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, 2007

¨	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

(Zip code)

(Address of principal executive offices)

(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 is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨

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, 2007, 45,841,000 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, 2007

INDEX


			Page No.
Part I.	Financial Information:

	Item 1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at June 30, 2007 and December 31, 2006	1

		Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006	2

		Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	3

		Notes to Unaudited Consolidated Financial Statements	4

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

	Item 4.	Controls and Procedures	49

Part II.	Other Information:

	Item 1.	Legal Proceedings	50

	Item 1A.	Risk Factors	50

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

	Item 3.	Defaults Upon Senior Securities	53

	Item 4.	Submission of Matters to a Vote of Security Holders	53

	Item 5.	Other Information	53

	Item 6.	Exhibits	53

	Signature		54

(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, 2007			December 31, 2006
ASSETS
Cash and cash equivalents	$	668,379		$	507,947
Restricted cash		2,176			2,641
Home sales and other receivables		87,823			143,936
Mortgage loans held in inventory, net		125,717			212,903
Inventories
Housing completed or under construction		1,273,042			1,178,671
Land and land under development		1,061,884			1,575,158
Property and equipment, net		38,983			44,606
Deferred income taxes		229,291			124,880
Prepaid expenses and other assets, net		98,406			119,133

Total Assets	$	3,585,701		$	3,909,875

LIABILITIES
Accounts payable	$	161,208		$	171,005
Accrued liabilities		361,154			418,953
Income taxes payable		-			28,485
Related party liabilities		701			2,401
Homebuilding line of credit		-			-
Mortgage line of credit		99,411			130,467
Senior notes, net		996,883			996,682

Total Liabilities		1,619,357			1,747,993

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; 45,866,000 and 45,841,000 issued and outstanding, respectively, at June 30, 2007 and 45,179,000 and 45,165,000 issued and outstanding, respectively, at December 31, 2006		458			452
Additional paid-in capital		788,316			760,831
Retained earnings		1,179,232			1,402,261
Accumulated other comprehensive loss		(1,003	)		(1,003	)
Less treasury stock, at cost; 25,000 and 14,000 shares at June 30, 2007 and December 31, 2006, respectively		(659	)		(659	)

Total Stockholders’ Equity		1,966,344			2,161,882

Total Liabilities and Stockholders’ Equity	$	3,585,701		$	3,909,875

The accompanying Notes are an integral part of the 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,
	2007			2006			2007			2006
REVENUE

Home sales revenue	$	687,813		$	1,188,561		$	1,399,613		$	2,305,716
Land sales revenue		3,417			13,639			9,451			15,476
Other revenue		25,478			29,781			52,768			56,214

Total Revenue		716,708			1,231,981			1,461,832			2,377,406

COSTS AND EXPENSES

Home cost of sales		590,564			911,707			1,189,763			1,726,557
Land cost of sales		2,181			13,140			7,288			14,914
Asset impairments		161,050			260			302,472			860
Marketing expenses		29,371			31,568			58,450			60,603
Commission expenses		24,380			37,394			47,630			70,237
General and administrative expenses		80,090			115,551			170,747			226,816
Related party expenses		100			127			191			2,704

Total Costs and Expenses		887,736			1,109,747			1,776,541			2,102,691

(Loss) income before income taxes		(171,028	)		122,234			(314,709	)		274,715
Benefit from (provision for) income taxes		64,956			(45,743	)		114,239			(102,803	)

NET (LOSS) INCOME	$	(106,072	)	$	76,491		$	(200,470	)	$	171,912

(LOSS) EARNINGS PER SHARE

Basic	$	(2.32	)	$	1.70		$	(4.40	)	$	3.83

Diluted	$	(2.32	)	$	1.66		$	(4.40	)	$	3.74

WEIGHTED-AVERAGE SHARES

Basic		45,722			44,939			45,612			44,880

Diluted		45,722			45,972			45,612			45,967

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

The accompanying Notes are an integral part of the 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,
	2007			2006
OPERATING ACTIVITIES
Net (loss) income	$	(200,470	)	$	171,912
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
Amortization of deferred marketing costs		14,927			19,086
Depreciation and amortization of long-lived assets		7,290			9,423
Asset impairments		302,472			860
Non-cash land option deposit and pre-acquisition write-off costs		10,210			15,752
Deferred income taxes		(104,411	)		(16,812	)
Stock-based compensation expense		5,408			7,142
Non-cash related party expenses		-			2,301
Excess tax benefits from stock-based compensation		(6,326	)		(1,486	)
Other non-cash expenses		1,246			189
Net change in assets and liabilities
Restricted cash		465			(113	)
Home sales and other receivables		60,466			(12,534	)
Mortgage loans held in inventory, net		87,186			74,003
Housing completed or under construction		(158,873	)		(191,903	)
Land and land under development		275,304			(82,989	)
Prepaid expenses and other assets, net		(5,067	)		(30,575	)
Accounts payable		(9,797	)		22,919
Accrued liabilities		(54,388	)		(29,792	)
Income taxes payable		(26,320	)		(69,654	)

Net cash provided by (used in) operating activities		199,322			(112,271	)

INVESTING ACTIVITIES
Net purchase of property and equipment		(2,055	)		(4,331	)

FINANCING ACTIVITIES
Lines of credit
Advances		468,478			437,531
Principal payments		(499,534	)		(425,900	)
Excess tax benefits from stock-based compensation		6,326			1,486
Dividend payments		(22,852	)		(22,456	)
Proceeds from exercise of stock options		10,747			2,894

Net cash used in financing activities		(36,835	)		(6,445	)

Net increase in (decrease in) cash and cash equivalents		160,432			(123,047	)
Cash and cash equivalents
Beginning of period		507,947			214,531

End of period	$	668,379		$	91,484

The accompanying Notes are an integral part of the 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. 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, 2007 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, 2006, filed with the SEC on February 28, 2007. Certain prior period balances have been reclassified to conform to the current year’s presentation.

The Company in the past has experienced seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, the number of homes closed and associated home sales revenue historically have increased during the third and fourth quarters, compared with the first and second quarters. The Company believes that this seasonality reflects the historical tendency of homebuyers to purchase new homes in the spring with closings scheduled in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions in certain geographical areas (or markets). Also, the Company in the past has experienced seasonality in the financial services operations because mortgage loan originations are directly attributed to the closing of homes from the homebuilding operations. Due to reduced home closing levels during 2006 and continuing in 2007, this seasonality pattern in the homebuilding and financial services operations did not continue for the third and fourth quarters of 2006 and for the first two quarters of 2007, and there can be no assurance that it will continue in the future. The Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2007 and the Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2007 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, 2006 Annual Report on Form 10-K.

The following table summarizes, by quarter, home sales revenue during 2007, 2006 and 2005 (in thousands).


	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
2007	$	711,800	$	687,813		N/A		N/A
2006		1,117,155		1,188,561	$	1,050,700	$	1,294,140
2005		914,751		1,026,943		1,145,481		1,705,525

2.	Asset Impairment

On a quarterly basis, the Company evaluates its inventory for impairment in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

As a result of its evaluation, the Company recorded impairments of its housing completed and under construction inventories of $38.2 million and $64.5 million during the three and six months ended June 30, 2007, respectively, and impairments of its land and land under development inventories of $122.9 million and $238.0 million during the three and six months ended June 30, 2007, respectively. These impairments, which relate to assets contracted for primarily during 2004 and 2005, were due to decreases in home sales prices and/or increases in incentives offered in an effort to: (1) stimulate new home orders when the spring selling season failed to materialize; (2) maintain homes in Backlog (defined as homes under contract but not yet delivered) until they close; and (3) remain competitive with home sales prices offered by our competitors. In accordance with SFAS 144, the Company generally determined the fair value of each impaired asset based upon the present value of the estimated future cash flows on a subdivision-by-subdivision basis at a discount rate commensurate with the risk of the subdivision under evaluation, generally ranging from 10% to 18%.

The impairments recorded during the three and six months ended June 30, 2007 and 2006, by reportable segment (as defined in Note 9), are as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
West	$	132,730	$	-	$	254,634	$	-
Mountain		9,123		-		9,777		-
East		5,865		-		8,432		-
Other Homebuilding		13,332		260		29,629		860

Total asset impairment	$	161,050	$	260	$	302,472	$	860

3.	Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material impact on its financial position, results of operations or cash flows upon adoption.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company currently is evaluating the impact, if any, that SFAS 157 may have on its financial position, results of operations or cash flows.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 provides interpretive guidance for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 requires the affirmative evaluation that it is more-likely-than-not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the “more-likely-than-not” recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 also requires companies to disclose additional quantitative and qualitative information in their financial statements about uncertain tax positions. FIN 48 was effective for fiscal year beginning January 1, 2007, and the $0.3 million cumulative effect of applying FIN 48 was reported as an adjustment to the opening balance of retained earnings for this fiscal year.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), an amendment of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 requires that servicing assets and servicing liabilities be recognized at fair value, if practicable, when a company enters into a servicing agreement and allows two alternative subsequent measurement methods, the amortization and fair value measurement methods. This accounting standard is effective for all new transactions occurring as of the beginning of fiscal years beginning after September 15, 2006. The adoption of SFAS 156 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 eliminates the exemption from applying SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instrument. SFAS 155 also allows a company to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise be bifurcated. At the adoption of SFAS 155, any difference between the total carrying amount of the individual components of any existing hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to the Company’s beginning retained earnings. SFAS 155 is effective for all financial instruments acquired or issued after January 1, 2007. The adoption of SFAS 155 did not have a material impact on the Company’s financial position, results of operations or cash flows.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

4.	Balance Sheet Components

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


	June 30, 2007		December 31, 2006
Accrued liabilities
Warranty reserves	$	104,089	$	102,033
Insurance reserves		53,952		50,854
Land development and home construction accruals		44,500		64,224
Accrued compensation and related expenses		47,119		74,751
Customer and escrow deposits		31,797		28,705
Accrued interest payable		12,922		13,321
Accrued pension liability		13,783		13,183
Deferred revenue		6,362		23,089
Other accrued liabilities		46,630		48,793

Total accrued liabilities	$	361,154	$	418,953

5.	(Loss) Earnings Per Share

The Company calculates (loss) or earnings per share (“EPS”) in accordance with SFAS No. 128, “Earnings per Share” (“SFAS 128”). Pursuant to SFAS 128, basic EPS excludes the dilutive effect of common stock equivalents and is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. 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 period. Common stock equivalents include stock options and unvested restricted stock awards. Diluted EPS for the three and six months ended June 30, 2007 excluded common stock equivalents because the effect of their inclusions would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method pursuant to SFAS 128, the weighted-average common stock equivalents excluded were 1.5 million and 1.6 million shares during the three and six months ended June 30, 2007, respectively.

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

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,
	2007			2006		2007			2006
Basic (Loss) Earnings Per Share
Net (loss) income	$	(106,072	)	$	76,491	$	(200,470	)	$	171,912

Basic weighted-average shares outstanding		45,722			44,939		45,612			44,880

Per share amounts	$	(2.32	)	$	1.70	$	(4.40	)	$	3.83

Diluted (Loss) Earnings Per share
Net (loss) income	$	(106,072	)	$	76,491	$	(200,470	)	$	171,912

Basic weighted-average shares outstanding		45,722			44,939		45,612			44,880
Stock options, net		-			1,033		-			1,087

Diluted weighted-average shares outstanding		45,722			45,972		45,612			45,967

Per share amounts	$	(2.32	)	$	1.66	$	(4.40	)	$	3.74

6.	Interest Activity

The Company capitalizes interest incurred on its senior notes and Homebuilding Line (as defined below) during the period of active development and through the completion of construction of its homebuilding inventories. Interest incurred on the senior notes or Homebuilding Line, if any, that is not capitalized and interest expense on the Mortgage Line (as defined below) is included in interest income, net, which is a component of other revenue in the Unaudited Consolidated Statements of Operations.

Interest activity is shown below (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Total Interest Incurred
Corporate and Homebuilding	$	14,435		$	15,006		$	28,876		$	29,843
Financial Services and Other		359			2,317			1,010			4,281

Total interest incurred	$	14,794		$	17,323		$	29,886		$	34,124

Total Interest Capitalized
Interest capitalized in homebuilding inventory, beginning of period	$	51,811		$	47,222		$	50,655		$	41,999
Interest capitalized during the period		14,435			15,006			28,876			29,843
Previously capitalized interest included in home cost of sales during the period		(12,258	)		(13,659	)		(25,543	)		(23,273	)

Interest capitalized in homebuilding inventory, end of period	$	53,988		$	48,569		$	53,988		$	48,569

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Interest income and interest expense are shown below (in thousands).


	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Interest income	$	9,520	$	3,357	$	18,515	$	7,134
Interest expense, net of interest capitalized		359		2,317		1,010		4,281

Total interest income, net	$	9,161	$	1,040	$	17,505	$	2,853

7.	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 not covered by the Company’s general and structural warranty reserve. Generally, warranty reserves are reviewed monthly, using historical data and other relevant information, to determine the reasonableness and adequacy of both the reserve and the per-unit reserve amount originally included in home cost of sales, as well as the timing of the reversal of any excess reserve. Warranty payments for an individual house may exceed the related reserve. Payments in excess of the reserve are evaluated in the aggregate to determine if an adjustment to the warranty reserve should be recorded, which could result in a corresponding adjustment to home cost of sales. Warranty reserve activity for the three and six months ended June 30, 2007 and 2006 is shown below (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Warranty reserve balance at beginning of period	$	101,835		$	85,613		$	102,033		$	82,238
Warranty expense provision		6,169			11,797			12,591			23,293
Warranty cash payments		(7,408	)		(7,790	)		(13,853	)		(15,911	)
Warranty reserve adjustments		3,493			2,390			3,318			2,390

Warranty reserve balance at end of period	$	104,089		$	92,010		$	104,089		$	92,010

8.	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 StarAmerican Insurance Ltd. (“StarAmerican”) and Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (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 interpretation of circumstances,

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

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.

The following table summarizes the insurance reserve activity for the three and six months ended June 30, 2007 and 2006 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Insurance reserve balances at beginning of period	$	51,908		$	38,222		$	50,854		$	35,570
Insurance expense provisions		2,849			3,792			5,710			7,745
Insurance cash payments		(529	)		(362	)		(2,322	)		(1,663	)
Insurance reserve adjustments		(276	)		1,888			(290	)		1,888

Insurance reserve balances at end of period	$	53,952		$	43,540		$	53,952		$	43,540

9.	Information on Business Segments

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”), defines operating segments 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 in accordance with SFAS 131. 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 markets)

(2) Mountain (Colorado and Utah markets)

(3) East (Virginia and Maryland markets)

(4) Other Homebuilding (Delaware Valley, Florida, Illinois and Texas markets)

The Company’s Financial Services and Other reportable segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) American Home Insurance Agency, Inc. (“American Home Insurance”); (3) American Home Title

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

and Escrow Company (“American Home Title”); (4) Allegiant; and (5) StarAmerican. 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.

Inter-company supervisory fees (“Supervisory Fees”), which are included in (loss) income before income taxes, 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. Additionally, inter-company adjustments noted in the (loss) income before income taxes table below relate to mortgage loan origination fees paid by the Company’s homebuilding subsidiaries to HomeAmerican on behalf of homebuyers.

The following table summarizes revenue and (loss) income before income taxes for each of the Company’s six reportable segments (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Revenue
Homebuilding
West	$	433,049		$	720,530		$	887,703		$	1,407,776
Mountain		134,670			187,724			279,861			350,914
East		71,800			160,534			133,155			307,715
Other Homebuilding		58,971			142,859			123,831			268,746

Total Homebuilding		698,490			1,211,647			1,424,550			2,335,151
Financial Services and Other		13,614			26,673			33,184			50,315
Corporate		9,029			183			14,462			615
Inter-company adjustments		(4,425	)		(6,522	)		(10,364	)		(8,675	)

Consolidated	$	716,708		$	1,231,981		$	1,461,832		$	2,377,406

(Loss) Income Before Income Taxes
Homebuilding
West	$	(139,239	)	$	98,817		$	(264,630	)	$	220,880
Mountain		(6,828	)		7,228			4,143			15,863
East		(6,784	)		26,462			(11,170	)		61,780
Other Homebuilding		(18,487	)		15			(38,618	)		4,897

Total Homebuilding		(171,338	)		132,522			(310,275	)		303,420
Financial Services and Other		4,241			10,988			11,758			22,172
Corporate		(3,931	)		(21,276	)		(16,192	)		(50,877	)

Consolidated	$	(171,028	)	$	122,234		$	(314,709	)	$	274,715

- 11 -

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).


	June 30, 2007			December 31, 2006
Homebuilding
West	$	1,438,028		$	1,869,442
Mountain		545,487			535,554
East		313,380			333,902
Other Homebuilding		208,654			266,326

Total Homebuilding		2,505,549			3,005,224
Financial Services and Other		196,655			284,791
Corporate		924,354			657,917
Inter-company adjustments		(40,857	)		(38,057	)

Consolidated	$	3,585,701		$	3,909,875

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,
	2007		2006		2007		2006
Homebuilding
West	$	6,604	$	8,014	$	13,491	$	15,760
Mountain		1,040		1,419		2,075		2,727
East		56		1,125		1,179		1,718
Other Homebuilding		1,109		2,824		2,302		5,241

Total Homebuilding		8,809		13,382		19,047		25,446

Financial Services and Other		73		79		120		175
Corporate		1,515		1,420		3,050		2,888

Consolidated	$	10,397	$	14,881	$	22,217	$	28,509

10.

Other Comprehensive (Loss) Income

Total other comprehensive (loss) income includes net (loss) income plus unrealized gains or losses on securities available for sale and minimum pension liability adjustments which have been reflected as a component of stockholders’ equity and have not affected consolidated net (loss) income. The Company’s other comprehensive loss was $106.1 million and $200.5 million for the three and six months ended June 30, 2007, respectively, and other comprehensive income was $76.5 million and $171.9 million for the three and six months ended June 30, 2006, respectively.

- 12 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

11.

Commitments and Contingencies

The Company often is required to obtain bonds and letters of credit in support of its obligations primarily with respect to subdivision improvement, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At June 30, 2007, the Company had issued and outstanding performance bonds and letters of credit totaling $354.3 million and $62.7 million, respectively, including $21.6 million in letters of credit issued by HomeAmerican, a wholly owned subsidiary of MDC. In the event any such bonds or letters of credit issued by third parties are called, MDC would be obligated to reimburse the issuer of the bond or letter of credit.

12.

Lines of Credit and Total Debt Obligations

Homebuilding. The Company’s homebuilding line of credit (“Homebuilding Line”) is an unsecured revolving line of credit with a group of lenders for support of its homebuilding segments. The Company’s Homebuilding Line has an aggregate commitment amount of $1.25 billion and a maturity date of March 21, 2011. The facility’s provision for letters of credit is available in the aggregate amount of $500 million. The facility permits an increase in the maximum commitment amount to $1.75 billion upon the Company’s request, subject to receipt of additional commitments from existing or additional participant lenders. Interest rates on outstanding borrowings are determined by reference to a chosen London Interbank Offered Rate (“LIBOR”), with a spread from LIBOR which is determined based on changes in the Company’s credit ratings and leverage ratio, or to an alternate base rate. At June 30, 2007, the Company did not have any borrowings under the Homebuilding Line and had $37.8 million in letters of credit issued as of such date, which reduced the amount available to be borrowed under the Homebuilding Line.

Mortgage Lending. The Company’s mortgage line of credit (“Mortgage Line”) has a borrowing limit of $225 million with terms that allow for increases of up to $175 million in the borrowing limit to a maximum of $400 million, subject to concurrence by the participating banks. Available borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed securities and are limited to the value of eligible collateral, as defined. At June 30, 2007, $99.4 million was borrowed and an additional $8.2 million was collateralized and available to be borrowed. The Mortgage Line is cancelable upon 120 days notice.

General. The agreements for the Company’s bank lines of credit and the indentures for the Company’s senior notes require compliance with certain representations, warranties and covenants. The Company believes that it is in compliance with these requirements, and the Company is not aware of any covenant violations. The agreements containing these representations, warranties and covenants for the bank lines of credit and the indentures for the Company’s senior notes are on file with the SEC and are listed in the Exhibit Table in Part IV of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

- 13 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

The Company’s debt obligations at June 30, 2007 and December 31, 2006 are as follows (in thousands):


	June 30, 2007		December 31, 2006
7% Senior Notes due 2012	$	149,039	$	148,963
5¹/2% Senior Notes due 2013		349,404		349,361
5³/8% Medium Term Senior Notes due 2014		248,731		248,663
5³/8% Medium Term Senior Notes due 2015		249,709		249,695

Total Senior Notes		996,883		996,682
Homebuilding Line		-		-

Total Corporate and Homebuilding Debt		996,883		996,682
Mortgage Line		99,411		130,467

Total Debt	$	1,096,294	$	1,127,149

13.

Related Party Liabilities

Effective March 1, 2006, the Company entered into a consulting agreement (the “Agreement”) with a firm owned by Mr. Gilbert Goldstein (a member of the Company’s Board of Directors). Pursuant to the terms of the Agreement, the Company has agreed that, among other things, in the event that Mr. Goldstein retires from the practice of law, becomes disabled, dies or the Agreement with the Company is not renewed or extended during the term of the Agreement, the Company will pay Mr. Goldstein’s firm or his estate, in lieu of any other payments, other benefits or services to be provided by the Company, $15,000 per month for five years or the duration of Mr. Goldstein’s life, whichever is longer. At June 30, 2007, the Company had a related party liability of $0.7 million associated with the foregoing obligation.

In December 2006, the Company committed to contributing $1.7 million to the MDC/Richmond American Homes Foundation, a Delaware non-profit corporation that was incorporated on September 30, 1999 (the “Foundation”). In January 2007, the Company contributed to the Foundation 29,798 shares of MDC common stock in fulfillment of its December 2006 commitment.

14.

Income Taxes

The Company’s overall effective income tax rates were 38.0% and 36.3% for the three and six months ended June 30, 2007, respectively, and 37.4% for both the three and six months ended June 30, 2006. These changes in the effective tax rates during the 2007 periods, compared with the same periods during 2006, resulted from the impact of reductions in the benefits from I.R.C. Sec. 199, “Income Attributable to Domestic Production Activities,” and increases in estimated permanent differences related to accruals for non-deductible excess compensation under I.R.C. Sec. 162(m), “Certain Excessive Employee Remuneration.”

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

- 14 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

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


	June 30, 2007		December 31, 2006
Deferred tax assets
Warranty, litigation and other reserves	$	55,518	$	52,752
Asset impairment charges		146,788		41,876
Accrued liabilities		8,772		8,298
Deferred revenue		2,126		8,797
Inventory, additional costs capitalized for tax purposes		11,906		12,356
Stock-based compensation		7,339		5,620
Property, equipment and other assets, net		2,803		730

Total gross deferred tax assets		235,252		130,429

Deferred tax liabilities
Deferred revenue		1,947		1,532
Inventory, additional costs capitalized for financial statement purposes		593		596
Other, net		3,421		3,421

Total gross deferred tax liabilities		5,961		5,549

Net deferred tax asset	$	229,291	$	124,880

On January 1, 2007, the Company adopted the provisions of FIN 48. As a result of the implementation of FIN 48, the Company decreased its liability for unrecognized tax benefits by approximately $0.3 million, which was accounted for as an increase to the January 1, 2007 retained earnings balance. A reconciliation of the beginning and ending balance for liabilities associated with unrecognized tax benefits is as follows (in thousands):


Balances at January 1, 2007	$	18,739
Additions for tax positions related to the current year		1,263

Balances at June 30, 2007	$	20,002

The total liabilities associated with unrecognized tax benefits that, if recognized, would affect the effective tax rate were $12.9 million and $13.8 million at January 1, 2007 and June 30, 2007, respectively.

The Company recognizes interest and penalties associated with unrecognized tax benefits in income tax expense in the Unaudited Consolidated Statements of Operations, and the corresponding liability in income taxes payable on the Unaudited Consolidated Balance Sheets. The expense for interest and penalties reflected in the Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2007 was approximately $0.8 million and $1.1 million, respectively (interest net of related tax benefits). The corresponding liabilities on the Consolidated Balance Sheets were $2.6 million and $3.7 million at January 1, 2007 and June 30, 2007, respectively.

- 15 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

The Company has taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may significantly decrease within the next twelve months. The possible decrease could result from the finalization of certain state income tax audits. An estimate of the range of the reasonably possible change cannot be made.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal income tax examination for calendar tax years ending 2003 through 2006. The Company is subject to various state income tax examinations for the 1996 through 2006 calendar tax years. The Company currently is under state income tax examination in the states of California, Virginia and Arizona.

15.

Subsequent Events

In August 2007, the Company filed a registration statement on Form S-8 with the SEC, registering approximately 6.3 million shares of MDC common stock in connection with the M.D.C. Holdings, Inc. 2001 Equity Incentive Plan and the M.D.C. Holdings, Inc. Stock Option Plan for Non-Employee Directors, both of which were approved previously by the Company’s shareowners.

In July 2007, the Company closed transactions with third parties that qualify for tax purposes as a like-kind exchange transaction in accordance with I.R.C. Section 1031. Pursuant to the transactions, the Company sold an aircraft for approximately $21.8 million (resulting in a pre-tax gain of approximately $8.0 million) and upgraded with the purchase of a new aircraft for approximately $29.0 million.

16.

Supplemental Guarantor Information

The Company’s senior notes and Homebuilding Line 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 California, 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.

- 16 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

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

•

American Home Insurance

•

American Home Title

•

HomeAmerican

•

StarAmerican

•

Allegiant

•

RAH of Texas, LP (as of January 2007)

•

RAH Texas Holdings, LLC (as of January 2007)

•

Richmond American Homes of Texas, Inc. (as of January 2007)

The supplemental condensed combining statement of operations for the three and six months ended June 30, 2006 previously disclosed inter-company cost of capital charges by the Company’s Corporate segment to its homebuilding segments. The supplemental condensed combining statement of operations for the three and six months ended June 30, 2006 has been adjusted to eliminate this inter-company cost of capital charge in order to conform the presentation to the Company’s segment reporting included in Note 9 of the Unaudited Consolidated Financial Statements.

- 17 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Balance Sheet

June 30, 2007

(In thousands)


	MDC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
ASSETS
Cash and cash equivalents	$	647,173		$	3,372		$	17,834		$	-		$	668,379
Restricted cash		-			2,176			-			-			2,176
Home sales and other receivables		5,230			74,416			49,034			(40,857	)		87,823
Mortgage loans held in inventory, net		-			-			125,717			-			125,717
Inventories
Housing completed or under construction		-			1,272,917			125			-			1,273,042
Land and land under development		-			1,061,884			-			-			1,061,884
Investment in and advances to parent and subsidiaries		239,514			79,533			1,125			(320,172	)		-
Other assets, net		271,729			90,864			4,087			-			366,680

Total Assets	$	1,163,646		$	2,585,162		$	197,922		$	(361,029	)	$	3,585,701


LIABILITIES
Accounts payable and related party liabilities	$	42,794		$	158,987		$	985		$	(40,857	)	$	161,909
Accrued liabilities		78,784			228,392			53,978			-			361,154
Advances and notes payable to parent and subsidiaries		(2,074,486	)		2,077,116			(2,630	)		-			-
Income taxes payable		153,327			(155,583	)		2,256			-			-
Homebuilding Line		-			-			-			-			-
Mortgage Line		-			-			99,411			-			99,411
Senior notes, net		996,883			-			-			-			996,883

Total Liabilities		(802,698	)		2,308,912			154,000			(40,857	)		1,619,357


STOCKHOLDERS’ EQUITY		1,966,344			276,250			43,922			(320,172	)		1,966,344

Total Liabilities and Stockholders’ Equity	$	1,163,646		$	2,585,162		$	197,922		$	(361,029	)	$	3,585,701

- 18 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Balance Sheet

December 31, 2006

(In thousands)


	MDC			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
ASSETS
Cash and cash equivalents	$	484,682		$	6,400	$	16,865		$	-		$	507,947
Restricted cash		-			2,641		-			-			2,641
Home sales and other receivables		-			129,559		53,379			(39,002	)		143,936
Mortgage loans held in inventory, net		-			-		212,903			-			212,903
Inventories
Housing completed or under construction		-			1,178,671		-			-			1,178,671
Land and land under development		-			1,575,158		-			-			1,575,158
Investment in and advances to parent and subsidiaries		480,650			1,068		(37,782	)		(443,936	)		-
Other assets, net		169,961			113,383		5,275			-			288,619

Total Assets	$	1,135,293		$	3,006,880	$	250,640		$	(482,938	)	$	3,909,875


LIABILITIES
Accounts payable and related party liabilities	$	41,458		$	168,401	$	1,604		$	(38,057	)	$	173,406
Accrued liabilities		93,755			271,482		54,661			(945	)		418,953
Advances and notes payable to parent and subsidiaries		(2,114,146	)		2,103,373		10,773			-			-
Income taxes payable		(44,338	)		66,668		6,155			-			28,485
Homebuilding Line		-			-		-			-			-
Mortgage Line		-			-		130,467			-			130,467
Senior notes, net		996,682			-		-			-			996,682

Total Liabilities		(1,026,589	)		2,609,924		203,660			(39,002	)		1,747,993


STOCKHOLDERS’ EQUITY		2,161,882			396,956		46,980			(443,936	)		2,161,882

Total Liabilities and Stockholders’ Equity	$	1,135,293		$	3,006,880	$	250,640		$	(482,938	)	$	3,909,875

- 19 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

(In thousands)

Three Months Ended June 30, 2007


	MDC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-		$	690,471		$	1,767		$	(4,425	)	$	687,813
Land sales and other revenue		7,923			6,225			14,747			-			28,895
Equity in earnings of subsidiaries		(85,866	)		-			-			85,866			-

Total Revenue		(77,943	)		696,696			16,514			81,441			716,708


COSTS AND EXPENSES
Home cost of sales		-			593,055			1,934			(4,425	)		590,564
Asset impairments		-			161,050			-			-			161,050
Marketing and commission expenses		-			53,577			174			-			53,751
General and administrative expenses		12,862			57,656			9,572			-			80,090
Other expenses		100			2,181			-			-			2,281

Total Costs and Expenses		12,962			867,519			11,680			(4,425	)		887,736

(Loss) income before income taxes		(90,905	)		(170,823	)		4,834			85,866			(171,028	)
(Provision for) benefit from income taxes		(15,167	)		81,846			(1,723	)		-			64,956

NET (LOSS) INCOME	$	(106,072	)	$	(88,977	)	$	3,111		$	85,866		$	(106,072	)

- 20 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

(In thousands)

Three Months Ended June 30, 2006


	MDC		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-	$	1,195,083		$	-		$	(6,522	)	$	1,188,561
Land sales and other revenue		171		16,434			26,815			-			43,420
Equity in earnings of subsidiaries		98,064		-			-			(98,064	)		-

Total Revenue		98,235		1,211,517			26,815			(104,586	)		1,231,981


COSTS AND EXPENSES
Home cost of sales		-		918,202			27			(6,522	)		911,707
Asset impairments		-		260			-			-			260
Marketing and commission expenses		306		68,656			-			-			68,962
General and administrative expenses		21,332		78,826			15,393			-			115,551
Other expenses		127		13,140			-			-			13,267

Total Costs and Expenses		21,765		1,079,084			15,420			(6,522	)		1,109,747

Income before income taxes		76,470		132,433			11,395			(98,064	)		122,234
Benefit from (provision for) income taxes		21		(41,431	)		(4,333	)		-			(45,743	)

NET INCOME	$	76,491	$	91,002		$	7,062		$	(98,064	)	$	76,491

- 21 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

(In thousands)

Six Months Ended June 30, 2007


	MDC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-		$	1,406,719		$	3,258		$	(10,364	)	$	1,399,613
Land sales and other revenue		14,461			14,289			33,469			-			62,219
Equity in earnings of subsidiaries		(146,867	)		-			-			146,867			-

Total Revenue		(132,406	)		1,421,008			36,727			136,503			1,461,832


COSTS AND EXPENSES
Home cost of sales		-			1,196,883			3,244			(10,364	)		1,189,763
Asset impairments		-			302,472			-			-			302,472
Marketing and commission expenses		-			105,727			353			-			106,080
General and administrative expenses		30,464			118,351			21,932			-			170,747
Other expenses		191			7,063			225			-			7,479

Total Costs and Expenses		30,655			1,730,496			25,754			(10,364	)		1,776,541

(Loss) income before income taxes		(163,061	)		(309,488	)		10,973			146,867			(314,709	)
(Provision for) benefit from income taxes		(37,409	)		155,583			(3,935	)		-			114,239

NET (LOSS) INCOME	$	(200,470	)	$	(153,905	)	$	7,038		$	146,867		$	(200,470	)

- 22 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

(In thousands)

Six Months Ended June 30, 2006


	MDC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
REVENUE
Home sales revenue	$	-		$	2,314,391		$	-		$	(8,675	)	$	2,305,716
Land sales and other revenue		593			20,488			50,609			-			71,690
Equity in earnings of subsidiaries		230,381			-			-			(230,381	)		-

Total Revenue		230,974			2,334,879			50,609			(239,056	)		2,377,406


COSTS AND EXPENSES
Home cost of sales		-			1,735,188			44			(8,675	)		1,726,557
Asset impairments		-			860			-			-			860
Marketing and commission expenses		107			130,733			-			-			130,840
General and administrative expenses		48,788			150,505			27,523			-			226,816
Other expenses		2,704			14,914			-			-			17,618

Total Costs and Expenses		51,599			2,032,200			27,567			(8,675	)		2,102,691

Income before income taxes		179,375			302,679			23,042			(230,381	)		274,715
Provision for income taxes		(7,463	)		(86,647	)		(8,693	)		-			(102,803	)

NET INCOME	$	171,912		$	216,032		$	14,349		$	(230,381	)	$	171,912

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Cash Flows

(In thousands)

Six Months Ended June 30, 2007


	MDC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries		Consolidated MDC
Net cash provided by (used in) operating activities	$	170,254		$	(2,976	)	$	32,044		$	-	$	199,322

Net cash used in investing activities		(1,984	)		(52	)		(19	)		-		(2,055	)

Financing activities
Net increase (decrease) in borrowings from parent and subsidiaries		-			-			-			-		-
Lines of credits
Advances		160,448			-			308,030			-		468,478
Principal payments		(160,448	)		-			(339,086	)		-		(499,534	)
Excess tax benefit from stock- based compensation		6,326			-			-			-		6,326
Dividend payments		(22,852	)		-			-			-		(22,852	)
Proceeds from exercise of stock options		10,747			-			-			-		10,747

Net cash used in financing activities		(5,779	)		-			(31,056	)		-		(36,835	)

Net increase (decrease) in cash and cash equivalents		162,491			(3,028	)		969			-		160,432
Cash and cash equivalents
Beginning of period		484,682			6,400			16,865			-		507,947

End of period	$	647,173		$	3,372		$	17,834		$	-	$	668,379

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Cash Flows

(In thousands)

Six Months Ended June 30, 2006


	MDC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Net cash provided by (used in) operating activities	$	65,767		$	(175,127	)	$	(2,165	)	$	(746	)	$	(112,271	)

Net cash used in investing activities		(1,464	)		(2,840	)		(27	)		-			(4,331	)

Financing activities
Net (decrease) increase in borrowings from parent and subsidiaries		(170,848	)		178,628			(7,780	)		-			-
Lines of credits
Advances		425,900			-			11,631			-			437,531
Principal payments		(425,900	)		-			-			-			(425,900	)
Excess tax benefit from stock-based compensation		1,486												1,486
Dividend payments		(23,202	)		-			-			746			(22,456	)
Proceeds from exercise of stock options		2,894			-			-			-			2,894

Net cash (used in) provided by financing activities		(189,670	)		178,628			3,851			746			(6,445	)

Net (decrease) increase in cash and cash equivalents		(125,367	)		661			1,659			-			(123,047	)
Cash and cash equivalents
Beginning of period		196,032			5,527			12,972			-			214,531

End of period	$	70,665		$	6,188		$	14,631		$	-		$	91,484

- 25 -

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, 2006 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. Our homebuilding segments consist of subsidiary companies that build and sell homes under the name “Richmond American Homes.” The Company’s homebuilding reportable segments are as follows: (1) West (Arizona, California and Nevada markets); (2) Mountain (Colorado and Utah markets); (3) East (Maryland and Virginia, which includes Virginia and West Virginia, markets); and (4) Other Homebuilding (Florida, Illinois, Delaware Valley, which includes Pennsylvania, Delaware and New Jersey, and Texas markets, although we recently completed our exit of the Texas market).

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 our homebuyers in Colorado, Delaware, Florida, Illinois, Nevada, Maryland, Virginia and West Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides general liability coverage for products and completed operations to the Company and, in most of the Company’s markets, to subcontractors of MDC’s homebuilding subsidiaries. In 2003, we formed StarAmerican Insurance Ltd. (“StarAmerican”), now a Hawaii corporation. StarAmerican, a wholly owned subsidiary of MDC, has agreed to re-insure all claims pursuant to two policies issued to the Company by a third party. Pursuant to agreements beginning in June 2004, StarAmerican has agreed to re-insure all Allegiant claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits, which do not exceed $18.0 million per year.

EXECUTIVE SUMMARY

We closed 2,031 and 4,032 homes during the three and six months ended June 30, 2007, respectively, compared with 3,376 and 6,574 homes during the same periods during 2006. We received 1,970 and 4,528 net home orders during the 2007 second quarter and first six months, respectively, compared with 2,738 and 6,538 net home orders during the same periods in 2006. We had 4,134 homes in Backlog (as defined below) valued at approximately $1.5 billion at June 30, 2007, compared with 6,496 homes in Backlog valued at approximately $2.4 billion at June 30, 2006.

We continued to experience weakness in the demand for new homes in each of our homebuilding segments, and particularly in our California, Nevada and Arizona markets. This weakness contributed to the decline in our financial and operating results during the 2007 second quarter and first six months,

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compared with the same periods in 2006. The conditions we have been experiencing during 2007 include, among other things, increased homebuyer concerns about declines in the market value of homes, and lower availability of credit for homebuyers resulting from more strict mortgage loan underwriting criteria associated with higher-risk mortgage loan products. These and other factors contributed to, among other things: (1) significant increases in competition for new home orders; (2) continued high levels of incentives and, in many cases, increased incentives required to stimulate new home orders and maintain previous home orders in Backlog until they close; (3) increases in the supply of new and existing homes available to be purchased; and (4) prospective homebuyers having a more difficult time selling their existing homes in this increasingly competitive environment. Additionally, during the first six months of 2007, many lenders in the mortgage industry faced liquidity issues surrounding originated higher-risk mortgage loans. We believe that these factors, as well as the media’s recent reporting of problems in the mortgage lending environment, have impacted negatively our homebuyers’ confidence in both the homebuilding and mortgage lending industries.

For MDC, the weaker homebuilding market resulted in fewer closed homes, decreased new home orders, reduced year-over-year Backlog and lower Home Gross Margins (as defined below) in 2007, as well as asset impairments of $161.1 million and $302.5 million for the second quarter and first six months of 2007, respectively. As a consequence, we recognized net losses of $106.1 million and $200.5 million during the three and six months ended June 30, 2007, respectively, compared with net income of $76.5 million and $171.9 million for the same periods in 2006.

Recognizing the challenges presented by the current homebuilding and mortgage lending environments, our management continued to focus on: (1) initiatives to generate new home orders and maintain home orders in Backlog until they close; (2) sales and marketing programs to generate homebuyer traffic in our home sales offices; (3) controlling our general and administrative expenses, primarily through personnel reductions and consolidation of several homebuilding divisions; (4) adjusting our portfolio of lots controlled to accommodate the current pace of new home orders in our markets; (5) strategies to lower risks associated with the origination and subsequent sales of mortgage loan products; and (6) implementing our new national customer experience initiative, which is intended to improve our customer’s home buying and home ownership experience. Our sales and marketing strategies included offering additional incentives as a means of generating homebuyer interest and discouraging home order cancellations. This contributed to the significant reduction in our Home Gross Margins during the second quarter and first six months of 2007, compared with the same periods during 2006. Additionally, during the first six months of 2007, we continued to right-size our business in response to the reduced levels of homebuilding activity in most of our markets. Accordingly, our employee headcount declined to approximately 2,700 at June 30, 2007, from approximately 3,900 and 3,200 at June 30, 2006 and December 31, 2006, respectively, and we decreased the number of our separate homebuilding operating divisions to 19 at June 30, 2007, compared with 23 operating divisions at December 31, 2006. See “Forward-Looking Statements” below.

In response to the issues surrounding the mortgage lending industry, as discussed above, we have tightened our mortgage loan underwriting criteria during 2007. This resulted in fewer originations of: (1) high loan-to-value mortgage loans; (2) sub-prime (as defined below) and Alt-A (as defined below) mortgage loan products; and (3) loans with related second mortgages. Additionally, during the 2007 second quarter, we implemented a new strategy of selling our mortgage loans on a flow basis rather than a bulk basis, which was intended to mitigate some of the risks associated with holding these mortgage loans. However, this strategy also contributed to lower gains on sales of mortgage loans.

- 27 -

Consistent with our homebuilding inventory valuation policy, we evaluated facts and circumstances existing at quarter-end to determine whether the carrying values of our homebuilding inventories were recoverable on a subdivision-by-subdivision basis. Based upon the evaluation performed, we determined that the carrying value of certain inventory assets at June 30, 2007 in each of our homebuilding segments, particularly in our California, Nevada and Arizona markets, were not recoverable. Accordingly, we recorded $161.1 million in asset impairments at June 30, 2007 associated with 4,427 owned lots in 83 subdivisions. These impairments, which relate to assets contracted for primarily during 2004 and 2005, resulted from decreases in home sales prices and/or increases in incentives offered in an effort to: (1) stimulate new home orders when the spring selling season failed to materialize; (2) maintain homes in Backlog until they close; and (3) remain competitive with home sales prices offered by our competitors. As market conditions for the homebuilding industry can fluctuate significantly period-to-period, we will continue to assess facts and circumstances existing at each future period-end to determine whether the carrying values of our homebuilding inventories are recoverable. We cannot provide any assurance as to the potential for future asset impairments. See “Forward-Looking Statements” below.

We have continued to pursue our objective of limiting our lot supply to avoid over-exposure to any single sub-market and to create flexibility to react to changes in market conditions. Accordingly, we limited our new land acquisitions and elected not to exercise certain options to purchase lots under existing contracts. As a result, we incurred approximately $6.4 million and $10.5 million in write-offs of lot option deposits and pre-acquisition costs during the three and six months ended June 30, 2007, respectively, which contributed to the 29% and 21% reductions of total lots under option and total lots owned, respectively, from December 31, 2006. In addition, partly as a result of our efforts to control land acquisitions through modifications to lot takedown prices and extensions of time for specified lot takedowns, we were able to decrease our land and land under development by $513.3 million from December 31, 2006, which includes the impact of $238.0 million of impairments recognized during the first six months of 2007.

During the 2007 second quarter and first six months, we maintained our focus on our balance sheet, preparing to react to opportunities that may arise in the future. We were able to generate $199.3 million in cash from operations during the first six months of 2007, resulting in cash and cash equivalents at June 30, 2007 of $668.4 million, with no borrowings outstanding on our Homebuilding Line (as defined below). Consequently, our cash and available borrowing capacity increased to approximately $1.9 billion at June 30, 2007, compared with $1.7 billion and $1.3 billion at December 31, 2006 and June 30, 2006, respectively. We will continue to evaluate our alternatives for using this capital, which may include lot acquisitions, various investment vehicles, potential repurchases of MDC common stock and dividend payments. See “Forward-Looking Statements” below.

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.

- 28 -

Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. 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 (1) homebuilding inventory valuation; (2) revenue recognition; (3) segment reporting; (4) stock-based compensation; (5) home cost of sales; (6) warranty reserves; (7) land option contracts; and (8) insurance reserves. 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, 2006.

RESULTS OF OPERATIONS

The following discussion compares results for the three and six months ended June 30, 2007 with the three and six months ended June 30, 2006.

(Loss) Income Before Income Taxes. The table below summarizes our (loss) income before income taxes by segment (dollars in thousands).


	Three Months Ended June 30,						Change
	2007			2006			Amount			%
Homebuilding
West	$	(139,239	)	$	98,817		$	(238,056	)	-241%
Mountain		(6,828	)		7,228			(14,056	)	-194%
East		(6,784	)		26,462			(33,246	)	-126%
Other Homebuilding		(18,487	)		15			(18,502	)	N/A

Total Homebuilding		(171,338	)		132,522			(303,860	)	-229%
Financial Services and Other		4,241			10,988			(6,747	)	-61%
Corporate		(3,931	)		(21,276	)		17,345		-82%

Consolidated	$	(171,028	)	$	122,234		$	(293,262	)	-240%


	Six Months Ended June 30,						Change
	2007			2006			Amount			%
Homebuilding
West	$	(264,630	)	$	220,880		$	(485,510	)	-220%
Mountain		4,143			15,863			(11,720	)	-74%
East		(11,170	)		61,780			(72,950	)	-118%
Other Homebuilding		(38,618	)		4,897			(43,515	)	-889%

Total Homebuilding		(310,275	)		303,420			(613,695	)	-202%
Financial Services and Other		11,758			22,172			(10,414	)	-47%
Corporate		(16,192	)		(50,877	)		34,685		-68%

Consolidated	$	(314,709	)	$	274,715		$	(589,424	)	-215%

We recognized a loss before income taxes in our homebuilding segments during the three and six months ended June 30, 2007, primarily resulting from: (1) asset impairments of $161.1 million and

- 29 -

$302.5 million, respectively; (2) significant decreases in Home Gross Margins in most of our homebuilding segments; and (3) closing fewer homes in most of our homebuilding segments during the 2007 second quarter and first six months. Partially offsetting these items were decreases in general and administrative, commission and marketing expenses during three and six months ended June 30, 2007.

In our West segment, the loss before income taxes during the three and six months ended June 30, 2007 primarily was due to: (1) asset impairments of $132.7 million and $254.6 million, respectively; (2) significant decreases in Home Gross Margins; and (3) closing 670 and 1,294 fewer homes, respectively. These items partially were offset by a combined decrease in general and administrative, marketing and commission expenses. In our Mountain segment, the loss before income taxes during the 2007 second quarter primarily resulted from asset impairments of $9.1 million and closing 244 fewer homes. Income before income taxes for the six months ended June 30, 2007 decreased primarily resulting from closing 424 fewer homes and $9.8 million in asset impairments, partially offset by a combined decrease in general and administrative, commission and marketing expenses.

In our East segment, we recognized losses before income taxes during the 2007 second quarter and first six months, primarily due to: (1) asset impairments of $5.9 million and $8.4 million, respectively; (2) significant decreases in Home Gross Margins; and (3) closing 146 and 280 fewer homes, respectively. These items partially were offset by a combined decrease in general and administrative, marketing and commission expenses for the three and six months ended June 30, 2007. We recognized losses before income taxes during the 2007 second quarter and first six months in our Other Homebuilding segment, primarily resulting from: (1) asset impairments of $13.3 million and $29.6 million, respectively; (2) closing 285 and 544 fewer homes, respectively; and (3) decreases in Home Gross Margins in nearly each market within this segment. These items partially were offset by a combined decrease in general and administrative, marketing and commission expenses for the three and six months ended June 30, 2007.

Income before income taxes in our Financial Services and Other segment decreased during the 2007 second quarter and first six months due to lower gains on sales of mortgage loans primarily resulting from originating fewer mortgage loans during these periods. This decline partially was offset by decreases in general and administrative expenses during both 2007 periods. Our Corporate segment net expenses decreased $17.3 million and $34.7 million for the three and six months ended June 30, 2007, respectively, primarily resulting from a decrease in general and administrative expenses and an increase in interest income, net.

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Total Revenue. The table below summarizes total revenue by segment (dollars in thousands).


	Three Months Ended June 30,						Change
	2007			2006			Amount			%
Homebuilding
West	$	433,049		$	720,530		$	(287,481	)	-40%
Mountain		134,670			187,724			(53,054	)	-28%
East		71,800			160,534			(88,734	)	-55%
Other Homebuilding		58,971			142,859			(83,888	)	-59%

Total Homebuilding		698,490			1,211,647			(513,157	)	-42%
Financial Services and Other		13,614			26,673			(13,059	)	-49%
Corporate		9,029			183			8,846		N/A
Inter-company adjustments		(4,425	)		(6,522	)		2,097		-32%

Consolidated	$	716,708		$	1,231,981		$	(515,273	)	-42%


	Six Months Ended June 30,						Change
	2007			2006			Amount			%
Homebuilding
West	$	887,703		$	1,407,776		$	(520,073	)	-37%
Mountain		279,861			350,914			(71,053	)	-20%
East		133,155			307,715			(174,560	)	-57%
Other Homebuilding		123,831			268,746			(144,915	)	-54%

Total Homebuilding		1,424,550			2,335,151			(910,601	)	-39%
Financial Services and Other		33,184			50,315			(17,131	)	-34%
Corporate		14,462			615			13,847		N/A
Inter-company adjustments		(10,364	)		(8,675	)		(1,689	)	19%

Consolidated	$	1,461,832		$	2,377,406		$	(915,574	)	-39%

The decline in total revenue during the three and six months ended June 30, 2007 primarily resulted from a significant decline in home closings in each of our homebuilding segments, most notably in our West segment. Total revenue for our Financial Services and Other segment decreased due to lower gains on sales of mortgage loans, which were driven by: (1) originating significantly fewer mortgage loans because of declines in our home closing levels; (2) lower capture rates during the 2007 periods; and (3) a shift to a less profitable, but risk mitigating strategy of selling mortgage loan products faster after origination. Total revenue in our Corporate segment improved during the 2007 second quarter and first six months due to an increase in interest income generated from significantly higher cash balances throughout the first two quarters of 2007.

Inter-company adjustments relate to mortgage loan origination fees paid at the time of a home closing by our homebuilding subsidiaries to HomeAmerican on behalf of our homebuyers.

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Home Sales Revenue. The table below summarizes home sales revenue by segment (dollars in thousands).


	Three Months Ended June 30,						Change
	2007			2006			Amount			%
West	$	430,921		$	719,178		$	(288,257	)	-40%
Mountain		132,071			186,948			(54,877	)	-29%
East		70,584			159,251			(88,667	)	-56%
Other Homebuilding		58,662			129,706			(71,044	)	-55%

Total Homebuilding		692,238			1,195,083			(502,845	)	-42%
Inter-company adjustments		(4,425	)		(6,522	)		2,097		-32%

Consolidated	$	687,813		$	1,188,561		$	(500,748	)	-42%


	Six Months Ended June 30,						Change
	2007			2006			Amount			%
West	$	884,190		$	1,405,316		$	(521,126	)	-37%
Mountain		270,892			349,879			(78,987	)	-23%
East		131,908			305,851			(173,943	)	-57%
Other Homebuilding		122,987			253,345			(130,358	)	-51%

Total Homebuilding		1,409,977			2,314,391			(904,414	)	-39%
Inter-company adjustments		(10,364	)		(8,675	)		(1,689	)	19%

Consolidated	$	1,399,613		$	2,305,716		$	(906,103	)	-39%

In our West segment, the decreases in home sales revenue for the three and six months ended June 30, 2007 primarily resulted from closing 670 and 1,294 fewer homes, respectively, as well as decreases in the average selling prices for homes closed in each market within this segment for both 2007 periods. Home sales revenue in our Mountain segment decreased during the 2007 second quarter and first six months due to closing 244 and 424 fewer homes, respectively, partially offset by higher average selling prices for homes closed during both 2007 periods in each market within this segment.

The decline in home sales revenue for the three and six months ended June 30, 2007 in our East segment primarily was due to significant decreases in the average selling prices of closed homes during both 2007 periods in each market within this segment and closing 146 and 280 fewer homes, respectively. Home sales revenue in our Other Homebuilding segment decreased in the second quarter of 2007 and first six months primarily due to closing 285 and 544 fewer homes, respectively, and decreases in the average selling prices for homes closed in our Florida and Texas markets.

Land Sales. Land sales revenue was $3.4 million and $9.5 million during the three and six months ended June 30, 2007, respectively, primarily due to the sale of land in Utah that no longer met our strategic objectives in that market. Land sales revenue was $13.6 million and $15.5 million during the three and six months ended June 30, 2006, respectively, primarily due to the sale of land in Texas as we were in the process of exiting that market.

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Other Revenue. The table below sets forth the components of other revenue (dollars in thousands).


	Three Months Ended June 30,				Change
	2007		2006		Amount			%
Gains on sales of mortgage loans, net	$	6,410	$	15,439	$	(9,029	)	-58%
Broker origination fees		1,673		2,343		(670	)	-29%
Insurance revenue		4,669		4,839		(170	)	-4%
Interest income, net		9,161		1,040		8,121		781%
Title and other revenue		3,565		6,120		(2,555	)	-42%

Total other revenue	$	25,478	$	29,781	$	(4,303	)	-14%


	Six Months Ended June 30,				Change
	2007		2006		Amount			%
Gains on sales of mortgage loans, net	$	15,681	$	28,466	$	(12,785	)	-45%
Broker origination fees		3,435		4,423		(988	)	-22%
Insurance revenue		9,686		11,079		(1,393	)	-13%
Interest income, net		17,505		2,853		14,652		514%
Title and other revenue		6,461		9,393		(2,932	)	-31%

Total other revenue	$	52,768	$	56,214	$	(3,446	)	-6%

The decrease in other revenue for the three and six months ended June 30, 2007 primarily resulted from lower gains on sales of mortgage loans, due in part to originating fewer mortgage loans during the 2007 first quarter and first six months. Offsetting a substantial portion of the decline in other revenue during the second quarter and first six months of 2007 was an increase in interest income. This increase is attributable to our cash balances being significantly higher during the 2007 periods, resulting from our on-going efforts to limit our inventory acquisitions during the current homebuilding down cycle. Our cash and cash equivalents primarily consisted of funds in highly liquid, cash equivalents with an original maturity of 90 days or less, such as commercial paper, money market funds and time deposits.

Home Cost of Sales. Home cost of sales (which primarily includes land and construction costs, capitalized interest, closing costs, and reserves for warranty expenses and excludes commissions, amortization of deferred marketing costs and asset impairments) was $590.6 million and $1.2 billion for the three and six months ended June 30, 2007, respectively, compared with $911.7 million and $1.7 billion during the same periods in 2006, respectively. These decreases primarily resulted from closing 1,345 and 2,542 fewer homes during the 2007 second quarter and first six months, respectively. Partially offsetting these decreases was the impact of closing more homes with higher land costs per closed home (more of the lots on which we closed homes during the 2007 second quarter and first six months were purchased in the higher-priced 2005 and 2006 periods), and closing larger homes that included more options and upgrades as incentives for our homebuyers.

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Asset Impairments. The following table sets forth by homebuilding segment, the 2007 second quarter asset impairment, post-impairment asset balances, and number of impaired lots and subdivisions (dollars in thousands).


	Three Months Ended June 30, 2007
	Asset Impairments		Post-Impairment Asset Balances		Number of Lots	Number of Subdivisions
West	$	132,730	$	340,904	3,398	55
Mountain		9,123		25,910	409	11
East		5,865		12,781	85	4
Other Homebuilding		13,332		68,777	535	13

Total	$	161,050	$	448,372	4,427	83

During the three and six months ended June 30, 2007, we recorded impairments of our housing completed and under construction in the amounts of $38.2 million and $64.5 million, respectively, and impairments of our land and land under development in the amounts of $122.9 million and $238.0 million, respectively. The 2007 second quarter impairments, related to assets contracted for primarily during 2004 and 2005, resulted from decreases in home sales prices and/or increases in incentives offered in an effort to: (1) stimulate new home orders when the spring selling season failed to materialize; (2) maintain homes in Backlog until they close; and (3) remain competitive with home sales prices offered by our competitors.

Marketing Expenses. Marketing expenses (which include advertising, amortization of deferred marketing costs, model home expenses and other selling costs) were $29.4 million and $31.6 million for the three months ended June 30, 2007 and 2006, respectively, and $58.5 million and $60.6 million for six months ended June 30, 2007 and 2006, respectively. The decreases during the 2007 periods primarily related to lower amortization of deferred marketing costs resulting from closing fewer homes and reduced salaries from a reduction in headcount. These decreases were offset partially by increases in advertising and sales office expenses incurred in an effort to generate homebuyer traffic.

Commission Expenses. Commission expenses (which include direct incremental commissions paid for closed homes) were $24.4 million and $37.4 million for the three months ended June 30, 2007 and 2006, respectively, and $47.6 million and $70.2 million for the six months ended June 30, 2007 and 2006, respectively. The decreases during the 2007 periods primarily were attributable to closing 1,345 and 2,542 fewer homes during the three and six months ended June 30, 2007, respectively, partially offset by increases in commission rates paid to outside brokers in response to more competitive markets.

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General and Administrative Expenses. The following table summarizes our general and administrative expenses (dollars in thousands).


	Three Months Ended June 30,				Change
	2007		2006		Amount			%
Homebuilding segments	$	57,859	$	78,822	$	(20,963	)	-27%
Financial Services and Other		9,367		15,397		(6,030	)	-39%
Corporate		12,864		21,332		(8,468	)	-40%

Total general and administrative expenses	$	80,090	$	115,551	$	(35,461	)	-31%


	Six Months Ended June 30,				Change
	2007		2006		Amount			%
Homebuilding segments	$	118,858	$	150,503	$	(31,645	)	-21%
Financial Services and Other		21,425		27,525		(6,100	)	-22%
Corporate		30,464		48,788		(18,324	)	-38%

Total general and administrative expenses	$	170,747	$	226,816	$	(56,069	)	-25%

General and administrative expenses for each of our segments decreased during the three and six months ended June 30, 2007, primarily due to lower compensation and other employee benefit related costs. These reduced expenses resulted from various initiatives intended to right-size our operations, including the consolidation of several of our homebuilding divisions and reductions in employee headcount. We continue to remain focused on properly structuring our operations in response to reduced levels of homebuilding activity in most of our markets. As a result of these efforts, our employee headcount has decreased from approximately 3,900 at June 30, 2006 to approximately 2,700 at June 30, 2007. In addition, general and administrative expenses in our homebuilding segments were lower due to declines in write-offs of pre-acquisition costs and deposits on lot option contracts that we elected not to exercise. In our Financial Services and Other segment, the declines in general and administrative expenses associated with lower compensation related costs partially were offset by increased expenses associated with mortgage loans that were repurchased or subject to repurchase during both 2007 periods.

Income Taxes. Our overall effective income tax rates were 38.0% and 36.3% for the three and six months ended June 30, 2007, respectively, and 37.4% and for both the three and six months ended June 30, 2006. The changes in the effective tax rates during the 2007 periods, compared with the same periods during 2006, resulted from the impact of reductions in the benefits from I.R.C. Sec. 199, “Income Attributable to Domestic Production Activities,” and increases in estimated permanent differences related to accruals for non-deductible excess compensation under I.R.C. Sec. 162(m), “Certain Excessive Employee Remuneration.”

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Homebuilding Operating Activities

The table below sets forth information relating to Home Gross Margins and orders for homes.


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2007		2006		Amount			%	2007		2006		Amount			%
Home Gross Margins		14.1%		23.3%		-9.2%				15.0%		25.1%		-10.1%
Orders For Homes, net (units)
Arizona		611		679		(68	)	-10%		1,365		1,598		(233	)	-15%
California		282		392		(110	)	-28%		697		936		(239	)	-26%
Nevada		365		519		(154	)	-30%		745		1,298		(553	)	-43%

West		1,258		1,590		(332	)	-21%		2,807		3,832		(1,025	)	-27%

Colorado		224		291		(67	)	-23%		524		742		(218	)	-29%
Utah		139		326		(187	)	-57%		349		665		(316	)	-48%

Mountain		363		617		(254	)	-41%		873		1,407		(534	)	-38%

Maryland		92		98		(6	)	-6%		191		250		(59	)	-24%
Virginia		82		113		(31	)	-27%		194		307		(113	)	-37%

East		174		211		(37	)	-18%		385		557		(172	)	-31%

Delaware Valley		19		35		(16	)	-46%		81		74		7		9%
Florida		117		177		(60	)	-34%		296		449		(153	)	-34%
Illinois		31		18		13		72%		72		62		10		16%
Texas		8		90		(82	)	-91%		14		157		(143	)	-91%

Other Homebuilding		175		320		(145	)	-45%		463		742		(279	)	-38%

Total		1,970		2,738		(768	)	-28%		4,528		6,538		(2,010	)	-31%

Approximate Cancellation Rate		44%		43%		1%				39%		37%		2%
Estimated Value of Orders for Homes, net	$	653,000	$	914,000	$	(261,000	)	-29%	$	1,555,000	$	2,274,000	$	(719,000	)	-32%
Estimated Average Selling Price of Orders for Homes, net	$	331.5	$	333.8	$	(2.3	)	-1%	$	343.4	$	347.8	$	(4.4	)	-1%

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Orders for Homes. Each of our homebuilding segments experienced declines in net home orders during the 2007 second quarter and first six months, resulting from what we believe to be homebuyer concerns about declines in the market value of homes and lower availability of credit for homebuyers. Additionally, competition for new home orders during the three and six months ended June 30, 2007 continued at a high level, caused in part by expanding new and existing home inventories.

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. Home Gross Margins during the 2007 periods decreased significantly in each of our West, East and Other Homebuilding segments due to offering lower selling prices and/or higher sales incentives to generate new home orders and subsequent home closings, increases in speculative homes that were sold and closed, and higher land and home construction costs incurred to build larger homes that we were unable to fully offset through increases in the average selling prices of our closed homes. The decreases in Home Gross Margins for these three segments partially were offset by increases in Home Gross Margins in our Mountain segment. These increases resulted from closing homes in select subdivisions in our Colorado market with higher Home Gross Margins due, in part, to strong demand for our homes in those locations, as well as closing a higher percentage of homes in Utah, which produced some of the highest Home Gross Margins in the Company during these periods.

Home Gross Margins for the three months ended June 30, 2007 were impacted positively by recognizing $10.6 million in “Operating Profits” (home sales revenue less home cost of sales and all direct incremental costs associated with the home closing) that had been deferred under Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”), as of March 31, 2006, partially offset by a current deferral of $5.6 million in Operating Profits at June 30, 2007 pursuant to SFAS 66. Home Gross Margins for the first six months of 2007 were impacted positively by recognizing $23.1 million in Operating Profits that had been deferred under SFAS 66 as of December 31, 2006, partially offset by our June 30, 2006 deferral of $5.6 million. Additionally, during the three and six months ended June 30, 2007, we closed homes on lots for which we previously recorded $18.8 million and $28.0 million, respectively, of asset impairments.

Future Home Gross Margins may be impacted by, among other things: (1) increased competition and continued high levels of cancellations, which would affect our ability to maintain home prices and lower levels of incentives; (2) continued decline in demand for new homes in our markets; (3) 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; (4) adverse weather; (5) shortages of subcontractor labor, finished lots and other resources, which can result in delays in the delivery of homes under construction and increases in related home cost of sales; (6) the impact of being unable to sell high loan-to-value mortgage loans on a timely basis, as this may affect the timing of recognizing the Operating Profit on closed homes pursuant to SFAS 66; and (7) other general risk factors. See “Forward-Looking Statements” below.

Approximate Cancellation Rate. We define our home order “Approximate Cancellation Rate” as the approximate number of total cancelled home order contracts during a specified period of time as a percent of total home orders received during such time period.

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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
	2007	2006	Amount		%	2007	2006	Amount		%
Arizona	645	843	(198	)	-23%	1,297	1,621	(324	)	-20%
California	266	405	(139	)	-34%	594	869	(275	)	-32%
Nevada	405	738	(333	)	-45%	718	1,413	(695	)	-49%

West	1,316	1,986	(670	)	-34%	2,609	3,903	(1,294	)	-33%

Colorado	200	421	(221	)	-52%	364	820	(456	)	-56%
Utah	178	201	(23	)	-11%	406	374	32		9%

Mountain	378	622	(244	)	-39%	770	1,194	(424	)	-36%

Maryland	61	112	(51	)	-46%	110	186	(76	)	-41%
Virginia	76	171	(95	)	-56%	144	348	(204	)	-59%

East	137	283	(146	)	-52%	254	534	(280	)	-52%

Delaware Valley	35	41	(6	)	-15%	81	72	9		13%
Florida	138	255	(117	)	-46%	266	507	(241	)	-48%
Illinois	13	37	(24	)	-65%	27	73	(46	)	-63%
Texas	14	152	(138	)	-91%	25	291	(266	)	-91%

Other Homebuilding	200	485	(285	)	-59%	399	943	(544	)	-58%

Total	2,031	3,376	(1,345	)	-40%	4,032	6,574	(2,542	)	-39%

Our home closings were down during the three and six months ended June 30, 2007 in most markets of our homebuilding segments primarily due to significantly lower Backlogs at the beginning of both 2007 periods, compared with the beginning of both 2006 periods. These declines in Backlog primarily resulted from decreases in new home orders during the second half of 2006 and first quarter of 2007, compared with the second half of 2005 and first quarter of 2006, partially as a result of homebuyer concerns about declines in the market value of homes and the lack of stabilization in home sales prices.

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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, 2007		December 31, 2006		June 30, 2006		December 31, 2005
Backlog (units)
Arizona		1,572		1,504		2,076		2,099
California		530		427		832		765
Nevada		342		315		908		1,023

West		2,444		2,246		3,816		3,887

Colorado		413		253		499		577
Utah		408		465		629		338

Mountain		821		718		1,128		915

Maryland		268		187		315		251
Virginia		186		136		340		381

East		454		323		655		632

Delaware Valley		119		119		183		181
Florida		227		197		541		599
Illinois		68		23		69		80
Texas		1		12		104		238

Other Homebuilding		415		351		897		1,098

Total		4,134		3,638		6,496		6,532

Backlog Estimated Sales Value	$	1,480,000	$	1,300,000	$	2,440,000	$	2,440,000

Estimated Average Selling Price of Homes in Backlog	$	358.0	$	357.3	$	375.6	$	373.5

We define “Backlog” as homes under contract but not yet delivered. At June 30, 2007 and 2006, we had 4,134 and 6,496 homes in Backlog, respectively. Because our change in Backlog during the first six months of 2007 is equal to the total net home orders received during the six months ended June 30, 2007 less homes closed during the same period, refer to the previous discussion on “Homes Closed” and “Orders for Homes” for an explanation of the change in the number of homes in Backlog. The estimated Backlog sales value decreased from $2.4 billion at June 30, 2006 to $1.5 billion at June 30, 2007, primarily due to the 36% decrease in the number of homes in Backlog and a 5% decrease in the estimated average selling price of homes in Backlog.

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Active Subdivisions. The following table displays the number of our active subdivisions for each market within our homebuilding segments.


	June 30, 2007	December 31, 2006	June 30, 2006
Arizona	69	67	61
California	44	45	45
Nevada	43	41	35

West	156	153	141


Colorado	50	47	45
Utah	25	22	20

Mountain	75	69	65


Maryland	16	19	18
Virginia	23	19	23

East	39	38	41


Delaware Valley	5	8	7
Florida	27	30	28
Illinois	6	6	7
Texas	-	2	4

Other Homebuilding	38	46	46

Total	308	306	293

Average for quarter ended	311	299	300

Average Selling Prices Per Home Closed. The following table displays our average selling prices per home closed, by market (dollars in thousands).


	Three Months Ended June 30,				Change				Six Months Ended June 30,				Change
	2007		2006		Amount			%	2007		2006		Amount			%
Arizona	$	253.1	$	313.6	$	(60.5	)	-19%	$	257.8	$	300.0	$	(42.2	)	-14%
California		534.6		574.5		(39.9	)	-7%		537.6		552.5		(14.9	)	-3%
Colorado		326.5		308.3		18.2		6%		338.2		302.6		35.6		12%
Delaware Valley		439.9		387.5		52.4		14%		468.1		398.0		70.1		18%
Florida		260.1		293.5		(33.4	)	-11%		270.1		295.6		(25.5	)	-9%
Illinois		412.0		374.5		37.5		10%		359.8		369.0		(9.2	)	-2%
Maryland		513.4		573.9		(60.5	)	-11%		521.2		572.5		(51.3	)	-9%
Nevada		304.2		320.9		(16.7	)	-5%		304.7		321.9		(17.2	)	-5%
Texas		126.3		166.8		(40.5	)	-24%		130.4		167.9		(37.5	)	-22%
Utah		369.2		291.5		77.7		27%		358.4		277.3		81.1		29%
Virginia		497.8		573.3		(75.5	)	-13%		495.1		584.9		(89.8	)	-15%
Company average	$	338.7	$	352.1	$	(13.4	)	-4%	$	347.1	$	350.7	$	(3.6	)	-1%

The average selling prices of homes closed for the Company decreased during the three and six months ended June 30, 2007. These declines were most notable in our Arizona, California, Maryland,

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Nevada and Virginia markets and resulted in part from increased levels of incentives and reductions in sales prices required to close homes in response to lower demand for new homes in these markets. Additionally, we experienced an increase in the number of cancellations, which resulted in homes being resold as speculative homes, generally at lower prices or with higher incentives, and closed during the 2007 second quarter, which negatively impacted our average selling prices of closed homes during this period. We experienced increases in average selling prices in our Delaware Valley, Colorado and Utah markets during the second quarter of 2007 and first six months, primarily related to changes in the style and size of our single-family detached homes that were closed during these periods. Also contributing to the higher average selling prices of homes closed in Utah was our ability to raise home sales prices due to the higher demand for new homes in the second half of 2006, compared with the same period during 2005.

Land Inventory. The table below shows the carrying value of land and land under development, for each market within our homebuilding segments (in thousands).


	June 30, 2007		December 31, 2006		June 30, 2006
Arizona	$	203,928	$	284,407	$	289,959
California		181,867		391,170		498,073
Nevada		201,161		305,089		365,206

West		586,956		980,666		1,153,238

Colorado		172,355		191,456		167,554
Utah		79,831		90,607		85,560

Mountain		252,186		282,063		253,114

Maryland		55,476		76,981		80,138
Virginia		85,822		108,646		127,173

East		141,298		185,627		207,311

Delaware Valley		22,403		29,345		38,441
Florida		41,358		74,149		82,385
Illinois		17,683		23,105		23,757
Texas		-		203		1,831

Other Homebuilding		81,444		126,802		146,414

Total	$	1,061,884	$	1,575,158	$	1,760,077

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The tables below show the total number of lots owned (excluding homes completed or under construction) and lots controlled under option agreements for each market within our homebuilding segments (in units).


	June 30, 2007	December 31, 2006	June 30, 2006
Lots Owned
Arizona	4,771	6,368	7,477
California	2,182	2,802	3,391
Nevada	2,038	2,747	3,619

West	8,991	11,917	14,487


Colorado	3,052	3,479	3,390
Utah	933	1,185	1,159

Mountain	3,985	4,664	4,549


Maryland	389	528	558
Virginia	542	643	822

East	931	1,171	1,380


Delaware Valley	212	265	372
Florida	907	1,093	1,307
Illinois	233	287	312
Texas	-	13	77

Other Homebuilding	1,352	1,658	2,068

Total	15,259	19,410	22,484


Lots Controlled Under Option
Arizona	548	744	2,506
California	157	387	1,510
Nevada	4	250	568

West	709	1,381	4,584


Colorado	312	801	1,785
Utah	93	91	553

Mountain	405	892	2,338


Maryland	925	960	1,156
Virginia	1,894	2,381	2,642

East	2,819	3,341	3,798


Delaware Valley	741	683	966
Florida	1,073	1,800	2,367
Illinois	-	-	139
Texas	-	-	-

Other Homebuilding	1,814	2,483	3,472

Total	5,747	8,097	14,192

Total Lots Owned and Controlled (excluding homes completed or under construction)	21,006	27,507	36,676

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During the 2007 second quarter and first six months, in view of the current pace of new home orders in our markets, we remained focused on managing the total number of lots we owned and controlled under option. Accordingly, the total number of lots owned (excluding homes completed or under construction) at June 30, 2007 declined 32% and 21% from June 30, 2006 and December 31, 2006, respectively, including decreases in each of our homebuilding segments. Additionally, our total lots controlled under option at June 30, 2007 decreased by 60% and 29% from June 30, 2006 and December 31, 2006, respectively. The decrease from December 31, 2006 includes declines within each of our homebuilding segments and primarily related to the termination of lot option contracts with terms that no longer met our underwriting criteria, as well as limited purchases of lots under option. As a result, we incurred approximately $6.4 million and $10.5 million in write-offs of lot option deposits and pre-acquisition costs during the three and six months ended June 30, 2007, respectively, compared with $12.1 million and $15.8 million during the same periods in 2006, respectively.

In addition to the non-refundable option deposits noted in the table below (in thousands), we had $4.0 million and $5.6 million in capitalized pre-acquisition costs at June 30, 2007 and December 31, 2006, respectively.


	June 30, 2007		December 31, 2006		June 30, 2006
Non-refundable Option Deposits
Cash	$	11,009	$	20,228	$	37,993
Letters of Credit		11,850		14,224		17,640

Total Non-refundable Option Deposits	$	22,859	$	34,452	$	55,633

The table below shows the number of homes completed or under construction (in units).


	June 30, 2007	December 31, 2006	June 30, 2006
Unsold Home Under Construction - Final	423	476	279
Unsold Home Under Construction - Frame	690	573	781
Unsold Home Under Construction - Foundation	382	400	395

Total Unsold Homes Under Construction	1,495	1,449	1,455
Sold Homes Under Construction	3,095	2,430	4,699
Model Homes	764	757	720

Homes Completed or Under Construction	5,354	4,636	6,874

- 43 -

Other Operating Results

HomeAmerican Operating Activities. The following table sets forth information relating to mortgage loans originated by our HomeAmerican operations, mortgage loans brokered and our Capture Rate (dollars in thousands).


	Three Months Ended June 30,				Change
	2007		2006		Amount			%
Principal amount of mortgage loans originated	$	293,544	$	604,419	$	(310,875	)	-51%
Principal amount of mortgage loans brokered	$	127,891	$	172,438	$	(44,547	)	-26%
Capture Rate		52%		59%		-7%
Including brokered loans		72%		75%		-3%
Mortgage products (% of loans originated by HomeAmerican)
Fixed rate		83%		49%		34%
Adjustable rate - interest only		14%		43%		-29%
Adjustable rate - other		3%		8%		-5%

Prime loans ⁽¹⁾		86%		61%		25%
Alt-A loans ⁽²⁾		5%		33%		-28%
Government loans ⁽³⁾		9%		4%		5%
Sub-prime loans ⁽⁴⁾		0%		2%		-2%

	Six Months Ended June 30,				Change
	2007		2006