Edgar Filing: MDC HOLDINGS INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

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

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


Delaware		84-0622967
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

4350 South Monaco Street, Suite 500 Denver, Colorado		80237
(Address of principal executive offices)		(Zip code)

(303) 773-1100

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨ (Do not check if a smaller reporting company)	Smaller Reporting Company	¨

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

As of June 30, 2010, 47,139,000 shares of M.D.C. Holdings, Inc. common stock were outstanding.

M.D.C. HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2010

INDEX


			Page No.
Part I.	Financial Information:

	Item 1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at June 30, 2010 and December 31, 2009	1

		Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009	2

		Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	3

		Notes to Unaudited Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

	Item 4.	Controls and Procedures	61

Part II.	Other Information:

	Item 1.	Legal Proceedings	62

	Item 1A.	Risk Factors	63

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

	Item 3.	Defaults Upon Senior Securities	64

	Item 4.	(Removed and Reserved)	64

	Item 5.	Other Information	64

	Item 6.	Exhibits	65

	Signatures		66

(i)

ITEM 1.

Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)


	June 30, 2010			December 31, 2009
Assets
Cash and cash equivalents	$	692,132		$	1,234,252
Marketable securities		941,403			327,944
Restricted cash		713			476
Receivables
Home sales receivables		34,096			10,056
Income taxes receivable		641			145,144
Other receivables		17,412			5,844
Mortgage loans held-for-sale, net		112,065			62,315
Inventories, net
Housing completed or under construction		382,971			260,324
Land and land under development		370,352			262,860
Property and equipment, net		41,188			38,421
Deferred tax asset, net of valuation allowance of $217,455 and $208,144 at June 30, 2010 and December 31, 2009, respectively		-			-
Related party assets		7,856			7,856
Prepaid expenses and other assets, net		80,369			73,816

Total Assets	$	2,681,198		$	2,429,308

Liabilities
Accounts payable	$	51,888		$	36,087
Accrued liabilities		289,614			291,969
Related party liabilities		86			1,000
Mortgage repurchase facility		65,305			29,115
Senior notes, net		1,242,325			997,991

Total Liabilities		1,649,218			1,356,162

Commitments and Contingencies		-			-

Stockholders’ Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding		-			-
Common stock, $0.01 par value; 250,000,000 shares authorized; 47,195,000 and 47,139,000 issued and outstanding, respectively, at June 30, 2010 and 47,070,000 and 47,017,000 issued and outstanding, respectively, at December 31, 2009		472			471
Additional paid-in-capital		810,929			802,675
Retained earnings		222,532			270,659
Accumulated other comprehensive loss		(1,294	)		-
Treasury stock, at cost; 56,000 and 53,000 shares at June 30, 2010 and December 31, 2009, respectively		(659	)		(659	)

Total Stockholders’ Equity		1,031,980			1,073,146

Total Liabilities and Stockholders’ Equity	$	2,681,198		$	2,429,308

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenue

Home sales revenue	$	311,276		$	185,554		$	452,219		$	352,536
Land sales revenue		5,699			1,954			5,714			4,572
Other revenue		9,355			7,758			15,475			14,090

Total Revenue		326,330			195,266			473,408			371,198

Costs and Expenses

Home cost of sales		255,062			152,118			364,452			293,443
Land cost of sales		4,974			1,500			5,165			2,841
Asset impairments, net		-			1,243			-			15,812
Marketing expenses		11,475			7,930			18,535			16,762
Commission expenses		11,611			6,953			16,740			13,311
General and administrative expenses		44,588			37,800			84,791			76,181
Other operating expenses		529			292			1,020			557
Related party expenses		-			4			9			9

Total Operating Costs and Expenses		328,239			207,840			490,712			418,916

Loss from Operations		(1,909	)		(12,574	)		(17,304	)		(47,718	)

Other income (expense)
Interest income		7,541			2,968			11,969			7,039
Interest expense		(9,436	)		(9,838	)		(19,810	)		(19,578	)
Other income		105			381			204			121

Loss before income taxes		(3,699	)		(19,063	)		(24,941	)		(60,136	)
Benefit from (provision for) income taxes, net		15			(10,519	)		384			(10,299	)

NET LOSS	$	(3,684	)	$	(29,582	)	$	(24,557	)	$	(70,435	)

LOSS PER SHARE

Basic	$	(0.08	)	$	(0.64	)	$	(0.53	)	$	(1.52	)

Diluted	$	(0.08	)	$	(0.64	)	$	(0.53	)	$	(1.52	)

DIVIDENDS DECLARED PER SHARE	$	0.25		$	0.25		$	0.50		$	0.50

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2010			2009
Operating Activities
Net loss	$	(24,557	)	$	(70,435	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities Asset impairments, net		-			15,812
Amortization of deferred marketing costs		5,528			3,804
Write-offs of land option deposits and pre-acquisition costs		873			557
Depreciation and amortization of long-lived assets		2,573			2,920
Stock-based compensation expense		8,202			7,325
Gain on sale of assets, net		(550	)		(1,531	)
Other non-cash expenses		872			1,223
Net changes in assets and liabilities:
Restricted cash		(237	)		51
Home sales and other receivables		(35,608	)		7,620
Income taxes receivable		144,503			169,862
Mortgage loans held-for-sale, net		(49,750	)		17,575
Housing completed or under construction		(122,647	)		114,079
Land and land under development		(105,669	)		16,506
Prepaid expenses and other assets, net		(14,629	)		(4,235	)
Accounts payable		15,801			(211	)
Accrued liabilities		(3,639	)		(29,104	)

Net cash (used in) provided by operating activities		(178,934	)		251,818

Investing Activities

Purchase of marketable securities		(722,159	)		(81,926	)
Maturity of marketable securities		88,287			64,864
Sale of marketable securities		19,119			-
Proceeds from redemption requests on unsettled trades		1,678			55,554
Purchase of property and equipment		(5,072	)		(4,549	)

Net cash (used in) provided by investing activities		(618,147	)		33,943

Financing Activities

Proceeds from issuance of senior notes		242,288			-
Payment on mortgage repurchase facility		(45,470	)		(34,873	)
Advances on mortgage repurchase facility		81,660			24,175
Dividend payments		(23,570	)		(23,437	)
Proceeds from exercise of stock options		53			3,471

Net cash provided in (used in) financing activities		254,961			(30,664	)

Net (decrease in) increase in cash and cash equivalents		(542,120	)		255,097
Cash and cash equivalents
Beginning of period		1,234,252			1,304,728

End of period	$	692,132		$	1,559,825

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

1.	Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. (“MDC” or the “Company,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The Company has evaluated subsequent events for recognition or disclosure through the date the Unaudited Consolidated Financial Statements were filed with the SEC. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at June 30, 2010 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on February 5, 2010.

The Consolidated Statements of Operations for the three and six months ended June 30, 2010 and Consolidated Statement of Cash Flows for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year. Refer to the economic conditions described under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and “Risk Factors Relating to our Business” in Item 1A of the Company’s December 31, 2009 Annual Report on Form 10-K.

2.	Asset Impairment

The Company’s held-for-development inventory is included as a component of housing completed or under construction and land and land under development in the Consolidated Balance Sheets.

The Company evaluates its held-for-development inventory for impairment at each quarter end. The Company did not have any impairments of its homebuilding inventory during the three and six months ended June 20, 2010. The following table sets forth, by reportable segment, the asset impairments recorded during the three and six months ended June 30, 2009 (in thousands).

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)


	Three Months Ended June 30, 2009			Six Months Ended June 30, 2009
Land and Land Under Development (Held-for-Development)
West	$	-		$	9,791
Mountain		-			254
East		1,450			1,600
Other Homebuilding		-			17

Subtotal		1,450			11,662

Housing Completed or Under Construction (Held-for-Development)
West		-			3,276
Mountain		-			-
East		275			875
Other Homebuilding		-			267

Subtotal		275			4,418

Land and Land Under Development (Held-for-Sale)
West		(557	)		(557	)
Mountain		-			-
East		-			-
Other Homebuilding		-			-

Subtotal		(557	)		(557	)

Other Assets		75			289

Consolidated Asset Impairments	$	1,243		$	15,812

During the 2009 second quarter, the Company’s impairments were concentrated in two subdivisions in the East segment and primarily resulted from declines in the demand for homes in these subdivisions.

The 2009 first quarter impairments of the Company’s held-for-development inventories were concentrated in the Nevada market of the West segment. These impairments resulted from a significant decrease in the average selling prices of closed homes during the 2009 first quarter, compared with the 2008 fourth quarter, in response to increased levels of competition in this market and continued high levels of home foreclosures. The impairments in the Mountain, East and Other Homebuilding segments primarily resulted from lower forecasted average selling prices for communities that are in the close out phase.

3.	Fair Value Measurements

ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents. For cash and cash equivalents, the fair value approximates carrying value.

Marketable securities. The Company’s marketable securities consist of both held-to-maturity and available-for-sale securities. The Company’s held-to-maturity marketable securities consist of both fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; and (2) deposit securities, which may include, among others, certificates of deposit and time deposits. For those debt securities that the Company has both the ability and intent to hold to their maturity dates, the Company classifies such debt securities as held-to-maturity. The Company’s held-to-maturity debt securities are reported at amortized cost in the Consolidated Balance Sheets.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

The following table shows the Company’s carrying value of its held-to-maturity marketable securities by both security type and maturity date as well as the estimated fair value for each security type (in thousands).


	June 30, 2010				December 31, 2009
	Recorded Amount		Estimated Fair Value		Recorded Amount		Estimated Fair Value
Debt securities - maturity less than 1 year	$	472,106	$	472,380	$	160,765	$	159,752
Debt securities - maturity 1 to 5 years		140,529		141,733		64,679		64,844
Deposit securities - maturity less than 1 year		2,500		2,508		2,500		2,558

Total held-to-maturity securities	$	615,135	$	616,621	$	227,944	$	227,154

Included in the Company’s June 30, 2010 held-to-maturity investment balances are $560.3 million of debt securities that were in a gross unrealized gain position of $1.8 million and $54.8 million of debt securities that were in a gross unrealized loss position of $0.3 million. Because the Company has the intent and ability to hold these securities to maturity and ultimately expects to receive the contractual amounts due to it, the Company has concluded that the decrease in fair value of these securities is not indicative of an other-than-temporary-impairment. Accordingly, the Company has continued to record each of these securities at its amortized cost.

For certain debt securities, primarily corporate debt, the Company may not have the intent to hold them until their maturity date and, as such, the Company classifies such debt securities as available-for-sale. The Company’s available-for-sale securities also include holdings in a fund that invests predominantly in fixed income securities. The Company records all of its available-for-sale marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income in the Consolidated Balance Sheets. The fair value of the Company’s marketable securities are based upon Level 1 fair value inputs.

The following table sets forth the amortized cost and estimated fair value of the Company’s available-for-sale marketable securities (in thousands).


	June 30, 2010				December 31, 2009
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Equity security	$	101,388	$	101,209	$	100,000	$	100,000
Debt securities		226,174		225,059		-		-

Total available-for-sale securities	$	327,562	$	326,268	$	100,000	$	100,000

Mortgage Loans Held-for-Sale, Net. As of June 30, 2010, the primary components of the Company’s mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At June 30, 2010 and December 31, 2009, the Company had $79.1 million and $42.8 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon a Level 1 input being the quoted market prices for those mortgage loans. At June 30, 2010 and December 31, 2009, the Company had $31.3 million and $19.4 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell and, as such, their fair value was based upon Level 2 fair value inputs, primarily estimated market price received from an outside party.

Inventories. The Company records its homebuilding inventory (housing completed or under construction and land and land under development) at fair value only when the undiscounted future cash flow of a subdivision is less than its carrying value. For the Company’s held-for-development subdivisions, the Company determines the estimated fair value of each subdivision by calculating the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. These estimates are dependent on specific market or sub-market conditions for each subdivision. Local market-specific conditions that may impact these estimates for a subdivision include, among other things: (1) forecasted base selling prices and home sales incentives; (2) estimated land development costs and home cost of construction; (3) the current sales pace for active subdivisions; (4) changes by management in the sales strategy of a given subdivision; and (5) the intensity of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors. The Company did not record any impairment to subdivisions during the three and six months ended June 30, 2010.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Related Party Asset. The Company’s related party assets are debt security bonds that it acquired from a quasi-municipal corporation in the state of Colorado. The Company has estimated the fair value of the related party assets based upon discounted cash flows as the Company does not believe there is a readily available market for such assets. The Company used a 15% discount rate in determining the present value of the estimated future cash flows from the bonds. The estimated cash flows from the bonds are ultimately based upon the Company’s estimated cash flows associated with the building, selling and closing of homes in one of its Colorado subdivisions. The estimated fair values of these assets are based upon Level 3 cash flow inputs. Based upon this evaluation, the estimated fair value of the related party assets approximates its carrying value.

Mortgage Repurchase Facility. The Company’s Mortgage Repurchase Facility (as defined below) is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities. The fair value approximates carrying value.

Senior Notes. The estimated fair values of the senior notes in the following table are considered to be Level 2 fair value inputs pursuant to ASC 820 and are an estimated fair value of the bonds when compared with bonds in the homebuilding sector (in thousands).


	June 30, 2010				December 31, 2009
	Recorded Amount		Estimated Fair Value		Recorded Amount		Estimated Fair Value
7% Senior Notes due 2012	$	149,553	$	161,977	$	149,460	$	161,550
5¹/2 % Senior Notes due 2013		349,694		361,270		349,642		360,500
5³/8 % Medium Term Senior Notes due 2014		249,183		255,242		249,102		240,050
5³/8 % Medium Term Senior Notes due 2015		249,804		253,450		249,787		236,800
5⁵/8 % Senior Notes due 2020		244,091		236,508		-		-

Total	$	1,242,325	$	1,268,447	$	997,991	$	998,900

4.	Derivative Financial Instruments

The Company utilizes certain derivative instruments in the normal course of business, which primarily include forward sales securities commitments and private investor sales commitments to hedge changes in fair value of mortgage loan inventory and commitments to originate mortgage loans. At June 30, 2010, the Company had $99.8 million in interest rate lock commitments, which consisted of $70.1 million in loan locks and $29.7 million in 4.25% promotional program commitments. Additionally, the Company had $105.2 million in forward sales of mortgage-backed securities.

The Company records its mortgage loans held-for-sale at fair value to achieve matching of the changes in the fair value of its derivative instruments with the changes in fair values of the loans it is hedging, without having to designate its derivatives as hedging instruments. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, the Company records the fair value of the derivatives in other revenue in the Consolidated Statements of Operations with an offset to either prepaid and other assets or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change. The changes in fair value of the Company’s derivatives were not material during the three and six months ended June 30, 2010 and 2009.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

5.	Balance Sheet Components

The following table sets forth information relating to accrued liabilities (in thousands).


	June 30, 2010		December 31, 2009
Accrued liabilities
Liability for unrecognized tax benefits	$	60,197	$	60,226
Warranty reserves		51,986		59,022
Insurance reserves		48,312		51,606
Land development and home construction accruals		20,042		21,236
Accrued compensation and related expenses		19,535		20,297
Accrued executive deferred compensation		19,163		17,782
Accrued interest payable		17,879		12,023
Legal accruals		14,910		14,489
Loan loss reserves		8,069		9,641
Customer and escrow deposits		6,610		5,524
Other accrued liabilities		22,911		20,123

Total accrued liabilities	$	289,614	$	291,969

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

6.	Loss Per Share

For purposes of calculating loss per share (“EPS”), as the Company has participating security holders (security holders who receive non-forfeitable dividends on unvested restricted stock) it is required to utilize the two-class method for calculating earnings per share. The two-class method is an allocation of earnings between the holders of common stock and the Company’s participating security holders. Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders, based on their respective rights to receive distributed earnings (i.e. dividends) and undistributed earnings (i.e. net income or loss). Currently, the Company has one class of security and has participating security holders consisting of shareholders of unvested restricted stock. The basic and diluted EPS calculations are shown below (in thousands, except per share amounts).


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Basic and Diluted Loss Per Common Share
Net loss	$	(3,684	)	$	(29,582	)	$	(24,557	)	$	(70,435	)
Less: distributed and undistributed earnings allocated to participating securities		(135	)		(100	)		(259	)		(201	)

Net loss attributable to common stockholders	$	(3,819	)	$	(29,682	)	$	(24,816	)	$	(70,636	)


Basic and diluted weighted-average shares outstanding		46,617			46,548			46,615			46,474
Basic Loss Per Common Share	$	(0.08	)	$	(0.64	)	$	(0.53	)	$	(1.52	)

Dilutive Loss Per Common Share	$	(0.08	)	$	(0.64	)	$	(0.53	)	$	(1.52	)

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include stock options and unvested restricted stock. Diluted EPS for the three and six months ended June 30, 2010 and 2009 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS were 0.4 million shares during the three and six months ended June 30, 2010 and were 0.4 million shares during the three and six months ended June 30, 2009.

7.	Interest Activity

The Company capitalizes interest on its senior notes associated with its qualifying assets. The Company has determined that inventory is a qualifying asset during the period of active development and through the completion of construction of a home. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Interest activity is shown below (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Total Interest Incurred

Corporate and homebuilding segments	$	18,158		$	14,455		$	35,089		$	28,948
Financial Services and Other		127			83			206			174

Total interest incurred	$	18,285		$	14,538		$	35,295		$	29,122

Total Interest Capitalized

Interest capitalized, beginning of period	$	31,773		$	36,050		$	28,339		$	39,239
Interest capitalized		8,849			4,700			15,485			9,544
Previously capitalized interest included in home cost of sales		(8,202	)		(8,661	)		(11,404	)		(16,694	)

Interest capitalized, end of period	$	32,420		$	32,089		$	32,420		$	32,089

8.	Warranty Reserves

Warranty reserves presented in the table below relate to general and structural reserves, as well as reserves for known, unusual warranty-related expenditures. Warranty payments incurred for an individual house may differ from the related reserve established for the home at the time it home was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an adjustment to the historical warranty reserve should be recorded, that would result in a corresponding adjustment to home cost of sales. During the 2010 second quarter, in light of a continued decrease in the Company’s warranty payments, and similar to its procedure in prior years, the Company engaged a third-party actuary to assist in its analysis of estimated future warranty payments. Based upon the actuarial analysis, the Company refined its methodology of estimating a reasonable range for warranty reserves. The Company believes the refined methodology will result in a better estimate of warranty cost exposure especially in periods of declining payment activity and provide better visibility to the sensitivity of the estimate in the current environment. The Company will continue to periodically engage a third-party actuary for purposes of assisting us in evaluating and determining the reasonableness of our warranty reserves.

The following table summarizes the warranty reserve activity for the three and six months ended June 30, 2010 and 2009 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Warranty reserve balance at beginning of period	$	54,054		$	84,911		$	59,022		$	89,318
Warranty expense provisions		2,220			1,872			3,210			3,346
Warranty cash payments		(2,611	)		(2,327	)		(4,640	)		(4,565	)
Warranty reserve adjustments		(1,677	)		(10,904	)		(5,606	)		(14,547	)

Warranty reserve balance at end of period	$	51,986		$	73,552		$	51,986		$	73,552

The warranty adjustments recorded during the three and six months ended June 30, 2010 and 2009, primarily were recorded as a reduction to home cost of sales in the Consolidated Statements of Operations and resulted from the improvement in historical warranty payment trends on previously closed homes.

9.	Insurance Reserves

The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies and re-insurance agreements issued by Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”) and StarAmerican Insurance Ltd. (“StarAmerican”); (2) self-insurance, including workers compensation; and (3) deductible amounts under the Company’s insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on actuarial studies that include known facts and interpretations of circumstances, including the Company’s experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns such as those caused by natural disasters, fires or accidents, depending on the business conducted, and changing regulatory and legal environments.

- 10 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

The following table summarizes the insurance reserve activity for the three and six months ended June 30, 2010 and 2009 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Insurance reserve balance at beginning of period	$	51,390		$	59,695		$	51,606		$	59,171
Insurance expense provisions		1,231			929			1,814			1,827
Insurance cash payments		(4,309	)		(222	)		(5,108	)		(596	)
Insurance reserve adjustments		-			(1,007	)		-			(1,007	)

Insurance reserve balance at end of period	$	48,312		$	59,395		$	48,312		$	59,395

The insurance payments incurred during the three and six months ended June 30, 2010, primarily related to payments for certain insurance claims for which a separate case reserve was previously established.

10.

Information on Business Segments

The Company’s operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. The Company has identified its chief operating decision-makers (“CODMs”) as three key executives—the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer.

The Company has identified each homebuilding subdivision as an operating segment as each homebuilding subdivision engages in business activities from which it earns revenue, primarily from the sale of single-family detached homes, generally to first-time and first-time move-up homebuyers. Subdivisions in the reportable segments noted below have been aggregated because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. The Company’s homebuilding reportable segments are as follows:

(1)

West (Arizona, California and Nevada)

(2)

Mountain (Colorado and Utah)

(3)

East (Delaware Valley, Maryland and Virginia)

(4)

Other Homebuilding (Florida and Illinois)

The Company’s Financial Services and Other reportable segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant; (3) StarAmerican; (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. These operating segments have been aggregated into one reportable segment because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (A) the combined reported profit of all operating segments that did not report a loss or (B) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets. The Company’s Corporate reportable segment incurs general and administrative expenses that are not identifiable specifically to another operating segment, earns interest income on its cash, cash equivalents and marketable securities, and incurs interest expense on its senior notes.

- 11 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

The following table summarizes revenue for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the revenue table below relate to Mortgage Loan Origination fees paid by the Company’s homebuilding subsidiaries to HomeAmerican on behalf of homebuyers.


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Homebuilding
West	$	123,193		$	81,758		$	180,330		$	156,440
Mountain		110,112			57,658			156,794			101,775
East		72,657			39,479			104,162			79,971
Other Homebuilding		16,757			13,117			25,793			26,800

Total Homebuilding		322,719			192,012			467,079			364,986
Financial Services and Other		9,143			7,006			14,764			12,569
Corporate		-			-			-			50
Intercompany adjustments		(5,532	)		(3,752	)		(8,435	)		(6,407	)

Consolidated	$	326,330		$	195,266		$	473,408		$	371,198

The following table summarizes (loss) income before income taxes for each of the Company’s six reportable segments (in thousands). Inter-company supervisory fees (“Supervisory Fees”), which are included in (loss) income before income taxes for each reportable segment in the table below, are charged by the Company’s Corporate segment to the homebuilding segments and the Financial Services and Other segment. Supervisory Fees represent costs incurred by the Company’s Corporate segment associated with certain resources that support the Company’s other reportable segments. Transfers, if any, between operating segments are recorded at cost.


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Homebuilding
West	$	6,357		$	10,075		$	8,711		$	(228	)
Mountain		4,962			(2,308	)		6,132			(7,119	)
East		1,455			(4,626	)		(64	)		(6,997	)
Other Homebuilding		295			(677	)		(224	)		(1,508	)

Total Homebuilding		13,069			2,464			14,555			(15,852	)
Financial Services and Other		4,089			2,615			5,935			4,236
Corporate		(20,857	)		(24,142	)		(45,431	)		(48,520	)

Consolidated	$	(3,699	)	$	(19,063	)	$	(24,941	)	$	(60,136	)

- 12 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

The following table summarizes total assets for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the table below relate to loans from the Company’s Financial Services and Other segment to its Corporate segment. The assets in the Company’s Corporate segment primarily include cash, cash equivalents and marketable securities.


	June 30, 2010			December 31, 2009
Homebuilding
West	$	300,848		$	190,204
Mountain		328,696			237,702
East		170,525			112,964
Other Homebuilding		36,457			26,778

Total Homebuilding		836,526			567,648
Financial Services and Other		183,478			133,957
Corporate		1,663,851			1,773,660
Intercompany adjustments		(2,657	)		(45,957	)

Consolidated	$	2,681,198		$	2,429,308

The following table summarizes depreciation and amortization of long-lived assets and amortization of deferred marketing costs for each of the Company’s six reportable segments (in thousands).


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Homebuilding
West	$	2,211	$	771	$	3,285	$	2,517
Mountain		1,091		640		1,554		1,202
East		639		443		951		946
Other Homebuilding		237		72		398		180

Total Homebuilding		4,178		1,926		6,188		4,845
Financial Services and Other		170		167		339		386
Corporate		821		738		1,574		1,493

Consolidated	$	5,169	$	2,831	$	8,101	$	6,724

11.

Commitments and Contingencies

The Company often is required to obtain bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At June 30, 2010, the Company had issued and outstanding performance bonds and letters of credit totaling $90.7 million and $19.8 million, respectively, including $5.3 million in letters of credit issued by HomeAmerican. In the event any such bonds or letters of credit issued by third parties are called, MDC could be obligated to reimburse the issuer of the bond or letter of credit.

Legal Reserves. Litigation has been filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. (“RAH West Virginia”) and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs seek compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation includes the following actions:

- 13 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia (“Joy”). This action was filed on May 16, 2008, by sixty-six plaintiffs from sixteen households. The Company and RAH West Virginia have answered and asserted claims against the subcontractors for contractual and implied indemnity and contribution.

Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia (“Bauer”). This action was filed on October 24, 2008, by eighty-six plaintiffs from twenty-one households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia (“Saliba”). This action was filed on November 7, 2008, by thirty-five plaintiffs from nine households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

By orders dated November 4 and 18, 2009, the trial court struck the answers filed by the Company and RAH West Virginia and entered judgment by default in favor of the plaintiffs on liability, with damages to be determined in a subsequent jury trial. On December 7, 2009, the Company and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On January 15, 2010, the West Virginia Supreme Court of Appeals entered an order agreeing to consider the request to vacate the default judgment. The hearing to consider this request occurred on March 31, 2010.

On June 16, 2010, the West Virginia Supreme Court of Appeals rendered its opinion holding that imposition of a default judgment sanction will be upheld if a trial court’s findings adequately demonstrate and establish willfulness, bad faith or fault. The Supreme Court of Appeals found that the sanctions orders lacked the required specificity. The Supreme Court of Appeals noted that the trial court is authorized to impose sanctions if the action taken is based on specific factual findings of serious misconduct in light of the standards set forth in the opinion. The Supreme Court of Appeals granted the Company and RAH West Virginia a writ of prohibition and vacated the trial court’s sanctions orders.

Pursuant to the rules of the Supreme Court, the underlying proceedings in the Circuit Court had been stayed pending the Supreme Court’s decision. Under the Supreme Court’s applicable rules, the stay expired on July 19, 2010.

Also, a new lawsuit has been filed by homeowners in West Virginia against the Company, RAH West Virginia and individual superintendants who had worked for RAH West Virginia. The new litigation consists of the following:

Thorin, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 10-C-154, Circuit Court of Jefferson County, West Virginia (“Thorin”). This action was filed on May 12, 2010, by forty plaintiffs from eleven households in Jefferson and Berkeley Counties. To date, this action has not been consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case are substantially similar to the Joy, Bauer and Saliba cases.

MDC and RAH West Virginia believe that they have meritorious defenses to each of the lawsuits and intend to vigorously defend the actions.

Additionally, in the normal course of business, the Company is a defendant in claims primarily relating to construction defects, product liability and personal injury claims. These claims seek relief from the Company under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes. The Company has accrued for losses that may be incurred with respect to legal claims based upon information provided to it by its legal counsel, including counsels’ on-going evaluation of the merits of the claims and defenses. Due to uncertainties in the estimation process, actual results could vary from those accruals. The Company had legal accruals of $14.9 million and $14.5 million at June 30, 2010 and December 31, 2009, respectively.

Mortgage Loan Loss Reserves. In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican’s loan sale agreements pursuant to which mortgage loans are sold to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior period loans; and (3) historical loss experience. The Company’s mortgage loan loss reserves of $8.1 million and $9.6 million at June 30, 2010 and December 31, 2009, respectively, are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations. The Company made cash payments associated with its mortgage loan loss reserve of $1.3 million during the six months ended June 30, 2010.

- 14 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

12.

Lines of Credit and Total Debt Obligations

Homebuilding. On June 30, 2010, the Company terminated its homebuilding line of credit (“Homebuilding Line”), which was an unsecured revolving line of credit with a group of lenders that had a maturity date of March 21, 2011. The Company used this facility to provide letters of credit required in the ordinary course of its business and financing in support of its homebuilding segments. There were no penalties associated with the termination of the credit facility and the Company believes that at the time of termination it was in compliance with the covenants under the Homebuilding Line credit agreement. Prior to the termination of the Homebuilding Line, the Company transferred or replaced all letters of credit that had been outstanding. At the time of the termination, the Homebuilding Line had an aggregate commitment of $12.0 million and the Company had no letters of credit and no borrowings outstanding under the line. The Homebuilding Line was terminated as the Company believes that it does not need the Homebuilding Line to meet its liquidity needs.

Mortgage Lending. As of June 30, 2010 HomeAmerican had, and continues to have, a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”) and other banks that may be parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). As of June 30, 2010, USBNA was the only Buyer under the Mortgage Repurchase Facility. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA (as agent for the Buyers) with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as agent for the Buyers and as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. The Mortgage Repurchase Facility expires on October 28, 2010. Advances under the Mortgage Repurchase Facility carry a Pricing Rate equal to the greater of (i) the LIBOR Rate (as defined in the Mortgage Repurchase Facility) plus 2.5%, or (ii) 4.5%. At HomeAmerican’s option the Balance Funded Rate (equal to 4.5%) may be applied to certain advances under the Mortgage Repurchase Facility provided the applicable Buyer is holding sufficient Qualifying Balances. The foregoing terms are defined in the Mortgage Repurchase Facility. At June 30, 2010 and December 31, 2009, the Company had $65.3 million and $29.1 million, respectively, of mortgage loans that it was obligated to repurchase under the Mortgage Repurchase Facility.

The Mortgage Repurchase Facility is accounted for as a debt financing arrangement. Accordingly, at June 30, 2010 and December 31, 2009, amounts advanced under the Mortgage Repurchase Facility, which were used to finance mortgage loan originations, have been reported as a liability in Mortgage Repurchase Facility in the Consolidated Balance Sheets.

General. The agreement for the Company’s Mortgage Repurchase Facility requires compliance with certain representations, warranties and covenants. The Company believes that it is in compliance with these representations, warranties and covenants and the Company is not aware of any covenant violations.

The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants customary for agreements of this type. The negative covenants include, among others, (i) an Adjusted Tangible Net Worth (as defined) requirement, (ii) a minimum Adjusted Tangible Net Worth Ratio, (iii) an Adjusted Net Income requirement, and (iv) a minimum Liquidity (as defined) requirement (the foregoing terms are defined in the Mortgage Repurchase Facility). Adjusted Tangible Net Worth means the sum of (a) all assets of HomeAmerican less (b) the sum of (i) all Debt and all Contingent Indebtedness of HomeAmerican, (ii) all assets of HomeAmerican that would be classified as intangible assets under generally accepted accounting principles, and (iii) receivables from Affiliates. HomeAmerican’s Adjusted Tangible Net Worth Ratio is the ratio of HomeAmerican’s total liabilities (excluding Permitted Letters of Credit) to the Adjusted Tangible Net Worth. HomeAmerican’s Adjusted Net Income is a rolling twelve consecutive months of net income for HomeAmerican. HomeAmerican’s Liquidity is defined as its unencumbered and unrestricted cash and Cash Equivalents plus the amount by which the aggregate Purchase Value of all Purchased Mortgage Loans at such time exceeds the aggregate Purchase Price outstanding for all Open Transactions at such time. The foregoing terms are defined in the Mortgage Repurchase Facility.

- 15 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Failure to meet the foregoing negative covenants would constitute an event of default. In the event of default, USBNA may, at its option, declare the Repurchase Date for any or all Transactions to be deemed immediately to occur. Upon such event of default, and if USBNA exercises its right to terminate any Transactions, then (a) HomeAmerican’s obligation to repurchase all Purchased Loans in such Transactions will become immediately due and payable; (b) the Repurchase Price for each such Transaction shall be increased by the aggregate amount obtained by daily multiplication of (i) the greater of the Pricing Rate for such Transaction and the Default Pricing Rate by (ii) the Purchase Price for the Transaction as of the Repurchase Date, (c) all Income paid after the event of default will be payable to and retained by USBNA and applied to the aggregate unpaid Repurchase Prices owed by HomeAmerican, and (d) HomeAmerican shall deliver any documents relating to Purchased Loans subject to such Transactions to USBNA. Upon the occurrence of an event of default, USBNA may (a) sell any or all Purchased Loans subject to such Transactions on a servicing released or servicing retained basis and apply the proceeds to the unpaid amounts owed by HomeAmerican, (b) give HomeAmerican credit for such Purchased Loans in an amount equal to the Market Value and apply such credit to the unpaid amounts owed by HomeAmerican, (c) replace HomeAmerican as Servicer, (d) exercise its right under the Mortgage Repurchase Facility with respect to the Income Account and Escrow Account, and (e) with notice to HomeAmerican, declare the Termination Date to have occurred. The foregoing terms are defined in the Mortgage Repurchase Facility.

In January 2010, the Company completed a public offering of $250 million principal amount of 5⁵/8% senior notes due February 2020 (the “2020 Notes”). The 2020 Notes, which pay interest in February and August of each year, are general unsecured obligations of MDC and rank equally and ratably with its other general unsecured and unsubordinated indebtedness. The Company is not required to make any principal payments until February 2020. In addition, the Notes are fully guaranteed on an unsecured basis, jointly and severally, by most of the Company’s homebuilding subsidiaries. The 2020 Notes may be redeemed, at the election of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of (1) 100% of their principal amount; or (2) the present value of the remaining scheduled payments on the notes being redeemed on the redemption date discounted on a semiannual basis at the Treasury Rate (as defined) plus 0.35%, plus, in each case, accrued and unpaid interest. Upon the occurrence of both a change of control and a below investment grade rating event, the Company is required to offer to repurchase the 2020 Notes at a repurchase price in cash equal to 101% of the aggregate principal amount of the notes. The Company received proceeds of $242.3 million, net of discounts and issuance costs of $6.1 million and $1.6 million, respectively. The Company is using the proceeds of the offering for general corporate purposes.

The Company’s senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of its homebuilding segment subsidiaries. The Company’s debt obligations at June 30, 2010 and December 31, 2009 are as follows (in thousands):


	June 30, 2010		December 31, 2009
7% Senior Notes due 2012	$	149,553	$	149,460
5¹/2 % Senior Notes due 2013		349,694		349,642
5³/8 % Medium-Term Senior Notes due 2014		249,183		249,102
5³/8 % Medium-Term Senior Notes due 2015		249,804		249,787
5⁵/8 % Senior Notes due 2020		244,091		-

Total Senior Notes, net	$	1,242,325	$	997,991
Mortgage repurchase facility		65,305		29,115

Total Debt	$	1,307,630	$	1,027,106

- 16 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

13.

Income Taxes

The Company is required, at the end of each interim period, to estimate its annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Based on these estimates, the Company’s overall effective income tax rates were 0.4% and 1.5% during the three and six months ended June 30, 2010, respectively, and -55.2% and -17.1% during the three and six months ended June 30, 2009, respectively. The change in the effective tax rates during the 2010 second quarter and first six months, compared with the same periods during 2009, resulted primarily from recording during the 2009 second quarter a $9.7 million income tax expense related to an IRS examination of the Company’s 2008 net operating loss carryback to 2006.

The Company is required to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. Any difference between the income tax return position and the benefit recognized in the financial statements results in a liability for unrecognized tax benefits. During the three and six months ended June 30, 2010, there have been no material changes in the Company’s liability for unrecognized tax benefits.

During the 2010 first quarter, the Company reached a settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns, which settlement is subject to review by the Joint Committee on Taxation (“Joint Committee”). The settlement is expected to result in a decrease of approximately $35 million in the Company’s gross unrecognized tax benefits. The settlement is also expected to result in an increase of approximately $13 million to additional paid-in-capital in the Company’s Consolidated Statements of Stockholders’ Equity and an income tax benefit of approximately $1 million in the Company’s Consolidated Statement of Operations. Finally, since the Company made a deposit of $35.6 million, included in Prepaid Expenses and Other Assets in the Consolidated Balance Sheets, with the IRS during 2008 related to this audit, the settlement is expected to result in an increase of approximately $12 million to cash in the Company’s Consolidated Balance Sheets. At June 30, 2010, the Company was still awaiting final review by the Joint Committee.

Also during the 2010 first quarter, the Company received a $142.1 million federal income tax refund, which was generated by a 2009 federal net operating loss carry back to the 2004 and 2005 tax years in accordance with the provisions contained in the Worker, Homeownership, and Business Assistance Act of 2009.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The increase in the Company’s total deferred tax asset at June 30, 2010 (per the table below) resulted primarily from an increase in the Company’s federal and state net operating loss carry forwards, offset by a decrease in the Company’s asset impairment charges.

A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. The Company had a valuation allowance of $217.5 million and $208.1 million at June 30, 2010 and December 31, 2009, respectively, resulting in a net deferred tax asset of zero. The Company’s future realization of its deferred tax assets ultimately depends upon the existence of sufficient taxable income in the carryback or carryforward periods under the tax laws. The Company will continue analyzing, in subsequent reporting periods, the positive and negative evidence in determining the expected realization of its deferred tax assets.

- 17 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows (in thousands).


	June 30, 2010			December 31, 2009
Deferred tax assets
Asset impairment charges	$	55,245		$	87,121
State net operating loss carryforward		45,676			41,845
Federal net operating loss carryforward		43,688			5,716
Warranty, litigation and other reserves		35,282			38,789
Stock-based compensation expense		20,392			17,510
Alternative minimum tax credit carryforward		9,679			9,679
Accrued liabilities		8,628			7,921
Inventory, additional costs capitalized for tax purposes		6,961			7,317
Property, equipment and other assets, net		2,151			2,622
Charitable contribution carryforward		932			934
Deferred revenue		351			321

Total deferred tax assets		228,985			219,775
Valuation allowance		(217,455	)		(208,144	)

Total deferred tax assets, net of valuation allowance		11,530			11,631

Deferred tax liabilities
Deferred revenue		6,256			5,820
Inventory, additional costs capitalized for financial statement purposes		627			681
Accrued liabilities		406			926
Other, net		4,241			4,204

Total deferred tax liabilities		11,530			11,631

Net deferred tax asset	$	-		$	-

14.

Variable Interest Entities

In the normal course of business, the Company enters into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments, including interest and other carrying costs, and minimizes the amount of the Company’s land inventories on its consolidated balance sheets.

In compliance with ASC 810, the Company analyzes its land option contracts and other contractual arrangements to determine whether the corresponding land sellers are variable interest entities (“VIE”) and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the optioned land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. As a result of its analyses, the Company determined that as of June 30, 2010 it was not the primary beneficiary of any VIEs from which it is purchasing land under land option contracts. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of, or the right to receive benefits from, the VIE.

The Company’s financial exposure with respect to VIEs is limited to the forfeiture of non-refundable deposit of cash or letters of credit. As of June 30, 2010 the Company had cash deposits and letters of credit totaling $7.9 million and $2.7 million, respectively, associated with the right to acquire 3,606 lots under Option Contracts.

- 18 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

The Company cash deposits for Option Contracts are included in Prepaid Expenses and Other Assets in the Consolidated Balance Sheets.

15.

Other Comprehensive Loss

Total other comprehensive loss includes net loss plus $2.4 million and $1.3 million, respectively, during the three and six months ended June 30, 2010 of unrealized loss on the Company’s available-for-sale marketable securities. Accordingly, the Company’s other comprehensive loss was $6.1 million and $25.9 million, respectively, during the three and six months ended June 30, 2010.

16.

Supplemental Guarantor Information

The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the “Guarantor Subsidiaries”), which are 100%-owned subsidiaries of the Company.

•

M.D.C. Land Corporation

•

RAH of Florida, Inc.

•

Richmond American Construction, Inc.

•

Richmond American Homes of Arizona, Inc.

•

Richmond American Homes of Colorado, Inc.

•

Richmond American Homes of Delaware, Inc.

•

Richmond American Homes of Florida, LP

•

Richmond American Homes of Illinois, Inc.

•

Richmond American Homes of Maryland, Inc.

•

Richmond American Homes of Nevada, Inc.

•

Richmond American Homes of New Jersey, Inc.

•

Richmond American Homes of Pennsylvania, Inc.

•

Richmond American Homes of Utah, Inc.

•

Richmond American Homes of Virginia, Inc.

•

Richmond American Homes of West Virginia, Inc.

Subsidiaries that do not guarantee the Company’s senior notes (collectively, the “Non-Guarantor Subsidiaries”) primarily include:

•

American Home Insurance

•

American Home Title

•

HomeAmerican

•

StarAmerican

•

Allegiant

The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

- 19 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Balance Sheet

June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated MDC
Asset
Cash and cash equivalents	$	655,241		$	5,485	$	31,406	$	-		$	692,132
Marketable securities		911,863			-		29,540		-			941,403
Restricted cash		-			713		-		-			713
Receivables		11,371			40,832		2,603		(2,657	)		52,149
Mortgage loans held-for-sale, net		-			-		112,065		-			112,065
Inventories, net
Housing completed or under construction		-			382,971		-		-			382,971
Land and land under development		-			370,352		-		-			370,352
Investment in subsidiaries		106,192			-		-		(106,192	)		-
Other assets, net		87,049			36,396		5,968		-			129,413

Total Assets	$	1,771,716		$	836,749	$	181,582	$	(108,849	)	$	2,681,198


Liabilities
Accounts payable and related party liabilities	$	2,743		$	51,331	$	557	$	(2,657	)	$	51,974
Accrued liabilities		135,367			91,493		62,754		-			289,614
Advances and notes payable to parent and subsidiaries		(640,699	)		638,903		1,796		-			-
Mortgage repurchase facility		-			-		65,305		-			65,305
Senior notes, net		1,242,325			-		-		-			1,242,325

Total Liabilities		739,736			781,727		130,412		(2,657	)		1,649,218


Stockholders’ Equity		1,031,980			55,022		51,170		(106,192	)		1,031,980

Total Liabilities and Stockholders’ Equity	$	1,771,716		$	836,749	$	181,582	$	(108,849	)	$	2,681,198

- 20 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Balance Sheet

December 31, 2009

(In thousands)


	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Asset
Cash and cash equivalents	$	1,210,123		$	3,258	$	20,871		$	-		$	1,234,252
Marketable securities		327,944			-		-			-			327,944
Restricted cash		-			476		-			-			476
Receivables		137,688			24,740		44,573			(45,957	)		161,044
Mortgage loans held-for-sale, net		-			-		62,315			-			62,315
Inventories, net
Housing completed or under construction		-			260,324		-			-			260,324
Land and land under development		-			262,860		-			-			262,860
Investment in subsidiaries		90,413			-		-			(90,413	)		-
Other assets, net		87,121			29,629		3,343			-			120,093

Total Assets	$	1,853,289		$	581,287	$	131,102		$	(136,370	)	$	2,429,308


Liabilities
Accounts payable and related party liabilities	$	48,331		$	34,017	$	696		$	(45,957	)	$	37,087
Accrued liabilities		133,226			95,705		63,038			-			291,969
Advances and notes payable to parent and subsidiaries		(399,405	)		410,285		(10,880	)		-			-
Mortgage repurchase facility		-			-		29,115			-			29,115
Senior notes, net		997,991			-		-			-			997,991

Total Liabilities		780,143			540,007		81,969			(45,957	)		1,356,162


Stockholders’ Equity		1,073,146			41,280		49,133			(90,413	)		1,073,146

Total Liabilities and Stockholders’ Equity	$	1,853,289		$	581,287	$	131,102		$	(136,370	)	$	2,429,308

- 21 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Statements of Operations

Three Months Ended June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-		$	316,809		$	-		$	(5,533	)	$	311,276
Land sales and other revenue		-			5,910			9,144			-			15,054
Equity in (loss) income of subsidiaries		15,307			-			-			(15,307	)		-

Total Revenue		15,307			322,719			9,144			(20,840	)		326,330


COSTS AND EXPENSES
Home cost of sales		-			260,614			(19	)		(5,533	)		255,062
Asset impairments, net		-			-			-			-			-
Marketing and commission expenses		-			23,086			-			-			23,086
General and administrative and other expenses		18,607			25,828			5,656			-			50,091

Total Operating Costs and Expenses		18,607			309,528			5,637			(5,533	)		328,239

(Loss) income from Operations		(3,300	)		13,191			3,507			(15,307	)		(1,909	)
Other income (expense)		(2,422	)		28			604			-			(1,790	)

(Loss) income before income taxes		(5,722	)		13,219			4,111			(15,307	)		(3,699	)
Provision for income taxes		2,038			(245	)		(1,778	)		-			15

NET (LOSS) INCOME	$	(3,684	)	$	12,974		$	2,333		$	(15,307	)	$	(3,684	)

- 22 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Statements of Operations

Three Months Ended June 30, 2009

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-		$	189,306		$	-		$	(3,752	)	$	185,554
Land sales and other revenue		-			2,706			7,006			-			9,712
Equity in (loss) income of subsidiaries		(4,778	)		-			-			4,778			-

Total Revenue		(4,778	)		192,012			7,006			1,026			195,266


COSTS AND EXPENSES
Home cost of sales		-			155,876			(6	)		(3,752	)		152,118
Asset impairments		-			1,243			-			-			1,243
Marketing and commission expenses		-			14,883			-			-			14,883
General and administrative and other expenses		16,851			17,909			4,836			-			39,596

Total Operating Costs and Expenses		16,851			189,911			4,830			(3,752	)		207,840

(Loss) income from Operations		(21,629	)		2,101			2,176			4,778			(12,574	)
Other income (expense)		(7,046	)		147			410			-			(6,489	)

(Loss) income before income taxes		(28,675	)		2,248			2,586			4,778			(19,063	)
Benefit from (provision for) income taxes		(907	)		(8,443	)		(1,169	)		-			(10,519	)

NET (LOSS) INCOME	$	(29,582	)	$	(6,195	)	$	1,417		$	4,778		$	(29,582	)

- 23 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Statements of Operations

Six Months Ended June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-		$	460,655		$	-		$	(8,436	)	$	452,219
Land sales and other revenue		-			6,424			14,765			-			21,189
Equity in (loss) income of subsidiaries		17,661			-			-			(17,661	)		-

Total Revenue		17,661			467,079			14,765			(26,097	)		473,408


COSTS AND EXPENSES
Home cost of sales		-			372,925			(37	)		(8,436	)		364,452
Asset impairments, net		-			-			-			-			-
Marketing and commission expenses		-			35,275			-			-			35,275
General and administrative and other expenses		36,789			44,451			9,745			-			90,985

Total Operating Costs and Expenses		36,789			452,651			9,708			(8,436	)		490,712

(Loss) income from Operations		(19,128	)		14,428			5,057			(17,661	)		(17,304	)
Other income (expense)		(8,630	)		76			917			-			(7,637	)

(Loss) income before income taxes		(27,758	)		14,504			5,974			(17,661	)		(24,941	)
Provision for income taxes		3,201			(223	)		(2,594	)		-			384

NET (LOSS) INCOME	$	(24,557	)	$	14,281		$	3,380		$	(17,661	)	$	(24,557	)

- 24 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Statements of Operations

Six Months Ended June 30, 2009

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-		$	358,943		$	-		$	(6,407	)	$	352,536
Land sales and other revenue		50			6,043			12,569			-			18,662
Equity in (loss) income of subsidiaries		(22,104	)		-			-			22,104			-

Total Revenue		(22,054	)		364,986			12,569			15,697			371,198


COSTS AND EXPENSES
Home cost of sales		-			299,856			(6	)		(6,407	)		293,443
Asset impairments		-			15,812			-			-			15,812
Marketing and commission expenses		-			30,073			-			-			30,073
General and administrative and other expenses		34,822			35,490			9,276			-			79,588

Total Operating Costs and Expenses		34,822			381,231			9,270			(6,407	)		418,916

(Loss) income from Operations		(56,876	)		(16,245	)		3,299			22,104			(47,718	)
Other income (expense)		(13,365	)		(20	)		967			-			(12,418	)

(Loss) income before income taxes		(70,241	)		(16,265	)		4,266			22,104			(60,136	)
Benefit from (provision for) income taxes		(194	)		(8,343	)		(1,762	)		-			(10,299	)

NET (LOSS) INCOME	$	(70,435	)	$	(24,608	)	$	2,504		$	22,104		$	(70,435	)

- 25 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Statements of Cash Flows

Six Months Ended June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Net cash provided by (used in) operating activities	$	71,574		$	(225,398	)	$	(7,449	)	$	(17,661	)	$	(178,934	)

Net cash used in investing activities		(588,283	)		(454	)		(29,410	)		-			(618,147	)

Financing activities
Payments from (advances to) subsidiaries		(256,944	)		228,079			11,204			17,661			-
Proceeds from issuance of senior notes, net		242,288			-			-			-			242,288
Mortgage repurchase facility		-			-			36,190			-			36,190
Dividend payments		(23,570	)		-			-			-			(23,570	)
Proceeds from exercise of stock options		53			-			-			-			53

Net cash provided by (used in) financing activities		(38,173	)		228,079			47,394			17,661			254,961

Net (decrease) increase in cash and cash equivalents		(554,882	)		2,227			10,535			-			(542,120	)
Cash and cash equivalents
Beginning of period		1,210,123			3,258			20,871			-			1,234,252

End of period	$	655,241		$	5,485		$	31,406		$	-		$	692,132

- 26 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

Supplemental Condensed Combining Statements of Cash Flows

Six Months Ended June 30, 2009

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Net cash (used in) provided by operating activities	$	103,162		$	110,484		$	16,068		$	22,104		$	251,818

Net cash provided by (used in) investing activities		33,977			(34	)		-			-			33,943

Financing activities
Payments from (advances to) subsidiaries		138,545			(110,257	)		(6,184	)		(22,104	)		-
Mortgage repurchase facility		-			-			(10,698	)		-			(10,698	)
Dividend payments		(23,437	)		-			-			-			(23,437	)
Proceeds from exercise of stock options		3,471			-			-			-			3,471
Excess tax benefit from stock-based compensation		-			-			-			-			-

Net cash provided by (used in) financing activities		118,579			(110,257	)		(16,882	)		(22,104	)		(30,664	)

Net increase (decrease) in cash and cash equivalents		255,718			193			(814	)		-			255,097
Cash and cash equivalents
Beginning of period		1,279,684			3,536			21,508			-			1,304,728

End of period	$	1,535,402		$	3,729		$	20,694		$	-		$	1,559,825

- 27 -

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in “Item 1A: Risk Factors Relating to our Business” of our Annual Report on Form 10-K for the year ended December 31, 2009 and this Quarterly Report on Form 10-Q.

INTRODUCTION

M.D.C. Holdings, Inc. is a Delaware corporation. We refer to M.D.C. Holdings, Inc. as the “Company,” “MDC,” “we” or “our” in this Quarterly Report on Form 10-Q, and these designations include our subsidiaries unless we state otherwise. We have two primary operations, homebuilding and financial services. Our homebuilding operations consist of wholly-owned subsidiary companies that generally purchase finished lots for the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers under the name “Richmond American Homes.” Our homebuilding operations are comprised of many homebuilding subdivisions that we consider to be our operating segments. Homebuilding subdivisions in a given market are aggregated into reportable segments as follows: (1) West (Arizona, California and Nevada); (2) Mountain (Colorado and Utah); (3) East (Maryland, Virginia, which includes Virginia and West Virginia, and Delaware Valley, which includes Pennsylvania, Delaware and New Jersey); and (4) Other Homebuilding (Florida and Illinois).

Our Financial Services and Other segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans primarily for our homebuyers, American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers, and American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides to its customers, primarily many of our homebuilding subsidiaries and certain subcontractors of these homebuilding subsidiaries, general liability coverage for construction work performed associated with closed homes, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly-owned subsidiary of MDC. StarAmerican has agreed to re-insure: (1) all claims pursuant to two policies issued to the Company by a third-party; and (2) pursuant to agreements beginning in June 2004, all Allegiant claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits, not to exceed $18.0 million per year, through June 30, 2009. Effective July 1, 2009, StarAmerican re-insures Allegiant for all claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits, not to exceed $6.0 million per year.

EXECUTIVE SUMMARY

During the six months ended June 30, 2010, our homebuilding operations experienced an 18% increase in net orders, a 33% increase in home closings, a 260 basis point increase in Home Gross Margins (as defined below) and an 18% increase in Backlog (as defined below) from June 30, 2009. Additionally, for the second consecutive quarter, we did not have any inventory impairments, compared with inventory impairments of $1.2 million and $15.8 million during the three and six months ended June 30, 2009. Contributing to our improved operational and financial performance during the three and six months ended June 30, 2010 were sales programs, which focused on offering low mortgage interest rates, and the federal homebuyer tax credit. All of these items contributed to reducing our loss from operations from $12.6 million and $47.7 million during the three and six months ended June 30, 2009, respectively, to losses of $1.9 million and $17.3 million during the same periods in 2010.

Despite these improvements, we continued to be faced with challenges, which include: (1) significant deterioration in the new orders for homes following the expiration of the federal homebuyer tax credit, which required the sale of a home to be completed by April 30, 2010; (2) high levels of foreclosures and resale home inventories; and (3) high unemployment levels. Additionally, despite the increased affordability of new housing products and low interest rates, economic conditions continued to create uncertainty in the timing, strength and sustainability of any recovery in the new home sales market. We believe that stability in the credit and capital markets, improvement in U.S. employment levels and an eventual renewal of confidence in the United States and global economies will play a major role in any turnaround in the homebuilding and mortgage lending industries. See “Forward-Looking Statements” below.

- 28 -

During the first six months of 2010, we received $144.5 million of our income tax receivable and completed the issuance of senior notes that generated $242.3 million in cash. Additionally, we continued to strengthen our sales and marketing operations with training and special sales promotions, in an effort to improve sales velocity both before and after the April 30, 2010 expiration of the federal homebuyer tax credit. We continued to manage our inventory levels by limiting the number of finished spec and model homes, yet increased levels of unsold homes under construction at the foundation and framing stages to meet the needs of homebuyers who, before the deadline for closings under the federal homebuyer tax credit was extended to September 30, 2010, were required to close on their home purchases by June 30, 2010. While competition for the acquisition of finished lots continued to be intense during the first six months of 2010, we were able to increase the total number of lots controlled through acquisition and lot option contracts by approximately 1,900 in 36 new subdivisions. Additionally, during the first six months of 2010, we continued to rebuild and improve our processes and business practices seeking to increase efficiency and standardized business practices nationwide. To that end, at our corporate office and for certain of our non-homebuilding subsidiaries of MDC, we began operating under our new enterprise resource planning system in May 2010. Finally, we invested $722.2 million of cash into various debt and equity securities during the first six months of 2010.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. Additionally, using different estimates or assumptions in our critical accounting estimates and policies could have a material impact to our consolidated financial statements. See “Forward-Looking Statements” below.

The accounting policies and estimates, which we believe are critical and require the use of complex judgment in their application, are those related to:

•

homebuilding inventory valuation (held-for-development);

•

homebuilding inventory valuation (held-for-sale);

•

warranty costs;

•

insurance reserves;

•

legal accruals;

•

income taxes—valuation allowance;

•

income tax reserves;

•

revenue recognition;

•

home cost of sales;

•

mortgage loan loss reserves;

•

stock-based compensation;

•

segment reporting; and

•

land option contracts.

Except for warranty reserves noted below, our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.

Warranty Reserves. Warranty reserves presented in the table below relate to general and structural reserves, as well as reserves for known, unusual warranty-related expenditures. Warranty payments incurred for an individual house may differ from the related reserve established for the home at the time it home was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an adjustment to the historical warranty reserve should be recorded, that would result in a corresponding adjustment to home cost of sales. During the 2010 second quarter, in light of a continued decrease in our warranty payments, and similar to our procedure in prior years, we engaged a third-party actuary to assist in our analysis of estimated future warranty payments. Based upon the actuarial analysis, we refined our methodology of estimating a reasonable range for warranty reserves. We believe the refined methodology will result in a better estimate of warranty cost exposure especially in periods of declining payment activity and provide better visibility to the sensitivity of the estimate in the current environment. We will continue to periodically engage a third-party actuary for purposes of assisting us in evaluating and determining the reasonableness of our warranty reserves.

- 29 -

Warranty reserve adjustments are recorded as an increase or reduction to home cost of sales in the Consolidated Statement of Operations. It is possible we could be required to record further adjustments to our warranty reserve balance in future reporting periods if the current favorable warranty payment trend continues. A 1% change in our estimated ultimate warranty losses for homes that closed over the last ten years would result in an adjustment to our warranty reserve balance of approximately $2.0 million. See “Forward-Looking Statements” below.

KEY HOMEBUILDING MEASURES

The table below sets forth information relating to orders for homes (dollars in thousands).


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2010		2009		Amount			%	2010		2009		Amount			%
Orders For Homes, net (units)
Arizona		184		214		(30	)	-14%		352		372		(20	)	-5%
California		109		112		(3	)	-3%		135		187		(52	)	-28%
Nevada		195		153		42		27%		365		248		117		47%

West		488		479		9		2%		852		807		45		6%


Colorado		232		206		26		13%		502		340		162		48%
Utah		110		86		24		28%		235		127		108		85%

Mountain		342		292		50		17%		737		467		270		58%


Delaware Valley		2		19		(17	)	-89%		16		33		(17	)	-52%
Maryland		60		54		6		11%		93		91		2		2%
Virginia		76		61		15		25%		142		117		25		21%

East		138		134		4		3%		251		241		10		4%


Florida		47		64		(17	)	-27%		106		122		(16	)	-13%
Illinois		-		8		(8	)	-100%		-		16		(16	)	-100%

Other Homebuilding		47		72		(25	)	-35%		106		138		(32	)	-23%


Total		1,015		977		38		4%		1,946		1,653		293		18%


Estimated Value of Orders for Homes, net	$	281,000	$	289,000	$	(8,000	)	-3%	$	539,000	$	480,000	$	59,000		12%
Estimated Average Selling Price of Order for Homes, net	$	276.8	$	295.8	$	(19.0	)	-6%	$	277.0	$	290.4	$	(13.4	)	-5%

Orders for Homes, net. During the three months ended June 30, 2010, net orders for homes increased to 1,015 homes with an estimated sales value of $281.0 million, compared with net orders for 977 homes within an estimated sales value of $289.0 million during the same period in 2009. The improvement in net orders is attributable to a 25% increase in the average rate of sales per active community, partially offset by a 17% decline in the average number of active communities. During the six months ended June 30, 2010, net orders for homes increased to 1,946 homes with an estimated sales value of $539.0 million, compared with net orders for 1,653 homes within an estimated sales value of $480.0 million during the same period in 2009. The increase in the average rate of sales per active community is primarily attributable to continued low interest rate levels, decreases in the average selling prices of homes, making them more affordable, the federal homebuyer tax credit and our strengthened sales department. Although our net orders increased, our cancellation rate also increased to 25% compared with 20% during the same period in 2009. Additionally, following the expiration of the federal homebuyer tax credit on April 30, 2010, we experienced significant decreases in net orders for homes.

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Homes Closed. The following table sets forth homes closed for each market within our homebuilding segments (in units).


	Three Months Ended June 30,		Change			Six Months Ended June 30,		Change
	2010	2009	Amount		%	2010	2009	Amount		%
Arizona	242	181	61		34%	350	353	(3	)	-1%
California	68	52	16		31%	114	111	3		3%
Nevada	221	114	107		94%	319	188	131		70%

West	531	347	184		53%	783	652	131		20%


Colorado	230	113	117		104%	338	204	134		66%
Utah	147	56	91		163%	199	96	103		107%

Mountain	377	169	208		123%	537	300	237		79%


Delaware Valley	12	11	1		9%	16	30	(14	)	-47%
Maryland	75	39	36		92%	101	65	36		55%
Virginia	68	45	23		51%	108	86	22		26%

East	155	95	60		63%	225	181	44		24%


Florida	72	44	28		64%	113	93	20		22%
Illinois	-	10	(10	)	-100%	-	19	(19	)	-100%

Other Homebuilding	72	54	18		33%	113	112	1		1%

Total	1,135	665	470		71%	1,658	1,245	413		33%

Homes closed during the three months ended June 30, 2010 increased for each homebuilding segment, primarily due to more homes being in Backlog at the beginning of the 2010 second quarter, compared with those at the beginning of the 2009 second quarter. During the six months ended June 30, 2010, home closings increased in the Mountain and East segments as most of the markets within these segments had a higher Backlog at the beginning of the 2010 year, compared with the beginning of the 2009 year.

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Home Gross Margins. We define “Home Gross Margins” to mean home sales revenue less home cost of sales as a percent of home sales revenue. The following table sets forth our Home Gross Margins by reportable segment.


	Three Months Ended June 30,
	2010	2009	Change
Homebuilding
West	20.0%	26.5%	-6.5%
Mountain	15.6%	8.5%	7.1%
East	16.9%	14.5%	2.4%
Other Homebuilding	19.9%	10.8%	9.1%


Consolidated	18.1%	18.0%	0.1%


	Six Months Ended June 30,
	2010	2009	Change
Homebuilding
West	22.1%	24.1%	-2.0%
Mountain	16.5%	7.9%	8.6%
East	17.2%	14.3%	2.9%
Other Homebuilding	21.4%	11.1%	10.3%


Consolidated	19.4%	16.8%	2.6%

Home Gross Margins can be impacted positively or negatively in a reporting period by adjustments in our warranty reserves. Beginning in 2007 and continuing into the first six months of 2010, the Company experienced a significant favorable trend in the amount of warranty payments incurred on its previously closed homes. Because our warranty reserve balance at each period end is generally determined based upon historical warranty payment patterns, the foregoing favorable trend in warranty payments impacted significantly our warranty reserves during the 2009 and 2010 first quarters. As a result of the significant decline in warranty payments incurred on previously closed homes, we recorded reductions to our warranty reserves for previously closed homes totaling $10.9 million and $14.5 million during the three and six months ended June 30, 2009, respectively. The trend in lower warranty payments on previously closed homes continued into 2010. As a result, we recorded reductions totaling $5.6 million during the six months ended June 30, 2010, of which $3.9 million was recorded during the 2010 first quarter.

The following table sets forth our Home Gross Margins excluding warranty adjustments and interest in cost of sales during the three and six months ended June 30, 2010 and 2009.


	Three Months Ended June 30,
	2010	2009	Change
West	21.8%	19.5%	2.3%
Mountain	17.9%	13.5%	4.4%
East	19.2%	16.4%	2.8%
Other	20.8%	10.5%	10.3%


Consolidated	20.2%	16.8%	3.4%

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	Six Months Ended June 30,
	2010	2009	Change
West	22.6%	16.0%	6.6%
Mountain	18.4%	8.4%	10.0%
East	19.3%	11.8%	7.5%
Other	21.1%	8.5%	12.6%


Consolidated	20.7%	12.6%	8.1%

During the three and six months ended June 30, 2010, Home Gross Margins for each of our homebuilding segments were generally favorably impacted by decreases in home cost of construction as we have been closing more of our smaller and redesigned homes that are more cost efficient to build. This improvement has been partially offset by increases in the lot cost per closed home.

Future Home Gross Margins may be impacted negatively by, among other things: (1) a weaker economic environment, including recurring effects of the recession in the United States, as well as homebuyers’ reluctance to purchase new homes based on concerns about employment conditions; (2) continued and/or increases in home foreclosure levels; (3) on-going tightening of mortgage loan origination requirements; (4) increased competition and increases in the level of home order cancellations, which could affect our ability to maintain existing home prices and/or home sales incentive levels; (5) deterioration in the demand for new homes in our markets; (6) fluctuating energy costs, including oil and gasoline; (7) increases in the costs of subcontracted labor, finished lots, building materials, and other resources, to the extent that market conditions prevent the recovery of increased costs through higher selling prices; (8) increases in interest expense included in home cost of sales; (9) increases in the costs of finished lots; (10) changes in our warranty payment experiences and/or increases in warranty expenses or litigation expenses associated with construction defect claims; and (11) other general risk factors. See “Forward-Looking Statements” below.

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The following table sets forth by reportable segment a reconciliation of our home cost of sales, as reported, to home cost of sales excluding warranty adjustments and interest in cost of sales, which is used in the calculation of Home Gross Margins, excluding warranty adjustments and interest in cost of sales.


	Home Sales Revenue - As reported			Home Cost of Sales - As reported			Warranty Adjustments			Interest in Cost of Sales		Home Cost of Sales - Excluding Warranty Adjustments and Interest			Home Gross Margins - Excluding Warranty Adjustments and Interest ⁽¹⁾
Three Months Ended June 30, 2010
West	$	117,752		$	94,218		$	(1,255	)	$	3,387	$	92,086		21.8%
Mountain		110,072			92,926			119			2,492		90,315		17.9%
East		72,622			60,339			(374	)		2,004		58,709		19.2%
Other		16,362			13,111			(167	)		319		12,959		20.8%
Intercompany adjustments		(5,532	)		(5,532	)		-			-		(5,532	)	N/A


Consolidated	$	311,276		$	255,062		$	(1,677	)	$	8,202	$	248,537		20.2%


Three Months Ended June 30, 2009
West	$	81,304		$	59,739		$	(9,250	)	$	3,539	$	65,450		19.5%
Mountain		55,489			50,760			42			2,709		48,009		13.5%
East		39,398			33,669			(1,008	)		1,759		32,918		16.4%
Other		13,115			11,702			(688	)		654		11,736		10.5%
Intercompany adjustments		(3,752	)		(3,752	)		-			-		(3,752	)	N/A


Consolidated	$	185,554		$	152,118		$	(10,904	)	$	8,661	$	154,361		16.8%

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	Home Sales Revenue - As reported			Home Cost of Sales - As reported			Warranty Adjustments			Interest in Cost of Sales		Home Cost of Sales - Excluding Warranty Adjustments and Interest			Home Gross Margins - Excluding Warranty Adjustments and Interest ⁽¹⁾
Six Months Ended June 30, 2010
West	$	174,479		$	135,963		$	(3,827	)	$	4,715	$	135,075		22.6%
Mountain		156,671			130,805			(681	)		3,566		127,920		18.4%
East		104,108			86,156			(570	)		2,661		84,065		19.3%
Other		25,396			19,963			(528	)		462		20,029		21.1%
Intercompany adjustments		(8,435	)		(8,435	)		-			-		(8,435	)	N/A


Consolidated	$	452,219		$	364,452		$	(5,606	)	$	11,404	$	358,654		20.7%


Six Months Ended June 30, 2009
West	$	152,932		$	116,027		$	(12,423	)	$	6,140	$	128,450		16.0%
Mountain		99,495			91,666			555			5,730		91,111		8.4%
East		79,774			68,376			(1,991	)		3,705		70,367		11.8%
Other		26,742			23,781			(688	)		1,119		24,469		8.5%
Intercompany adjustments		(6,407	)		(6,407	)		-			-		(6,407	)	N/A


Consolidated	$	352,536		$	293,443		$	(14,547	)	$	16,694	$	307,990		12.6%

(1)	Home Gross Margins excluding the impact of warranty adjustments and interest in cost of sales is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that warranty adjustments and interest has on our Home Gross Margins.

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Backlog. The following table below sets forth information relating to Backlog for each market within our homebuilding segments (dollars in thousands).


	June 30, 2010		December 31, 2009		June 30, 2009
Backlog (units)
Arizona		105		103		177
California		97		76		125
Nevada		134		88		113

West		336		267		415


Colorado		371		207		208
Utah		130		94		73

Mountain		501		301		281


Delaware Valley		23		23		30
Maryland		95		103		84
Virginia		107		73		67

East		225		199		181


Florida		52		59		64
Illinois		-		-		-

Other Homebuilding		52		59		64


Total		1,114		826		941


Backlog Estimated Sales Value	$	351,000	$	265,000	$	295,000

Estimated Average Selling Price of Homes in Backlog	$	315.1	$	320.8	$	313.5

We define “Backlog” as homes under contract but not yet delivered. Our Backlog at June 30, 2010 increased in most of our homebuilding segments as our net orders for homes during the first six months of 2010 exceeded our home closings in each market. Contributing to the improvement in our June 30, 2010 Backlog was the impact of the federal homebuyer tax credit, which stimulated improvement in our net orders for homes during the first six months of 2010. The Backlog estimated sales value also increased from December 31, 2009 due to the 35% increase in the number of homes in Backlog at June 30, 2010, slightly offset by the 2% decrease in the estimated average selling price of homes in Backlog.

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Cancellation Rate. We define our home order “Cancellation Rate” as the approximate number of cancelled home order contracts during a reporting period as a percentage of total home order contracts received during such reporting period. The following tables set forth our Cancellation Rate by segment.


	Three Months Ended June 30,		Increase (Decrease)
	2010	2009	Increase (Decrease)
Homebuilding
West	20%	16%	4%
Mountain	31%	25%	6%
East	25%	25%	0%
Other Homebuilding	31%	24%	7%


Consolidated	25%	20%	5%


	Six Months Ended June 30,		Increase (Decrease)
	2010	2009	Increase (Decrease)
Homebuilding
West	20%	18%	2%
Mountain	26%	24%	2%
East	26%	27%	-1%
Other Homebuilding	32%	22%	10%


Consolidated	24%	22%	2%

The increase in the Cancellation Rate in our Other Homebuilding segment during the three and six months ended June 30, 2010 and our Mountain segment during the three months ended June 30, 2010 primarily resulted from a higher volume of home orders cancellations as a result of homebuyers not being able to qualify for mortgage loans.

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Active Subdivisions. The following table displays the number of our active subdivisions for each market within our homebuilding segments. We define an active subdivision as a subdivision that has more than five homes available to be sold and closed, and has sold at least five homes.


	June 30, 2010	December 31, 2009	June 30, 2009
Arizona	26	28	27
California	6	3	10
Nevada	15	18	19

West	47	49	56


Colorado	41	42	43
Utah	18	16	18

Mountain	59	58	61


Delaware Valley	1	1	1
Maryland	9	8	9
Virginia	9	7	7

East	19	16	17


Florida	9	10	8
Illinois	-	-	-

Other Homebuilding	9	10	8


Total	134	133	142

Average Selling Price Per Home Closed. The average selling price for our closed homes includes the base sales price, any purchased options and upgrades, reduced by any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican). The following tables set forth our average selling price per home closed, by market (dollars in thousands).


	Three Months Ended June 30,				Change
	2010		2009		Amount			%
Arizona	$	190.7	$	197.9	$	(7.2	)	-4%
California		444.7		414.0		30.7		7%
Colorado		303.0		341.7		(38.7	)	-11%
Delaware Valley		377.1		393.6		(16.5	)	-4%
Florida		227.3		227.1		0.2		0%
Illinois		-		312.1		N/A		N/A
Maryland		476.2		381.7		94.5		25%
Nevada		187.2		210.3		(23.1	)	-11%
Utah		274.7		301.5		(26.8	)	-9%
Virginia		476.2		451.3		24.9		6%
Average	$	274.3	$	279.0	$	(4.7	)	-2%

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	Six Months Ended June 30,				Change
	2010		2009		Amount			%
Arizona	$	194.7	$	195.3	$	(0.6	)	0%
California		407.3		405.6		1.7		0%
Colorado		302.0		346.4		(44.4	)	-13%
Delaware Valley		366.4		413.4		(47.0	)	-11%