7,848		)		(2,582		)		—				(93,629		)
Cash flows from financing activities:
Repayment of other borrowings	(320,916		)		(160		)		—				—				(321,076		)
Intercompany activities, net	602,295				(743,078		)		140,783				—				—
Stock repurchases	(2,836		)		—				—				—				(2,836		)
Net cash provided by (used in) financing activities	278,543				(743,238		)		140,783				—				(323,912		)
Net increase (decrease) in cash and equivalents	109,287				(231,062		)		(278,544		)		—				(400,319		)
Cash and equivalents at beginning of year	10,000				1,106,623				366,767				—				1,483,390
Cash and equivalents at end of year	$	119,287			$	875,561			$	88,223			$	—			$	1,083,071

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2010

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	551,430			$	34,853			$	4,574			$	—			$	590,857
Cash flows from investing activities:
Distributions from unconsolidated entities	—				4,231				—				—				4,231
Investments in unconsolidated entities	—				(21,623		)		(1,267		)		—				(22,890		)
Net change in loans held for investment	—				—				12,603				—				12,603
Proceeds from the sale of fixed assets	—				1,762				18				—				1,780
Capital expenditures	—				(13,168		)		(2,011		)		—				(15,179		)
Net cash provided by (used in) investing activities	—				(28,798		)		9,343				—				(19,455		)
Cash flows from financing activities:
Net repayments under Financial Services credit arrangements	—				—				(18,394		)		—				(18,394		)
Repayment of other borrowings	(933,206		)		(1,444		)		—				—				(934,650		)
Intercompany activities, net	387,131				(404,757		)		17,626				—				—
Issuance of common stock	8,668				—				—				—				8,668
Stock repurchases	(4,023		)		—				—				—				(4,023		)
Net cash provided by (used in) financing activities	(541,430		)		(406,201		)		(768		)		—				(948,399		)
Net increase (decrease) in cash and equivalents	10,000				(400,146		)		13,149				—				(376,997		)
Cash and equivalents at beginning of year	—				1,506,769				353,618				—				1,860,387
Cash and equivalents at end of year	$	10,000			$	1,106,623			$	366,767			$	—			$	1,483,390

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2009

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	44,747			$	509,669			$	174,939			$	—			$	729,355
Cash flows from investing activities:
Distributions from unconsolidated entities	—				8,612				—				—				8,612
Investments in unconsolidated entities	—				(35,144		)		—				—				(35,144		)
Cash acquired with Centex merger, net of cash used	(50		)		1,723,120				25,672				—				1,748,742
Net change in loans held for investment	—				—				8,802				—				8,802
Proceeds from the sale of fixed assets	—				1,960				91				—				2,051
Capital expenditures	—				(30,432		)		(8,820		)		—				(39,252		)
Net cash provided by (used in) investing activities	(50		)		1,668,116				25,745				—				1,693,811
Cash flows from financing activities:
Net repayments under Financial Services credit arrangements	—				—				(219,166		)		—				(219,166		)
Repayment of other borrowings	(2,000,732		)		(4,473		)		—				—				(2,005,205		)
Intercompany activities, net	1,961,695				(1,965,934		)		4,239				—				—
Issuance of common stock	4,782				—				—				—				4,782
Stock repurchases	(7,384		)		—				—				—				(7,384		)
Debt issuance costs	(3,058		)		—				—				—				(3,058		)
Net cash provided by (used in) financing activities	(44,697		)		(1,970,407		)		(214,927		)		—				(2,230,031		)
Net increase (decrease) in cash and equivalents	—				207,378				(14,243		)		—				193,135
Cash and equivalents at beginning of year	—				1,299,391				367,861				—				1,667,252
Cash and equivalents at end of year	$	—			$	1,506,769			$	353,618			$	—			$	1,860,387

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

17. Quarterly Results (Unaudited)

UNAUDITED QUARTERLY INFORMATION

(000’s omitted, except per share data)

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total
2011
Homebuilding:
Revenues	$	783,767			$	904,831			$	1,114,027			$	1,230,971			$	4,033,596
Cost of revenues (a)	685,960				793,465				944,882				1,079,370				3,503,677
Income (loss) before income taxes (b)	(46,365		)		(36,690		)		(211,126		)		18,351				(275,830		)
Financial Services:
Revenues	$	21,435			$	22,381			$	27,904			$	31,374			$	103,094
Income (loss) before income taxes	973				(16,643		)		8,626				(27,426		)		(34,470		)
Consolidated results:
Revenues	$	805,202			$	927,212			$	1,141,931			$	1,262,345			$	4,136,690
Income (loss) before income taxes	(45,392		)		(53,333		)		(202,500		)		(9,075		)		(310,300		)
Income taxes (benefit)	(5,866		)		2,052				(73,202		)		(22,896		)		(99,912		)
Net income (loss)	$	(39,526	)		$	(55,385	)		$	(129,298	)		$	13,821			$	(210,388	)
Per share data:
Basic:
Net income (loss)	$	(0.10	)		$	(0.15	)		$	(0.34	)		$	0.04			$	(0.55	)
Weighted-average common shares outstanding	379,544				379,781				380,025				380,149				379,877
Assuming dilution:
Net income (loss)	$	(0.10	)		$	(0.15	)		$	(0.34	)		$	0.04			$	(0.55	)
Adjusted weighted-average common shares and effect of dilutive securities	379,544				379,781				380,025				381,261				379,877

(a)	Cost of revenues includes land and community valuation adjustments of $0.1 million, $3.3 million, $1.5 million, and $11.0 million and net realizable value adjustments of $0.0 million, $(0.2) million, $0.1 million, and $9.9 million for the 1st Quarter, 2nd Quarter, 3rd Quarter, and 4th Quarter, respectively.

(b)

Income (loss) before income taxes includes the write-off (recovery) of deposits and pre-acquisition costs of $0.6 million, $3.7 million, $2.3 million, and $3.4 million for the 1st Quarter, 2nd Quarter, 3rd Quarter, and 4th Quarter, respectively. Income (loss) before income taxes also includes goodwill impairments of $240.5 million for the 3rd Quarter. Homebuilding income (loss) before income taxes includes amounts previously classified within Other Non-Operating.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

UNAUDITED QUARTERLY INFORMATION

(000’s omitted, except per share data)

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total
2010
Homebuilding:
Revenues	$	989,792			$	1,269,735			$	1,030,755			$	1,157,345			$	4,447,627
Cost of revenues (a)	859,093				1,107,019				957,637				1,136,191				4,059,940
Income (loss) before income taxes (b)	(19,980		)		2,859				(1,027,300		)		(195,734		)		(1,240,155		)
Financial Services:
Revenues	$	30,566			$	36,163			$	27,009			$	27,925			$	121,663
Income (loss) before income taxes	5,472				(8,585		)		3,463				5,259				5,609
Consolidated results:
Revenues	$	1,020,358			$	1,305,898			$	1,057,764			$	1,185,270			$	4,569,290
Income (loss) before income taxes	(14,508		)		(5,726		)		(1,023,837		)		(190,475		)		(1,234,546		)
Income taxes (benefit)	(2,020		)		(82,029		)		(28,721		)		(25,047		)		(137,817		)
Net income (loss)	$	(12,488	)		$	76,303			$	(995,116	)		$	(165,428	)		$	(1,096,729	)
Per share data:
Basic:
Net income (loss)	$	(0.03	)		$	0.20			$	(2.63	)		$	(0.44	)		$	(2.90	)
Weighted-average common shares outstanding	377,747				378,618				378,842				379,115				378,585
Assuming dilution:
Net income (loss)	$	(0.03	)		$	0.20			$	(2.63	)		$	(0.44	)		$	(2.90	)
Adjusted weighted-average common shares and effect of dilutive securities	377,747				380,412				378,842				379,115				378,585

(a)	Cost of revenues includes land and community valuation adjustments of $4.5 million, $25.5 million, $57.5 million, and $82.2 million and net realizable value adjustments of $0.6 million, $(0.2) million, $0.6 million, and $38.1 million for the 1st Quarter, 2nd Quarter, 3rd Quarter, and 4th Quarter, respectively.

(b)

Income (loss) before income taxes includes the write-off (recovery) of deposits and pre-acquisition costs of $0.5 million, $2.3 million, $1.1 million, and $1.6 million for the 1st Quarter, 2nd Quarter, 3rd Quarter, and 4th Quarter, respectively. Income (loss) before income taxes also includes impairments of investments of unconsolidated joint ventures of $1.9 million for the 1st Quarter and goodwill impairments of $1.4 million and $654.9 million for the 2nd Quarter and 3rd Quarter, respectively. Income (loss) before income taxes also includes insurance-related charges of $10.0 million, $9.6 million, $272.2 million, and $(11.4) million for the 1st Quarter, 2nd Quarter, 3rd Quarter, and 4th Quarter, respectively. Homebuilding income (loss) before income taxes includes amounts previously classified within Other Non-Operating.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

of PulteGroup, Inc.

We have audited the accompanying consolidated balance sheets of PulteGroup, Inc. (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PulteGroup, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PulteGroup, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 9, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Detroit, Michigan

February 9, 2012