UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005March 31, 2006
OR
   
o 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
(I.R.S. employer
of incorporation or organization) 84-0622967
(I.R.S. employer
identification no.)
   
4350 South Monaco Street, Suite 500
80237
Denver, Colorado
(Zip code)
(Address of principal executive offices) 80237
(Zip code)
(303) 773-1100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, (as definedor non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). YesAct.
Large Accelerated Filerþ           NoAccelerated FileroNon-Accelerated Filero
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of October 31, 2005, 44.6 millionApril 28, 2006, 44,932,000 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 SEPTEMBER 30, 2005MARCH 31, 2006
INDEX
         
      Page
      No.
Part I. Financial Information:    
         
  Item 1. Unaudited Consolidated Financial Statements (Unaudited):Statements:    
         
    Consolidated Balance Sheets at September 30, 2005March 31, 2006 and December 31, 20042005  1 
         
    Consolidated Statements of Income for the three and nine months ended September 30,March 31, 2006 and 2005 and 2004  3 
         
    Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2005 and 2004  4 
         
    Notes to Unaudited Consolidated Financial Statements  5 
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  1723 
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk  3238 
         
  Item 4. Controls and Procedures  3238 
         
Part IIII. Other Information:    
         
  Item 1. Legal Proceedings  3339
Item 1A.Risk Factors39 
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  3340 
         
  Item 3. Defaults Upon Senior Securities  3340 
         
  Item 4. Submission of Matters to a Vote of Security Holders  3340 
         
  Item 5. Other Information  3340 
         
  Item 6. Exhibits  3441 
         
  Signature  3542 
Certificate of Amendment to the Certificate of Incorporation
 Ratio of Earnings to Fixed Charges Schedule
 Certification of CEO Pursuant to Section 302
 Certification of CFO Pursuant to Section 302
 Certification of CEO Pursuant to Section 906
 Certification of CFO Pursuant to Section 906

(i)


ITEM 1.Unaudited Consolidated Financial Statements
M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands)

(Unaudited)
                
 September 30, December 31,  March 31, December 31, 
 2005 2004  2006 2005 
ASSETS
  
Corporate  
Cash and cash equivalents $105,105 $389,828  $142,651 $196,032 
Property and equipment, net 30,927 28,932  29,878 30,660 
Deferred income taxes 41,850 40,963  58,959 54,319 
Deferred debt issue costs, net 7,284 5,671  6,768 6,937 
Other assets, net 11,206 9,022  12,749 10,792 
          
 196,372 474,416  251,005 298,740 
          
  
Homebuilding  
Cash and cash equivalents 23,110 16,961  20,290 16,671 
Restricted cash 7,649 6,742 
Home sales and other accounts receivable 80,845 31,018  80,016 134,270 
Inventories, net      
Housing completed or under construction 1,535,936 851,628  1,346,057 1,266,901 
Land and land under development 1,367,890 1,109,953  1,814,612 1,656,198 
Prepaid expenses and other assets, net 150,955 115,544  149,358 139,529 
          
 3,158,736 2,125,104  3,417,982 3,220,311 
          
  
Financial Services  
Cash and cash equivalents 1,906 1,361  2,798 1,828 
Mortgage loans held in inventory 206,396 178,925  190,437 237,376 
Other assets, net 10,279 10,238  16,901 26,640 
          
 218,581 190,524  210,136 265,844 
          
 
Total Assets $3,573,689 $2,790,044  $3,879,123 $3,784,895 
          
See notes to consolidated financial statements.The accompanying Notes are an integral part of the Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
                
 September 30, December 31,  March 31, December 31, 
 2005 2004  2006 2005 
LIABILITIES
  
Corporate  
Accounts payable and accrued liabilities $113,184 $94,178  $89,302 $117,767 
Income taxes payable 49,499 50,979  82,924 102,656 
Related party liabilities 1,600 8,100 
Senior notes, net 996,171 746,310  996,391 996,297 
          
 1,158,854 891,467  1,170,217 1,224,820 
          
  
Homebuilding  
Accounts payable 243,560 159,763  192,770 203,592 
Accrued liabilities 203,045 165,705  212,658 216,872 
Line of credit 40,000   100,000  
          
 486,605 325,468  505,428 420,464 
          
  
Financial Services  
Accounts payable and accrued liabilities 25,382 18,810  22,730 30,970 
Line of credit 138,664 135,478  125,540 156,532 
          
 164,046 154,288  148,270 187,502 
          
Total Liabilities 1,809,505 1,371,223  1,823,915 1,832,786 
     
      
COMMITMENTS AND CONTINGENCIES      
          
STOCKHOLDERS’ EQUITY  
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued   
Common stock, $0.01 par value; 100,000,000 shares authorized; 44,587,000 and 43,286,000 shares issued, respectively, at September 30, 2005 and December 31, 2004 446 433 
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; 44,928,000 and 44,915,000 shares issued and outstanding, respectively, at March 31, 2006 and 44,642,000 and 44,630,000 shares issued and outstanding, respectively, at December 31, 2005 449 447 
Additional paid-in capital 720,235 660,699  741,003 722,291 
Retained earnings 1,046,641 760,780  1,317,175 1,232,971 
Unearned restricted stock  (2,380)  (1,418)  (2,231)  (2,478)
Accumulated other comprehensive income  (275)  (290)
     
 1,764,667 1,420,204 
Less treasury stock, at cost; 11,000 and 31,000 shares, respectively, at September 30, 2005 and December 31, 2004  (483)  (1,383)
Accumulated other comprehensive loss  (622)  (622)
Less treasury stock, at cost; 13,000 and 12,000 shares, respectively, at March 31, 2006 and December 31, 2005  (566)  (500)
          
Total Stockholders’ Equity 1,764,184 1,418,821  2,055,208 1,952,109 
          
Total Liabilities and Stockholders’ Equity $3,573,689 $2,790,044  $3,879,123 $3,784,895 
          
See notes to consolidated financial statements.The accompanying Notes are an integral part of the Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)

(Unaudited)
                        
 Three Months Ended Nine Months Ended  Three Months 
 September 30, September 30,  Ended March 31, 
 2005 2004 2005 2004  2006 2005 
REVENUES
 
REVENUE
 
 
Homebuilding $1,152,104 $1,011,392 $3,106,728 $2,623,625  $1,124,854 $921,330 
Financial services 15,471 14,627 39,881 41,022  17,408 11,598 
Corporate 237 110 1,459 569  432 988 
              
Total Revenues 1,167,812 1,026,129 3,148,068 2,665,216 
Total Revenue 1,142,694 933,916 
              
  
COSTS AND EXPENSES
  
 
Homebuilding 937,454 818,301 2,541,943 2,164,604  951,085 758,820 
Financial services 9,207 9,054 26,643 27,647  9,095 8,751 
Corporate 27,825 27,905 86,250 67,991  28,357 30,316 
Related party expenses 1,676 100 
              
Total Costs and Expenses 974,486 855,260 2,654,836 2,260,242  990,213 797,987 
              
Income before income taxes 193,326 170,869 493,232 404,974  152,481 135,929 
Provisions for income taxes  (72,336)  (65,796)  (184,988)  (156,432)  (57,060)  (51,298)
         
     
NET INCOME
 $120,990 $105,073 $308,244 $248,542  $95,421 $84,631 
              
  
EARNINGS PER SHARE
  
 
Basic $2.73 $2.47 $7.03 $5.87  $2.13 $1.95 
              
Diluted $2.62 $2.36 $6.70 $5.61  $2.08 $1.86 
     
          
WEIGHTED-AVERAGE SHARES OUTSTANDING
  
Basic 44,379 42,493 43,849 42,373  44,820 43,458 
              
Diluted 46,258 44,442 46,006 44,324  45,970 45,564 
              
DIVIDENDS DECLARED PER SHARE
 $0.180 $0.115 $0.510 $0.318  $0.25 $0.15 
              
See notes to consolidated financial statements.The accompanying Notes are an integral part of the Unaudited Consolidated Financial Statements.

- 3 --3-


M.D.C. HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
                
 Nine Months Ended  Three Months 
 September 30,  Ended March 31, 
 2005 2004  2006 2005 
OPERATING ACTIVITIES
  
Net income $308,244 $248,542  $95,421 $84,631 
Adjustment to reconcile net income to net cash used in operating activities 
Depreciation and amortization 34,518 28,756 
Adjustments to reconcile net income to net cash used in operating activities 
Amortization of deferred marketing costs 9,085 6,766 
Depreciation and amortization of long-lived assets 4,543 3,228 
Amortization of debt discount 94 82 
Deferred income taxes  (887)  (3,533)  (4,640)  (1,334)
Stock-based compensation expense 3,947 657 
Excess tax benefits from stock-based compensation  (1,192)  
Net changes in assets and liabilities  
Home sales and other accounts receivable  (49,827)  (14,915) 54,254  (14,015)
Homebuilding inventories  (942,245)  (549,395)
Housing completed or under construction  (79,156)  (52,846)
Land and land under development  (158,414)  (197,287)
Prepaid expenses and other assets  (56,003)  (56,214)  (22,710)  (14,456)
Mortgage loans held in inventory  (27,471) 853  46,939 62,848 
Accounts payable and accrued liabilities 179,180 147,530   (63,731) 671 
Restricted cash  (907)  (825)
Other, net 615 4,144  8,024 3,547 
          
Net cash used in operating activities  (553,876)  (194,232)  (108,443)  (118,333)
          
 
INVESTING ACTIVITIES
  
Net purchase of property and equipment  (18,118)  (27,083)  (1,638)  (4,663)
          
 
FINANCING ACTIVITIES
  
Lines of credit  
Advances 948,786 1,388,500  354,800  
Principal payments  (905,600)  (1,273,254)  (285,792)  (60,667)
Proceeds from issuance of senior notes, net 247,605  
Excess tax benefits from stock-based compensation 1,192  
Dividend payments  (22,383)  (13,641)  (11,217)  (6,509)
Stock repurchases   (6,812)
Proceeds from exercise of stock options 25,557 6,040  2,306 8,031 
          
Net cash provided by financing activities 293,965 100,833 
Net cash provided by (used in) financing activities 61,289  (59,145)
          
Net decrease in cash and cash equivalents  (278,029)  (120,482)  (48,792)  (182,141)
Cash and cash equivalents  
Beginning of year 408,150 173,565 
Beginning of period 214,531 400,959 
          
End of period $130,121 $53,083  $165,739 $218,818 
          
See notes to consolidated financial statements.The accompanying Notes are an integral part of the Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
(Unaudited)
A.1. Basis of Presentation of Financial Statements
     The consolidated financial statementsConsolidated 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.Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted accounting principlesin the United States of America for complete financial statements. These statements reflect all adjustments (including all normal and recurring accruals)adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at September 30, 2005March 31, 2006 and for all periods presented. These statements should be read in conjunction with MDC’s consolidated financial statementsConsolidated Financial Statements and notesNotes thereto included in MDC’s Annual Report on Form 10-K for its fiscalthe year ended December 31, 2004.2005. Certain reclassificationsyears’ prior balances have been made in the 2004 consolidated financial statementsreclassified to conform to the classifications used in the current year.year’s presentation.
     The Company historically has experienced, and expects to continue to experience, significant seasonality and quarter-to-quarter variability in quarterly results.homebuilding activity levels. In general, the number of homes closed increases substantially during the third and fourth quarters, compared with the first and second quarters. The consolidated statementsCompany believes that this seasonality reflects the historical tendency of incomehomebuyers to purchase new homes in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. Also, the Company has experienced, and expects to continue to experience, seasonality in the financial services operations because loan originations correspond with the closing of homes in the homebuilding operations. The Consolidated Statements of Income and Cash Flows for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.
B. Earnings Per Share2. Recent Accounting Pronouncements
     The basic and diluted earnings per share calculations are shown below (in thousands, except per share amounts). Prior period earnings per share and weighted-average shares outstanding have been adjusted retroactively for the effect of the January 10, 2005 1.3 for 1 stock split.
                 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2005  2004  2005  2004 
Basic Earnings Per Share
                
Net income $120,990  $105,073  $308,244  $248,542 
             
Basic weighted-average shares outstanding  44,379   42,493   43,849   42,373 
             
Per share amounts $2.73  $2.47  $7.03  $5.87 
             
                 
Diluted Earnings Per share
                
Net income $120,990  $105,073  $308,244  $248,542 
             
Basic weighted-average shares outstanding  44,379   42,493   43,849   42,373 
Stock options, net  1,879   1,949   2,157   1,951 
             
Diluted weighted-average shares outstanding  46,258   44,442   46,006   44,324 
             
Per share amounts $2.62  $2.36  $6.70  $5.61 
             
C. Stockholders’ Equity
Stock Repurchase ProgramIn October 2005, MDC’s board of directors increased the number of remaining shares of MDC common stock authorized to be repurchased under the Company’s stock repurchase program to 4,000,000 shares. No shares were repurchased during the nine months ended September 30, 2005. At September 30, 2005, MDC held 11,000 shares of treasury stock with an average purchase price of $42.07.

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Stock Split — On December 14, 2004, MDC’s board of directors declared a 1.3 for 1 stock split in the form of a 30% stock dividend that was distributed on January 10, 2005. In accordance withFebruary 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share,” basic155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and diluted net income per share amounts, weighted-average shares outstanding,140” (“SFAS 155”). SFAS 155 eliminates the exemption from applying SFAS 133 to interest in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instrument. SFAS 155 also allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise be bifurcated. At the adoption of SFAS 155, any difference between the total carrying amount of the individual components of any existing hybrid financial instrument and dividends declared per share have been adjusted retroactivelythe fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to the Company’s beginning retained earnings. SFAS 155 is effective for the Company for all periods presentedfinancial instruments acquired or issued after January 1, 2007. The Company is currently evaluating the impact, if any, that SFAS 155 will have on its financial position, results of operations or cash flows.
     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), an amendment of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 requires that servicing assets and servicing liabilities be recognized at fair value, if practicable, when the Company enters into a servicing agreement and allows two alternatives, the amortization and fair value measurement methods, as subsequent measurement methods. This accounting standard is effective for all new transactions occurring as of the beginning of fiscal years beginning after September 15, 2006. The Company is currently evaluating the impact, if any, that SFAS 156 will have on its financial position, results of operations or cash flows.

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M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
3. Stock-Based Compensation
Stock-Based Compensation Policy— Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this transition method, stock-based compensation expense for the effectfirst quarter of this stock split.
2006 includes compensation expense for all share-based payment awards granted prior to, but not yet vested at December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation-Compensation” (“SFAS 123”). Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company has electedrecognizes these compensation costs net of an estimated annual forfeiture rate and recognizes the compensation costs for only those awards expected to account forvest on a straight-line basis over the requisite service period of the award, which is currently the option vesting term of up to seven years. Prior to the adoption of SFAS 123(R), the Company recognized stock-based compensation using the intrinsic value method as prescribed byexpense in accordance with Accounting Principles Board Opinion (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”Employees” (“APB 25”).
     In March 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), regarding the SEC’s interpretation of SFAS 123(R) and related interpretations. Stockthe valuation of share-based payment awards for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). Additionally, upon the adoption of SFAS 123(R), tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. Prior to the adoption of SFAS 123(R), the Company presented the tax benefit of stock option exercises as operating cash flows.
     As a result of adopting SFAS 123(R), income before income taxes and net income for the three months ended March 31, 2006 were $3.0 million and $1.9 million lower, respectively, or $0.7 per basic and diluted share, than if the Company had continued to account for share-based payment awards under APB 25. The Company has recorded all stock-based compensation expense to general and administrative expenses for each of the Company’s segments included in Note 10.
Pro Forma Disclosures Pursuant to SFAS 123 —Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”), as if the fair value method defined by SFAS 123 had been applied to all share-based payment awards. As the Company has only granted at anstock options with exercise priceprices that is not lessare equal to or greater than the fair market value of MDC’sthe Company’s common stock aton the date of grant and, therefore, the Company recorded nothrough December 31, 2005, stock-based compensation expense was recorded only in association with the determinationvesting of net income forrestricted stock and unrestricted stock awards granted prior to January 1, 2006. Any resulting compensation expense was recognized ratably over the three and nine months ended September 30, 2005 and 2004.associated service period, which was generally the vesting term. The following table illustrates the effect on net income and earnings per share if the fair value method prescribed by SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” had been applied to all outstanding and unvested share-based payment awards in the three and nine-month periodsmonths ended September 30,March 31, 2005 and 2004 (in thousands, except per share amounts).

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  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2005  2004  2005  2004 
Net income, as reported $120,990  $105,073  $308,244  $248,542 
Deduct stock-based compensation expense determined using the fair value method, net of related tax effects  (2,647)  (1,966)  (7,944)  (5,238)
             
Pro forma net income $118,343  $103,107  $300,300  $243,304 
             
                 
Earnings per share                
Basic as reported $2.73  $2.47  $7.03  $5.87 
             
Basic pro forma $2.67  $2.43  $6.85  $5.74 
             
                 
Diluted as reported $2.62  $2.36  $6.70  $5.61 
             
Diluted pro forma $2.56  $2.32  $6.53  $5.49 
             
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
     
  Three Months Ended 
  March 31, 2005 
Net income, as reported $84,631 
Deduct stock-based compensation expense determined using the fair value method, net of related tax effects  (2,421)
    
Pro forma net income $82,210 
    
Earnings per share    
Basic as reported $1.95 
    
Basic pro forma $1.89 
    
Diluted as reported $1.86 
    
Diluted pro forma $1.80 
    
Determining Fair Value of Share-Based Awards— As part of the adoption of SFAS 123(R), the Company examined its historical pattern of option exercises in an effort to determine if there were any discernable activity patterns based on certain employee and non-employee populations. Based upon this evaluation, the Company identified three distinct populations: (1) executives consisting of the Company’s Chief Executive Officer, Chief Operating Officer, Chief Company’s Financial Officer and General Counsel (collectively, the “Executives”); (2) non-executive employees; and (3) non-employee members of the Company’s board of directors (“Directors”). The Company has used the Black-Scholes option pricing model to value stock options for each of these populations.
     The fair values for stock options granted during the three months ended March 31, 2006 and 2005 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions and weighted-average fair values. These assumptions were used for the stock options granted only to non-executive employees during the three months ended March 31, 2006 and 2005. No stock option awards were granted during these periods to Executives or Directors.
         
  Three Months
  Ended March 31,
  2006 2005
Weighted-average grant date fair value $22.94  $33.50 
Expected volatility  46.4%  45.2%
Risk-free interest rate  4.7%  3.9%
Dividend yield rate  1.2%  0.8%
Expected lives of options 3.8yrs. 6.0yrs.
     The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for the expected term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected life of employee stock options represents the weighted-average period for which the stock options are expected to remain outstanding and are derived primarily from historical exercise patterns.
     SFAS 123(R) requires an annual forfeiture rate to be estimated at the time of grant for all share-based payment awards granted subsequent to January 1, 2006, and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the Company’s estimate. Additionally, in accordance with SFAS 123(R), the Company has estimated an annual forfeiture rate to be applied to all share-based payment awards which were unvested as of December 31, 2005 in determining the number of awards expected to vest in the

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M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
future. The Company estimated the annual forfeiture rate to be 25% for share-based payment awards granted to non-executive employees and 0% for share-based payment awards granted to Executives and Directors, based on the terms of their awards, as well as historical forfeiture experience. In the Company’s pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.
Stock Option Award Activity- Option activity under the Company’s option plans at March 31, 2006 and changes during the three months ended March 31, 2006 were as follows.
                 
          Weighted-Average    
          Remaining  Aggregate Intrinsic 
  Number of  Weighted-Average  Contractual Life  Value (in 
  Shares  Exercise Price  (in years)  thousands) 
Outstanding at December 31, 2005  5,659,766  $40.54         
Granted  5,000  $61.19         
Exercised  (105,694) $21.82         
Cancelled  (55,049) $55.88         
                
                 
Outstanding at March 31, 2006  5,504,023  $40.76   6.66  $129,596 
                
     The following table summarizes information concerning stock options exercisable, as well as options vested and expected to vest for the previously discussed Executives, non-executive employees and Directors at March 31, 2006.
                 
  Vested and Expected to Vest at March 31, 2006 
          Weighted-Average    
          Remaining  Aggregate Intrinsic 
  Number of  Weighted-Average  Contractual Life  Value (in 
  Shares  Exercise Price  (in years)  thousands) 
Executives  3,875,815  $36.24         
Non-Executive Employees  593,911  $43.15         
Directors  303,325  $61.41         
                
Total  4,773,051  $38.70   6.52  $115,802 
                
                 
  Exercisable at March 31, 2006 
          Weighted-Average    
          Remaining  Aggregate Intrinsic 
  Number of  Weighted-Average  Contractual Life  Value (in 
  Shares  Exercise Price  (in years)  thousands) 
Executives  1,449,699  $19.53         
Non-Executive Employees  200,311  $21.28         
Directors  303,325  $61.41         
                
Total  1,953,335  $26.21   5.36  $74,422 
                

-8-


M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
     The following table summarizes information concerning outstanding and exercisable options at March 31, 2006.
                     
  Options Outstanding      Options Exercisable    
      Weighted-Average           
      Remaining  Weighted-      Weighted- 
Range of Number  Contractual  Average  Number  Average 
Exercise Price Outstanding  Life (in years)  Exercise Price  Exercisable  Exercise Price 
$7.92 - $23.77  2,265,820   4.66  $19.96   1,570,863  $19.32 
$23.78 - $31.69  290,190   2.07  $26.67   86,471  $27.17 
$31.70 - $47.53  946,663   7.61  $44.33   73,501  $41.02 
$47.54 - $71.30  1,859,350   9.12  $63.60   97,500  $57.66 
$71.31 - $79.22  142,000   9.49  $78.70   125,000  $78.89 
                   
Total  5,504,023   6.66  $40.76   1,953,335  $26.21 
                   
     The aggregate intrinsic values in the tables above represent the total pre-tax intrinsic values (the difference between the closing price of MDC’s common stock on the last trading day of the first quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. This amount changes based on changes in the fair market value of the Company’s common stock. The total intrinsic value of options exercised and total fair value of options vested during the three months ended March 31, 2006 was $4.4 million and $294,000 respectively.
     Total stock-based compensation expense relating to stock options granted by the Company was $3.0 million for the three months ended March 31, 2006. As of March 31, 2006, $45.0 million of total unrecognized compensation cost related to stock options is expected to be recognized as an expense by the Company in the future over a weighted-average period of 4.4 years.
     Cash received from stock option exercises was $2.3 million and the actual tax benefit realized for the tax deduction from these option exercises totaled $1.2 million for the three months ended March 31, 2006.
Restricted and Unrestricted Stock Award Activity- Non-vested restricted stock awards at March 31, 2006 and changes during the three months ended March 31, 2006 were as follows.
         
  Number of  Weighted-Average Grant 
  Shares  Date Fair Value 
Non-vested at December 31, 2005  43,312  $57.16 
Granted  31,851  $64.58 
Vested  (17,365) $60.94 
Forfeited  (789) $63.45 
        
         
Non-vested at March 31, 2006  57,009  $60.07 
        
     Total stock-based compensation expense relating to restricted stock and unrestricted stock awards was $0.9 million and $0.7 million for the three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006, there was $2.6 million of unrecognized stock-based compensation expense related to non-vested restricted stock awards. That cost is expected to be recognized as an expense by the Company in the future over a weighted-average period of 3.2 years.

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M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
D.4. Equity Incentive Plans
     A summary of the Company’s equity incentive plans follows:
Employee Equity Incentive Plans— In April 1993, the Company adopted the Employee Equity Incentive Plan (the “Employee Plan”). The Employee Plan provided for an initial authorization of 2,100,000 shares of MDC common stock for issuance thereunder, subject to adjustment for stock dividends and stock splits, plus an additional annual authorization equal to 10% of the then authorized shares of MDC common stock under the Employee Plan as of each succeeding annual anniversary of the date the Employee Plan was adopted. Under the Employee Plan, the Company could grant awards of restricted stock, incentive and non-statutory stock options and dividend equivalents, or any combination thereof, to officers and employees of the Company or any of its subsidiaries. The incentive and non-statutory stock options granted under the Employee Plan are exercisable at prices not less than the market value on the date of grant and vest over periods of up to four years and expire within six years. The Company’s ability to make further grants under the Employee Plan terminated pursuant to its terms on April 20, 2003.
     Effective March 2001, the Company adopted the M.D.C. Holdings, Inc. 2001 Equity Incentive Plan (the “Equity Incentive Plan”). The Equity Incentive Plan provided for an initial authorization of 2,000,000 shares of MDC common stock for issuance thereunder, subject to adjustment for stock dividends and stock splits, plus an additional annual authorization equal to 10% of the then authorized shares of MDC common stock under the Equity Incentive Plan as of each succeeding annual anniversary of the date the Equity Incentive Plan was adopted. In April 2003, an additional 1,000,000 shares (also subject to adjustment for stock dividends and stock splits) were authorized for issuance by vote of the Company’s shareowners. The Equity Incentive Plan provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, stock bonuses and other stock grants to employees of the Company. Incentive stock options granted under the Equity Incentive Plan must have an exercise price that is at least equal to the fair market value of the common stock on the date the incentive stock option is granted. Non-qualified option awards generally vest over periods of up to seven years and expire in ten years. Restricted stock awards are granted with vesting terms of up to four years.
Director Equity Incentive Plan— Effective March 2001, the Company adopted the M.D.C. Holdings, Inc. Stock Option Plan for Non-Employee Directors (the “Director Stock Option Plan”). Under the Director Stock Option Plan, non-employee Directors of the Company are granted non-qualified stock options. The Director Stock Option Plan provided for an initial authorization of 500,000 shares of MDC common stock for issuance thereunder, subject to adjustment for stock dividends and stock splits, plus an additional annual authorization equal to 10% of the then authorized shares of MDC common stock under the Director Stock Option Plan as of each succeeding annual anniversary of the date the Director Stock Option Plan was adopted. Pursuant to the Director Stock Option Plan, on October 1 of each year, each non-employee director of the Company is granted options to purchase 25,000 shares of MDC common stock. Each option granted under the Director Stock Option Plan vests immediately and expires ten years from the date of grant. The option exercise price must be equal to the fair market value (as defined in the plan) of MDC common stock on the date of grant of the option. In October 2003, the Director Stock Option Plan, which was approved by the shareowners on May 21, 2001, was amended to terminate on May 21, 2011.

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M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
5. Balance Sheet Components
     The following tables set forth information relating to corporate and homebuilding accounts payable and accrued liabilities (in thousands).
         
  March 31,  December 31, 
  2006  2005 
Corporate
        
Accrued bonuses $13,481  $47,850 
Accrued interest payable  20,496   13,027 
Warranty reserves  10,707   10,693 
Accrued legal expenses  9,074   7,908 
Accrued pension liability  11,987   11,687 
Accrued employee benefits  15,301   19,035 
Other accounts payable and accrued liabilities  8,256   7,567 
       
Total Corporate $89,302  $117,767 
       
         
  March 31,  December 31, 
  2006  2005 
Homebuilding
        
Accounts payable        
Construction accounts payable $188,973  $195,803 
Non-construction accounts payable  3,797   7,789 
       
Total accounts payable  192,770   203,592 
       
Accrued liabilities        
Warranty reserves $74,906  $71,545 
Customer and escrow deposits  50,261   56,186 
Accrued compensation and related expense  25,107   32,656 
Insurance reserves  33,888   32,166 
Other accrued liabilities  28,496   24,319 
       
Total accrued liabilities  212,658   216,872 
       
Total Homebuilding accounts payable and accrued liabilities $405,428  $420,464 
       

-11-


M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
6. Earnings Per Share
     Pursuant to SFAS No. 128, “Earnings per Share,” the computation of diluted earnings per share takes into account the effect of dilutive stock options. The basic and diluted earnings per share calculations are shown below (in thousands, except per share amounts).
         
  Three Months 
  Ended March 31, 
  2006  2005 
Basic Earnings Per Share
        
Net income $95,421  $84,631 
       
Basic weighted-average shares outstanding  44,820   43,458 
       
Per share amounts $2.13  $1.95 
       
Diluted Earnings Per share
        
Net income $95,421  $84,631 
       
Basic weighted-average shares outstanding  44,820   43,458 
Stock options, net  1,150   2,106 
       
Diluted weighted-average shares outstanding  45,970   45,564 
       
Per share amounts $2.08  $1.86 
       
7. Interest Activity
     The Company capitalizes interest incurred on its corporate and homebuilding debt during the period of active development and through the completion of construction of its homebuilding inventories. All corporate and homebuilding interest incurred was capitalized during the three and nine months ended September 30, 2005March 31, 2006 and 2004.2005. Interest incurred by the financial services segment is charged to interest expense, which is deducted from interest income and reported as net interest income in Note F.10.

- 6 --12-


M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Interest activity, in total and by business segment, is shown below (in thousands).
                        
 Three Months Ended Nine Months Ended  Three Months 
 September 30, September 30,  Ended March 31, 
 2005 2004 2005 2004  2006 2005 
Total Interest Incurred
  
 
Corporate and homebuilding $14,615 $8,406 $36,540 $23,481  $14,837 $10,815 
Financial services 1,014 556 2,152 1,324  1,964 484 
              
Total interest incurred $15,629 $8,962 $38,692 $24,805  $16,801 $11,299 
              
  
Corporate/Homebuilding Interest Capitalized
  
 
Interest capitalized in homebuilding inventory, beginning of period $30,293 $22,023 $24,220 $20,043  $41,999 $24,220 
Interest incurred 14,615 8,406 36,540 23,481  14,837 10,815 
Previously capitalized interest included in cost of sales  (7,030)  (7,175)  (22,882)  (20,270)
Previously capitalized interest included in home cost of sales  (9,614)  (7,294)
              
Interest capitalized in homebuilding inventory, end of period $37,878 $23,254 $37,878 $23,254  $47,222 $27,741 
              
  
Financial Services Net Interest Income
  
 
Interest income $1,769 $1,549 $4,162 $4,147  $2,820 $1,011 
Interest expense  (1,014)  (556)  (2,152)  (1,324)  (1,964)  (484)
              
Net interest income $755 $993 $2,010 $2,823  $856 $527 
              
E.8. Warranty Reserves
     Warranty reserves are reviewed quarterly, using historical data and other relevant information, to determine the reasonableness and adequacy of both the reserve and the per unit reserve amount originally included in home cost of sales, as well as the timing of the reversal of the reserve. Warranty reserves are included in corporate accounts payable and accrued liabilities and homebuilding accrued liabilities in the consolidated balance sheets,Consolidated Balance Sheets, and totaled $60.8$85.6 million and $64.4$82.2 million, respectively, at September 30, 2005March 31, 2006 and December 31, 2004. Warranty expense was $10.9 million and $27.4 million for the three and nine months ended September 30, 2005, respectively, compared with $10.2 million and $28.3 million for the same periods in 2004.respectively. In addition, the reserves include additional qualified settlement fund warranty reserves created pursuant to litigation settled in 1996. Warranty activity for the ninethree months ended September 30, 2005March 31, 2006 is shown below (in thousands).
        
Warranty reserve balance at December 31, 2004 $64,424 
Warranty reserve balance at December 31, 2005 $82,238 
Warranty expense provision 27,415  11,496 
Warranty cash payments, net  (31,013)  (8,121)
      
Warranty reserve balance at September 30, 2005 $60,826 
Warranty reserve balance at March 31, 2006 $85,613 
      

- 7 --13-


F.M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
9. Insurance Reserves
     The Company records expenses and liabilities for costs to cover self-insurance and deductible amounts under the Company’s insurance policies and for any estimated outstanding losses and loss adjustment expenses associated with claims in excess of coverage limits or not covered by insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on known facts and interpretation of circumstances, which include the Company’s experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns such as those caused by natural disasters, fires, or accidents, depending on the business conducted and changing regulatory and legal environments.
     The following table summarizes the insurance activity for the three months ended March 31, 2006 (in thousands).
     
Insurance reserve balance at beginning of period $32,166 
Insurance expense provisions  2,562 
Insurance cash payments, net  (840)
    
Insurance reserve balance at end of period $33,888 
    
10. Information on Business Segments
     The Company operates in two business segments:segments — homebuilding and financial services. Operating segments are defined as components of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-making group to evaluate performance and make operating decisions. The Company identified its chief operating decision-makers as the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. These executives review the financial position and results of operations for the homebuilding and financial services business segments.
     Corporate general and administrative expenses consist principally of salaries and other administrative expenses that are not identifiable to a specific segment. Transfers between segments are recorded at cost. Identifiable segment assets are shown on the face of the Consolidated Balance Sheets.

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M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
     Included in homebuilding general and administrative expenses are supervisory fees charged by MDC to both of the Company’s operating segments. Supervisory fees represent costs incurred by the Company’s corporate operations associated with certain departments which support the Company’s segment operations. Supervisory fees included in general and administrative expense for the homebuilding segment were $10.8 million and $7.3 million for the three months ended March 31, 2006 and 2005, respectively. Supervisory fees included in general and administrative expense for the financial services segment were $122,000 for each of the three months ended March 31, 2006 and 2005.
     A summary of the Company’s segment informationbusiness segments is shown below (in thousands).
                        
 Three Months Ended Nine Months Ended  Three Months 
 September 30, September 30,  Ended March 31, 
 2005 2004 2005 2004  2006 2005 
Homebuilding
  
Revenues 
Revenue 
Home sales $1,147,757 $1,007,134 $3,094,141 $2,615,100  $1,119,308 $916,831 
Land sales 1,269 1,839 2,565 1,839  1,837 1,296 
Other revenues 3,078 2,419 10,022 6,686 
Other revenue 3,709 3,203 
              
Total Homebuilding Revenues 1,152,104 1,011,392 3,106,728 2,623,625 
Total Homebuilding Revenue 1,124,854 921,330 
              
Home cost of sales 817,330 723,240 2,208,882 1,898,158  814,589 656,780 
Land cost of sales 706 1,316 1,496 1,316  2,374 790 
Marketing expenses 56,842 49,856 158,694 137,677  29,035 22,318 
Commission expenses 32,843 25,846 
General and administrative expenses 62,576 43,889 172,871 127,453  72,244 53,086 
              
Total Homebuilding Expenses 937,454 818,301 2,541,943 2,164,604  951,085 758,820 
              
Homebuilding Operating Profit
 214,650 193,091 564,785 459,021  173,769 162,510 
              
Financial Services
 
Revenue 
Net interest income 856 527 
Broker origination fees 2,080 2,168 
Gain on sale of mortgage loans, net 13,027 7,898 
Other revenue 1,445 1,005 
      
Financial Services
 
Revenues 
Net interest income 755 993 2,010 2,823 
Origination fees 8,433 6,801 21,428 17,464 
Gains on sales of mortgage servicing 1,121 406 2,590 1,543 
Gains on sales of mortgage loans, net 4,356 5,595 11,372 16,905 
Mortgage servicing and other 806 832 2,481 2,287 
         
Total Financial Services Revenues 15,471 14,627 39,881 41,022 
General and administrative expenses 9,207 9,054 26,643 27,647 
Total Financial Services Revenue 17,408 11,598 
General and Administrative Expenses 9,095 8,751 
              
Financial Services Operating Profit
 6,264 5,573 13,238 13,375  8,313 2,847 
              
Total Operating Profit
 220,914 198,664 578,023 472,396  182,082 165,357 
              
  
Corporate
  
Interest and other revenues 237 110 1,459 569  432 988 
General and administrative expenses  (27,825)  (27,905)  (86,250)  (67,991)  (28,357)  (30,316)
Related party expenses  (1,676)  (100)
              
Net Corporate Expenses
  (27,588)  (27,795)  (84,791)  (67,422)  (29,601)  (29,428)
              
Income Before Income Taxes
 $193,326 $170,869 $493,232 $404,974  $152,481 $135,929 
              

- 8 --15-


G.M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
11. Other Comprehensive Income
     OtherTotal other comprehensive income includes net income plus unrealized gains or losses on securities available for sale and minimum pension liability adjustments which hashave been reflected as a component of stockholders’ equity and have not affected net income and consolidated net income. A summary of components of totalThe Company’s other comprehensive income is shown below (in thousands).
                 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2005  2004  2005  2004 
Net income $120,990  $105,073  $308,244  $248,542 
Unrealized gain (loss) on securities available for sale, net of taxes  1   15   15   (265)
             
Total other comprehensive income $120,991  $105,088  $308,259  $248,277 
             
was $95.4 million and $84.6 million for the three months ended March 31, 2006 and 2005, respectively.
H.12. Commitments and Contingencies
     The Company often is required to obtain bonds and letters of credit in support of its obligations relating to subdivision improvement, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At September 30, 2005,March 31, 2006, MDC had issued and outstanding performance bonds and letters of credit totaling approximately $370.8$421.5 million and $97.8$94.1 million, respectively, including $30.5$29.0 million in letters of credit issued by HomeAmerican Mortgage Corporation (“HomeAmerican”), a wholly owned subsidiary of MDC. In the event any such bonds or letters of credit issued by third parties are called, MDC would be obligated to reimburse the issuer of the bond or letter of credit.
I.13. Lines of Credit and Total Debt Obligations
     Homebuilding— The Company’s homebuilding line of credit (“Homebuilding Line”) is an unsecured revolving line of credit with a group of lenders for support of our homebuilding operations. During January 2005,On March 22, 2006, the Company modifiedamended and restated the Homebuilding Line, increasing the aggregate commitment amount to $1.058$1.250 billion, while maintainingand extending the maturity date of April 7, 2009.to March 21, 2011. The facility’s provision for letters of credit is available in the aggregate amount of $350$500 million. The modifiedamended and restated facility permits an increase in the maximum commitment amount to $1.25$1.750 billion upon the Company’s request, subject to receipt of additional commitments from existing or additional participant lenders. Interest rates on outstanding borrowings are determined by reference to LIBOR with a spread from LIBOR, which is determined based on changes in the Company’s credit ratings and leverage ratio, or to an alternate base rate. At September 30, 2005,March 31, 2006, the Company had $40.0$100.0 million of borrowings and $65.2$65.1 million in letters of credit issued under the Homebuilding Line.
     Mortgage Lending— The Company’s mortgage line of credit (“Mortgage Line”) has a borrowing limit of $175$225 million with terms that allow for increases of up to $50$175 million in the borrowing limit to a maximum of $225$400 million, subject to concurrence by the participating banks. In September 2005,The terms of the Mortgage Line borrowing limit was increased temporarily to $225 million. This temporary increase will expire on January 23, 2006.are set forth in the Third Amended and Restated Warehousing Credit Agreement dated as of October 31, 2003, as amended. Available borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed securities and are limited to the value of eligible collateral, as defined. At September 30, 2005, $138.7March 31, 2006, $125.5 million was borrowed and an additional $12.0$15.2 million was collateralized and available to be borrowed. The Mortgage Line is cancelable upon 120 days notice.
     Other Debt Obligations — In July 2005, the Company completed a public offering of $250 million principal amount of 53/8% medium term senior notes due July 2015 (the “2015 Medium Term Senior Notes”) at a discount, with an effective yield of 51/2%. The 2015 Medium Term Senior Notes have interest due and payable on January 1st and July 1st of each year until maturity. The Company does not make any principal payments until the 2015 Medium Term Senior Notes are fully due in July 2015. The 2015 Medium Term Senior Notes are guaranteed by certain of the Company’s subsidiaries and may be redeemed, at the election of the Company, in whole at any time or in part from time to time, at the redemption price set forth in the pricing supplement for the 2015 Medium Term Senior Notes.

- 9 -


General— The agreements for the Company’s bank lines of credit and the indentures for the Company’s senior notes require compliance with certain representations, warranties and covenants. The Company believes that it is in compliance with these requirements, and the Company is not aware of any covenant violations. The agreements containing these representations, warranties and covenants for the bank lines of credit and the indentures for the Company’s senior notes are on file with the Securities and Exchange CommissionSEC and are listed in the Exhibit Table in Part IV of the Company’s 2004 Annual Report on Form 10-K.10-K for the year ended December 31, 2005 and in Part II, Item 6, of this Form 10-Q.

-16-


M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
     The Company’s debt obligations at September 30, 2005March 31, 2006 and December 31, 20042005 are as follows (in thousands):
                
 September 30, December 31,  March 31, December 31, 
 2005 2004  2006 2005 
7% Senior Notes due 2012 $148,787 $148,688  $148,855 $148,821 
51/2% Senior Notes due 2013
 349,256 349,197  349,297 349,276 
53/8% Medium Term Senior Notes due 2014
 248,501 248,425  248,564 248,532 
53/8% Medium Term Senior Notes due 2015
 249,627   249,675 249,668 
          
Total Senior Notes
 996,171 746,310  996,391�� 996,297 
Homebuilding Line 40,000   100,000  
          
Total Corporate and Homebuilding Debt
 1,036,171 746,310  1,096,391 996,297 
Mortgage Line 138,664 135,478  125,540 156,532 
          
Total Debt
 $1,174,835 $881,788  $1,221,931 $1,152,829 
          
J.14. Related Party Transactions
     During the first quarter of 2006, the Company accrued $1.6 million of contributions to be made to the MDC/Richmond American Homes Foundation (the “Foundation”), a Delaware non-profit corporation that was incorporated on September 30, 1999.
15. Income Taxes
     The Company’s overall effective income tax rates ofwere 37.4% and 37.5%37.7% for the three and nine months ended September 30,March 31, 2006 and 2005, respectively, differed fromrespectively.
16. Subsequent Events
     On April 27, 2006, the 38.5% and 38.6% forCompany amended the same periods in 2004, primarily due to the Internal Revenue Code Section 199 manufacturing deduction establishedCertificate of Incorporation, as authorized by the American Jobs Creation ActCompany’s shareowners on April 24, 2006, thereby increasing the number of 2004, as well as a reduction in our state effective income tax rate.
K. Recent Accounting Pronouncements
     In June 2005, the Emerging Issues Task Force (“EITF”) released Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 creates a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate the partnership. EITF 04-5 states that the presumption of general partner control would be overcome only when the limited partners have certain specific rights as outlined in EITF 04-5. EITF 04-5 is effective immediately for all newly formed limited partnerships and for existing limited partnership agreements that are modified. For general partners in all other limited partnerships, EITF 04-5 is effective no later than the beginningauthorized shares of the first reporting period in fiscal years beginning after December 15, 2005. As the Company’s only partnership entities are wholly owned entities, the adoption of EITF 04-5 is not expectedcommon stock from 100 million shares to have an impact on the Company’s results of operations or financial position.
     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). The new standard changes the requirements for the accounting for, and reporting of, a change in accounting principle and applies to all such voluntary changes. The previous accounting required that most changes in accounting principle be recognized in net earnings by including a cumulative effect of the change in the period of the change. SFAS 154, which is effective for fiscal years beginning after December 15, 2005, requires retroactive application to prior periods’ financial statements. Adoption of SFAS 154 is not expected to have a material impact on the Company’s results of operations or financial position.

- 10 -


     On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123(R) supersedes APB 25 and amends SFAS Statement No. 95, “Statement of Cash Flows.”SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The provisions of SFAS 123(R) must be adopted no later than January 1, 2006. Had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share as disclosed above in Note C under “Stock-Based Compensation” to the Company’s consolidated financial statements.250 million shares.
L.17. Supplemental Guarantor Information
     The Company’s senior notes and Homebuilding Line are fully and unconditionally guaranteed on an unsecured basis, jointly and severally by the following subsidiaries (collectively, the “Guarantor Subsidiaries”).
  M.D.C. Land Corporation
 
  RAH of Florida, Inc.
 
  RAH of Texas, LP
 
  RAH Texas Holdings, LLC
 
  Richmond American Construction, Inc.
 
  Richmond American Homes of Arizona, Inc.
 
  Richmond American Homes of California, Inc.
 
  Richmond American Homes of Colorado, Inc.
 
  Richmond American Homes of Delaware, Inc.
 
  Richmond American Homes of Florida, LP
 
  Richmond American Homes of Illinois, Inc.

-17-


M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
  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 Texas, Inc.
 
  Richmond American Homes of Utah, Inc.
 
  Richmond American Homes of Virginia, Inc.
 
  Richmond American Homes of West Virginia, Inc.
     Subsidiaries that do not guarantee the Company’s senior notes and Homebuilding Line (collectively, the “Non-Guarantor Subsidiaries”) include:
  American Home Insurance Agency, Inc.
 
  American Home Title and Escrow Company
 
  HomeAmerican Mortgage Corporation
 
  Lion Insurance Company
 
  StarAmerican Insurance Ltd.
 
  Allegiant Insurance Company, Inc., A Risk Retention Group
     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.

- 11 --18-


M.D.C. Holdings, Inc.HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Supplemental Combining Balance Sheet
September 30, 2005March 31, 2006
(In thousands)
                                        
 �� Non-      Non-     
 Guarantor Guarantor Eliminating Consolidated  Guarantor Guarantor Eliminating Consolidated 
 MDC Subsidiaries Subsidiaries Entries MDC  MDC Subsidiaries Subsidiaries Entries MDC 
ASSETS
  
Corporate  
Cash and cash equivalents $105,105 $ $ $ $105,105  $142,651 $ $ $ $142,651 
Investment in and advances to parent and subsidiaries 526,246 1,083 7,869  (535,198)   358,376 599  (13,027)  (345,948)  
Other assets 91,295 195  (223)  91,267  108,326 146  (118)  108,354 
                      
 722,646 1,278 7,646  (535,198) 196,372  609,353 745  (13,145)  (345,948) 251,005 
                      
 
Homebuilding  
Cash and cash equivalents  15,564 7,546  23,110   7,496 12,794  20,290 
Restricted cash  7,649   7,649 
Home sales and other accounts receivable  105,977 1,344  (26,476) 80,845   94,789 1,383  (16,156) 80,016 
Inventories, net  
Housing completed or under construction  1,535,936   1,535,936   1,346,057   1,346,057 
Land and land under development  1,367,890   1,367,890   1,814,612   1,814,612 
Other assets  136,352 38,603  (24,000) 150,955   133,943 41,415  (26,000) 149,358 
                      
  3,161,719 47,493  (50,476) 3,158,736   3,404,546 55,592  (42,156) 3,417,982 
                      
Financial Services   218,581  218,581    210,136  210,136 
                      
Total Assets $722,646 $3,162,997 $273,720 $(585,674) $3,573,689  $609,353 $3,405,291 $252,583 $(388,104) $3,879,123 
                      
  
LIABILITIES
  
Corporate  
Accounts payable and accrued liabilities $137,939 $245 $50 $(25,050) $113,184  $117,708 $195 $48 $(27,049) $90,902 
Advances and notes payable — parent and subsidiaries  (2,093,977) 2,078,501 15,476     (2,693,089) 2,676,938 16,151   
Income taxes payable  (121,671) 166,117 5,053  49,499  33,135 45,216 4,573  82,924 
Senior notes, net 996,171    996,171  996,391    996,391 
                      
  (1,081,538) 2,244,863 20,579  (25,050) 1,158,854   (1,545,855) 2,722,349 20,772  (27,049) 1,170,217 
                      
 
Homebuilding  
Accounts payable and accrued liabilities  418,611 27,994  446,605   374,095 31,333  405,428 
Line of credit 40,000    40,000 
Homebuilding Line 100,000    100,000 
                      
 40,000 418,611 27,994  486,605  100,000 374,095 31,333  505,428 
                      
Financial Services   189,462  (25,416) 164,046    163,375  (15,105) 148,270 
                      
Total Liabilities  (1,041,538) 2,663,474 238,035  (50,466) 1,809,505   (1,445,855) 3,096,444 215,480  (42,154) 1,823,915 
                      
 
STOCKHOLDERS’ EQUITY
 1,764,184 499,523 35,685  (535,208) 1,764,184  2,055,208 308,847 37,103  (345,950) 2,055,208 
                      
Total Liabilities and Stockholders’ Equity $722,646 $3,162,997 $273,720 $(585,674) $3,573,689  $609,353 $3,405,291 $252,583 $(388,104) $3,879,123 
                      

- 12 --19-


M.D.C. Holdings, Inc.HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Supplemental Combining Balance Sheet
December 31, 20042005
(In thousands)
                                        
 Non-      Non-     
 Guarantor Guarantor Eliminating Consolidated  Guarantor Guarantor Eliminating Consolidated 
 MDC Subsidiaries Subsidiaries Entries MDC  MDC Subsidiaries Subsidiaries Entries MDC 
ASSETS
  
Corporate  
Cash and cash equivalents $389,828 $ $ $ $389,828  $196,032 $ $ $ $196,032 
Investment in and advances to parent and subsidiaries 552,635 1,246  (3,104)  (550,777)   728,608 1,248  (4,687)  (725,169)  
Other assets 85,177 207  (796)  84,588  102,768 162  (222)  102,708 
                      
 1,027,640 1,453  (3,900)  (550,777) 474,416  1,027,408 1,410  (4,909)  (725,169) 298,740 
                      
  
Homebuilding  
Cash and cash equivalents  12,252 4,709  16,961   5,527 11,144  16,671 
Restricted cash  6,742   6,742 
Home sales and other accounts receivable  34,144 1,477  (4,603) 31,018   160,028 1,462  (27,220) 134,270 
Inventories, net            
Housing completed or under construction  851,628   851,628   1,266,901   1,266,901 
Land and land under development  1,109,953   1,109,953   1,656,198   1,656,198 
Other assets  100,997 29,047  (14,500) 115,544   124,777 40,752  (26,000) 139,529 
                      
  2,108,974 35,233  (19,103) 2,125,104   3,220,173 53,358  (53,220) 3,220,311 
                      
Financial Services   190,524  190,524    265,844  265,844 
                      
Total Assets $1,027,640 $2,110,427 $221,857 $(569,880) $2,790,044  $1,027,408 $3,221,583 $314,293 $(778,389) $3,784,895 
                      
  
LIABILITIES
  
Corporate  
Accounts payable and accrued liabilities $109,550 $130 $48 $(15,550) $94,178  $152,692 $177 $47 $(27,049) $125,867 
Advances and notes payable — parent and subsidiaries  (1,057,552) 1,043,249 14,303     (1,892,320) 1,876,894 15,426   
Income taxes payable  (189,489) 236,466 4,002  50,979   (181,370) 275,602 8,424  102,656 
Senior notes, net 746,310    746,310  996,297    996,297 
                      
  (391,181) 1,279,845 18,353  (15,550) 891,467   (924,701) 2,152,673 23,897  (27,049) 1,224,820 
                      
  
Homebuilding  
Accounts payable and accrued liabilities  305,894 19,574  325,468   390,057 30,407  420,464 
Line of credit      
Homebuilding Line      
                      
  305,894 19,574  325,468   390,057 30,407  420,464 
                      
Financial Services   157,841  (3,553) 154,288    213,672  (26,170) 187,502 
                      
Total Liabilities  (391,181) 1,585,739 195,768  (19,103) 1,371,223   (924,701) 2,542,730 267,976  (53,219) 1,832,786 
                      
 
STOCKHOLDERS’ EQUITY
 1,418,821 524,688 26,089  (550,777) 1,418,821  1,952,109 678,853 46,317  (725,170) 1,952,109 
                      
Total Liabilities and Stockholders’ Equity $1,027,640 $2,110,427 $221,857 $(569,880) $2,790,044  $1,027,408 $3,221,583 $314,293 $(778,389) $3,784,895 
                      

- 13 --20-


M.D.C. Holdings, Inc.HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Supplemental Combining Statements of Income
(In thousands)
Three Months Ended September 30, 2005March 31, 2006
                                        
 Non-      Non-     
 Guarantor Guarantor Eliminating Consolidated  Guarantor Guarantor Eliminating Consolidated 
 MDC Subsidiaries Subsidiaries Entries MDC  MDC Subsidiaries Subsidiaries Entries MDC 
REVENUE
  
Homebuilding $ $1,150,650 $1,991 $(537) $1,152,104  $ $1,123,736 $1,492 $(374) $1,124,854 
Financial services   15,471  15,471    17,408  17,408 
Corporate 228  9  237  422  10  432 
Equity in earnings of subsidiaries 114,147    (114,147)   82,798    (82,798)  
                      
Total Revenues 114,375 1,150,650 17,471  (114,684) 1,167,812 
Total Revenue 83,220 1,123,736 18,910  (83,172) 1,142,694 
                      
  
COSTS AND EXPENSES
  
Homebuilding 307 980,333  (1,450)  (41,736) 937,454   (199) 1,002,635  (1,832)  (49,519) 951,085 
Financial services   9,207  9,207    9,095  9,095 
Corporate 27,825    27,825  30,033    30,033 
Corporate and homebuilding interest  (41,736)   41,736    (49,519)   49,519  
                      
Total Costs and Expenses  (13,604) 980,333 7,757  974,486   (19,685) 1,002,635 7,263  990,213 
                      
 
Income before income taxes 127,979 170,317 9,714  (114,684) 193,326  102,905 121,101 11,647  (83,172) 152,481 
Provision for income taxes  (6,989)  (61,689)  (3,658)   (72,336)  (7,484)  (45,216)  (4,360)   (57,060)
                      
NET INCOME
 $120,990 $108,628 $6,056 $(114,684) $120,990  $95,421 $75,885 $7,287 $(83,172) $95,421 
                      
Three Months Ended September 30, 2004March 31, 2005
                                        
 Non-      Non-     
 Guarantor Guarantor Eliminating Consolidated  Guarantor Guarantor Eliminating Consolidated 
 MDC Subsidiaries Subsidiaries Entries MDC  MDC Subsidiaries Subsidiaries Entries MDC 
REVENUE
  
Homebuilding $ $1,009,785 $1,779 $(172) $1,011,392  $ $919,893 $1,661 $(224) $921,330 
Financial services   14,627  14,627    11,598  11,598 
Corporate 102  8  110  978  10  988 
Equity in earnings of subsidiaries 103,679    (103,679)   83,073    (83,073)  
                      
Total Revenues 103,781 1,009,785 16,414  (103,851) 1,026,129 
Total Revenue 84,051 919,893 13,269  (83,297) 933,916 
                      
  
COSTS AND EXPENSES
  
Homebuilding 120 847,826  (511)  (29,134) 818,301  179 790,844 784  (32,987) 758,820 
Financial services   9,054  9,054    8,751  8,751 
Corporate 27,905    27,905  30,416    30,416 
Corporate and homebuilding interest  (29,134)   29,134    (32,987)   32,987  
                      
Total Costs and Expenses  (1,109) 847,826 8,543  855,260   (2,392) 790,844 9,535  797,987 
                      
 
Income before income taxes 104,890 161,959 7,871  (103,851) 170,869  86,443 129,049 3,734  (83,297) 135,929 
Provision for income taxes 183  (62,988)  (2,991)   (65,796)  (1,812)  (48,053)  (1,433)   (51,298)
                      
NET INCOME
 $105,073 $98,971 $4,880 $(103,851) $105,073  $84,631 $80,996 $2,301 $(83,297) $84,631 
                      

- 14 --21-


M.D.C. Holdings, Inc.HOLDINGS, INC.
Supplemental CombiningNotes to Unaudited Consolidated Financial Statements of Income
(In thousands)(Continued)
Nine Months Ended September 30, 2005
                     
          Non-       
      Guarantor  Guarantor  Eliminating  Consolidated 
  MDC  Subsidiaries  Subsidiaries  Entries  MDC 
REVENUE
                    
Homebuilding $  $3,102,077  $5,412  $(761) $3,106,728 
Financial services        39,881      39,881 
Corporate  1,432      27      1,459 
Equity in earnings of subsidiaries  292,745         (292,745)   
                
Total Revenues  294,177   3,102,077   45,320   (293,506)  3,148,068 
                
                     
COSTS AND EXPENSES
                    
Homebuilding  239   2,654,368   (516)  (112,148)  2,541,943 
Financial services        26,643      26,643 
Corporate  86,250            86,250 
Corporate and homebuilding interest  (112,148)        112,148    
                
Total Costs and Expenses  (25,659)  2,654,368   26,127      2,654,836 
                
                     
Income before income taxes  319,836   447,709   19,193   (293,506)  493,232 
Provision for income taxes  (11,592)  (166,118)  (7,278)     (184,988)
                
NET INCOME
 $308,244  $281,591  $11,915  $(293,506) $308,244 
                
Nine Months Ended September 30, 2004
                     
          Non-       
      Guarantor  Guarantor  Eliminating  Consolidated 
  MDC  Subsidiaries  Subsidiaries  Entries  MDC 
REVENUE
                    
Homebuilding $  $2,619,219  $4,882  $(476) $2,623,625 
Financial services        41,022      41,022 
Corporate  549      20      569 
Equity in earnings of subsidiaries  244,589         (244,589)   
                
Total Revenues  245,138   2,619,219   45,924   (245,065)  2,665,216 
                
                     
COSTS AND EXPENSES
                    
Homebuilding  695   2,238,853   (1,211)  (73,733)  2,164,604 
Financial services        27,647      27,647 
Corporate  67,991            67,991 
Corporate and homebuilding interest  (73,733)        73,733    
                
Total Costs and Expenses  (5,047)  2,238,853   26,436      2,260,242 
                
                     
Income before income taxes  250,185   380,366   19,488   (245,065)  404,974 
Provision for income taxes  (1,643)  (147,477)  (7,312)     (156,432)
                
NET INCOME
 $248,542  $232,889  $12,176  $(245,065) $248,542 
                

- 15 -


M.D.C. Holdings, Inc.
Supplemental Combining Statements of Cash Flows
(In thousands)
NineThree Months Ended September 30,March 31, 2006
                     
          Non-       
      Guarantor  Guarantor  Eliminating  Consolidated 
  MDC  Subsidiaries  Subsidiaries  Entries  MDC 
Net cash provided by (used in) operating activities
 $202,693  $(353,014) $42,251  $(373) $(108,443)
                
Net cash used in investing activities
  (684)  (929)  (25)     (1,638)
                
Financing activities
                    
Net increase (reduction) in borrowings from parent and subsidiaries  (347,298)  355,912   (8,614)      
Lines of credits                    
Advances  354,800            354,800 
Principal payments  (254,800)     (30,992)     (285,792)
Excess tax benefit from stock- based compensation  1,192               1,192 
Dividend payments  (11,590)        373   (11,217)
Proceeds from exercise of stock options  2,306            2,306 
                
Net cash provided by (used in) financing activities
  (255,390)  355,912   (39,606)  373   61,289 
                
Net increase (decrease) in cash and cash equivalents  (53,381)  1,969   2,620      (48,792)
Cash and cash equivalents                    
Beginning of period  196,032   5,527   12,972      214,531 
                
End of period $142,651  $7,496  $15,592  $  $165,739 
                
Three Months Ended March 31, 2005
                     
          Non-       
      Guarantor  Guarantor  Eliminating  Consolidated 
  MDC  Subsidiaries  Subsidiaries  Entries  MDC 
Net cash provided by (used in) operating activities
 $155,969  $(718,944) $9,860  $(761) $(553,876)
                
Net cash used in investing activities
  (6,232)  (11,579)  (307)     (18,118)
                
Financing activities
                    
Net increase (reduction) in borrowings from parent and subsidiaries  (724,478)  733,834   (9,356)      
Lines of credits                    
Advances  945,600      3,186      948,786 
Principal payments  (905,600)           (905,600)
Proceeds from senior notes, net  247,605            247,605 
Dividend payments  (23,144)        761   (22,383)
Proceeds from exercise of stock options  25,557            25,557 
                
Net cash provided by (used in) financing activities
  (434,460)  733,834   (6,170)  761   293,965 
                
Net increase (decrease) in cash and cash equivalents  (284,723)  3,311   3,383      (278,029)
Cash and cash equivalents                    
Beginning of year  389,828   12,252   6,070      408,150 
                
End of period $105,105  $15,563  $9,453  $  $130,121 
                
Nine Months Ended September 30, 2004
                                        
 Non-      Non-     
 Guarantor Guarantor Eliminating Consolidated  Guarantor Guarantor Eliminating Consolidated 
 MDC Subsidiaries Subsidiaries Entries MDC  MDC Subsidiaries Subsidiaries Entries MDC 
Net cash provided by (used in) operating activities
 $26,609 $(237,396) $17,030 $(475) $(194,232) $200,681 $(386,823) $68,033 $(224) $(118,333)
                      
Net cash used in investing activities
  (22,741)  (4,012)  (330)   (27,083)  (1,602)  (2,953)  (108)   (4,663)
                      
Financing activities
  
Net increase (reduction) in borrowings from parent and subsidiaries  (244,670) 254,687  (10,017)     (384,889) 390,441  (5,552)   
Lines of credits  
Advances 1,388,500    1,388,500       
Principal payments  (1,268,500)   (4,754)   (1,273,254)    (60,667)   (60,667)
Proceeds from senior notes, net  (14,116)   475  (13,641)      
Dividend payments  (6,812)     (6,812)  (6,733)   224  (6,509)
Proceeds from exercise of stock options 6,040    6,040  8,031    8,031 
                      
Net cash provided by (used in) financing activities
  (139,558) 254,687  (14,771) 475 100,833   (383,591) 390,441  (66,219) 224  (59,145)
                      
Net increase (decrease) in cash and cash equivalents  (135,690) 13,279 1,929   (120,482)  (184,512) 665 1,706   (182,141)
Cash and cash equivalents  
Beginning of year 163,133 6,335 4,097  173,565 
Beginning of period 389,828 5,061 6,070  400,959 
                      
End of period $27,443 $19,614 $6,026 $ $53,083  $205,316 $5,726 $7,776 $ $218,818 
                      

- 16 --22-


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 onForm 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 onForm 10-K for the year ended December 31, 2005.
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 Form 10-Q, and these designations include our subsidiaries unless we state otherwise. Our primary business is owning and managing subsidiary companies that build and sell homes under the name “Richmond American Homes.” OurIn addition, our financial services segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans primarily for our homebuyers, and American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third party insurance products to our homebuyers. In addition, weWe provide title agency services through American Home Title and Escrow Company (“American Home Title”) to our homebuyers in Virginia, Maryland, Colorado, Florida, Texas, Delaware, Illinois and West Virginia.
RESULTS OF OPERATIONScertain of our markets.
OverviewEXECUTIVE SUMMARY
     Our third quarter earnings were 15% above earnings forThe Company closed 3,198 homes during the three months ended March 31, 2006, compared with 3,158 during the same period lastin 2005. Our net income increased 12.7% to $95.4 million during the first quarter of 2006, compared with $84.6 million during the same period in 2005, and our consolidated revenue increased 22.4% to $1.1 billion for the three months ended March 31, 2006, compared with $933.9 million for the three months ended March 31, 2005.
     Beginning in the second half of 2005 and through the first four months of 2006, we have seen demand for new homes weaken in most of the markets in which we operate. Among the factors contributing to these market conditions are: uncertainty surrounding Federal Reserve policy on interest rates; increases in the cost of living, particularly higher energy costs; fluctuations in consumer confidence; reduced affordability of new homes; and homebuyer concerns about home price appreciation. As a result, in general, we have seen what appear to be speculative buyers exiting the new home market, increased supplies of new and existing homes for sale, moderating home price appreciation, higher incentives offered by our competition, reduced home orders per active subdivision and increased order cancellations.
     The level of our success in 2006 will depend largely on our ability to generate net home orders in this environment over the balance of the year driven by third quarter records for home closings, averageas we attempt to maximize our returns on homes we close during the year. Therefore, in response to these challenging market conditions, we have continued to modify and strengthen our sales and marketing strategies to address the specific needs and concerns of each submarket and subdivision. In many cases, this has required increases in the level of incentives we offer as a means of generating homebuyer interest and minimizing order cancellations. These incentives may reduce our selling prices revenueson new home orders and will impact adversely our Home Gross Margins (as defined below). These improvements resultedA continued slowdown in net home orders could have a greater negative impact on our Home Gross Margins and net income during the year. See “Forward-Looking Statements” below.

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     We have continued to maintain a high level of cash and borrowing capacity, reaching $1.27 billion at March 31, 2006, to support the growth of our business and to pursue opportunities that we believe will be presented by these changing market conditions. We reached this current capacity by increasing the commitment under our five-year, unsecured credit facility by 18% to $1.25 billion, with the ability to further increase this amount to $1.75 billion, subject to increases in bank commitments. This gives us the flexibility to allocate capital with the objective of producing the highest risk-adjusted returns. Consistent with this objective, during the first quarter, we continued to reallocate our financial and human capital away from growthTexas to markets such as Utah, where recently we acquired certain assets of Salisbury Homes to strengthen our position in one of our long-standing businessesfastest growing markets. See “Forward-Looking Statements” below.
     We remain focused on seeking to maintain approximately a two-year supply of lots to avoid overexposure to any single sub-market and to create flexibility to react to changes in Arizona, Virginiamarket conditions. We prefer to acquire finished lots using rolling options or in phases for cash. However, we will purchase land assets or acquire entitled land for development into finished lots when we determine that the risk is justified. We continue to closely monitor the number of lots we control and Maryland,the estimated returns from the sale of homes on those lots to confirm that our supply of lots and risk-adjusted returns are consistent with our operating strategy. As a result of this on-going evaluation, during the first quarter of 2006, we experienced an increase in write-offs of deposits and capitalized costs associated with lot option contracts which we chose not to exercise.
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 period. 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 well as our relatively new operations in Utahdeemed necessary. Actual results could differ from these estimates using different estimates and Florida. Additionally, the Company experienced a favorable income tax benefit attributable to the Internal Revenue Code Section 199 manufacturing deduction established by the American Jobs Creation Act of 2004. Also impacting our 2005 financial performance were production-related challenges in Arizona and Nevada that delayed the closing of approximately 450 homes from September until the 2005 fourth quarter. The Company is actively pursuing alternative arrangements in order to minimize the impact of these types of delaysassumptions, or if conditions are significantly different in the future. See “Forward-Looking Statements” below.
     OurThe accounting policies and estimates which we believe are critical and require the use of complex judgment in their application are those related to (1) stock-based compensation; (2) homebuilding inventory valuation; (3) estimates to complete land development and home ordersconstruction; (4) warranty costs; (5) revenue recognition; and (6) land options. With the exception of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), our other 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, 2005.
Stock-Based Compensation.Effective January 1, 2006, we adopted SFAS 123(R) and have included it as a critical accounting estimate and policy given the significant judgment and estimates required when applying SFAS 123(R). See Note 3 to the Unaudited Consolidated Financial Statements for a further discussion on share-based payment awards.
     Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires judgment, including estimating stock price volatility, annual forfeiture rates and the expected life of an award. We estimated the fair value for stock options granted during the three months ended September 30, 2005 increased 21%, compared withMarch 31, 2006 using the same period in 2004, primarily due to the 24% year-over-year increase in our average active subdivisions. Average home selling prices increased in most of our markets, particularly in Arizona, Maryland, Virginia and Florida, contributing to the 20% year-over-year rise in the overall average selling price of our third quarter home orders. As a result, the estimated value of home orders received during the third quarter of 2005 increased by more than 45% from the same period of a year ago.
     Our 280 active subdivisions at September 30, 2005 were 18% above the level of a year ago. However, this number was slightly below our expectations, primarily due to strong home orders in Nevada, California and Maryland that resulted in a number of subdivisions in these markets selling out earlier than anticipated. In addition, we experienced land development, permitting or architectural delays in certain subdivisions in Colorado, Arizona, California and Florida that postponed their opening for sales.
     We continued to focus on improving our financial position and enhancing shareowner value. We have positioned our Company for future growth through year-over-year increases in our lot supply and active subdivisions of 10% and 18%, respectively, and by increasing our cash and available borrowing capacity by 87% from this time last year to $1.07 billion. This improved financial flexibility from September 30, 2004 resulted from an aggregate of $500 million in debt issuances in December 2004 and July 2005, and the $350 million increase in the capacity of our homebuilding line of credit in January 2005. See “Forward-Looking Statements” below.Black-Scholes

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     We enteroption pricing model. The Black-Scholes option pricing model includes making estimates and judgments associated with the fourth quarter(1) expected stock option life; (2) expected volatility; (3) risk-free interest rate; and (4) dividend yield rate.
     The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our employee stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for the expected term of our employee stock options. The dividend yield assumption is based on our historical and expected dividend payouts. The expected life of employee stock options represents the weighted-average period for which the stock options are expected to remain outstanding and is derived primarily from historical exercise patterns.
     SFAS 123(R) requires an annual forfeiture rate to be estimated at the time of grant for all awards granted subsequent to January 1, 2006, and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from our estimate. Additionally, in accordance with SFAS 123(R), we have estimated an annual forfeiture rate to be applied to all share-based payment awards which were unvested as of December 31, 2005 with a Backlog (as defined below)in determining the number of 9,078 homes valued at an estimated $3.3 billion. We expectawards expected to continue to evaluate strategic land opportunitiesvest in the markets in which we operatefuture. We estimated the annual forfeiture rate to better position usbe 25% for future growth, while maintaining a conservative balance between our ownedshare-based payment awards granted to non-executive employees and optioned land positions0% for share-based payment awards granted to Executives and operating within our disciplined business model. By limiting our lot commitments and given our existing geographic profile, we have enhanced our ability to react to favorable or unfavorable changes in market conditions. See “Directors, based on the terms of their awards, as well as historical forfeiture experience.
Forward-Looking StatementsRESULTS OF OPERATIONS” below.
Consolidated Results
     The following discussion for both consolidated results of operations and segment results refers to the three and nine months ended September 30, 2005,March 31, 2006, compared with the same periods in 2004.March 31, 2005. The table below summarizes our results of operations (in(dollars in thousands, except per share amounts). Prior period earnings per share have been adjusted retroactively for the effect of the January 10, 2005 1.3 for 1 stock split.
                                              
 Three Months Ended Nine Months Ended    Three Months  
 September 30, Change September 30, Change Ended March 31, Change
 2005 2004 Amount % 2005 2004 Amount % 2006 2005 Amount %
Revenue $1,167,812 $1,026,129 $141,683  14% $3,148,068 $2,665,216 $482,852  18% $1,142,694 $933,916 $208,778  22%
Income Before Income Taxes $193,326 $170,869 $22,457  13% $493,232 $404,974 $88,258  22% $152,481 $135,929 $16,552  12%
Net Income $120,990 $105,073 $15,917  15% $308,244 $248,542 $59,702  24% $95,421 $84,631 $10,790  13%
Earnings Per Share:  
Basic $2.73 $2.47 $0.26  11% $7.03 $5.87 $1.16  20% $2.13 $1.95 $0.18  9%
Diluted $2.62 $2.36 $0.26  11% $6.70 $5.61 $1.09  19% $2.08 $1.86 $0.22  12%
     The increases in revenuesRevenue for the three and nine months ended September 30,March 31, 2006 increased by 22% from the first quarter of 2005, primarily were due to higher homebuilding revenues resulting from increases in home closings to 3,686 and 10,356, respectively, compared with 3,558 and 9,553, respectively, in 2004. Also contributing to the higher revenues were increasesa 21% increase in the average selling pricesprice of homes closed by $28,300 and $25,100 for the three and nine months ended September 30, 2005, respectively, compared with the same periods in 2004.
     The increases in incomeclosed. Income before income taxes for the three and nine months ended September 30, 2005 were the result of increasesrose $16.6 million in the operating profits from our homebuilding segmentfirst quarter of approximately $21.6 million and $105.8 million, respectively. The increase for the nine months ended September 30,2006, compared with 2005, partially was offset by higher corporate general and administrative expenses of approximately $18.3 million. Theseprimarily due to increases in homebuilding segment profits primarily resulted from the higher home closings and average selling prices described above, as well as increases in Home Gross Margins of 60 and 120 basis points for the three and nine-month periods, respectively.financial services operating profits.

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Homebuilding Segment
     The tables below set forth information relating to our homebuilding segment (dollars in thousands).
                  
 Three Months Ended Nine Months Ended    Three Months   
 September 30, Change September 30, Change  Ended March 31, Change 
 2005 2004 Amount % 2005 2004 Amount %  2006 2005 Amount % 
Home Sales Revenues $1,147,757 $1,007,134 $140,623  14% $3,094,141 $2,615,100 $479,041  18%
Home Sales Revenue $1,119,308 $916,831 $202,477  22%
Operating Profit $214,650 $193,091 $21,559  11% $564,785 $459,021 $105,764  23% $173,769 $162,510 $11,259  7%
Average Selling Price Per Home Closed $311.4 $283.1 $28.3  10% $298.8 $273.7 $25.1  9% $350.0 $290.3 $59.7  21%
Cancellation Rate  31.0%  20.2%  10.8% 
Home Gross Margins  28.8%  28.2%  0.6%  28.6%  27.4%  1.2%   27.2%  28.4%  -1.2% 
  
Orders For Homes, net(units)
  
Arizona 798 951  (153)  -16% 3,040 3,104  (64)  -2% 919 1,152  (233)  -20%
California 504 311 193  62% 1,737 1,764  (27)  -2% 544 531 13  2%
Colorado 469 521  (52)  -10% 1,727 1,811  (84)  -5% 451 664  (213)  -32%
Delaware Valley 39 43  (4)  -9%
Florida 238 93 145  156% 917 292 625  214% 272 320  (48)  -15%
Illinois 53 5 48 N/A 113 8 105 N/A  44 29 15  52%
Maryland 89 52 37  71% 365 255 110  43% 152 145 7  5%
Nevada 829 454 375  83% 2,788 2,411 377  16% 779 750 29  4%
Pennsylvania/New Jersey/Delaware 56 1 55 N/A 156 1 155 N/A 
Texas 162 152 10  7% 672 647 25  4% 67 321  (254)  -79%
Utah 257 187 70  37% 741 573 168  29% 339 248 91  37%
Virginia 96 198  (102)  -52% 673 720  (47)  -7% 194 343  (149)  -43%
                        
Total 3,551 2,925 626  21% 12,929 11,586 1,343  12% 3,800 4,546  (746)  -16%
                        
  
Homes Closed(units)
  
Arizona 895 808 87  11% 2,550 2,343 207  9% 778 796  (18)  -2%
California 475 631  (156)  -25% 1,238 1,642  (404)  -25% 464 386 78  20%
Colorado 599 583 16  3% 1,615 1,603 12  1% 399 448  (49)  -11%
Delaware Valley 31  31 N/A 
Florida 252 96 156  163% 832 251 581  231% 252 295  (43)  -15%
Illinois 19  19 N/A 40  40 N/A  36 5 31 N/A 
Maryland 106 90 16  18% 260 251 9  4% 74 74   0%
Nevada 616 690  (74)  -11% 1,851 1,887  (36)  -2% 675 609 66  11%
Pennsylvania/New Jersey/Delaware 17  17 N/A 18  18 N/A 
Texas 214 222  (8)  -4% 616 440 176  40% 139 165  (26)  -16%
Utah 239 188 51  27% 640 416 224  54% 173 168 5  3%
Virginia 254 250 4  2% 696 720  (24)  -3% 177 212  (35)  -17%
                        
Total 3,686 3,558 128  4% 10,356 9,553 803  8% 3,198 3,158 40  1%
                        

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 September 30, December 31, September 30,  March 31, December 31, March 31, 
 2005 2004 2004  2006 2005 2005 
Backlog(units)
  
Arizona 2,633 2,143 2,094  2,240 2,099 2,499 
California 1,306 807 1,241  845 765 952 
Colorado 804 692 942  629 577 908 
Delaware Valley 189 181 66 
Florida 723 638 685  619 599 663 
Illinois 91 18 8  88 80 42 
Maryland 330 225 273  329 251 296 
Nevada 1,683 746 1,410  1,127 1,023 887 
Pennsylvania/New Jersey/Delaware 161 23 1 
Texas 312 256 350  166 238 412 
Utah 390 289 308  504 338 369 
Virginia 645 668 854  398 381 799 
              
Total 9,078 6,505 8,166  7,134 6,532 7,893 
              
  
Estimated Backlog Value $3,290,000 $1,920,000 $2,480,000 
Backlog Estimated Sales Value $2,700,000 $2,440,000 $2,430,000 
              
Estimated Average Sales Price of Homes in Backlog $362.4 $295.2 $303.7 
Estimated Average Selling Price of Homes in Backlog $378.5 $373.5 $307.9 
              
 
Active Subdivisions  
Arizona 46 32 30  58 54 42 
California 28 22 21  42 34 28 
Colorado 56 53 56  50 57 55 
Delaware Valley 8 7 4 
Florida 19 18 22  26 19 18 
Illinois 8 1 1  7 8 4 
Maryland 10 11 10  15 11 14 
Nevada 47 31 26  41 43 34 
Pennsylvania/New Jersey/Delaware 6 2  
Texas 24 24 24  18 21 24 
Utah 16 22 22  21 18 18 
Virginia 20 26 26  25 20 24 
              
Total 280 242 238  311 292 265 
              
Average for quarter ended 281 237 226  299 287 252 
              
Average for nine months ended 269 229 218 
       
     Home Sales RevenuesRevenue— Home sales revenuesrevenue increased for both22% during the third quarter and first ninethree months of 2005,ended March 31, 2006, compared with the same periodsfirst quarter of 2005, primarily due to a 21% increase in 2004, as a result of the increases in average selling prices and the numberprice of homes closed, as discussed below.closed.
     Homes Closed —HomeOur home closings were 4% and 8% higher forrelatively constant in the thirdfirst quarter and first nine months of 2005, respectively,2006, compared with the same periodsperiod in 2004. For2005. In our California and Nevada markets, we closed 1,139 homes during the three and nine months ended September 30, 2005,March 31, 2006, compared with 995 homes closed increased by a combined 27%for the same period in 2005. The increases in California and 34%, respectively, in Arizona, Florida and Utah,Nevada primarily were due to higher year-over-year Backlogshaving more homes in Backlog under construction at the beginning of the 2005 periods resulting from2006 first quarter than at the strong demand for newbeginning of 2005. In our Colorado, Florida and Virginia markets, we closed 828 homes in these markets. In addition, home closings in Florida were higher induring the 2005 periods as a result of our September 2004 acquisition of certain assets of Watson Home Builders, Inc. The increases in Arizona home closingsthree months ended March 31, 2006, compared with 955 homes for the 2005 third quarter and first nine months were impacted by labor and material shortages that delayed the closing of approximately 250same period in 2005. In Colorado, homes until the 2005 fourth quarter. Home closings were lower in California and Nevada for the third quarter and first nine months of 2005,closed decreased primarily due to lower year-over-year Backlogsincreased competition for new home orders, as well as fewer homes in Backlog at the beginning of the 2006 first quarter. In Virginia and Florida, we closed fewer homes primarily due to startincreases in home order cancellations, as discussed below, as well as having fewer homes in Backlog at the periods. Our Nevada home closings forbeginning of the 2005 periods also were reduced byfirst quarter of 2006, compared with the beginning of 2005.

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approximately 200 home closings that moved to the 2005 fourth quarter due to scheduling delays with the local power company.
     Average Selling Prices Per Home Closed- The $28,300 and $25,100 increasesDuring the first quarter of 2006, we experienced a 21% increase in the average selling prices in the third quarter and first nine months of 2005, respectively,price, compared with the same periodsperiod in 2004, were attributable to higher2005, as the average selling prices increased in all of our markets. Themarkets except Illinois. Increases were most notable in Maryland, Virginia and Florida, where the average selling pricesprice for homes closed increased in Virginia and California were particularly strong, both increasing over $50,000excess of $110,000, primarily due to a combination of home price appreciation, as well as changes in the 2005 third quarter and over $70,000product mix. Approximately 25% of our total homes closed for the first ninethree months of 2005. In our relatively newer markets of Floridaended March 31, 2006 and Utah,2005 were in Arizona, where we experienced an $81,900 increase in average selling prices increasedprice during the first quarter of 2006, primarily due to home price appreciation experienced in this market during 2004 and 2005. Additionally, we closed an additional 78 homes in our California markets during the first quarter of 2006, compared with the first quarter of 2005, where the average selling price per home closed exceeded the Company average by more than $40,000 for the 2005 third quarter and by more than $25,000 for the first nine months of 2005, compared with the same periods in 2004. These and our other average selling price increases more than offset the impact of the change in mix of home closings that resulted from reduced home closings in California and higher home closings in our lower-priced Florida, Utah and Arizona markets.$180,000.
     The following table displays our average selling price per home closed, by market (in thousands).
                                
 Three Months Ended September 30, Nine Months Ended September 30,  Three Months Ended March 31, Change
 2005 2004 2005 2004  2006 2005 Amount %
Average Selling Price
 
Arizona $221.2 $192.9 $215.0 $192.1  $285.2 $203.3 $81.9  40%
California 510.5 452.6 509.2 427.5  533.3 518.5 14.8  3%
Colorado 287.7 264.0 285.7 264.7  296.5 282.5 14.0  5%
Delaware Valley 412.0  N/A N/A  
Florida 226.2 182.3 205.3 179.5  297.7 186.4 111.3  60%
Illinois 411.7 N/A 426.5 N/A  363.3 401.9  (38.6)  -10%
Maryland 513.5 397.3 458.6 404.5  570.3 423.7 146.6  35%
Nevada 307.6 258.3 298.1 232.6  323.1 288.8 34.3  12%
Pennsylvania/New Jersey/Delaware 362.2 N/A 361.3 N/A 
Texas 162.7 155.0 159.1 158.1  169.0 155.1 13.9  9%
Utah 226.9 180.1 219.0 177.8  260.7 212.9 47.8  22%
Virginia 515.9 447.8 503.4 430.1  596.2 484.2 112.0  23%
         
Company average $311.4 $283.1 $298.8 $273.7  $350.0 $290.3 $59.7  21%
         
     Home Gross Margins- We define “Home Gross Margins” to mean home sales revenue less home cost of sales (which primarily includes land and construction costs, capitalized interest, financingclosing costs, and a reserve for warranty expense) as a percent of home sales revenue. Home Gross Margins improved to 28.8% and 28.6% forwere 27.2% during the three and nine months ended September 30, 2005, respectively,first quarter of 2006, compared with 28.2% and 27.4% for28.4% during the same periods during 2004. These improvementsperiod in 2005. This decrease primarily were dueis attributable to the continued strong demand for homes and increased selling prices in many of our markets. We experienced particularly strong year-over-year improvements inreduced Home Gross Margins in Virginia, Maryland,our Nevada and California markets, offset in part by an increase in our Arizona Utah and Florida, which offset the impact of the anticipated easing ofmarkets. Home Gross Margins in Nevada fromdecreased, primarily due to increases in the extraordinary levels during 2004. These increases tocost of land and construction materials used in building new homes. In addition, our Home Gross Margins partially were offset byin California moderated from the impactlevels achieved in the first quarter of a greater number2005, due in part to the earlier close-out of homes closed for the three and nine months ended September 30, 2005 in markets such as Utah and Florida, wherecertain high margin subdivisions. In Arizona, Home Gross Margins were lower thanincreased, primarily resulting from an increase in the Company average and fewer home closings in Nevada, where Home Gross Margins significantly exceeded the Company average.selling price of homes closed.
     Future Home Gross Margins both overall and in each of our markets, may be impacted by, among other things: (1) increased competition, which could adversely affect our ability to raise home prices and incentive levels;maintain lower levels of incentives; (2) increases in the costs of subcontracted labor, finished lots, building materials, (for example, lumber and steel have significantly increased year-over-year), and other resources, to the extent that market conditions prevent the recovery of increased costs through higher selling prices; (3) adverse weather; (4) shortages of subcontractor labor, finished lots and other resources, which can result in delays in the delivery of homes under construction and increases in related cost of sales; (5) the impact of changes in demand for housing in our markets, particularly Nevada;Nevada, California and Arizona; (6) the impact of us being able to sell mortgage loans on a timely basis given the increase in low or no down

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payment products being offered by HomeAmerican, as this may affect the timing of recognizing the profit on homes closed that do not qualify for the full accrual method as defined in SFAS 66; and (7) other general risk factors. See “Forward-Looking Statements” below.

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     Orders for Homes- Home— During the three months ended March 31, 2006, we received 3,800 net home orders, compared with 4,546 net home orders for the same period in 2005. This order decrease was most notable in our Texas market, which is consistent with our decision not to purchase additional lots in this market. Additionally, we received 1,385 net home orders during the three months ended March 31, 2006 in Arizona, Florida and Virginia, compared with 1,815 net home orders in these markets during the thirdsame period in 2005. These declines primarily resulted from reductions in the number of gross home orders received per active subdivision from record first quarter order levels in 2005, combined with significant increases in home order cancellations, as discussed below. Additionally in Virginia, the number of average active subdivisions declined in the 2006 first quarter, compared with the same period in 2005. In Colorado, net home orders decreased as a result of increased competition, as well as an increase in cancellations as discussed below. These decreases were offset in part by an increase of 37% in net home orders in Utah during the first quarter of 2006, compared with the same period in 2005, increased from 2004 levels in most of our markets, led by Nevada and California, mainly dueprimarily attributable to year-over-year increases in active subdivisions and the continued strong demand for new homes in these two markets. In addition, we received 604 netthis market.
Cancellation Rate —We define home orders in the 2005 third quarter from our newer markets in Florida, Pennsylvania/New Jersey/Delaware, Utah and Illinois, compared with 286order “Cancellation Rate” as total cancelled home orders from these marketsorder contracts during the 2004 third quarter. These increases partially were offset by a decline in home orders in Virginia, due in part tospecified period of time as a temporary decline in the numberpercent of active subdivisions, and in Arizona, compared with the exceptional order levels experienced during the same periods in 2004 in this market. Additionally, in Colorado, we experienced a more competitive environment that resulted in a year-over-year decline in orders for the third quarter 2005. The 21% increase in total home orders combined with a $57,000 increase in the average selling price in the third quarter home orders resulted in the estimated sales value of orders increasing by 45% to $1.2 billionreceived during such time period. Our Cancellation Rates were 31.0% and 20.2% for the three months ended September 30,March 31, 2006 and 2005, respectively. Cancellation Rates during the first quarter of 2006, compared with $840 million for the same period in 2004.
     For the first nine monthsquarter of 2005, home orders particularly were strongincreased significantly in Nevadacertain markets, most notably Virginia, Arizona, California and Maryland, primarily due to the continued strong demand for new homesFlorida. The increases in Cancellation Rates in these markets. In addition, we received 1,927 netmarkets has resulted primarily from what appears to be an exit of speculators from the new home ordersmarket, an increased supply of homes on the market which has made it more difficult for homebuyers to sell their existing homes, slower home price appreciation levels, increased incentives being offered which homebuyers in Backlog did not receive at the first nine monthstime of 2005placing their home order, and other factors related to higher mortgage interest rates. Additionally, in Colorado, an increased supply of homes available to be purchased resulted in an elevated number of order cancellations from our newer marketsprospective homebuyers who were unable to sell their existing home in Florida, Pennsylvania/New Jersey/Delaware, Utah and Illinois, compared with 874 home orders from these markets in the comparable period in 2004. These increases partially were offset by lower home orders in Arizona, Colorado and Virginia for the same reasons discussed above.a more competitive sales environment.
     Backlog- Record home orders received during the first nine months of 2005, combined with the delayed home closings in Arizona and Nevada discussed previously, resulted in— We define “Backlog” as homes under contract but not yet delivered (“Backlog”) increasing by 11%delivered. At March 31, 2006 and 2005, we had 7,134 and 7,893 homes in Backlog, respectively. Because our Backlog equals total home orders less home order cancellations and homes closed, refer to 9,078 units at September 30, 2005, compared with 8,166 units at September 30, 2004. Assuming no significantthe previous discussion on “Homes Closed” and “Orders for Homes” for an explanation of the change in market conditions or mortgage interest rates, we expect approximately 70% to 75%the number of our September 30, 2005 Backlog to close under existing signed sales contracts duringhomes in Backlog. Although the fourth quarter of 2005 and first half of 2006. The balancenumber of homes in Backlog is not expected to close under existing contracts due to cancellation. See “Forward-Looking Statements” below.
     Increases in bothdecreased approximately 10% from March 31, 2005, higher average selling prices andfor homes in Backlog units resulted in the estimated Backlog sales value increasing by 33%approximately 11% to $3.3$2.70 billion at September 30, 2005,March 31, 2006, compared with $2.5$2.43 billion at September 30, 2004. The average selling price of homes in our Backlog at September 30, 2005 increased to approximately $362,400 from $340,800 at June 30,March 31, 2005. While sales price increases played a part, this rise also can be attributed to changes in the Backlog mix, the most significant of which were increased units and average selling prices in California and Nevada and decreased units in Colorado as a percentage of total Backlog.
     Marketing- Marketing expenses (which include sales commissions, advertising, amortization of deferred marketing costs, model home expenses and other costs) totaled $56.8increased $6.7 million and $158.7to $29.0 million respectively, for the three and nine months ended September 30, 2005, compared with $49.9 million and $137.7 million, respectively, for the same periods in 2004. The higher costs in 2005March 31, 2006, primarily were due to (1) increases of $4.4(1) $2.5 million in advertising expenses; (2) $2.3 million in amortization of deferred marketing costs; and $13.6(3) $1.5 million respectively, in sales commissions resulting from our higher home sales revenues; (2) increases of $1.0 million and $3.3 million, respectively, for salaries and benefits, primarily attributable to our expanding homebuilding operationsincrease in new and existing home markets; and (3) increases of $2.1active subdivisions.
Commissions —Commission expenses (which include direct incremental commissions paid for closed homes) increased by 27% to $32.8 million and $3.7 million, respectively, for product and design center advertising for the thirdthree months ended March 31, 2006 from $25.8 million for the three months ended March 31, 2005. This increase primarily was attributable to the 21% increase in the average selling price of homes closed during the first quarter and first nine months of 2005,2006, compared with the same periods in 2004.first quarter of 2005.

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     General and Administrative- General and administrative expenses increased to $62.6were $72.2 million and $172.9$53.1 million respectively, forduring the three and nine months ended September 30,March 31, 2006 and 2005, compared with $43.9respectively. The $19.1 million and $127.5increase primarily resulted from an increase of approximately $7.8 million respectively, for the same periods in 2004, primarily due to increases in compensation and related benefits and other employee benefit-related costs, as well as $1.3 million in office-related expenses associated with the expansionexpanded operations in several of our operationsmarkets, most notably California, Arizona and Nevada. Also contributing to this increase were $2.9 million of additional due diligence costs and deposits on land projects under option which we elected not to exercise and a $3.5 million increase in the majority ofsupervisory fees (see Note 10 to our markets.
Title Operations
     American Home Title provides title agency services to MDC homebuyers in Virginia, Maryland, Colorado, Florida, Texas, Delaware, Illinois and West Virginia. We are evaluating opportunities to provide title agency services in our other markets. Income before income taxes from title operations was $1.3 million and $3.3 million, respectively, for the three and nine months ended September 30, 2005, compared with $1.3 million and $3.2 million, respectively, for the same periods in 2004.Unaudited Consolidated Financial Statements).
Land Inventory
     The table below shows the carrying value of land and land under development, by market (dollars in(in thousands).
                     
 September 30, December 31, September 30, March 31, December 31, March 31, 
 2005 2004 2004 2006 2005 2005 
Arizona $238,685 $168,489 $129,969 $288,025 $260,968 $258,775 
California 368,134 277,360 249,460 535,850 493,101 305,283 
Colorado 131,827 139,554 122,178 157,636 153,844 144,068 
Delaware Valley 39,303 46,561 31,392 
Florida 46,017 27,926 22,015 87,055 68,831 31,321 
Illinois 34,419 33,656 22,909 29,124 33,421 37,096 
Maryland 93,826 69,523 63,561 81,829 89,245 91,589 
Nevada 254,538 209,544 192,722 382,769 336,982 240,809 
Pennsylvania/New Jersey/Delaware 37,460 28,916 8,416
Texas 18,474 19,420 19,191 11,884 15,511 25,151 
Utah 49,239 35,104 35,959 90,044 62,191 37,076 
Virginia 95,271 100,461 72,609 111,093 95,543 104,680 
             
Total $1,367,890 $1,109,953 938,989 $1,814,612 $1,656,198 $1,307,240 
             

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     The table below shows the total number of lots owned and lots controlled under option agreements by market, along with the total non-refundable option deposits (dollars in thousands).
                        
 September 30, December 31, September 30,  March 31, December 31, March 31, 
 2005 2004 2004  2006 2005 2005 
Lots Owned  
Arizona 7,229 5,657 5,020  7,686 7,385 8,563 
California 2,632 2,646 2,652  3,622 3,367 2,610 
Colorado 3,560 3,993 3,866  3,508 3,639 3,951 
Delaware Valley 402 471 340 
Florida 970 594 442  1,458 1,201 573 
Illinois 474 508 703  380 430 537 
Maryland 734 650 602  624 679 760 
Nevada 3,482 3,916 4,040  4,139 4,055 4,085 
Pennsylvania/New Jersey/Delaware 367 312 51 
Texas 569 642 631  365 471 769 
Utah 881 862 964  1,295 964 836 
Virginia 762 980 938  784 783 997 
              
Total 21,660 20,760 19,909  24,263 23,445 24,021 
              
  
Lots Controlled Under Option  
Arizona 3,830 5,494 4,416  3,592 3,650 2,251 
California 3,139 1,782 1,574  1,921 2,005 1,454 
Colorado 3,187 1,866 1,759  2,064 2,198 1,630 
Delaware Valley 1,277 1,283 583 
Florida 3,411 2,980 2,889  2,686 3,202 3,406 
Illinois 186 203 284  186 186 336 
Maryland 1,156 1,206 1,103  1,148 1,173 1,043 
Nevada 1,639 1,859 1,785  665 1,400 1,379 
Pennsylvania/New Jersey/Delaware 1,111 723 933 
Texas 951 1,694 2,379  80 80 1,381 
Utah 568 216 291  454 418 549 
Virginia 3,149 3,141 2,647  3,231 3,224 2,883 
              
Total 22,327 21,164 20,060  17,304 18,819 16,895 
              
 
Total Lots Owned and Controlled (excluding lots in work-in-process) 43,987 41,924 39,969  41,567 42,264 40,916 
              
  
Non-refundable Option Deposits  
Cash $50,681 $41,804 $33,748  $44,108 $48,157 $39,049 
Letters of Credit 25,728 22,062 16,730  19,240 23,142 20,525 
              
Total Non-refundable Option Deposits $76,409 $63,866 $50,478  $63,348 $71,299 $59,574 
              
     At September 30, 2005,March 31, 2006, we owned a total of 21,66024,263 lots. Of these total lots owned, 9,953 were finished, of which approximately 10,100 lots were finished. In addition, over 1,500 of these finished2,058 lots were subject to home sales contracts for which construction had not started. The remaining 11,56014,310 lots arewere unfinished and in the process of being developed for future home sales. We believe the Company is well-positioned for future growth, consistent with our disciplined operating approach of maintaining control of approximately a two-year supply of lots. See “Forward-Looking Statements” below.

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Insurance Operations.Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), was organized as a risk retention group under the Federal Liability Risk Retention Act of 1981. Allegiant is licensed as a Class 3 stock insurance company by the Division of Insurance of the State of Hawaii and began operations in June 2004. Allegiant provides general liability coverage for products and completed operations to the Company and to subcontractors of homebuilding subsidiaries of MDC. Pursuant to an agreement effective June 30, 2004, StarAmerican Insurance Ltd., a Hawaii corporation and a wholly owned subsidiary of MDC, agreed to re-insure all Allegiant claims in excess of $50,000 per occurrence, up to $3.0 million. The results of insurance operations were not material for any of the periods presented.
Financial Services Segment
     The table below sets forth information relating to our financial services segment operations (in thousands).
                                                
 Three Months Ended Nine Months Ended    Three Months  
 September 30, Change September 30, Change  Ended March 31, Change
 2005 2004 Amount % 2005 2004 Amount %  2006 2005 Amount %
Mortgage loan origination fees $8,433 $6,801 $1,632  24% $21,428 $17,464 $3,964  23%
 
Gains on sales of mortgage servicing, net $1,121 $406 $715  176% $2,590 $1,543 $1,047  68%
 
Broker origination fees $2,080 $2,168 $(88)  -4%
Gains on sales of mortgage loans, net $4,356 $5,595 $(1,239)  -22% $11,372 $16,905 $(5,533)  -33% $13,027 $7,898 $5,129  65%
 
Operating Profit $6,264 $5,573 $691  12% $13,238 $13,375 $(137)  -1% $8,313 $2,847 $5,466  192%
 
Principal amount of loans originated $470,636 $426,227 $44,409  10% $1,197,053 $1,144,913 $52,140  5% $526,231 $305,193 $221,038  72%
 
Principal amount of loans brokered $225,628 $188,378 $37,250  20% $666,939 $497,435 $169,504  34% $157,243 $213,352 $(56,109)  -26%
 
Capture Rate  50%  53%  -3%  46%  54%  -8%   56%  41%  15% 
Including brokered loans  73%  75%  -2%  72%  75%  -3%   72%  68%  4% 
 
Mortgage product (% of loans originated)              
Fixed rate  58%  57%  1%  56%  68%  -12%   49%  56%  -7% 
 
Adjustable rate  42%  43%  -1%  44%  32%  12% 
Adjustable rate — interest only  44%  32%  12% 
Adjustable rate — other  7%  12%  -5% 
     Financial services operating profit forprofits increased $5.5 million during the thirdfirst quarter of 2005 increased,2006, compared with the same period in 2004,2005. The higher operating profits primarily was due to an increase in loan origination fees earned in connection with the record level of homes closed by the homebuilding segment$5.1 million in the third quarter. This increase partially was offset by lower gains on sales of mortgage loans. For the nine months ended September 30, 2005, operating profits remained relatively consistent with 2004, as the Company experienced a more competitive mortgage pricing environment, which resulted in lower gains on sales of mortgage loans that were offset partially byresulting from the 15% increase in the Capture Rate (as defined below), as well as an increase in loan origination fees. This competitive environment contributed to HomeAmerican originating a higher percentagethe average principal amount of less-valuable adjustable rateloans originated. Also impacting our gains on sales of mortgage loans in the first nine monthswas our ability to sell to third-party investors a significant amount of 2005,mortgage loans originated by HomeAmerican pursuant to an early purchase program, which was offset partially by brokering a lower percentageinitiated during the fourth quarter of total loans processed to third party mortgage companies by virtue of HomeAmerican’s expansion of available product offerings.2005.
     The principal amount of originated mortgage loans increased 10% and 5%, respectively, in72% during the thirdfirst quarter and first nine months of 2005,2006, compared with the same periodsperiod in 2004. These increases2005. This increase primarily wereis due to the record levels of homes closed and higher average selling prices by the homebuilding segment in the 2005 periods, offset partially by declinespreviously discussed increase in our Capture Rate.Rate, as well as an increase in the average principal amount of loans originated by HomeAmerican. The increase to our Capture Rate primarily is due to having more loan products offered through HomeAmerican, which include among other things, interest only loans and mortgage loans with low or no down payments, as well as increasing management focus to capture homebuyer mortgage loans rather than brokering these loans to third parties. The Capture Rate is defined as the number of mortgage loans originated by HomeAmerican for our homebuyers as a percentagepercent of total MDC home closings. Brokered loans, for which HomeAmerican receivesreceived a fee, have been excluded from the computation of the Capture Rate. Our homebuyers were the source of approximately 99% of the principal

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amount of mortgage loans originated and brokered by HomeAmerican in the third quarter and first nine months of 2005.
     Forward Sales Commitments — HomeAmerican’s operations are affectedHomeAmerican is exposed to market risks related to fluctuations in interest rates on its mortgage loan inventory. Derivative instruments utilized in the normal course of business by changes inHomeAmerican include forward sales securities commitments, private investor sales commitments and commitments to originate mortgage interest rates.loans. HomeAmerican utilizes forward mortgage securities contractsthe sales commitments to manage the price risk related toon fluctuations in interest rates on our mortgage loans held in inventoryowned and rate-lockedcommitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments utilized by us and are generally settled within 45 days of origination. Certain mortgage loans in process that had not closed.originated by HomeAmerican are able to be sold pursuant to the aforementioned early purchase program and generally are settled within five days of origination. Due to this hedging philosophy, the market risk associated with HomeAmerican’s mortgages is limited. Reported gains on sales of mortgage loans may vary significantly from period to period depending on the volatility in the interest rate market.
Insurance Operations — American Home Insurance provides homeowners, auto and other types of casualty insurance in each of our markets. The results of its operations were not material for any of the periods presented. See “Forward-Looking Statements” below.
Other Operating Results
     Interest ExpenseExpense — We capitalize interest incurred on our corporate and homebuilding debt during the period of active development and through the completion of construction of our homebuilding inventories. Corporate and homebuilding interest incurred but not capitalized is reported as interest expense. Interest incurred by the financial services segment is charged to interest expense, which is deducted from interest income and reported as net interest income in Note F10 to our unauditedUnaudited Consolidated Financial Statements. For a reconciliation of interest incurred, capitalized and expensed, see Note D7 to our unauditedUnaudited Consolidated Financial Statements.
     Corporate General and Administrative Expenses — Corporate general and administrative expenses totaled $27.8$28.4 million and $86.3$30.3 million respectively, duringfor the three months ended March 31, 2006 and nine months2005, respectively. The $1.9 million decrease primarily was attributable to an increase of 2005, compared with $27.9$3.5 million in supervisory costs which are charged to the Homebuilding and $68.0 million, respectively, for the same periods of 2004. The 2005 third quarterFinancial Services segments (see Note 10 to our Unaudited Consolidated Financial Statements) and first nine monthsa reduction in other general and administrative expenses, including professional services, information technology costs and travel expenses. These expense reductions were impactedoffset in part by increasesthe adoption of SFAS 123(R) in compensation-related costJanuary 2006, which resulted in an increase of approximately $3.6$3.0 million in stock-based compensation expense.
Related Party Expenses— Related party expenses were $1.7 million and $21.5 million, respectively, resulting$100,000 during the three months ended March 31, 2006 and 2005, respectively. The 2006 increase resulted from our higher profitability, partially offset by decreases in contributionscommitment to give a charitable contribution to the M.D.C. Holdings, Inc. CharitableMDC/Richmond American Homes Foundation of $2.0 million and $5.0 million, respectively.(the “Foundation”). During the 2005 first quarter, no charitable contribution commitment was made to the Foundation.
     Income Taxes —MDC’s overallOur effective income tax rates ofrate was 37.4% and 37.5% for the three and nine months ended September 30, 2005, respectively, differed fromMarch 31, 2006, relatively consistent with the 38.5% and 38.6%, respectively,37.7% effective income tax rate for the same periodsperiod in 2004, primarily2005. Accordingly, our income tax expense rose $5.8 million in the first quarter of 2006, compared with the same period in 2005, due to the Internal Revenue Code Section 199 manufacturing deduction established by the American Jobs Creation Act of 2004, as well as a reduction$16.6 million increase in our state effective income tax rate. These reduced effectivebefore income tax rates resulted in benefits of $2.1 million and $5.4 million for the three and nine months ended September 30, 2005, respectively.taxes.
LIQUIDITY AND CAPITAL RESOURCES
     We use our liquidity and capital resources to (1) support our operations, including our homebuilding inventories; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Liquidity and capital resources are generated internally from operations and from external sources. Additionally, we have an effective shelf registration statement, which has allowedallows us to issue equity, debt or hybrid securities up to $1.0 billion, with $500 million having been initially earmarked for our medium termmedium-term senior notes program. In December 2004, we issued $250 million principal amount of 53/8% medium term senior notes due 2014, and in July 2005, we issued another $250 million principal amount of 53/8% medium term senior notes due 2015. This issuance reduced our total capacity under our shelf registration statement to $500 million and extinguished our initial capacity for our medium term

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senior notes program. In July 2005, we designated $250 million of our shelf registration statement’s remaining $500 million capacity for our medium term senior notes program.
Capital Resources
     Our capital structure is 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 termmedium-term senior notes due 2014 and 2015 and our homebuilding line of credit (the “Homebuilding Line”); and (3) current financing, primarily our mortgage lending line of credit (the “Mortgage Line”). Based upon our current capital resources and additional capacity available under existing credit agreements, we believe that our current financial condition is both balanced to fit our current operating structure and adequate to satisfy our current and near-term capital requirements, including the acquisition of land and expansion into new markets. We continue to monitor and evaluate the adequacy of our Homebuilding Line and Mortgage Line. However, we believe that we can meet our long-term capital needs (including meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources, assuming that no significant adverse changes in our business or capital and credit markets occur as a result of the various risk factors described elsewhere in this report.Item 1A “Risk Factors Relating to our Business” which are included in our Annual Report on Form 10-K for the year ended December 31, 2005. See “Forward-Looking Statements” below.
Lines of Credit and Senior Notes
     Homebuilding— Our Homebuilding Line is an unsecured revolving line of credit with a group of lenders for support of our homebuilding operations. During January 2005, the Company modifiedOn March 22, 2006, we amended and restated the Homebuilding Line, increasing the aggregate commitment amount to $1.058$1.250 billion, while maintainingand extending the maturity date of April 7, 2009.to March 21, 2011. The facility’s provision for letters of credit is available in the aggregate amount of $350$500 million. The modifiedamended and restated facility permits an increase in the maximum commitment amount to $1.25$1.750 billion upon the Company’sour request, subject to receipt of additional commitments from existing or additional participant lenders. Interest rates on outstanding borrowings are determined by reference to LIBOR with a spread from LIBOR, which is determined based on changes in our credit ratings and leverage ratio, or to an alternate base rate. At September 30, 2005, the CompanyMarch 31, 2006, we had $40.0$100.0 million of borrowings and $65.2$65.1 million in letters of credit issued under the Homebuilding Line.
     Mortgage Lending— Our Mortgage Line has a borrowing limit of $175$225 million with terms that allow for increases of up to $50$175 million in the borrowing limit to a maximum of $225$400 million, subject to concurrence by the participating banks. AsThe terms of September 30, 2005, the Mortgage Line borrowing limit was increased temporarily to $225 million. This temporary increase will expire on January 23, 2006.are set forth in the Third Amended and Restated Warehousing Credit Agreement dated as of October 31, 2003, as amended. Available borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed securities and are limited to the value of eligible collateral, as defined. At September 30, 2005, $138.7March 31, 2006, $125.5 million was borrowed and an additional $12.0$15.2 million was collateralized and available to be borrowed. The Mortgage Line is cancelable upon 120 days notice.
Other Debt Obligations —In July 2005, we completed a public offering of $250 million principal amount of 53/8% medium term senior notes due in July 2015 (the “2015 Medium Term Senior Notes”) at a discount, with an effective yield of 51/2%. The 2015 Medium Term Senior Notes have interest due and payable on January 1st and July 1st of each year until maturity. We do not make any principal payments until the 2015 Medium Term Senior Notes are fully due in July 2015. The 2015 Medium Term Senior Notes are guaranteed by certain of our subsidiaries and may be redeemed, at our election, in whole at any time or in part from time to time, at the redemption price set forth in the 2015 Medium Term Senior Notes pricing supplement.
     General— The agreements for our bank lines of credit and the indentures for our senior notes require compliance with certain representations, warranties and covenants. We believe that we are in compliance with these requirements, and we are not aware of any covenant violations. The agreements containing these representations, warranties and covenants for the bank lines of credit and the indentures for our senior notes are on file with the Securities and Exchange Commission and are listed in the Exhibit Table in Part IV of our Annual Report on Form 10-K for our fiscalthe year ended December 31, 20042005 and the Exhibit Table toin Part II, Item 6, of this Form 10-Q.

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     The financial covenants contained in the Homebuilding Line credit agreement include a leverage test and a consolidated tangible net worth test. Under the leverage test, generally, our consolidated indebtedness is not permitted to exceed 55% (subject to adjustment in certain circumstances) of the sum of consolidated indebtedness and our “adjusted consolidated tangible net worth,” as defined. Under the consolidated tangible net worth test, our “consolidated tangible net worth,” as defined, must not be less

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than the sum of (1) $776 million;$1.360 billion; plus (2) 50% of “consolidated net income,” as defined, of the “borrower,” as defined, and the “guarantors,” as defined, earned after December 31, 2003; andSeptember 30, 2005; plus (3) 50% of the net proceeds or other consideration received for the issuance of capital stock after December 31, 2003.September 30, 2005; minus (4) the lesser of (A) the aggregate amount paid by “borrower” after September 30, 2005 to repurchase its common stock and (B) $300 million. Failure to satisfy the foregoing financial covenant tests maycould result in a scheduled term-out of the facility. In addition, “consolidated tangible net worth,” as defined, must not be less than the sum of (1) $485$850 million; (2) 50% of the quarterly“quarterly consolidated net incomeincome” of “borrower” and the “guarantors” earned after December 31, 2003;September 30, 2005; and (3) 50% of the net proceeds or other consideration received for the issuance of capital stock after December 31, 2003.September 30, 2005. Failure to satisfy this covenant could result in a termination of the facility. We believe that we are in full compliance with these covenants, and we are not aware of any covenant violations.
     Our senior notes are not secured and, while the senior notes indentures contain some restrictions on secured debtsdebt 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.
MDC Common Stock Repurchase ProgramsProgram
     In October 2005, our board of directors increased the number of remainingWe did not repurchase any shares of MDC’sour common stock available to be repurchased under the Company’s stock repurchase program to 4,000,000 shares. No shares were repurchased during the ninethree months ended September 30,March 31, 2006 or 2005.
Consolidated Cash Flow
     During the ninefirst quarter of 2006, we used $108.4 million in cash in our operating activities. We used $238.2 million of cash to increase our home and land inventories in connection with the expansion of our homebuilding operations. In addition, we used $66.5 million in cash to reduce accounts payable and accrued liabilities, primarily due to the payment of executive bonuses as well as homebuilding construction payables. These uses of cash partially were offset by cash proceeds from the $46.9 million decrease in mortgage loans held in inventory from December 31, 2005 resulting from our ability to sell a higher volume of loans to third-party purchasers under an early purchase program. Additionally, a decrease in our home sales and other accounts receivable balance provided $54.3 million in cash.
     During the first quarter of 2006, we received a total of $61.3 million in cash from financing activities. These cash proceeds primarily were the result of net borrowings under our Homebuilding Line and Mortgage Line of $69.0 million. Additionally, we received $3.5 million in proceeds and tax benefits from the exercise of stock options. As discussed in Note 3 to our Unaudited Consolidated Financial Statements, tax benefits from the exercise of stock options previously were reported as an operating activity and, pursuant to SFAS 123(R), are now reported as a financing activity. These financing cash proceeds were offset in part by dividend payments of $11.2 million.
     Additionally, we used $1.6 million of cash in investing activities in the first three months ended September 30,of 2006, primarily due to the purchase of property and equipment.
     During the first quarter of 2005, we used $553.9$118.3 million of cash for operating activities. Cash used from operations inThe 2005 operating cash use primarily was the result of increases of $998.2a $278.6 million increase in our homebuilding inventories, other assets and prepaid expenseshome sales and other assetsaccounts receivable in conjunction with our expanded homebuilding operations, and $27.5 million in mortgage loans held in inventory, partially offset by income before depreciation and amortization and deferred income taxes of $341.9$93.3 million and increasesan increase of $179.2$62.8 million of mortgage loans held in accounts payable and accrued liabilities. We continued to expand our homebuilding operations in a majority of our existing markets through increased active subdivisions and controlled lot inventory, thereby expending cash to acquire additional homebuilding assets.inventory.

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     Financing activities providedused cash of $294.0$59.1 million duringin the nine months ended September 30, 2005 first quarter, primarily due to $43.2 million in net borrowings onrepayments of our lines of credit net proceeds from the issuancetotaling $60.7 million and dividends paid of medium term senior notes in July 2005 of $247.6$6.5 million, andpartially offset by cash proceeds of $25.6$8.0 million from the exercise of stock options, partially offset by dividends paid of $22.4 million. The proceeds received upon the issuance of the medium term senior notes in July were used primarily for the purchase of homebuilding inventories as noted above.options.
     Additionally, we used $18.1$4.7 million of cash in investing activities duringin the ninefirst three months ended September 30,of 2005, primarily due to the purchase of property and equipment.
     During the first nine months of 2004, we used $194.2 million of cash in our operating activities. Cash used to build homebuilding assets in support of our expanding homebuilding activities partially was provided by net income before depreciation and amortization and an increase in accounts payable and accrued liabilities. In addition, net borrowings of $115.2 million on our bank lines of credit assisted us in financing these operating cash requirements, offset in part from the repurchase of 154,960 shares of common stock for $6.8 million, the $13.6 million payment of dividends and payments for the purchase of

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property and equipment of $27.1 million, including a corporate aircraft, computer equipment and office furniture.
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 significant lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At September 30,March 31, 2006, we had non-refundable deposits of $44.1 million in the form of cash and $19.2 million in the form of letters of credit to secure option contracts to purchase lots. In limited circumstances, in the event that we exercise our right to purchase the lots or land under option, in addition to our purchase price, our obligation also includes certain costs we are required to reimburse the seller. At March 31, 2006, we had approximately $1.2 billion in land available to be purchased under lot option purchase contracts. Refer to Critical Accounting Estimates and Policies included in our Annual Report on Form 10-K for the year ended December 31, 2005 there werefor additional information with respect to accounting for lot option purchase contracts which have been evaluated in accordance with the FASB’s Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended, and SFAS No. 49, “Accounting for Product Financing Arrangements.”
     At March 31, 2006, we had outstanding performance bonds ("Bonds"(“Bonds”) and letters of credit totaling approximately $370.8$421.5 million and $97.8$94.1 million, respectively, including $30.5$29.0 million in letters of credit issued by HomeAmerican, with the remaining issued by third parties, to secure our performance under various contracts. We expect that the obligations secured by these 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 Bonds and letters of credit should be released and we should not have any continuing obligations.
     All other off-balance sheet arrangementsWe have not changed materially from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2004 Annual Report on Form 10-K.made no material guarantees with respect to third-party obligations.
Contractual Obligations
     Except for the issuance of $250 million principal amount of 2015 Medium Term Senior Notes, as previously discussed in our Liquidity and Capital Resource section of Item 2 on this Form 10-Q, other existingOur contractual obligations have not changed materially from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2004 Annual Report on Form 10-K.10-K for the year ended December 31, 2005.

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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
     Real estate and residential housing prices are affected by inflation, which can cause increases in the price of land, raw materials and subcontracted labor. Unless these increased costs are recovered through higher sales prices, Home Gross Margins would decrease. If interest rates increase, construction and financing costs, as well as the cost of borrowings, could also increase, which can result in lower Home Gross Margins. Increases in home mortgage interest rates make it more difficult for our customers to qualify for home mortgage loans, potentially decreasing home sales revenue. Increases in interest rates also may affect adversely the volume of mortgage loan originations.
     The volatility of interest rates could have an adverse effect on our future operations and liquidity. Reported gains on sales of mortgage loans may vary significantly from period to period depending on the volatility in the interest rate market. Derivative instruments utilized in the normal course of business by HomeAmerican include forward sales securities commitments, private investor sales commitments and commitments to originate mortgage loans. We utilize these commitments to manage the price risk on fluctuations in interest rates on our mortgage loans held in inventory and commitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments we utilize.
     Among other things, an increase in interest rates may affect adversely the demand for housing and the availability of mortgage financing and may reduce the credit facilities offered to us by banks, investment bankers and mortgage bankers. See “Forward-Looking Statements” below.
     We continue to follow our disciplined strategy of controllingseeking to control approximately a two-year supply of land in nearly all of our markets. Operating within this conservative model allows us to evaluate each market and allocate our capital to those markets that present opportunity for growth. We consistently apply this disciplined approach and continue to monitor the economic conditions in each of our markets to actively manage our business, well-positioning us to respond to changes in our markets.

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CRITICAL ACCOUNTING POLICIES
     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Management evaluates such estimates and judgments on an ongoing basis and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. See “Forward-Looking Statements” below.
     Listed below are those policies that we believe are critical and require the use of complex judgment in their application. Our critical accounting policies are those related to (1) homebuilding inventory valuation; (2) estimates to complete land development and home construction; (3) warranty costs; and (4) litigation reserves.
     Our critical accounting policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2004 Annual Report on Form 10-K.changes.
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 to analysts and shareowners in the course of presentations about the Company and conference calls followingin connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We haveThese 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 “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 Form 10-Q by cross-referencing this section at the end of the paragraph in which the forward-looking statement is located. Such forward-lookingReport 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 any future results, performance or achievementsthose expressed or implied by the forward-looking statements. Such factors include, among other things, those listed below:
General Economic and Business Conditions — Changes in national, regional and local economic conditions, as well as changes in consumer confidence and preferences, can have a negative impact on our business.
Interest Rate Changes — Our homebuilding and mortgage lending operations are impacted by the availability and cost of mortgage financing.
Changes in Federal Lending Programs — The availability of mortgage financing under federal lending programs is an important factor in our business. Any change in the availability of this financing could reduce our home sales and mortgage lending volume.
Availability of Capital — Our ability to grow our business is dependent on our ability to generate or obtain capital. Increases in interest rates and changes in the capital markets could increase our costs of borrowing or reduce the availability of funds.
Competition — The real estate industry is fragmented and highly competitive. Our homebuilding subsidiaries compete with numerous homebuilders, including a number that are substantially larger and have greater financial resources.

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The Availability and Cost of Land, Labor and Materials — Our operations depend on our ability to continue to obtain land, labor and materials at reasonable prices. Changes in the general availability or cost of these items may hurt our ability to build homes and develop new residential communities.
The Availability and Cost of Performance Bonds and Insurance — Our operations also are affected by our ability to obtain performance bonds and insurance at reasonable prices. Changes in the availability and cost of bonds and insurance can adversely impact our business operations.
Weather and Geology — The climates and geology of many of the states in which we operate present increased risks of natural disasters and adverse weather. To the extent that such events occur, our business may be adversely affected.
Governmental Regulation and Environmental Matters — Our operations are subject to continuing compliance requirements mandated by applicable federal, state and local statutes, ordinances, rules and regulations, including environmental laws, moratoriums on utility availability, growth restrictions, zoning and land use ordinances, building, plumbing and electrical codes, contractors’ licensing laws, state insurance laws, federal and state human resources laws and regulations and health and safety regulations and laws.
Product Liability Litigation and Warranty Claims — As a homebuilder, we are subject to construction defect and home warranty claims, including moisture intrusion and related mold claims that can be costly and adversely affect our business.
Other Factors — Other factors over which we have little or no control, such as required accounting changes and terrorist acts and other acts of war, can also adversely affect us.
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, 2005 which is filed with the Securities and Exchange Commission.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk
     There have been no material changes from the 20042005 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 Financial Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at September 30, 2005.March 31, 2006.
     (b) Changes in internal control over financial reporting- There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2005March 31, 2006 that have materially affected, or are 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
     The Company and certain of its subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the normalordinary course of business, including moisture intrusion and related mold claims. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition, results of operations or cash flows of the Company. See “Forward-Looking Statements” above.
     The U.S. Environmental Protection Agency (“EPA”) filed an administrative action against Richmond American Homes of Colorado, Inc. (“Richmond”RAH Colorado”), alleging that RichmondRAH Colorado violated the terms of Colorado’s general permit for discharges of stormwater from construction activities at two of Richmond’sRAH Colorado’s development sites. In its complaint, the EPA sought civil penalties against RichmondRAH Colorado in the amount of $122,000. On November 11, 2003, the EPA filed a motion to withdraw the administrative action so that it could refile the matter in United States District Court as part of a consolidated action against RichmondRAH Colorado for alleged stormwater violations at not only the original two sites, but also two additional sites. The EPA’s motion to withdraw was granted by the Administrative Law Judge on February 9, 2004. The EPA has not yet refiled the matter. The EPA has inspected a number of sites under development in Colorado and by RichmondRAH Colorado affiliates in Virginia, Maryland, Arizona California and again in Colorado,California, and claims to have found additional stormwater permit violations. RichmondRAH Colorado has substantial defenses to the allegations made by the EPA and also is exploring methods of resolving this matter with the EPA.
     The EPA has issued two Notices of Violation against Richmond American Homes of Arizona, Inc. (“RAH Arizona”) alleging violations of the Clean Air Act. The EPA asserts that RAH Arizona has not controlled dust generated at construction sites in Maricopa County in that it has not operated a water application system or other approved control measures, installed suitable track-out control devices and/or cleaned-up materials tracked-out from project sites. RAH Arizona has substantial defenses to the EPA’s allegations and is exploring methods of resolving these matters with the EPA.
     Because of the nature of the homebuilding business, and in the ordinary course of its operations, the Company from time to time may be subject to product liability claims.
Item 1A.Risk Factors
     There has been no material change in our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005. For a more complete discussion of risk factors that affect our business, see “Risk Factors Relating to our Business” in our Annual Report on Form 10-K for the year ended December 31, 2005, which include the following:
An adverse change in economic conditions could reduce the demand for homes and, as a result, could reduce our earnings.
If land is not available at reasonable prices, our sales and earnings could decrease.
If our home prices continue to increase, our homes could become less affordable to the first-time and first-time move-up homebuyer.

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If the market value of our homes drops significantly, our profits could decrease.
Interest rate increase or changes in federal lending programs could lower demand for our home and our mortgage lending services.
Increased competition in the homebuilding industry could affect our ability to raise home prices and maintain lower levels of incentives, which could negatively impact our home sales revenue and operating profits.
Natural disasters could cause an increase in home construction costs, as well as delays, and could result in reduced profits.
Our business is subject to numerous environmental and other governmental regulations. These regulations could give rise to significant 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.
The interest of certain control persons may be adverse to investors.
We depend on certain markets, and reduced demand for homes in these markets could reduce home sales revenue and earnings.
Labor and material shortages could cause delays in the construction of our homes.
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
We are reliant on a small number of third party purchasers of mortgage loans originated by HomeAmerican which could impact our results of operations.
If our potential homebuyers are not able to obtain suitable financing, our business may decline.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
     The Company did not repurchase any shares during the thirdfirst quarter of 2005.2006. Additionally, there were no sales of unregistered equity securities during the thirdfirst quarter of 2005.2006.
Item 3.Defaults Upon Senior Securities
     None.
Item 4.4.Submission of Matters to a Vote of Security Holders
     None.
Item 5.Other Information
     On OctoberApril 24, 2005,2006, MDC’s board of directors declared a quarterly cash dividend of twenty five cents ($0.25) per share. The dividend is towill be paid on November 22, 2005May 24, 2006 to shareowners of record on November 8, 2005.May 10, 2006.

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Item 6.
Exhibits
(a) Exhibits:
             (a)      Exhibit:
    
4.13.1 Certificate of Amendment to the Certificate of Incorporation of M.D.C. Holdings, Inc. (hereinafter sometimes referred to as “MDC”, the “Company” or the “Registrant”), filed with the Delaware Secretary of State on April 27, 2006, and Certificate of Incorporation, dated May 17, 1985, as amended).
4.1 Amendment No. 12 dated as of July 20, 2005January 9, 2006 to Supplemental Indenture dated as of October 6, 2004, with respect to MDC’s Medium-Term Senior Notes (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated July 20, 2005)filed January 9, 2006). *
   
 
10.1 Purchase AgreementAmendment to the M.D.C. Holdings, Inc. Executive Officer Performance-Based Compensation Plan, dated as of June 28,December 30, 2005 among MDC and Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Wachovia Capital Markets, LLC, Banc of America Securities LLC, BNP Paribas Securities Corp., Comerica Securities, Inc., Credit Suisse First Boston LLC, KeyBanc Capital Markets, Greenwich Capital Markets, Inc. and SunTrust Capital Markets, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 7, 2005)filed January 6, 2006). *
   
 
10.2 Amendment No. 1 toAmended and Restated Distribution Agreement, dated as of July 20, 2005,January 9, 2006, among MDC,the Registrant, certain of its subsidiaries and Banc of America Securities LLC, BNP Paribas Securities Corp., Citigroup Global Markets Inc., Comerica Securities, Credit Suisse First Boston LLC, Deutsche Bank Securities Inc., Greenwich Capital Markets, Inc., J.P. Morgan Securities Inc., McDonald Investments Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, SunTrust Capital Markets, Inc., UBS Securities LLC and Wachovia Capital Markets, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 20, 2005)filed January 9, 2006). *
   
 
10.3 Consulting Agreement, effective as of March 1, 2006, by and between Gilbert Goldstein, P.C. and the Company (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated filed February 22, 2006). *
 
10.4Second Amended and Restated Credit Agreement dated as of March 22, 2006, among MDC as Borrower and the Lenders party thereto and JPMorgan Chase Bank, N.A. as Administrative Agent, including form of Amended and Restated Guaranty and form of Promissory Note (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 24, 2006). *
10.5First Amendment to Sub-Sublease agreement between MDC and CVentures, Inc., executed July 25, 2005on March 28, 2006 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 25, 2005)filed March 29, 2006). *
   
10.4Third Amendment to Third Amended and Restated Warehousing Credit Agreement, dated September 28, 2005, among HomeAmerican Mortgage Corporation and the Banks that are signatories thereto and U.S. Bank National Association as administrative agent (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated September 28, 2005). *
 
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.
 
* Incorporated herein by reference.

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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: November 7, 2005May 10, 2006  M.D.C. HOLDINGS, INC.
(Registrant)
By:  /s/ Paris G. Reece III   
  Paris G. Reece III,  
  By:/s/ Paris G. Reece IIIExecutive Vice President,
Chief Financial Officer and
Principal Accounting Officer 
 
 
Paris G. Reece III,
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer

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EXHIBIT INDEX TO EXHIBITS
   
Exhibits No. Description
3.1Certificate of Amendment to the Certificate of Incorporation of M.D.C. Holdings, Inc. (hereinafter sometimes referred to as “MDC”, the “Company” or the “Registrant”), filed with the Delaware Secretary of State on April 27, 2006, and Certificate of Incorporation, dated May 17, 1985, as amended).
   
Exhibit NumberDescription
4.1 Amendment No. 12 dated as of July 20, 2005January 9, 2006 to Supplemental Indenture dated as of October 6, 2004, with respect to MDC’s Medium-Term Senior Notes (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K dated July 20, 2005)filed January 9, 2006). *
   
10.1 Purchase AgreementAmendment to the M.D.C. Holdings, Inc. Executive Officer Performance-Based Compensation Plan, dated as of June 28,December 30, 2005 among MDC and Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Wachovia Capital Markets, LLC, Banc of America Securities LLC, BNP Paribas Securities Corp., Comerica Securities, Inc., Credit Suisse First Boston LLC, KeyBanc Capital Markets, Greenwich Capital Markets, Inc. and SunTrust Capital Markets, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 7, 2005)filed January 6, 2006). *
   
10.2 Amendment No. 1 toAmended and Restated Distribution Agreement, dated as of July 20, 2005,January 9, 2006, among MDC,the Registrant, certain of its subsidiaries and Banc of America Securities LLC, BNP Paribas Securities Corp., Citigroup Global Markets Inc., Comerica Securities, Credit Suisse First Boston LLC, Deutsche Bank Securities Inc., Greenwich Capital Markets, Inc., J.P. Morgan Securities Inc., McDonald Investments Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, SunTrust Capital Markets, Inc., UBS Securities LLC and Wachovia Capital Markets, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 20, 2005)filed January 9, 2006). *
   
10.3 Consulting Agreement, effective as of March 1, 2006, by and between Gilbert Goldstein, P.C. and the Company (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K dated filed February 22, 2006). *
   
10.4Second Amended and Restated Credit Agreement dated as of March 22, 2006, among MDC as Borrower and the Lenders party thereto and JPMorgan Chase Bank, N.A. as Administrative Agent, including form of Amended and Restated Guaranty and form of Promissory Note (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 24, 2006). *
10.5First Amendment to Sub-Sublease agreement between MDC and CVentures, Inc., executed July 25, 2005on March 28, 2006 (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 25, 2005)filed March 29, 2006). *
   
10.4Third Amendment to Third Amended and Restated Warehousing Credit Agreement, dated September 28, 2005, among HomeAmerican Mortgage Corporation and the Banks that are signatories thereto and U.S. Bank National Association as administrative agent (incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K dated September 28, 2005). *
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.
 
* Incorporated herein by reference.

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