M.D.C. HOLDINGS, INC. - Quarter Report: 2011 June (Form 10-Q)

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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, 2011

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

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

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, 2011, 47,530,000 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, 2011

INDEX


			Page No.
Part I.	Financial Information:

	Item 1.	Unaudited Consolidated Financial Statements:

		Consolidated Balance Sheets at June 30, 2011 and December 31, 2010		1

		Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010		2

		Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010		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		51

	Item 4.	Controls and Procedures		51

Part II.	Other Information:

	Item 1.	Legal Proceedings		52

	Item 1A.	Risk Factors		53

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		54

	Item 3.	Defaults Upon Senior Securities		54

	Item 4.	(Removed and Reserved)		54

	Item 5.	Other Information		55

	Item 6.	Exhibits		55

	Signatures			56

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, 2011			December 31, 2010
Assets
Cash and cash equivalents	$	755,835		$	572,225
Marketable securities		646,895			968,729
Restricted cash		604			420
Receivables
Home sales receivables		7,797			8,530
Income taxes receivable		-			2,048
Other receivables		8,661			9,432
Mortgage loans held-for-sale, net		39,200			65,114
Inventories, net
Housing completed or under construction		336,514			372,422
Land and land under development		524,234			415,237
Property and equipment, net		38,769			40,826
Deferred tax asset, net of valuation allowance of $252,209 and $231,379at June 30, 2011 and December 31, 2010, respectively		-			-
Related party assets		7,393			7,393
Prepaid expenses and other assets, net		54,402			85,393

Total Assets	$	2,420,304		$	2,547,769

Liabilities
Accounts payable	$	29,108		$	35,018
Accrued liabilities		204,890			260,729
Income taxes payable		734			-
Related party liabilities		117			90
Mortgage repurchase facility		8,988			25,434
Senior notes, net		1,243,273			1,242,815

Total Liabilities		1,487,110			1,564,086

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding		-			-
Common stock, $0.01 par value; 250,000,000 shares authorized; 47,530,000 and 47,474,000 issued and outstanding, respectively, at June 30, 2011 and 47,198,000 and 47,142,000 issued and outstanding, respectively,at December 31, 2010		475			472
Additional paid-in-capital		839,964			820,237
Retained earnings		87,198			158,749
Accumulated other comprehensive income		6,216			4,884
Treasury stock, at cost; 56,000 shares at June 30, 2011 and December 31, 2010		(659	)		(659	)

Total Stockholders’ Equity		933,194			983,683

Total Liabilities and Stockholders’ Equity	$	2,420,304		$	2,547,769

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenue

Home sales revenue	$	206,163		$	311,276		$	369,546		$	452,219
Land sales revenue		2,565			5,699			2,769			5,714
Other revenue		6,957			9,355			13,117			15,475

Total Revenue		215,685			326,330			385,432			473,408

Costs and expenses

Home cost of sales		179,097			255,062			320,078			364,452
Land cost of sales		1,741			4,974			1,758			5,165
Asset impairments		9,119			-			9,398			-
Marketing expenses		9,897			11,475			19,730			18,535
Commission expenses		7,456			11,611			13,223			16,740
General and administrative expenses		36,237			44,588			72,989			84,791
Other operating expenses		2,447			529			897			1,020
Related party expenses		28			-			32			9

Total operating costs and expenses		246,022			328,239			438,105			490,712

Loss from operations		(30,337	)		(1,909	)		(52,673	)		(17,304	)

Other income (expense)
Interest income		7,872			7,541			15,198			11,969
Interest expense		(7,394	)		(9,436	)		(16,124	)		(19,810	)
Other		56			105			92			204

Loss before income taxes		(29,803	)		(3,699	)		(53,507	)		(24,941	)

Benefit from income taxes, net		1,823			15			5,648			384

Net loss	$	(27,980	)	$	(3,684	)	$	(47,859	)	$	(24,557	)

Loss per share

Basic	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

Diluted	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

Dividends declared per share	$	0.25		$	0.25		$	0.50		$	0.50

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

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2011			2010
Operating Activities
Net loss	$	(47,859	)	$	(24,557	)
Adjustments to reconcile net loss to net cash used in operating activities
Asset impairments		9,398			-
Stock-based compensation expense		6,680			8,202
Amortization of deferred marketing costs		4,850			5,528
Depreciation and amortization of long-lived assets		3,217			2,573
Write-offs of land option deposits and pre-acquisition costs		2,907			873
Other non-cash (income) expenses		359			322
Net changes in assets and liabilities:
Restricted cash		(184	)		(237	)
Home sales and other receivables		1,504			(35,608	)
Income taxes receivable		17,431			144,503
Mortgage loans held-for-sale		25,914			(49,750	)
Housing completed or under construction		51,411			(122,647	)
Land and land under development		(107,890	)		(105,669	)
Prepaid expenses and other assets		(6,226	)		(14,629	)
Accounts payable		(5,910	)		15,801
Accrued liabilities and related party liabilities		(24,859	)		(3,639	)

Net cash used in operating activities		(69,257	)		(178,934	)

Investing Activities
Purchase of marketable securities		(404,472	)		(722,159	)
Maturity of marketable securities		451,000			88,287
Sales of marketable securities		275,726			20,797
Purchase of property and equipment and other		(29,295	)		(5,072	)

Net cash provided by (used in) investing activities		292,959			(618,147	)

Financing Activities
Payment on mortgage repurchase facility		(47,115	)		(45,470	)
Advances on mortgage repurchase facility		30,669			81,660
Dividend payments		(23,692	)		(23,570	)
Proceeds from issuance of senior notes		-			242,288
Proceeds from exercise of stock options		46			53

Net cash (used in) provided by financing activities		(40,092	)		254,961

Net increase (decrease) in cash and cash equivalents		183,610			(542,120	)
Cash and cash equivalents
Beginning of period		572,225			1,234,252

End of period	$	755,835		$	692,132

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

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

1.	Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. (“MDC” or the “Company,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. 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, 2011 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, 2010, filed with the SEC on February 11, 2011.

The Consolidated Statements of Operations for the three and six months ended June 30, 2011 and Consolidated Statements of Cash Flows for the six months ended June 30, 2011 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, 2010 Annual Report on Form 10-K.

2.	Fair Value Measurements

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

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

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

Marketable Securities. The Company’s marketable securities consist of fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; (2) holdings in mutual fund equity securities and (3) deposit securities, which may include, among others, certificates of deposit and time deposits. As of June 30, 2011 all of the Company’s marketable securities are treated as available-for-sale investments and, as such, the Company has recorded all of its marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income during the three and six months ended June 30, 2011. As of December 31, 2010, the Company classified certain marketable securities as held-to-maturity as it had the intent and ability to hold its held-to-maturity investments to maturity at the time of their purchase. In July 2011, the Company sold $100 million of held-to-maturity marketable securities prior to their maturity and, as a result, the Company has re-classified debt securities which were previously accounted for as held-to-maturity as available-for-sale as of June 30, 2011.

The following table sets forth the Company’s amortized cost and fair values of marketable securities, all of which were re-classified from held-to-maturity to available-for-sale (in thousands). The fair values of the Company’s marketable securities are based upon Level 1 and Level 2 fair value inputs.


	June 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Debt securities - maturity less than 1 year	$	67,755	$	68,303	$	469,318	$	469,956
Debt securities - maturity 1 to 5 years		120,164		121,556		120,078		121,406

Total	$	187,919	$	189,859	$	589,396	$	591,362

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

- 4 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Equity security	$	165,064	$	166,084	$	103,189	$	105,304
Debt securities		287,696		290,952		271,260		274,029

Total	$	452,760	$	457,036	$	374,449	$	379,333

Mortgage Loans Held-for-Sale, Net. As of June 30, 2011, the primary components of the Company’s mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At June 30, 2011 and December 31, 2010, the Company had $30.3 million and $56.9 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon a Level 2 input being the quoted market prices for those mortgage loans. At June 30, 2011 and December 31, 2010, the Company had $8.9 million and $8.2 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell and, as such, their fair value was based upon Level 2 fair value inputs, primarily estimated market price received from an outside party.

Inventories. The Company records its homebuilding inventory (housing completed or under construction and land and land under development) at fair value only when the undiscounted future cash flow of a subdivision is less than its carrying value. The Company determines the estimated fair value of each subdivision either by: (1) calculating the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation; or (2) assessing what the market value of the land is in its current condition by considering the estimated price a willing buyer would pay for the land (other than in a forced liquidation), and recent land purchase transactions that the Company believes are indicators of fair value. These estimates are dependent on specific market or sub-market conditions for each subdivision. Local market-specific conditions that may impact these estimates for a subdivision include, among other things: (1) forecasted base selling prices and home sales incentives; (2) estimated land development costs and home cost of construction; (3) the current sales pace for active subdivisions; (4) changes by management in the sales strategy of a given subdivision; and (5) the level of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors. The estimated fair values of impaired subdivisions are based upon Level 3 inputs. The fair value of the Company’s inventory that was impaired at June 30, 2011 is as follows (in thousands).


	Land and Land Under Development (Held-for-		Housing Completed or Under Construction (Held-		Total Fair Value of
	Development)		for-Development)		Impaired Inventory
West	$	8,084	$	6,796		14,880
Mountain		1,202		3,702		4,904
East		-		-		-
Other Homebuilding		201		587		788

Consolidated	$	9,487	$	11,085	$	20,572

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

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

- 5 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Senior Notes. The following table states the estimated fair values of the Company’s senior notes (in thousands).


	June 30, 2011				December 31, 2010
	Recorded Amount		Estimated Fair Value		Recorded Amount		Estimated Fair Value
7% Senior Notes due 2012	$	149,705	$	162,000	$	149,650	$	160,493
5¹/2% Senior Notes due 2013		349,810		374,500		349,748		362,198
5³/8% Medium Term Senior Notes due 2014		249,351		265,700		249,266		255,683
5³/8% Medium Term Senior Notes due 2015		249,839		259,050		249,821		251,450
5³/8% Senior Notes due 2020		244,568		244,525		244,330		244,400

Total	$	1,243,273	$	1,305,775	$	1,242,815	$	1,274,224

As further described in Note 16, in July 2011 the Company extinguished a combined $237.0 million of its senior notes due in 2012 and 2013. The estimated fair value of the 7% Senior Notes due 2012 and 5 ¹/2% Senior Notes due 2013 is based upon Level 1 fair value inputs determined using the price the Company paid to acquire the senior notes. The estimated fair value of the remaining senior notes is based on Level 2 fair value inputs, including market prices of bonds in the homebuilding sector.

3.	Inventory Impairments

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

The Company evaluates its held-for-development inventory for impairment at each quarter end. The Company did not have any impairments of its homebuilding inventory during the three and six months ended June 20, 2010. The following table sets forth, by reportable segment, the asset impairments recorded during the three and six months ended June 30, 2011 (in thousands).


	Three Months Ended June 30,		Six Months Ended June 30,
	2011		2011
Land and Land Under Development (Held-for-Development)
West	$	5,919	$	5,919
Mountain		1,236		1,236
East		285		285
Other Homebuilding		-		-

Subtotal		7,440		7,440

Housing Completed or Under Construction (Held-for-Development)
West		954		954
Mountain		239		239
East		-		-
Other Homebuilding		-		-

Subtotal		1,193		1,193

Other Assets		486		765

Consolidated Asset Impairments	$	9,119	$	9,398

The Company recorded $9.1 million and $9.4 million of asset impairments during the three and six months ended June 30, 2011 resulting from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets.

- 6 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

4.	Derivative Financial Instruments

The Company utilizes certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or locked pipeline) and forward sales of mortgage-backed securities commitments, both of which typically are short-term in nature. Forward sales securities commitments and private investor sales commitments are utilized to hedge changes in fair value of mortgage loan inventory and commitments to originate mortgage loans. At June 30, 2011, the Company had $130.0 million in interest rate lock commitments and $94.5 million in forward sales of mortgage-backed securities.

The Company records its mortgage loans held-for-sale at fair value to achieve matching of the changes in the fair value of its derivative instruments with the changes in fair values of the loans it is hedging, without having to designate its derivatives as hedging instruments. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, the Company records the fair value of the derivatives in other revenue in the Consolidated Statements of Operations with an offset to either prepaid and other assets or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change. The changes in fair value of the Company’s derivatives were not material during the three and six months ended June 30, 2011 and 2010.

5.	Balance Sheet Components

The following table sets for information relating to prepaid expenses and other assets, net (in thousands).


	June 30, 2011		December 31, 2010
Deferred marketing costs	$	23,135	$	22,736
Land option deposits		11,432		11,606
Goodwill		5,958		-
Deferred debt issue costs, net		4,552		5,021
Prepaid expenses		3,331		5,935
IRS deposit (See Note 13)		-		35,562
Other		5,994		4,533

Total	$	54,402	$	85,393

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


	June 30,		December 31,
	2011		2010
Accrued liabilities
Insurance reserves (see Note 9)	$	52,310	$	52,901
Warranty reserves (see Note 8)		31,200		34,704
Accrued executive deferred compensation		22,467		20,956
Accrued interest payable		17,807		17,822
Accrued compensation and related expenses		15,609		22,659
Legal accruals (see Note 11)		13,213		14,230
Liability for unrecognized tax benefits (see Note 13)		11,808		55,850
Land development and home construction accruals		11,043		12,450
Customer and escrow deposits		6,631		4,523
Mortgage loan loss reserves (see Note 11)		4,100		6,881
Other accrued liabilities		18,702		17,753

Total accrued liabilities	$	204,890	$	260,729

- 7 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

6.	Loss Per Share

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


	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Basic and Diluted Loss Per Common Share
Net loss	$	(27,980	)	$	(3,684	)	$	(47,859	)	$	(24,557	)
Less: distributed and undistributed earnings allocated to participating securities		(206	)		(135	)		(365	)		(259	)

Net loss attributable to common stockholders	$	(28,186	)	$	(3,819	)	$	(48,224	)	$	(24,816	)


Basic and diluted weighted-average shares outstanding		46,719			46,617			46,717			46,615
Basic Loss Per Common Share	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

Dilutive Loss Per Common Share	$	(0.60	)	$	(0.08	)	$	(1.03	)	$	(0.53	)

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include stock options and unvested restricted stock. Diluted EPS for the three and six months ending June 30, 2011 and 2010 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS were 0.4 million shares during the three and six months ended June 30, 2011 and 2010.

7.	Interest Activity

The Company capitalizes interest on its senior notes associated with its qualifying assets, which includes land and land under development that is actively being developed and homes under construction through the completion of construction. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. The Company expensed $7.4 million and $9.4 million of interest primarily associated with interest incurred on its senior notes during the three months ended June 30, 2011 and 2010, respectively, and $16.1 million and $19.8 million during the six months ended June 30, 2011 and 2010, respectively, that could not be capitalized.

Interest activity is shown below (in thousands).

- 8 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Total Interest Incurred
Corporate	$	18,084		$	18,158		$	36,270		$	35,089
Financial Services and Other		60			127			123			206

Total interest incurred	$	18,144		$	18,285		$	36,393		$	35,295


Total Interest Capitalized
Interest capitalized, beginning of period	$	43,762		$	31,773		$	38,446		$	28,339
Interest capitalized		10,750			8,849			20,269			15,485
Previously capitalized interest included in home cost of sales		(5,454	)		(8,202	)		(9,657	)		(11,404	)

Interest capitalized, end of period	$	49,058		$	32,420		$	49,058		$	32,420

8.	Warranty Reserves

The Company records expenses and warranty reserves for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. The establishment of warranty reserves is primarily based on an actuarial study that includes known facts and interpretations of circumstances, including, among other things, the Company’s trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring. Warranty payments incurred for an individual house may differ from the related reserve established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an adjustment to the historical warranty reserve should be recorded.

The following table summarizes the warranty reserve activity for the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	33,615		$	54,054		$	34,704		$	59,022
Expense provisions		1,034			2,220			1,875			3,210
Cash payments		(1,617	)		(2,611	)		(3,116	)		(4,640	)
Adjustments		(1,832	)		(1,677	)		(2,263	)		(5,606	)

Balance at end of period	$	31,200		$	51,986		$	31,200		$	51,986

The favorable warranty adjustments that were recorded as a reduction to home cost of sales in the Consolidated Statements of Operations during the three and six months ended June 30, 2011 and 2010 were primarily the result of a continued favorable trend in the amount of warranty payments incurred on previously closed homes.

9.	Insurance Reserves

The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies and re-insurance agreements issued by 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 interpretations of circumstances, including the Company’s experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns such as those caused by natural disasters, fires, or accidents, depending on the business conducted, and changing regulatory and legal environments.

- 9 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes the insurance reserve activity for the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	52,031		$	51,390		$	52,901		$	51,606
Expense provisions		587			1,231			1,067			1,814
Cash payments		(656	)		(4,309	)		(2,006	)		(5,108	)
Adjustments		348			-			348			-

Balance at end of period	$	52,310		$	48,312		$	52,310		$	48,312

10.

Information on Business Segments

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

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

(1)

West (Arizona, California, Nevada and Washington)

(2)

Mountain (Colorado and Utah)

(3)

East (Delaware Valley, Maryland and Virginia)

(4)

Other Homebuilding (Florida and Illinois)

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

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

- 10 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Homebuilding
West	$	69,401		$	123,193		$	111,884		$	180,330
Mountain		78,702			110,112			149,826			156,794
East		51,076			72,657			94,168			104,162
Other Homebuilding		10,949			16,757			20,808			25,793

Total Homebuilding		210,128			322,719			376,686			467,079
Financial Services and Other		6,731			9,143			12,434			14,764
Corporate		-			-			-			-
Intercompany adjustments		(1,174	)		(5,532	)		(3,688	)		(8,435	)

Consolidated	$	215,685		$	326,330		$	385,432		$	473,408

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Homebuilding
West	$	(11,837	)	$	6,357		$	(16,397	)	$	8,711
Mountain		(1,204	)		4,962			(2,436	)		6,132
East		(2,345	)		1,455			(4,301	)		(64	)
Other Homebuilding		(916	)		295			(1,692	)		(224	)

Total Homebuilding		(16,302	)		13,069			(24,826	)		14,555
Financial Services and Other		3,089			4,089			4,869			5,935
Corporate		(16,590	)		(20,857	)		(33,550	)		(45,431	)

Consolidated	$	(29,803	)	$	(3,699	)	$	(53,507	)	$	(24,941	)

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

- 11 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2011			December 31, 2010
Homebuilding
West	$	360,939		$	300,652
Mountain		308,805			311,833
East		214,246			188,693
Other Homebuilding		37,146			40,554

Total Homebuilding		921,136			841,732
Financial Services and Other		112,113			135,286
Corporate		1,390,811			1,573,408
Intercompany adjustments		(3,756	)		(2,657	)

Consolidated	$	2,420,304		$	2,547,769

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,
	2011		2010		2011		2010
Homebuilding
West	$	1,241	$	2,211	$	2,121	$	3,285
Mountain		928		1,091		1,761		1,554
East		602		639		1,046		951
Other Homebuilding		189		237		399		398

Total Homebuilding		2,960		4,178		5,327		6,188
Financial Services and Other		157		170		330		339
Corporate		1,221		821		2,410		1,574

Consolidated	$	4,338	$	5,169	$	8,067	$	8,101

11.

Commitments and Contingencies

The Company often is required to obtain bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At June 30, 2011 the Company had issued and outstanding performance bonds and letters of credit totaling $74.4 million and $22.9 million, respectively, including $9.1 million in letters of credit issued by HomeAmerican. In the event any such bonds or letters of credit issued by third parties are called, MDC could be obligated to reimburse the issuer of the bond or letter of credit.

Mortgage Loan Loss Reserves. In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. During 2011, HomeAmerican reached settlements associated with claims and potential claims to repurchase certain previously sold mortgage loans. Primarily as a result of these settlements, the Company increased its estimated mortgage loan loss reserve by $1.3 million during the six months ended June 30, 2011. The Company’s mortgage loan reserves are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations.

- 12 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

The following table summarizes the mortgage loan loss reserve activity for the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	7,636		$	8,241		$	6,881		$	9,641
Expense provisions		-			-			-			-
Cash payments		(3,871	)		(172	)		(4,078	)		(1,572	)
Adjustments		335			-			1,297			-

Balance at end of period	$	4,100		$	8,069		$	4,100		$	8,069

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

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

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

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

By orders dated November 4 and 18, 2009, the trial court struck the answers filed by the Company and RAH West Virginia and entered judgment by default in favor of the plaintiffs on liability, with damages to be determined in a subsequent jury trial. On December 7, 2009, the Company and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On June 16, 2010, the West Virginia Supreme Court of Appeals granted the Company and RAH West Virginia a writ of prohibition and vacated the trial court’s sanctions orders.

On July 29, 2010, the plaintiffs filed a renewed motion for sanctions based on substantially the same alleged misconduct. On January 14, 2011 the trial court again entered an order striking the answers filed by the Company and RAH West Virginia and imposing judgment by default upon them on the claims asserted in plaintiffs’ complaints (exclusive of the claim for punitive damages). As stated in the January 14, 2011 order, the cross-claims made by the Company and RAH West Virginia remain in effect.

On March 31, 2011 the West Virginia Supreme Court of Appeals declined to enter a writ of prohibition with respect to the trial court’s re-entry of its judgment of default stating that the issues presented are more properly presented on appeal after full development of the record in the lower court.

- 13 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Separately, additional claims have been filed by homeowners in West Virginia against the Company, RAH West Virginia and individual superintendants who had worked for RAH West Virginia. The new litigation consists of the following:

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

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

Additionally, in the normal course of business, the Company is a defendant in claims primarily relating to construction defects, product liability and personal injury claims. These claims seek relief from the Company under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes.

The Company has accrued for losses that may be incurred with respect to legal claims based upon information provided to it by its legal counsel, including counsels’ on-going evaluation of the merits of the claims and defenses. Due to uncertainties in the estimation process, actual results could vary from those accruals. The Company had legal accruals of $13.2 million and $14.2 million at June 30, 2011 and December 31, 2010, respectively.

12.

Line of Credit and Total Debt Obligations

Mortgage Lending. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”), which may include other banks that become parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. The Mortgage Repurchase Facility is accounted for as a debt financing arrangement. Accordingly, at June 30, 2011 and December 31, 2010, amounts advanced under the Mortgage Repurchase Facility, which were used to finance mortgage loan originations, have been reported as a liability in Mortgage Repurchase Facility in the Consolidated Balance Sheets. At June 30, 2011 and December 31, 2010, the Company had $9.0 million and $25.4 million, respectively, of mortgage loans that it was obligated to repurchase under the Mortgage Repurchase Facility.

The Company’s senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of its homebuilding segment subsidiaries.

The Company’s debt obligations at June 30, 2011 and December 31, 2010 are as follows (in thousands):


	June 30, 2011		December 31, 2010
7% Senior Notes due 2012	$	149,705	$	149,650
5¹/2% Senior Notes due 2013		349,810		349,748
5³/8% Medium-Term Senior Notes due 2014		249,351		249,266
5³/8% Medium-Term Senior Notes due 2015		249,839		249,821
5³/8% Senior Notes due 2020		244,568		244,330

Total Senior Notes, net		1,243,273		1,242,815
Mortgage repurchase facility		8,988		25,434

Total Debt	$	1,252,261	$	1,268,249

As further described in Note 16, in July 2011 the Company extinguished a combined $237.0 million of the senior notes due in 2012 and 2013.

- 14 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

13.

Income Taxes

The Company is required, at the end of each interim period, to estimate its annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, the Company’s effective tax rates in 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss. The income tax benefits of $1.8 million and $5.6 million during the three and six months ended June 30, 2011, respectively, resulted primarily from the Company’s 2011 second quarter settlement of various state income tax matters and the Company’s 2011 first quarter settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns. The Company’s income tax benefits during the three and six months ended June 30, 2010 were not material to the Company’s results of operations.

The Company is required to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. Any difference between the income tax return position and the benefit recognized in the financial statements results in a liability for unrecognized tax benefits. The Company’s liability for unrecognized tax benefits was $11.8 million and $55.9 million at June 30, 2011 and December 31, 2010, respectively. This decrease resulted primarily from the Company’s settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns and settlement of various state income tax matters.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The increase in the Company’s total deferred tax asset at June 30, 2011 (per the table below) resulted primarily from an increase in the Company’s net operating loss carry forwards.

A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. At June 30, 2011 and December 31, 2010, the Company had a full valuation allowance recorded against its net deferred tax assets. The Company’s future realization of its deferred tax assets ultimately depends upon the existence of sufficient taxable income in the carryback or carryforward periods under the tax laws. The Company will continue analyzing, in subsequent reporting periods, the positive and negative evidence in determining the expected realization of its deferred tax assets.

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

- 15 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)


	June 30, 2011			December 31, 2010
Deferred tax assets
Federal net operating loss carryforward	$	98,854		$	73,189
State net operating loss carryforward		49,485			47,041
Asset impairment charges		38,307			46,118
Warranty, litigation and other reserves		24,641			27,635
Stock-based compensation expense		25,124			22,777
Alternative minimum tax and other tax credit carryforwards		10,296			10,296
Accrued liabilities		10,529			9,789
Inventory, additional costs capitalized for tax purposes		5,368			5,368
Property, equipment and other assets, net		1,761			1,773
Charitable contribution on carryforward		946			938
Deferred revenue		293			326

Total deferred tax assets		265,604			245,250
Valuation allowance		(252,209	)		(231,379	)

Total deferred tax assets, net of valuation allowance		13,395			13,871

Deferred tax liabilities
Deferred revenue		5,731			6,401
Unrealized gain		2,393			1,880
Inventory, additional costs capitalized for financial statement purposes		580			604
Accrued liabilities		383			713
Other, net		4,308			4,273

Total deferred tax liabilities		13,395			13,871

Net deferred tax asset	$	-		$	-

14.

Variable Interest Entities

In the normal course of business, the Company enters into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments, including interest and other carrying costs, and minimizes the amount of the Company’s land inventories on its consolidated balance sheets. The Company’s obligation with respect to Option Contracts generally is limited to forfeiture of the related cash deposits and/or letters of credit. At June 30, 2011, the Company had cash deposits and letters of credit of $10.5 million and $6.7 million, respectively, at risk associated with 2,957 lots under Option Contracts.

- 16 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

15.

Other Comprehensive Loss

Total other comprehensive loss includes net loss and unrealized holding gains or losses on the Company’s available-for-sale marketable securities. The following table sets forth the Company’s other comprehensive loss during the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net loss	$	(27,980	)	$	(3,684	)	$	(47,859	)	$	(24,557	)
Unrealized holding (loss) gain		(1,971	)		(2,448	)		1,332			(1,294	)

Total other comprehensive loss	$	(29,951	)	$	(6,132	)	$	(46,527	)	$	(25,851	)

16.

Subsequent Events

In July 2011, the Company completed a debt tender offer purchasing $63.7 million of its 7% Senior Notes due 2012 and $173.3 million of its 5¹/2% Senior Notes due 2013. The Company paid $256.7 million, including interest and fees, for the acquired notes and, as a result of the tender, the Company will record an $18.6 million charge associated with the extinguishment of debt during the 2011 third quarter.

In July 2011, the Company sold $100 million of marketable securities, which it previously accounted for as held-to-maturity securities, at a gain of $1.2 million.

17.

Supplemental Guarantor Information

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

•

M.D.C. Land Corporation

•

RAH of Florida, Inc.

•

Richmond American Construction, Inc.

•

Richmond American Homes of Arizona, Inc.

•

Richmond American Homes of Colorado, Inc.

•

Richmond American Homes of Delaware, Inc.

•

Richmond American Homes of Florida, LP

•

Richmond American Homes of Illinois, Inc.

•

Richmond American Homes of Maryland, Inc.

•

Richmond American Homes of Nevada, Inc.

•

Richmond American Homes of New Jersey, Inc.

•

Richmond American Homes of Pennsylvania, Inc.

•

Richmond American Homes of Utah, Inc.

•

Richmond American Homes of Virginia, Inc.

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

•

American Home Insurance

•

American Home Title

•

HomeAmerican

•

StarAmerican

•

Allegiant

•

Richmond American Homes of West Virginia, Inc.

•

Richmond American Homes of Washington, Inc.

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

- 17 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Balance Sheet

June 30, 2011

(In thousands)


	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated MDC
Assets
Cash and cash equivalents	$	718,010		$	3,022	$	34,803	$	-		$	755,835
Marketable securities		615,892			-		31,003		-			646,895
Restricted cash		-			604		-		-			604
Receivables		8,572			5,666		4,877		(2,657	)		16,458
Mortgage loans held-for-sale, net		-			-		39,200		-			39,200
Inventories, net
Housing completed or under construction		-			319,951		16,563		-			336,514
Land and land underdevelopment		-			514,634		9,600		-			524,234
Investment in subsidiaries		122,483			-		-		(122,483	)		-
Other assets, net		48,334			42,106		11,223		(1,099	)		100,564

Total Assets	$	1,513,291		$	885,983	$	147,269	$	(126,239	)	$	2,420,304

Liabilities
Accounts payable and related party liabilities	$	2,768		$	26,106	$	3,008	$	(2,657	)	$	29,225
Accrued liabilities		85,099			56,992		64,632		(1,099	)		205,624
Advances and notes payable to parent and subsidiaries		(751,043	)		744,688		6,355		-			-
Mortgage repurchase facility		-			-		8,988		-			8,988
Senior notes, net		1,243,273			-		-		-			1,243,273

Total Liabilities		580,097			827,786		82,983		(3,756	)		1,487,110

Stockholders’ Equity		933,194			58,197		64,286		(122,483	)		933,194

Total Liabilities and Stockholders’ Equity	$	1,513,291		$	885,983	$	147,269	$	(126,239	)	$	2,420,304

- 18 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Balance Sheet

December 31, 2010

(In thousands)


	MDC			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated MDC
Assets
Cash and cash equivalents	$	535,035		$	4,287	$	32,903	$	-		$	572,225
Marketable securities		938,471			-		30,258		-			968,729
Restricted cash		-			420		-		-			420
Receivables		14,402			8,071		194		(2,657	)		20,010
Mortgage loans held-for-sale, net		-			-		65,114		-			65,114
Inventories, net
Housing completed or under construction		-			372,422		-		-			372,422
Land and land underdevelopment		-			415,237		-		-			415,237
Investment in subsidiaries		110,065			-		-		(110,065	)		-
Other assets, net		88,267			42,288		3,057		-			133,612

Total Assets	$	1,686,240		$	842,725	$	131,526	$	(112,722	)	$	2,547,769


Liabilities
Accounts payable and related party liabilities	$	2,747		$	34,553	$	465	$	(2,657	)	$	35,108
Accrued liabilities		130,960			65,622		64,147		-			260,729
Advances and notes payable to parent and subsidiaries		(673,965	)		671,190		2,775		-			-
Mortgage repurchase facility		-			-		25,434		-			25,434
Senior notes, net		1,242,815			-		-		-			1,242,815

Total Liabilities		702,557			771,365		92,821		(2,657	)		1,564,086

Stockholders’ Equity		983,683			71,360		38,705		(110,065	)		983,683

Total Liabilities and Stockholders’ Equity	$	1,686,240		$	842,725	$	131,526	$	(112,722	)	$	2,547,769
Total Liabilities and Stockholders’ Equity	$	1,686,240		$	842,725	$	131,526	$	(112,722	)	$	2,547,769

- 19 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Three Months Ended June 30, 2011

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Revenue

Home sales revenue	$	-		$	193,554		$	13,783		$	(1,174	)	$	206,163
Land sales and other revenue		-			2,730			6,792			-			9,522
Equity in (loss) income of subsidiaries		(13,221	)		-			-			13,221			-

Total revenue		(13,221	)		196,284			20,575			12,047			215,685

Costs and Expenses
Home cost of sales		-			168,000			12,271			(1,174	)		179,097
Asset impairments		-			9,119			-			-			9,119
Marketing and commission expenses		-			16,487			866			-			17,353
General and administrative and other expenses		16,251			18,672			5,530			-			40,453

Total operating costs and expenses		16,251			212,278			18,667			(1,174	)		246,022

(Loss) income from operations		(29,472	)		(15,994	)		1,908			13,221			(30,337	)
Other (expense) income		(337	)		41			830			-			534

(Loss) income before income taxes		(29,809	)		(15,953	)		2,738			13,221			(29,803	)
Benefit from (provision for) income taxes		1,829			1,208			(1,214	)		-			1,823

Net (loss) income	$	(27,980	)	$	(14,745	)	$	1,524		$	13,221		$	(27,980	)

- 20 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Three Months Ended June 30, 2010

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Revenue

Home sales revenue	$	-		$	316,809		$	-		$	(5,533	)	$	311,276
Land sales and other revenue		-			5,910			9,144			-			15,054
Equity in (loss) income of subsidiaries		15,307			-			-			(15,307	)		-

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

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

Total operating costs and expenses		18,607			309,528			5,637			(5,533	)		328,239

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

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

Net (loss) income	$	(3,684	)	$	12,974		$	2,333		$	(15,307	)	$	(3,684	)

- 21 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Six Months Ended June 30, 2011

(In thousands)


Revenue	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Home sales revenue	$	-		$	359,451		$	13,783		$	(3,688	)	$	369,546
Land sales and other revenue		-			3,391			12,495			-			15,886
Equity in (loss) income of subsidiaries		(19,273	)		-			-			19,273			-

Total revenue		(19,273	)		362,842			26,278			15,585			385,432

Costs and Expenses
Home cost of sales		-			311,495			12,271			(3,688	)		320,078
Asset impairments		-			9,398			-			-			9,398
Marketing and commission expenses		-			32,087			866			-			32,953
General and administrative and other expenses		31,019			34,429			10,228			-			75,676

Total operating costs and expenses		31,019			387,409			23,365			(3,688	)		438,105

(Loss) income from operations		(50,292	)		(24,567	)		2,913			19,273			(52,673	)
Other (expense) income		(2,528	)		83			1,611			-			(834	)

(Loss) income before income taxes		(52,820	)		(24,484	)		4,524			19,273			(53,507	)
Benefit from (provision for) income taxes		4,961			2,584			(1,897	)		-			5,648

Net (loss) income	$	(47,859	)	$	(21,900	)	$	2,627		$	19,273		$	(47,859	)

- 22 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Operations

Six Months Ended June 30, 2010

(In thousands)


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

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

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

Total operating costs and expenses		36,789			452,651			9,708			(8,436	)		490,712

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

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

Net (loss) income	$	(24,557	)	$	14,281		$	3,380		$	(17,661	)	$	(24,557	)

- 23 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Cash Flows

Six Months Ended June 30, 2011

(In thousands)


	MDC			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated MDC
Net cash (used in) provided by operating activities	$	(25,813	)	$	(83,489	)	$	20,772		$	19,273		$	(69,257	)

Net cash provided by (used in) investing activities		321,930			(11	)		(28,960	)		-			292,959

Financing activities
(Advances to) payments from subsidiaries		(89,496	)		82,235			26,534			(19,273	)		-
Mortgage repurchase facility		-			-			(16,446	)		-			(16,446	)
Dividend payments		(23,692	)		-			-			-			(23,692	)
Proceeds from exercise of stock options		46			-			-			-			46

Net cash (used in) provided by financing activities		(113,142	)		82,235			10,088			(19,273	)		(40,092	)

Net increase (decrease) in cash and cash equivalents		182,975			(1,265	)		1,900			-			183,610
Cash and cash equivalents
Beginning of period		535,035			4,287			32,903			-			572,225

End of period	$	718,010		$	3,022		$	34,803		$	-		$	755,835

- 24 -

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (Continued)

Supplemental Condensed Combining Statements of Cash Flows

Six Months Ended June 30, 2010

(In thousands)


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

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

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

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

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

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

- 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, 2010 and this Quarterly Report on Form 10-Q.

INTRODUCTION

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

Our Financial Services and Other segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans, primarily for our homebuyers, American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers, and American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Illinois, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides insurance coverage primarily to our homebuilding subsidiaries and certain subcontractors for homes sold by our homebuilding subsidiaries and for work performed in completed subdivisions, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly-owned subsidiary of MDC which is a re-insurer of Allegiant claims.

EXECUTIVE SUMMARY

During the first six months of 2011, we continued to be faced with challenges in the homebuilding industry including: (1) high levels of existing home inventories; (2) significant competition for new home orders and acquisition of finished lots; (3) low consumer confidence; and (4) high unemployment levels. These conditions reflect a further extension of the housing market downturn and it is difficult to predict when and at what rate these negative conditions will improve, or when the homebuilding industry will experience a sustainable recovery. As a result of these difficult market conditions and without the benefit of a federal homebuyer tax credit (which required the sale of homes to be completed by April 30, 2010), we experienced a 9% reduction in net home orders during the six months ended June 30, 2011 compared with the same period during 2010. However, despite the challenging 2011 homebuilding environment, we did experience a 5% increase in sold homes during the three months ended June 30, 2011, compared with the same period in 2010, primarily attributable to increased subdivisions and results from a sales promotion that took place during the 2011 second quarter. The difficulties in the homebuilding market during the three and six months ended June 30, 2011 also contributed to a sharp reduction in our Home Gross Margins (as defined below) and $9.4 million of asset impairments during the first six months of 2011, which contributed to our reported loss before income taxes during the three and six months ended June 30, 2011 of $28.0 million and $47.9 million, respectively, compared with $3.7 million and $24.6 million during the same periods in 2010.

Our Home Gross Margins decreased to 13.1% and 13.4% during the three and six months ended June 30, 2011, respectively, from 18.1% and 19.4% during the three and six months ended June 30, 2010, respectively. Contributing to the declines in Home Gross Margins was the impact of very competitive pricing for new home orders designed to generate sales velocity. During the first six months of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined

- 26 -

below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. Therefore, during the first six months of 2011, we focused on selling and closing unsold homes under construction, which decreased to 496 units at June 30, 2011 from 944 units at December 31, 2010. Our Home Gross Margins were also negatively impacted by an increase in our land costs, as the market for acquiring finished residential lots remained very competitive despite the continuing overall weakness in the market for new homes.

On the expense side of our business, we incurred asset impairments of $9.4 million during the first six months of 2011, with $9.1 million coming during the 2011 second quarter. These asset impairments resulted from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets. We saw a decrease of $5.7 million and $2.3 million in marketing and commission expenses during the three and six months ended June 30, 2011, compared with the same periods in 2010, generally attributable to closing fewer homes during the 2011 periods. Additionally, we experienced an $8.4 million and $11.8 million decrease in our general and administrative expenses during the three and six months ended June 30, 2011, compared with the same periods in 2010, primarily due to lower costs associated with legal-related matters and employee compensation related costs. During the three months ended June 30, 2011, we had net interest income of $0.5 million compared to net interest expense of $1.9 million during the same period in 2010. We had net interest expense of $0.9 million during the six months ended June 30, 2011, compared to $7.8 million during the same period in 2010. The improvement during the 2011 periods primarily related to obtaining better returns on our marketable securities and capitalizing interest incurred to our inventory during the first six months of 2011 compared with the same period in 2010.

During the first six months of 2011 we focused on: (1) decreasing expenses, including general and administrative costs and interest costs; (2) market share expansion; and (3) new market entry. We added to our 2010 fourth quarter efforts to reduce general and administrative expenses by reducing our headcount by approximately 10% during the 2011 second quarter. On July 7, 2011, we completed a debt tender offer extinguishing $237.0 million of our senior notes. Also, we took steps designed to increase market share in existing markets through additional investments in our homebuilding operations. On April 28, 2011, we entered the Seattle/Tacoma market through the purchase of substantially all of the homebuilding assets of SDC Homes and certain affiliated entities. Assets acquired included approximately 280 owned lots in various stages of construction, in 11 communities. Based on our acquisition activity in 2011 we increased our active subdivision (as defined below) count to 176 at June 30, 2011, a 19% increase from December 31, 2010. We also have an additional 45 subdivisions that we expect will be active in the near term, partially offset by 30 currently active subdivisions that we expect to be inactive in the near term.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

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

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, 2010.

Results of Operations

The following discussion compares results for the three and six months ended June 30, 2011 with the three and six months ended June 30, 2010.

- 27 -

Home Sales Revenue. Home sales revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican) and interest rate buydowns by HomeAmerican in mortgage loan financing offered to our homebuyers. The combination of base sales price and any purchased options and upgrades, less any of the foregoing incentives, for each closed home constitutes the selling price of our closed homes.

Our home sales revenue can be impacted by changes in our home closing levels and changes in the average selling prices of closed homes. The combination of home sales incentives offered to prospective homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors’ pricing.

The table below summarizes home sales revenue by reportable segment (dollars in thousands).


	Three Months
	Ended June 30,						Change
	2011			2010			Amount			%
West	$	66,951		$	117,752		$	(50,801	)		-43	%
Mountain		78,415			110,072			(31,657	)		-29	%
East		51,049			72,622			(21,573	)		-30	%
Other Homebuilding		10,922			16,362			(5,440	)		-33	%

Total Homebuilding		207,337			316,808			(109,471	)		-35	%

Intercompany		(1,174	)		(5,532	)		4,358			79	%

Consolidated	$	206,163		$	311,276		$	(105,113	)		-34	%


	Six Months
	Ended June 30,						Change
	2011			2010			Amount			%
West	$	109,344		$	174,479		$	(65,135	)		-37	%
Mountain		149,163			156,671			(7,508	)		-5	%
East		93,959			104,108			(10,149	)		-10	%
Other Homebuilding		20,768			25,396			(4,628	)		-18	%

Total Homebuilding		373,234			460,654			(87,420	)		-19	%

Intercompany		(3,688	)		(8,435	)		4,747			56	%

Consolidated	$	369,546		$	452,219		$	(82,673	)		-18	%

The decline in home sales revenue during the three months ended June 30, 2011 for our West segment was primarily driven by closing 291 fewer homes in the Arizona, California and Nevada markets of this segment as this resulted in home sales revenue decreasing by $56.5 million and $8.1 million associated with the decrease in the average selling prices of homes in the markets of this segment, primarily California. This was partially offset by the impact of closing 51 homes in our new Washington market, which generated $13.8 million of home sales revenue during the 2011 second quarter. In our Mountain segment, the impact of closing 129 fewer homes resulted in a $36.8 million reduction in home sales revenue. This was partially offset by a $29,000 increase in the average selling price of closed homes in the Colorado market.

The decline in home sales revenue during the three months ended June 30, 2011 for our East segment was primarily driven by closing 38 fewer homes in the Maryland market of this segment as this resulted in home sales revenue decreasing by $17.6 million and $5.9 million associated with the decrease in the average selling prices of homes in the markets of this segment. In our Other Homebuilding segment, the impact of closing 23 fewer homes resulted in a $5.5 million reduction in home sales revenue.

- 28 -

The decline in home sales revenue during the six months ended June 30, 2011 for our West segment was primarily driven by closing 352 fewer homes in the Arizona, California and Nevada markets of this segment as this resulted in home sales revenue decreasing by $68.2 million and $10.7 million associated with the decrease in the average selling prices of homes, primarily from the California market. This was partially offset by the impact of closing 51 homes in our new Washington market, which generated $13.8 million of home sales revenue. In our Mountain segment, the impact of closing 69 fewer homes resulted in an $18.7 million reduction in home sales revenue. This was partially offset by a $32,300 increase in the average selling price of closed homes in the Colorado market.

The decline in home sales revenue during the six months ended June 30, 2011 for our East segment was primarily driven primarily by an $8.5 million decrease associated with the declines in the average selling prices of homes in the markets of this segment. In our Other Homebuilding segment, the impact of closing 21 fewer homes resulted in a $4.9 million reduction in home sales revenue.

Home Gross Margins. We define “Home Gross Margins” to mean home sales revenue less home cost of sales as a percent of home sales revenue.

The following table sets forth our Home Gross Margins by reportable segment.


	Three Months
	Ended June 30,
	2011			2010			Change
Homebuilding
West		15.5	%		20.0	%		-4.5	%
Mountain		12.9	%		15.6	%		-2.7	%
East		10.4	%		16.9	%		-6.5	%
Other Homebuilding		11.4	%		19.9	%		-8.5	%

Consolidated		13.1	%		18.1	%		-5.0	%


	Six Months
	Ended June 30,
	2011			2010			Change
Homebuilding
West		16.7	%		22.1	%		-5.4	%
Mountain		12.4	%		16.5	%		-4.1	%
East		10.6	%		17.2	%		-6.6	%
Other Homebuilding		13.5	%		21.4	%		-7.9	%

Consolidated		13.4	%		19.4	%		-6.0	%

Home Gross Margins can be impacted positively or negatively in a reporting period by adjustments to our warranty reserves. During the three and six months ended June 30, 2011 and 2010, we continued to experience lower warranty payments on previously closed homes. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we recorded adjustments to reduce our warranty reserve of $1.8 million and $2.3 million during the three and six months ended June 30, 2011, respectively, and $1.7 million and $5.6 million during the three and six months ended June 30, 2010, respectively.

The following table sets forth our Home Gross Margins excluding warranty adjustments and interest in home cost of sales during the three and six months ended June 30, 2011 and 2010.

- 29 -


	Three Months
	Ended June 30,
	2011			2010			Change
West		16.7	%		21.8	%		-5.1	%
Mountain		14.2	%		17.9	%		-3.7	%
East		13.9	%		19.2	%		-5.3	%
Other		11.7	%		20.8	%		-9.1	%

Consolidated		14.9	%		20.2	%		-5.3	%


	Six Months
	Ended June 30,
	2011			2010			Change
West		18.3	%		22.6	%		-4.3	%
Mountain		14.2	%		18.4	%		-4.2	%
East		13.6	%		19.3	%		-5.7	%
Other		14.2	%		21.1	%		-6.9	%

Consolidated		15.4	%		20.7	%		-5.3	%

Home Gross Margins, excluding warranty and interest, decreased on a consolidated basis during the three and six months ended June 30, 2011 primarily due to: (1) accepting new home orders with lower Home Gross Margins designed to generate sales velocity in order to reduce our excess supply of unsold homes under construction; and (2) an increase in our land costs as the demand for finished residential lots has been very competitive despite the continuing overall weakness in the market for new homes. During the first quarter of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. As a result of our effort to reduce the number of unsold homes under construction, a higher percentage of our 2011 homes closed were homes under construction, compared with the same periods in 2010. Generally homes sold as a dirt start yield a higher Home Gross Margin than homes under construction.

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

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

- 30 -


Three Months Ended June 30, 2011	Home Sales Revenue - As reported			Home Cost of Sales - As reported			Warranty Adjustments			Interest in Cost of Sales		Home Cost of Sales - Excluding Warranty Adjustments and Interest			Home Gross Margins - Excluding Warranty Adjustments and Interest
West	$	66,951		$	56,592		$	(1,015	)	$	1,830	$	55,777			16.7	%
Mountain		78,415			68,276			(919	)		1,913		67,282			14.2	%
East		51,049			45,725			260			1,520		43,945			13.9	%
Other		10,922			9,678			(158	)		191		9,645			11.7	%
Intercompany		(1,174	)		(1,174	)		—			—		(1,174	)		N/A

Consolidated	$	206,163		$	179,097		$	(1,832	)	$	5,454	$	175,475			14.9	%


Three Months Ended June 30, 2010
West	$	117,752		$	94,218		$	(1,255	)	$	3,387	$	92,086			21.8	%
Mountain		110,072			92,926			119			2,492		90,315			17.9	%
East		72,622			60,339			(374	)		2,004		58,709			19.2	%
Other		16,362			13,111			(167	)		319		12,959			20.8	%
Intercompany		(5,532	)		(5,532	)		—			—		(5,532	)		N/A

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


Six Months Ended June 30, 2011	Home Sales Revenue - As reported			Home Cost of Sales - As reported			Warranty Adjustments			Interest in Cost of Sales		Home Cost of Sales -Excluding Warranty Adjustments and Interest			Home Gross Margins - Excluding Warranty Adjustments and Interest
West	$	109,344		$	91,113		$	(1,218	)	$	3,000	$	89,331			18.3	%
Mountain		149,163			130,652			(1,099	)		3,726		128,025			14.2	%
East		93,959			84,036			243			2,590		81,203			13.6	%
Other		20,768			17,965			(189	)		341		17,813			14.2	%
Intercompany		(3,688	)		(3,688	)		—			—		(3,688	)		N/A

Consolidated	$	369,546		$	320,078		$	(2,263	)	$	9,657	$	312,684			15.4	%


Six Months Ended June 30, 2010
West	$	174,479		$	135,963		$	(3,827	)	$	4,715	$	135,075			22.6	%
Mountain		156,671			130,805			(681	)		3,566		127,920			18.4	%
East		104,108			86,156			(570	)		2,661		84,065			19.3	%
Other		25,396			19,963			(528	)		462		20,029			21.1	%
Intercompany		(8,435	)		(8,435	)		—			—		(8,435	)		N/A

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

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

- 31 -

Land Sales Revenue. Land sales revenue was not material during the three and six months ended June 30, 2011. Land sales revenue during the three and six months ended June 30, 2010 was $5.7 million and related to the sale of 106 lots, primarily in our West segment.

Other Revenue. Gains on the sale of mortgage loans primarily represent revenue earned by HomeAmerican from the sale of HomeAmerican’s originated mortgage loans to third-parties. Insurance revenue primarily represents premiums collected by StarAmerican and Allegiant from our homebuilding subcontractors in connection with the construction of homes. Title and other revenue primarily consist of forfeitures of homebuyer deposits on home sales contracts and revenue associated with our American Home Title operations.

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


	Three Months
	Ended June 30,				Change
	2011		2010		Amount			%
Gains on sales of mortgage loans	$	4,292	$	6,593	$	(2,301	)		-35	%
Insurance revenue		1,992		1,888		104			6	%
Title and other revenue		673		874		(201	)		-23	%

Total other revenue	$	6,957	$	9,355	$	(2,398	)		-26	%


	Six Months
	Ended June 30,				Change
	2011		2010		Amount			%
Gains on sales of mortgage loans	$	8,615	$	10,603	$	(1,988	)		-19	%
Insurance revenue		2,980		3,177		(197	)		-6	%
Title and other revenue		1,522		1,695		(173	)		-10	%

Total other revenue	$	13,117	$	15,475	$	(2,358	)		-15	%

Gains on sales of mortgage loans decreased during the three and six months ended June 30, 2011 primarily due to closing 426 and 395 fewer homes, respectively.

Home Cost of Sales. Home cost of sales primarily includes land acquisition, land development and related costs (both incurred and estimated to be incurred), specific construction costs of each home, warranty costs and finance and closing costs, including Closing Cost Incentives (defined as homebuyer closing costs assistance paid by Richmond American Homes to a third-party).

Our home cost of sales can be impacted primarily from changes in our home closing levels and changes in the cost of land acquisition, development, construction cost of homes and changes in our estimated costs for warranty repairs.

The table below sets forth the home cost of sales by reportable segment (dollars in thousands).

- 32 -


	Three Months
	Ended June 30,						Change
	2011			2010			Amount			%
Homebuilding
West	$	56,592		$	94,218		$	(37,626	)		-40	%
Mountain		68,276			92,926			(24,650	)		-27	%
East		45,725			60,339			(14,614	)		-24	%
Other Homebuilding		9,678			13,111			(3,433	)		-26	%

Total Homebuilding		180,271			260,594			(80,323	)		-31	%
Intercompany adjustments		(1,174	)		(5,532	)		4,358			79	%

Consolidated	$	179,097		$	255,062		$	(75,965	)		-30	%


	Six Months
	Ended June 30,						Change
	2011			2010			Amount			%
Homebuilding
West	$	91,113		$	135,963		$	(44,850	)		-33	%
Mountain		130,652			130,805			(153	)		0	%
East		84,036			86,156			(2,120	)		-2	%
Other Homebuilding		17,965			19,963			(1,998	)		-10	%

Total Homebuilding		323,766			372,887			(49,121	)		-13	%
Intercompany adjustments		(3,688	)		(8,435	)		4,747			56	%

Consolidated	$	320,078		$	364,452		$	(44,374	)		-12	%

Home cost of sales in the West segment decreased during the three and six months ended June 30, 2011 primarily resulting from closing 240 and 301 fewer homes, respectively. The decrease associated with the decline in closings was partially offset by an increase to home cost of sales in our new Washington market of this segment.

In the Mountain segment home cost of sales decreased during the three months ended June 30, 2011 primarily due to closing 129 fewer homes. This was partially offset by an increase in the cost per closed home within this segment associated with a change in the mix of closed homes. Home cost of sales during the six months ended June 30, 2011 remained relatively flat as the decrease associated with closing 69 fewer homes during the first six months of 2011 was offset by increases in the cost per closed home.

In our East and Other Homebuilding segments, home cost of sales decreased during the three and six months ended June 30, 2011 primarily resulting from closing fewer homes during the 2011 periods.

Land Cost of Sales. Land cost of sales was not material during the three and six months ended June 30, 2011. Land cost of sales during the three and six months ended June 30, 2010 was $5.0 million and $5.2 million, respectively, and related to the sale of 106 lots, primarily in our West segment.

Asset Impairments. We recorded $9.1 million and $9.4 million of asset impairments during the three and six months ended June 30, 2011 resulting from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets.

Marketing Expenses. Marketing expenses primarily include advertising, amortization of deferred marketing costs, model home expenses, compensation related expenses and other selling costs. The following table summarizes our marketing expenses by reportable segment (in thousands).

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	Three Months
	Ended June 30,				Change
	2011		2010		Amount			%
Homebuilding
West	$	4,345	$	5,179	$	(834	)		-16	%
Mountain		3,094		3,467		(373	)		-11	%
East		1,859		2,030		(171	)		-8	%
Other Homebuilding		599		799		(200	)		-25	%

Consolidated	$	9,897	$	11,475	$	(1,578	)		-14	%


	Six Months
	Ended June 30,				Change
	2011		2010		Amount			%
Homebuilding
West	$	8,525	$	8,248	$	277			3	%
Mountain		6,290		5,646		644			11	%
East		3,449		3,294		155			5	%
Other Homebuilding		1,466		1,347		119			9	%

Consolidated	$	19,730	$	18,535	$	1,195			6	%

Marketing expenses decreased during the three months ended June 30, 2011 in each of our homebuilding segments primarily resulting from a reduction of $1.2 million in amortization of deferred marketing costs associated with closing fewer homes in each segment and a $0.5 million decrease in product advertising expenses.

Marketing expenses increased for each of our homebuilding segments during the six months ended June 30, 2011 despite a 9% decline in net orders for homes during the period. Contributing to these increased costs was the impact of an increase in total subdivisions. As a result of this increase in marketing activity, we experienced increases of $0.8 million in sales office/showroom expense, $0.7 million in product advertising and $0.3 million in employee compensation and other employee-related benefit costs. These items were partially offset by a decrease of $0.7 million in amortization of deferred marketing costs primarily resulting from closing 395 fewer homes.

Commission Expenses. Commission expenses include direct incremental commissions paid for closed homes. The following table summarizes our commission expenses by reportable segment (in thousands).


	Three Months
	Ended June 30,				Change
	2011		2010		Amount			%
Homebuilding
West	$	2,463	$	4,526	$	(2,063	)		-46	%
Mountain		2,702		3,901		(1,199	)		-31	%
East		1,793		2,420		(627	)		-26	%
Other Homebuilding		498		764		(266	)		-35	%

Consolidated	$	7,456	$	11,611	$	(4,155	)		-36	%

- 34 -


	Six Months
	Ended June 30,				Change
	2011		2010		Amount			%
Homebuilding
West	$	3,947	$	6,665	$	(2,718	)		-41	%
Mountain		5,175		5,473		(298	)		-5	%
East		3,147		3,525		(378	)		-11	%
Other Homebuilding		954		1,077		(123	)		-11	%

Consolidated	$	13,223	$	16,740	$	(3,517	)		-21	%

Commission expense decreased during the three and six months ended June 30, 2011 for each of our homebuilding segments due to closing 426 and 395 fewer homes, respectively.

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


	Three Months
	Ended June 30,				Change
	2011		2010		Amount			%
Homebuilding
West	$	7,702	$	7,980	$	(278	)		-3	%
Mountain		3,762		4,748		(986	)		-21	%
East		3,386		6,402		(3,016	)		-47	%
Other Homebuilding		972		1,359		(387	)		-28	%

Total Homebuilding		15,822		20,489		(4,667	)		-23	%
Financial Services and Other		4,432		5,658		(1,226	)		-22	%
Corporate		15,983		18,441		(2,458	)		-13	%

Consolidated	$	36,237	$	44,588	$	(8,351	)		-19	%


	Six Months
	Ended June 30,				Change
	2011		2010		Amount			%
Homebuilding
West	$	13,820	$	15,320	$	(1,500	)		-10	%
Mountain		8,008		8,472		(464	)		-5	%
East		6,988		11,238		(4,250	)		-38	%
Other Homebuilding		1,965		3,185		(1,220	)		-38	%

Total Homebuilding		30,781		38,215		(7,434	)		-19	%
Financial Services and Other		9,131		9,746		(615	)		-6	%
Corporate		33,077		36,830		(3,753	)		-10	%

Consolidated	$	72,989	$	84,791	$	(11,802	)		-14	%

Three Months Ended June 30, 2011

Our consolidated general and administrative expenses decreased $8.4 million during the three months ended June 30, 2011. Our salary related costs decreased by $5.0 million driven in part by the headcount reductions during the 2011 second quarter and 2010 fourth quarter and stock-based compensation expense as certain stock options became fully vested during the 2010 fourth quarter.

- 35 -

Also contributing to this decline was the impact of expenses incurred on legal related matters during the 2011 second quarter, which were $1.6 million lower than during the 2010 second quarter. We experienced a $1.2 million decline in expenses associated with homeowner association dues as well during the 2011 second quarter. Insurance expenses declined by $0.6 million driven in part by a 38% reduction in homes closed during the 2011 second quarter. Additionally, office-related expenses decreased by $0.6 million driven in part by lower rent expense and efforts to limit general office expenses. These declines in general and administrative expenses were slightly offset by $1.2 million in severance expense incurred as a result of headcount reductions during the quarter.

In our West segment, general and administrative expenses decreased by $0.3 million during the three months ended June 30, 2011 primarily related to the reduction in homeowner association dues. In our Mountain segment, general and administrative expenses decreased by $1.0 million during the three months ended June 30, 2011 driven primarily by homeowner association dues and employee compensation related costs.

In our East segment, general and administrative expenses were $3.0 million lower during the three months ended June 30, 2011 due to lower fees incurred associated with legal-related matters.

In our Financial Services and Other segment, general and administrative expenses decreased by $1.2 million during the three months ended June 30, 2011 primarily relating to declines of $0.7 million in salary related costs and $0.6 million in insurance expenses. In our Corporate segment, general and administrative expenses decreased $2.5 million during the three months ended June 30, 2011 primarily driven by our salary related costs partially offset by an increase in severance expense.

Six Months Ended June 30, 2011

Our consolidated general and administrative expenses decreased by $11.8 million during the six months ended June 30, 2011. Our salary related costs decreased by $6.8 million driven in part from the headcount reductions during 2011 second quarter and 2010 fourth quarter and stock-based compensation expense associated with stock options, which became fully vested during the 2010 fourth quarter. Also contributing to this decline was the impact of expenses incurred on legal related matters during 2011, which were $4.2 million lower than during 2010. We had a $1.7 million decline in expenses associated with homeowner association dues as well during 2011. Insurance expenses declined by $0.8 million driven in part by a 24% reduction in homes closed during 2011. Additionally, office-related expenses decreased by $1.1 million driven in part by lower rent expense and efforts to limit general office expenses. These declines in general and administrative expenses were slightly offset by a $1.3 million increase in mortgage loan loss reserves and a $1.4 million increase in severance expense incurred as a result of headcount reductions during the first six months of 2011.

In our West and Mountain segments, general and administrative expenses decreased primarily due to a decline in homeowner association dues and salary-related costs. The decline in our East segment was primarily due to lower legal-related expenses. In our Other Homebuilding segment the decline in general and administrative expenses were primarily driven by a decline in consulting expenses.

In our Financial Services and Other segment, general and administrative expenses were down primarily due to a $0.8 million reduction in employee compensation and other employee-related benefit costs and a $0.7 million decrease in insurance expense associated with closing fewer homes. These items partially were offset by a $1.3 million increase in our mortgage loan loss reserve. During the six months ending June 30, 2011 general and administrative expenses in our Corporate segment decreased by $3.8 million, primarily resulting from a $3.3 million decline in employee compensation and other employee-related benefit costs and a $0.6 million decrease in office-related expenses.

Other Operating Expense. Other operating expenses increased by $1.9 million during the three months ended June 30, 2011 primarily due to $2.1 million in write-offs of land option deposits and pre-acquisition costs associated with lot option contracts that we elected not to exercise. Other operating expenses decreased during the six months ended June 30, 2011 as we incurred $2.9 million write-offs of land option deposits and pre-acquisition costs and $0.6 million in due diligence costs associated with our acquisition of substantially all of the assets of SDC and related entities partially offset by the release of a $2.7 million employment tax contingency reserve as a result of the finalization of an IRS examination.

- 36 -

Other Income (Expense). Other income (expense) primarily includes interest and dividend income on our cash, cash equivalents and marketable securities, interest expense primarily on our senior notes, and gain or loss on the sale of other assets. Interest income was $7.9 million and $15.2 million during the three and six months ended June 30, 2011, respectively, compared with $7.5 million and $12.0 million during the three and six months ended June 30, 2010, respectively. These increases are attributable to an increase in our available-for-sale marketable securities during the 2011 periods compared with the 2010 periods. Our available-for-sale marketable securities include certain debt securities, primarily corporate debt and holdings in equity securities mutual funds. We increased our holdings of these marketable securities during 2011, primarily due to our efforts to achieve an appropriate rate of return.

Interest expense during the three and six months ended June 30, 2011 decreased $2.0 million and $3.7 million, respectively. We capitalize interest on our senior notes associated with our qualifying assets. We have determined that inventory is a qualifying asset during the period of active development of our land and through the completion of construction of a home. When construction of a home is complete, the home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. As a result of the increase in our inventory levels from the first six months of 2010, we capitalized $10.8 million and $20.3 million of interest incurred during the three and six months ended June 30, 2011, respectively, an increase of $1.9 million and $4.8 million from the same periods during 2010, respectively.

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


	Three Months
	Ended June 30,						Change
	2011			2010			Amount			%
Homebuilding
West	$	(11,837	)	$	6,357		$	(18,194	)		286	%
Mountain		(1,204	)		4,962			(6,166	)		124	%
East		(2,345	)		1,455			(3,800	)		261	%
Other Homebuilding		(916	)		295			(1,211	)		411	%

Total Homebuilding		(16,302	)		13,069			(29,371	)		225	%
Financial Services and Other		3,089			4,089			(1,000	)		-24	%
Corporate		(16,590	)		(20,857	)		4,267			20	%

Consolidated	$	(29,803	)	$	(3,699	)	$	(26,104	)		-706	%


	Six Months
	Ended June 30,						Change
	2011			2010			Amount			%
Homebuilding
West	$	(16,397	)	$	8,711		$	(25,108	)		288	%
Mountain		(2,436	)		6,132			(8,568	)		140	%
East		(4,301	)		(64	)		(4,237	)		-6620	%
Other Homebuilding		(1,692	)		(224	)		(1,468	)		-655	%

Total Homebuilding		(24,826	)		14,555			(39,381	)		271	%
Financial Services and Other		4,869			5,935			(1,066	)		-18	%
Corporate		(33,550	)		(45,431	)		11,881			26	%

Consolidated	$	(53,507	)	$	(24,941	)	$	(28,566	)		-115	%

- 37 -

Three Months Ended June 30, 2011

In our West segment, we had a loss before income taxes of $11.8 million during the three months ended June 30, 2011 compared with income before income taxes of $6.4 million during the same period in 2010. This decline primarily resulted from $6.9 million of inventory impairments, a 450 basis point decline in Home Gross Margins and closing 291 fewer homes in the Arizona, California and Nevada markets of this segment. These items were partially offset by a combined decrease of $3.2 million in marketing, commission and general and administrative expenses. In our Mountain segment, we had a loss before income taxes of $1.2 million during the three months ended June 30, 2011 compared with income before income taxes of $5.0 million during the same period in 2010. This decline primarily resulted from $1.5 million of inventory impairments, a 270 basis point decline in Home Gross Margins and closing 129 fewer homes in this segment. These items were partially offset by a combined decrease of $2.6 million in marketing, commission and general and administrative expenses.

In our East segment, we had a loss before income taxes of $2.3 million during the three months ended June 30, 2011 compared with income before income taxes of $1.5 million during the same period in 2010. This decline primarily resulted from a 650 basis point decline in Home Gross Margins, closing 34 fewer homes in this segment and $0.3 million of inventory impairments. These items were partially offset by a combined decrease of $3.8 million in marketing, commission and general and administrative expenses. In our Other Homebuilding segment, we had a loss before income taxes of $0.9 million during the three months ended June 30, 2011 compared with income before income taxes of $0.3 million during the same period in 2010. This decline primarily resulted from an 850 basis point decline in Home Gross Margins and closing 23 fewer homes in this segment. These items were partially offset by a combined decrease of $0.9 million in marketing, commission and general and administrative expenses.

In our Financial Services and Other segment, income before income taxes decreased during the three months ended June 30, 2011 primarily due to a $2.3 million decline in gain on sale of mortgage loans, partially offset by a $1.2 million reduction in general and administrative expenses. In our Corporate segment, loss before income taxes came down from $20.9 million during the three months ended June 30, 2010 to $16.6 million during the three months ended June 30, 2011. This improvement primarily resulted from a $2.5 million decline in general and administrative expenses and a decrease of $2.0 million in interest expense.

Six Months Ended June 30, 2011

In our West segment, we had a loss before income taxes of $16.4 million during the six months ended June 30, 2011 compared with income before income taxes of $8.7 million during the same period in 2010. This decline primarily resulted from $6.9 million of inventory impairments, a 540 basis point decline in Home Gross Margins and closing 352 fewer homes in the Arizona, California and Nevada markets of this segment. These items were partially offset by a combined decrease of $4.2 million in commission and general and administrative expenses. In our Mountain segment, we had a loss before income taxes of $2.4 million during the six months ended June 30, 2011 compared with income before income taxes of $6.1 million during the same period in 2010. This decline primarily resulted from $1.5 million of inventory impairments, a 410 basis point decline in Home Gross Margins and closing 69 fewer homes in this segment and a $0.6 million increase in marketing expenses. These items were partially offset by a combined decrease of $0.8 million in commission and general and administrative expenses.

In our East segment, we had a loss before income taxes of $4.3 million during the six months ended June 30, 2011 compared with $0.1 million during the same period in 2010. This decline primarily resulted from a 660 basis point decline in Home Gross Margins and $0.3 million of inventory impairments. These items were partially offset by a combined decrease of $4.6 million in commission and general and administrative expenses. In our Other Homebuilding segment, we had a loss before income taxes of $1.7 million during the six months ended June 30, 2011 compared with $0.2 million during the same period in 2010. This decline primarily resulted from an 790 basis point decline in Home Gross Margins and closing 21 fewer homes in this segment. These items were partially offset by a combined decrease of $1.3 million in commission and general and administrative expenses.

In our Financial Services and Other segment, income before income taxes decreased during the six months ended June 30, 2011 primarily due to a $2.0 million decline in gain on sale of mortgage loans, partially offset by a $0.6 million reduction in general and administrative expenses and a $0.6 million increase in interest income. In our Corporate segment, loss before income taxes came down from $45.4 million during the six months ended June 30, 2010 to $33.6 million during the six months ended June 30, 2011. This improvement primarily resulted from a $3.8 million decline in general and administrative expenses and a decrease of $3.6 million in interest expense partially offset by a $2.5 million decrease in interest income.

- 38 -

Income Taxes. We are required, at the end of each interim period, to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, our effective tax rates in 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss. The income tax benefits of $1.8 million and $5.6 million during the three and six months ended June 30, 2011, respectively, resulted primarily from our 2011 second quarter settlement of various state income tax matters and our 2011 first quarter settlement with the IRS on its audit of the 2004 and 2005 federal income tax returns. Our income tax benefits during the three and six months ended June 30, 2010 were not material to our results of operations.

Homebuilding Operating Activities

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


	Three Months										Six Months
	Ended June 30,				Change						Ended June 30,				Change
	2011		2010		Amount			%			2011		2010		Amount			%
Orders For Homes, net (units)
Arizona		164		184		(20	)		-11	%		286		352		(66	)		-19	%
California		117		109		8			7	%		194		135		59			44	%
Nevada		154		195		(41	)		-21	%		242		365		(123	)		-34	%
Washington		26		—		26			N/M			26		—		26			N/M

West		461		488		(27	)		-6	%		748		852		(104	)		-12	%

Colorado		232		232		—			0	%		413		502		(89	)		-18	%
Utah		109		110		(1	)		-1	%		176		235		(59	)		-25	%

Mountain		341		342		(1	)		0	%		589		737		(148	)		-20	%

Maryland		74		62		12			19	%		120		109		11			10	%
Virginia		95		76		19			25	%		163		142		21			15	%

East		169		138		31			22	%		283		251		32			13	%

Florida		91		47		44			94	%		142		106		36			34	%
Illinois		2		—		2			N/M			7		—		7			N/M

Other Homebuilding		93		47		46			98	%		149		106		43			41	%

Total		1,064		1,015		49			5	%		1,769		1,946		(177	)		-9	%

Estimated Value of Orders for Homes, net	$	302,000	$	281,000	$	21,000			7	%	$	507,000	$	539,000	$	(32,000	)		-6	%
Estimated Average Selling Price of Orders for Homes, net	$	283.8	$	276.8	$	7.0			3	%	$	286.6	$	277.0	$	9.6			3	%

N/M – Not meaningful

Contributing to the increase in our net orders for homes during the three months ended June 30, 2011 were: (1) a 31% increase in our active subdivisions at June 30, 2011 compared with June 30, 2010; (2) the impact from a Company-wide sales promotion which took place during the 2011 second quarter; and (3) 26 homes being sold in our new Washington market. These items partially were offset as our net orders for homes in the 2011 second quarter, compared with the 2010 second quarter, were negatively impacted through the expiration of the federal homebuyer tax credit, which required the sale of a home to be completed by April 30, 2010.

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During the six months ended June 30, 2011, our net orders for homes decreased, which was driven by a 148 unit decline in the markets of our Mountain segment and 189 unit decline in the Arizona and Nevada markets of our West segment. The decline in these markets was driven primarily from the impact of the expiration of the federal homebuyer tax credit. In certain markets, we did see some increases in net orders for homes, which were primarily the result of higher active subdivision counts.

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


	Three Months										Six Months
	Ended June 30,				Change						Ended June 30,				Change
	2011		2010		Amount			%			2011		2010		Amount			%
Arizona		98		242		(144	)		-60	%		175		350		(175	)		-50	%
California		62		68		(6	)		-9	%		110		114		(4	)		-4	%
Nevada		80		221		(141	)		-64	%		146		319		(173	)		-54	%
Washington		51		—		51			N/M			51		—		51			N/M

West		291		531		(240	)		-45	%		482		783		(301	)		-38	%

Colorado		182		230		(48	)		-21	%		348		338		10			3	%
Utah		66		147		(81	)		-55	%		120		199		(79	)		-40	%

Mountain		248		377		(129	)		-34	%		468		537		(69	)		-13	%

Maryland		49		87		(38	)		-44	%		106		117		(11	)		-9	%
Virginia		72		68		4			6	%		115		108		7			6	%

East		121		155		(34	)		-22	%		221		225		(4	)		-2	%

Florida		48		72		(24	)		-33	%		91		113		(22	)		-19	%
Illinois		1		—		1			0	%		1		—		1			0	%

Other Homebuilding		49		72		(23	)		-32	%		92		113		(21	)		-19	%

Total		709		1,135		(426	)		-38	%		1,263		1,658		(395	)		-24	%

Homes closed during the three and six months ended June 30, 2011 were down in each of our homebuilding segments. Contributing to the decline in home closings was the negative impact from the federal homebuyer tax credit, which expired during 2010.

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

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	June 30,		December 31,		June 30,
Backlog (units)	2011		2010		2010
Arizona		195		84		105
California		163		79		97
Nevada		172		76		134
Washington		51		—		—

West		581		239		336

Colorado		338		273		371
Utah		125		69		130

Mountain		463		342		501

Maryland		140		126		118
Virginia		118		70		107

East		258		196		225

Florida		115		64		52
Illinois		7		1		—

Other Homebuilding		122		65		52

Total		1,424		842		1,114


Backlog Estimated Sales Value	$	433,000	$	269,000	$	351,000


Estimated Average Selling Price of Homes in Backlog	$	304.1	$	319.5	$	315.1

We define “Backlog” as homes under contract but not yet delivered. Our Backlog at June 30, 2011 compared with June 30, 2010 has increased primarily resulting from the 5% increase in home sales during the 2011 second quarter and the impact of more of the homes sold during the first six months of 2010 being closed prior to June 30, 2010.

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


	Three Months
	Ended June 30,						Increase
	2011			2010			(Decrease)
Homebuilding
West		29	%		20	%		9	%
Mountain		31	%		31	%		0	%
East		29	%		25	%		4	%
Other Homebuilding		27	%		31	%		-4	%

Consolidated		29	%		25	%		4	%

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	Six Months
	Ended June 30,						Increase
	2011			2010			(Decrease)
Homebuilding
West		29	%		20	%		9	%
Mountain		34	%		26	%		8	%
East		30	%		26	%		4	%
Other Homebuilding		28	%		32	%		-4	%

Consolidated		31	%		24	%		7	%

Our consolidated Cancellation Rates during the three months ended June 30, 2011 increased mostly associated with the change in our West segment. Our consolidated Cancellation Rates during the six months ended June 30, 2011 increased mostly from our West and Mountain segments. Contributing to these foregoing increases were the following: (1) our prospective homebuyers having difficulty selling their existing homes; (2) low consumer confidence in the housing market; and (3) difficulties associated with qualifying for mortgage loans.

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


	June 30,		December 31,		June 30,
	2011		2010		2010
Arizona		30		26		26
California		16		13		6
Nevada		17		18		15
Washington		9		—		—

West		72		57		47

Colorado		40		39		41
Utah		21		19		18

Mountain		61		58		59

Maryland		13		14		10
Virginia		12		8		9

East		25		22		19

Florida		17		11		9
Illinois		1		—		—

Other Homebuilding		18		11		9

Total		176		148		134

Our active subdivisions at June 30, 2011 have increased in each of our homebuilding segments compared with both June 30, 2010 and December 31, 2010. These increases are the result of our on-going efforts to expand operations and generate more home closings in existing markets. However, as a result of continued uncertainty regarding the homebuilding industry, we have slowed our pace of new asset purchases and opening of new subdivisions during the 2011 second quarter, compared with recent quarters. As of June 30, 2011, we currently have more than 45 subdivisions we expect to become active in the near term and, assuming similar sales paces, we have nearly 30 subdivisions that we expect to become inactive in the near term.

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

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	Three Months
	Ended June 30,				Change
	2011		2010		Amount			%
Arizona	$	188.1	$	190.7	$	(2.6	)		-1	%
California		320.4		444.7		(124.3	)		-28	%
Colorado		332.0		303.0		29.0			10	%
Florida		221.4		227.3		(5.9	)		-3	%
Illinois		293.0		N/A		N/M			N/M
Maryland		414.9		462.5		(47.6	)		-10	%
Nevada		185.8		187.2		(1.4	)		-1	%
Utah		272.5		274.7		(2.2	)		-1	%
Virginia		426.7		476.2		(49.5	)		-10	%
Washington		270.3		N/A		N/M			N/M
Average	$	290.8	$	274.3	$	16.5			6	%

	Six Months
	Ended June 30,				Change
	2011		2010		Amount			%
Arizona	$	184.6	$	194.7	$	(10.1	)		-5	%
California		319.0		407.3		(88.3	)		-22	%
Colorado		334.3		302.0		32.3			11	%
Florida		225.0		224.8		0.2			0	%
Illinois		293.0		N/A		N/M			N/M
Maryland		422.1		449.7		(27.6	)		-6	%
Nevada		192.9		187.8		5.1			3	%
Utah		273.6		274.4		(0.8	)		0	%
Virginia		427.9		476.8		(48.9	)		-10	%
Washington		270.3		N/A		N/M			N/M
Average	$	292.6	$	272.7	$	19.9			7	%

N/M – Not Meaningful

The average selling price of closed homes during the three and six months ended June 30, 2011 increased by 6% and 7%, respectively, primarily due to a shift in mix where we closed a higher percentage of our homes in the higher priced markets of Colorado and Virginia and closing fewer homes in our lower priced markets of Arizona and Nevada. We did experience declines in the average selling price of closed homes in our California market during the three and six months ended June 30, 2011, primarily resulting from closing homes in subdivisions with lower price points and declines in the market value of homes in certain subdivisions of this market. The declines in the average selling prices of closed homes in our Maryland and Virginia market during the three and six months ended June 30, 2011 primarily resulted from mix. In our Colorado market, the average selling price of closed homes increased during the three and six months ended June 30, 2011 primarily driven from closing homes in higher priced subdivisions.

Inventory. Our inventory consists of housing completed or under construction and land and land under development. Housing completed or under construction in our Consolidated Balance Sheets primarily includes: (1) land costs transferred from land and land under development; (2) hard costs associated with the construction of a house; (3) overhead costs, which include real property taxes, engineering and permit fees; (4) capitalized interest; and (5) certain indirect fees. Land and land under development on our Consolidated Balance Sheets primarily includes land acquisition costs, land development costs associated with subdivisions for which we have the intent to construct and sell homes and capitalized interest.

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The following table shows the carrying value of housing completed or under construction for each market within our homebuilding segments (dollars in thousands).


	June 30,		December 31,		June 30,
	2011		2010		2010
Arizona	$	29,326	$	31,923	$	41,374
California		46,802		49,516		39,411
Nevada		26,264		33,377		32,495
Washington		16,563		—		—

West		118,955		114,816		113,280

Colorado		93,200		111,397		121,558
Utah		21,234		26,372		31,826

Mountain		114,434		137,769		153,384

Maryland		46,000		48,740		47,808
Virginia		36,896		45,836		45,127

East		82,896		94,576		92,935

Florida		18,175		24,262		23,372
Illinois		2,054		999		—

Other Homebuilding		20,229		25,261		23,372

Total	$	336,514	$	372,422	$	382,971

The table below shows the stage of construction for our homes completed or under construction, number of sold homes under construction and model homes (in units).


	June 30,		December 31,		June 30,
	2011		2010		2010
Unsold Homes Under Construction - Final		42		119		47
Unsold Homes Under Construction - Frame		353		722		720
Unsold Homes Under Construction - Foundation		101		103		124

Total Unsold Homes Under Construction		496		944		891
Sold Homes Under Construction		843		609		865
Model Homes		231		242		226

Homes Completed or Under Construction		1,570		1,795		1,982

Our housing completed and under construction decreased by $35.9 million, as we decreased the total unsold homes under construction to 496 at June 30, 2011 from 944 at December 31, 2010. This decrease primarily resulted from our efforts to sell and close our spec inventory that had increased during 2010 primarily because of an increase in active subdivisions and the anticipation of selling homes prior to the expiration of the federal homebuyer tax credit, which required the sale of a home to be completed by April 30, 2010 with a closing date by June 30, 2010. (The Homebuyer Assistance and Improvement Act, signed into law July 2, 2010, extended the closing date requirement to September 30, 2010.) However our total unsold homes under construction remained high at December 31, 2010 as a result of the continued low levels of net orders for homes during the year ended December 31, 2010.

The following table shows the carrying value of land and land under development for each market within our homebuilding segments (dollars in thousands).

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	June 30,		December 31,		June 30,
	2011		2010		2010
Arizona	$	39,099	$	41,892	$	48,957
California		115,541		93,194		87,374
Nevada		50,729		32,605		20,393
Washington		9,600		—		—

West		214,969		167,691		156,724


Colorado		147,643		128,727		120,748
Utah		30,026		30,457		30,298

Mountain		177,669		159,184		151,046


Maryland		45,510		31,782		15,780
Virginia		71,640		44,083		36,071

East		117,150		75,865		51,851


Florida		11,627		9,274		7,580
Illinois		2,819		3,223		3,151

Other Homebuilding		14,446		12,497		10,731

Total	$	524,234	$	415,237	$	370,352

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).

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	June 30,		December 31,		June 30,
	2011		2010		2010
Lots Owned
Arizona		1,064		1,257		1,165
California		1,376		1,201		1,130
Nevada		1,184		991		681
Washington		232		—		—

West		3,856		3,449		2,976

Colorado		3,240		2,919		2,893
Utah		579		594		569

Mountain		3,819		3,513		3,462

Maryland		380		319		199
Virginia		589		414		371

East		969		733		570

Florida		269		210		184
Illinois		123		130		134

Other Homebuilding		392		340		318

Total		9,036		8,035		7,326

Lots Controlled Under Option
Arizona		108		408		499
California		—		222		152
Nevada		398		838		570
Washington		42		—		—

West		548		1,468		1,221

Colorado		602		688		644
Utah		298		393		156

Mountain		900		1,081		800

Maryland		795		745		655
Virginia		234		132		272

East		1,029		877		927

Florida		480		733		658
Illinois		—		—		—

Other Homebuilding		480		733		658

Total		2,957		4,159		3,606

Total Lots Owned and Controlled		11,993		12,194		10,932

The table below shows the amount of at risk option deposits (in thousands).


	June 30,		December 31,		June 30,
	2011		2010		2010
Cash	$	10,534	$	9,019	$	7,933
Letters of Credit		6,716		4,467		2,727

Total At Risk Option Deposits	$	17,250	$	13,486	$	10,660

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Our total lots owned (excluding homes completed or under construction) increased by 1,001 units from December 31, 2010 primarily resulting from the purchase of lots that we controlled under option contracts as of December 31, 2010. Also contributing to the increase in lots owned was the acquisition of substantially all of the assets of SDC and related entities in April 2011 where we have 232 owned lots as of June 30, 2011. The decline in total lots under option primarily resulted from purchasing lots during the quarter and electing not to purchase lots which were under option. As a result of not purchasing lots that were under option, we recorded $2.1 million and $2.9 million of expenses of project write-off costs during the three and six months ended June 30, 2011. We did, however, see an increase in the amount of option deposits at risk primarily attributable to new lot option contracts in the markets of our East segment, where greater option deposits were required by land sellers.

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). The “Capture Rate” is defined as the number of mortgage loans originated by HomeAmerican for our homebuyers as a percent of total Company home closings.


	Three Months
	Ended June 30,						Change
	2011			2010			Amount			%
Principal amount of mortgage loans originated	$	146,275		$	240,693		$	(94,418	)		-39	%
Principal amount of mortgage loans brokered	$	2,177		$	2,660		$	(483	)		-18	%
Capture Rate		75	%		83	%		-8	%
Including brokered loans		76	%		84	%		-8	%
Mortgage products (% of mortgage loans originated)
Fixed rate		96	%		97	%		-1	%
Adjustable rate - other		4	%		3	%		1	%

Prime loans ⁽¹⁾		27	%		26	%		1	%
Government loans ⁽²⁾		73	%		74	%		-1	%

	Six Months
	Ended June 30,						Change
	2011			2010			Amount			%
Principal amount of mortgage loans originated	$	261,655		$	348,783		$	(87,128	)		-25	%
Principal amount of mortgage loans brokered	$	2,896		$	5,516		$	(2,620	)		-47	%
Capture Rate		75	%		82	%		-7	%
Including brokered loans		76	%		83	%		-7	%
Mortgage products (% of mortgage loans originated)
Fixed rate		96	%		96	%		0	%
Adjustable rate - other		4	%		4	%		0	%
Prime loans ⁽¹⁾		29	%		25	%		4	%
Government loans ⁽²⁾		71	%		75	%		-4	%

(1)	Prime loans are defined as loans with Fair, Isaac & Company (“FICO”) scores greater than 620 and which comply with the documentation standards of the government sponsored enterprise guidelines.

(2)	Government loans are loans either insured by the FHA or guaranteed by the VA.

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The principal amount of mortgage loans originated decreased during the three and six months ended June 30, 2011, primarily due to the Company closing 426 and 395 fewer homes, respectively, and declines in the Capture Rates during the 2011 periods. HomeAmerican’s Capture Rate declined during the three and six months ended June 30, 2011 primarily resulting from having an increase in the number of homebuyers who paid cash for their homes.

LIQUIDITY AND CAPITAL RESOURCES

We use our liquidity and capital resources to (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our balances of cash and cash equivalents, marketable securities and capital resources, our senior notes and Mortgage Repurchase Facility (as defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $750 million.

On July 7, 2011, the Company completed a debt tender offer extinguishing $63.7 million of its 7% Senior Notes due 2012 and $173.3 million of its 5 ¹/2% Senior Notes due 2013. The Company paid $256.7 million, including interest and fees, for the acquired notes and, as a result of the tender, the Company will record an $18.6 million charge associated with the extinguishment of debt during the 2011 third quarter.

The Company’s marketable securities consist of fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; (2) holdings in mutual fund equity securities and (3) deposit securities, which may include, among others, certificates of deposit and time deposits.

Capital Resources

Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our publicly traded 7% senior notes due 2012, 5¹/2% senior notes due 2013, 5³/8% medium-term senior notes due 2014 and 2015 and 5⁵/8% senior notes due 2020; and (3) our Mortgage Repurchase Facility. Because of our current balance of cash, cash equivalents, marketable securities and available capacity under our Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See “Forward-Looking Statements” above.

Senior Notes and Mortgage Repurchase Facility

Senior Notes. Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries.

Mortgage Lending. HomeAmerican has a Master Repurchase Agreement, which expires September 16, 2011 (the “Mortgage Repurchase Facility”), with U.S. Bank National Association (“USBNA”) and can include other banks that become parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). As of June 30, 2011, USBNA was the only Buyer under the Mortgage Repurchase Facility. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA (as agent for the Buyers) with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as agent for the Buyers and as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. At June 30, 2011 and December 31, 2010, we had $9.0 million and $25.4 million, respectively, of mortgage loans that we are obligated to repurchase under our Mortgage Repurchase Facility. Mortgage loans that we are obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility on the Consolidated Balance Sheets. Advances under the Mortgage Repurchase Facility carry a Pricing Rate equal to the greater of (i) the LIBOR Rate (as defined in the Mortgage Repurchase Facility) plus 2.5%, or (ii) 3.75%. At HomeAmerican’s option the Balance Funded Rate (equal to 3.75%) may be applied to advances under the Mortgage Repurchase Facility provided the applicable Buyer is holding sufficient Qualifying Balances. The foregoing terms are defined in the Mortgage Repurchase Facility.

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The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants customary for agreements of this type. The negative covenants include, among others, (i) an Adjusted Tangible Net Worth requirement, (ii) a minimum Adjusted Tangible Net Worth Ratio, (iii) an Adjusted Net Income requirement, (iv) a minimum Liquidity requirement; and (v) a requirement that HomeAmerican’s HUD Compare Ratio may be no more than 1.50 to 1.00. Adjusted Tangible Net Worth means the sum of (a) all assets of HomeAmerican less (b) the sum of (i) all Debt and all Contingent Indebtedness of HomeAmerican, (ii) all assets of HomeAmerican that would be classified as intangible assets under generally accepted accounting principles, and (iii) receivables from Affiliates. HomeAmerican’s Adjusted Tangible Net Worth Ratio is the ratio of HomeAmerican’s total liabilities (excluding Permitted Letters of Credit) to the Adjusted Tangible Net Worth. HomeAmerican’s Adjusted Net Income is a rolling twelve consecutive months of net income for HomeAmerican. HomeAmerican’s Liquidity is defined as its unencumbered and unrestricted cash and Cash Equivalents plus the amount by which the aggregate Purchase Value of all Purchased Loans at such time exceeds the aggregate Purchase Price outstanding for all Open Transactions at such time. HomeAmerican’s HUD Compare Ratio is the ratio of (a) the percentage of HomeAmerican’s FHA Mortgage Loan originations that were seriously delinquent or claim terminated in the first two years to (b) the percentage of all such Mortgage Loan originations. The foregoing terms are defined in the Mortgage Repurchase Facility.

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

The table below sets forth the actual results of the covenant calculations and covenant requirements under the Mortgage Repurchase Facility at June 30, 2011.


	Covenant Test		Covenant Results
Adjusted Tangible Net Worth (minimum)	$	18,000,000	$	26,199,000
Adjusted Tangible Net Worth Ratio (maximum)		8.0 : 1.0		0.7: 1.0
Adjusted Net Income (minimum)	$	1	$	5,374,000
Liquidity Test (minimum)	$	8,000,000	$	29,166,000

We believe we are in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility and we are not aware of any covenant violations.

MDC Common Stock Repurchase Program

At June 30, 2011, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three or six months ended June 30, 2011 and 2010.

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Consolidated Cash Flow

During the six months ended June 30, 2011, we used $69.3 million of cash in operating activities, primarily due to using $107.9 million to increase in our land inventory levels through the purchase of lots during the first six months of 2011. During the six months ended June 30, 2011 we increased our land units by 769, excluding the impact of the 232 lots in our Washington division. This use of cash was partially offset by generating $51.4 million in cash associated with the decrease in our housing completed or under construction as we closed 1,263 homes during the first six months of 2011 and reduced our total units of homes completed or under construction by 13% from December 31, 2010.

During the six months ended June 30, 2010, we used $178.9 million of cash from operating activities, primarily due to the increase of our homebuilding inventory, which resulted in the use of $228.3 million of cash during the first six months of 2010 as we purchased more than 3,300 lots and increased the total sold and unsold homes under construction from 1,109 at December 31, 2009 to 1,756 at June 30, 2010. Additionally, we used $85.4 million as a result of an increase in our home sales and other receivable and mortgage loans held-for-sale. These items partially were offset by the reduction of $144.5 million in our income tax receivable.

We generated $293.0 million in cash from investing activities during the six months ended June 30, 2011, primarily attributable to the maturity and sale of marketable securities that increased our cash by $726.7 million, partially offset by the purchase of $404.5 million of marketable securities. We used $29.3 million in cash for the purchase of property, equipment and other.

During the six months ended June 30, 2010, we invested $722.2 million into marketable securities and spent $5.1 million for property and equipment relating to our new enterprise resource planning system. These items partially were offset by the $109.1 million of marketable securities that matured or were sold during the six months ended June 30, 2010.

During the six months ended June 30, 2011, we used $40.1 million in cash for financing activities primarily attributable to $23.7 million associated with cash dividends that were paid during the first six months of 2011 and net payments on our mortgage repurchase facility, which resulted in use of $16.4 million of cash during the period. During the first six months of 2010, we generated $255.0 million in cash from financing activities, primarily due to the issuance of senior notes that raised $242.3 million. The proceeds from the issuance of the senior notes were used for general corporate purposes. Additionally, we had a net borrowing under our Mortgage Repurchase Facility of $36.2 million. Partially offsetting these items was $23.6 million in dividend payments.

Off-Balance Sheet Arrangements

In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At June 30, 2011, we had deposits of $10.5 million in the form of cash and $6.7 million in the form of letters of credit that were at risk to secure option contracts to purchase lots.

At June 30, 2011, we had outstanding performance bonds and letters of credit totaling approximately $74.4 million and $22.9 million, respectively, including $9.1 million in letters of credit issued by HomeAmerican, with the remaining bonds and letters of credit issued by third-parties, to secure our performance under various contracts. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

We have made no material guarantees with respect to third-party obligations.

Contractual Obligations

Our contractual obligations have not changed materially 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, 2010.

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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS

The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 2010 Annual Report on Form 10-K.

OTHER

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operation, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors Relating to our Business” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from the 2010 Annual Report on Form 10-K related to the Company’s exposure to market risk from interest rates.

Item 4.

Controls and Procedures

(a) Conclusion regarding the effectiveness of disclosure controls and procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision, and with the participation, of our management, including the Chief Executive Officer and the Chief Accounting Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, concluded that our disclosure controls and procedures were effective at June 30, 2011.

(b) Changes in internal control over financial reporting - In our Florida homebuilding division, we began operating under our new enterprise resource planning (“ERP”) system during the 2011 second quarter. As a result, our financial and operating transactions in this division is now utilizing the functionality provided by the new ERP system with oversight as to the completeness and accuracy of the information being performed through the ERP system. The full implementation of the ERP system in the other homebuilding divisions not currently operating under our new ERP system is scheduled to take place over the course of the next several quarters. There was no other change in our internal control over financial reporting that occurred during the 2011 second quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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M.D.C. HOLDINGS, INC.

FORM 10-Q

PART II

Item 1.

Legal Proceedings

Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

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

On July 29, 2010, the plaintiffs filed a renewed motion for sanctions based on substantially the same alleged misconduct. On January 14, 2011, the trial court again entered an order striking the answers filed by the Company and RAH West Virginia and imposing judgment by default upon them on the claims asserted in plaintiffs’ complaints (exclusive of the claim for punitive damages). As stated in the January 14, 2011 order, the cross-claims made by the Company and RAH West Virginia remain in effect.

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

We can give no assurance as to the final outcomes of these cases, or whether they would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A.

Risk Factors

There have been no significant changes in the risk factors previously identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2010. For a more complete discussion of other risk factors that affect our business, see “Risk Factors Relating to our Business” in our Form 10-K for the year ended December 31, 2010, which include the following:

•

The homebuilding industry is undergoing a significant downturn, and its duration and ultimate severity are uncertain. A continuation or further deterioration in industry conditions or in the broader economic conditions could have additional adverse effects on our business and financial results.

•

Increased competition levels in the homebuilding and mortgage lending industries could result in lower net home orders, closings and decreases in the average selling prices of sold and closed homes, which would have a negative impact on our home sales revenue and results of operations.

•

Further decline in the market value of our homes or carrying value of our land would have a negative impact on our results of operations and financial position.

•

Our strategies in responding to the adverse conditions in the homebuilding industry and in the U.S. economy have had limited success, and the continued implementation of these and other strategies may not be successful.

•

Increases in our Cancellation Rate could have a negative impact on our Home Gross Margins and home sales revenue.

•

If land is not available at reasonable prices, our homes sales revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

•

If mortgage interest rates rise or if mortgage financing otherwise becomes less affordable, it could adversely affect our sales and business, and the duration and ultimate severity of the effects are uncertain.

•

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and continued disruptions in these markets could have an adverse impact on our results of operations, financial position and/or cash flows.

•

In the ordinary course of business, we are required to obtain performance bonds, the unavailability of which could adversely affect our results of operations and/or cash flows.

•

Further uncertainty in the mortgage lending industry, including repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our results of operations.

•

Decreases in the market value of our investments in marketable securities could have an adverse impact on our results of operations.

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•

We are utilizing a new enterprise resource planning (“ERP”) system in four of our homebuilding divisions, our Corporate office and our non-homebuilding subsidiaries and, if we encounter significant problems with this implementation or implementation throughout our remaining homebuilding divisions, it could have an adverse impact on our operating activities and/or financial reporting capabilities.

•

Our financial services operations have concentration risks that could impact our results of operations.

•

Our business is subject to numerous federal, local and state laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.

•

Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.

•

Our income tax provision or benefit and other tax liabilities may be insufficient if taxing authorities are successful in asserting tax positions that are contrary to our position.

•

The homebuilding industry is cyclical and affected by changes in general economic, real estate or other business conditions that could adversely affect our business or financial results.

•

Because of the seasonal nature of our business, our quarterly operating results can fluctuate.

•

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

•

Natural disasters could cause an increase in home construction costs, as well as delays, and could negatively impact our results of operations.

•

We are dependent on the services of key employees, and the loss of their services could hurt our business.

•

The interests of certain controlling shareholders may be adverse to investors.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not repurchase any shares during the second quarter of 2011. In conjunction with the acquisition of substantially all of the assets of SDC Homes, LLC and certain affiliated entities as of April 28, 2011, the Company issued 176,716 shares of its common stock, valued at $5 million, to Robert Trent, the principal owner of the seller entities. The shares issued to Mr. Trent were unregistered, having been issued in a private placement under Section 4(2) of the Securities Act of 1933, and are subject to the terms of a restricted stock agreement. The agreement provides for 25%, 25% and 10% of the shares, respectively, to vest after each of the first three anniversaries of the effective date of the agreement, conditioned on Mr. Trent remaining employed. The final 40% of the stock will vest on December 31, 2015, conditioned on Mr. Trent remaining employed. The Company may use any unvested shares to apply against guaranty obligations that Mr. Trent has undertaken.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

(Removed and Reserved)

None.

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Item 5.

Other Information

On July 26, 2011, MDC’s Board of Directors declared a quarterly cash dividend of twenty five cents ($0.25) per share. The dividend will be paid on August 24 2011 to shareowners of record on August 10, 2011.

Item 6.

Exhibits


10.1		Second Amendment to the M.D.C. Holdings, Inc. Amended Executive Officer Performance-Based Compensation Plan, dated as of June 1, 2011.

10.2		Form of 2011 Stock Option Agreement (2011 Stock Option Plan for Non-Employee Directors).

10.3		Form of 2011 Stock Option Agreement (2011 Equity Incentive Plan).

10.4		Form of 2011 Restricted Stock Agreement (2011 Equity Incentive Plan).

12		Ratio of Earnings to Fixed Charges Schedule.

31.1		Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (iv) Notes to the Unaudited Consolidated Financial Statements. The information in Exhibit 101 is “furnished” and not “filed,” as provided in Rule 402 of Regulation S-T.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: August 4, 2011	M.D.C. HOLDINGS, INC.
	(Registrant)

	By:	/s/ Vilia Valentine
		Vilia Valentine,
		Vice President, Controller and Chief Accounting Officer
		(principal financial officer and principal accounting officer)

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EXHIBIT INDEX


10.1		Second Amendment to the M.D.C. Holdings, Inc. Amended Executive Officer Performance-Based Compensation Plan, dated as of June 1, 2011.

10.2		Form of 2011 Stock Option Agreement (2011 Stock Option Plan for Non-Employee Directors).

10.3		Form of 2011 Stock Option Agreement (2011 Equity Incentive Plan).

10.4		Form of 2011 Restricted Stock Agreement (2011 Equity Incentive Plan).

12		Ratio of Earnings to Fixed Charges Schedule.

31.1		Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (iv) Notes to the Unaudited Consolidated Financial Statements. The information in Exhibit 101 is “furnished” and not “filed,” as provided in Rule 402 of Regulation S-T.

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