Annual Report

UNITED STATES

FORM 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

For the fiscal year ended December 31, 2004

OR

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

For the Transition period from                      to                     

Commission file number 1-08951

M.D.C. HOLDINGS, INC.

(303) 773-1100
(Registrant’telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K . o

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). þ

      The aggregate market value of voting stock held by non-affiliates of the Registrant was $1.495 billion. Computation is based on the closing sales price of $48.93 per share of such stock on the New York Stock Exchange on June 30, 2004, the last business day of the Registrant’s most recently completed second quarter.

      As of January 31, 2005, the number of shares outstanding of Registrant’s common stock was 43,328,000.

DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference from the Registrant’s 2004 definitive proxy statement to be
filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year.

M.D.C. HOLDINGS, INC.

FORM 10-K

For the Year Ended December 31, 2004
_______________

Table of Contents

(i)

M.D.C. HOLDINGS, INC.

FORM 10-K

     (d) Narrative Description of Business

     Our business consists of two segments, homebuilding and financial services. In our homebuilding segment, our homebuilding subsidiaries build and sell primarily single-family detached homes, although we build some townhomes in Virginia and Maryland. Homes are designed and built to meet local customer preferences. We are the general contractor for all of our projects and retain subcontractors for site development and home construction. Our financial services segment consists of the operations of HomeAmerican and American Home Insurance. HomeAmerican is a full service mortgage lender with offices located in each of our markets and originates or brokers mortgage loans for approximately 75% of our homebuyers. As a result, HomeAmerican is an integral part of our business.

     The base prices for our homes primarily range from $100,000 to $600,000, although we also build homes with base prices above $1,400,000. The average sales price of our homes closed in 2004 and 2003 was $283,400 and $254,300, respectively. We maintain a balanced product offering in each of our markets, focusing on high quality design and construction of homes in most price points, targeting the largest homebuyer segments within a given market, which generally is the first-time and first-time move-up buyer. As a result, more than 80% of our homebuyers fall into these two categories.

     When opening a new homebuilding project, we generally acquire no more than a two-year supply of lots to avoid overexposure to any single sub-market. When we acquire finished lots, we prefer using option contracts or paying in phases with cash. We also acquire entitled land for development into finished lots when we determine that the risk is justified. Our Asset Management Committees, composed of members of MDC’s senior management, generally meet weekly to review all proposed land acquisitions and takedowns of lots under option. Additional information about our land acquisition practices may be found in the Homebuilding Segment, Land Acquisition and Development section.

Homebuilding Segment.

      General. MDC, whose subsidiaries build homes under the name “Richmond American Homes,” is one of the largest homebuilders in the United States. We provide mortgage financing, primarily for our homebuyers, through our wholly owned subsidiary HomeAmerican. We are a major regional homebuilder with a significant presence in some of the country’s best housing markets. We are the largest homebuilder in Colorado; among the top five homebuilders in Northern Virginia, suburban Maryland, Phoenix, Tucson, Las Vegas and Salt Lake City; and among the top ten homebuilders in Jacksonville, Northern California and Southern California. We also have established operating divisions in Dallas/Fort Worth, Houston, West Florida, Philadelphia/Delaware Valley and Chicago. We believe a significant presence in these markets enables us to compete effectively for homebuyers, land acquisitions and subcontractor labor.

     Our operations are diversified geographically, as shown in the following table of home sales revenues by state for the years 2002 through 2004 (dollars in thousands).

     The financial information required by Item 1 is contained in Note B to the accompanying consolidated financial statements.

      Housing. We build homes in a number of basic series, each designed to appeal to a different segment of the homebuyer market. Within each series, we build several models, each with a different floor plan, elevation and standard

2

and optional features. Differences in sales prices of similar models in any series depend primarily upon location, optional features and design specifications. The series of homes offered at a particular location are based on customer preference, lot size, the area’s demographics and, in certain cases, the requirements of major land sellers and local municipalities.

     Design centers are located in most of our homebuilding markets. Homebuyers are able to customize certain features of their homes by selecting options and upgrades on display at the design centers. Homebuyers can select finishes and upgrades soon after they decide to purchase a Richmond American home. The design centers also provide us with an additional source of revenue and profit. We recently have launched our new Home Gallery concept in the Denver area. These Home Galleries offer thousands of options for customizing a new home, including flooring; countertops; lighting and plumbing fixtures; cabinetry; paint; appliances; home entertainment, security and technology wiring; closet solutions and central vacuum systems. The Home Gallery color studios enable homebuyers to view selections that have been coordinated into color schemes by design consultants. The individualized process is designed to make design and upgrade decisions simpler. Another advantage of the Home Gallery is the ease with which homebuyers can visit to browse the design and upgrade options available before their appointment with a design consultant.

     We maintain limited levels of inventories of unsold homes in our markets. Unsold homes in various stages of completion allow us to meet the immediate and near-term demands of prospective homebuyers. In order to mitigate the risk of carrying excess inventory, we have strict controls and limits on the number of our unsold homes under construction.

      Land Acquisition and Development. We purchase finished lots using option contracts, in phases or in bulk for cash. We also acquire entitled land for development into finished lots when we believe that the risk is justified. In making land purchases, we consider a number of factors, including projected rates of return, sales prices of the homes to be built, population and employment growth patterns, proximity to developed areas, estimated costs of development and demographic trends. Generally, we acquire finished lots and land for development only in areas that will have, among other things, available building permits, utilities and suitable zoning. We attempt to maintain a supply of finished lots sufficient to enable us to start homes promptly after a contract for a home sale is executed. This approach is intended to minimize our investment in inventories and reduce the risk of shortages of labor and building materials. Increases in the cost of finished lots may reduce Home Gross Margins (as defined below) in the future to the extent that market conditions would not allow us to recover the higher cost of land through higher sales prices. See “ Forward-Looking Statements ” below. We define “Home Gross Margins” to mean home sales revenues less cost of goods sold (which primarily includes land and construction costs, capitalized interest, a reserve for warranty expense and financing and closing costs) as a percent of home sales revenues.

     We have the right to acquire a portion of the land we will acquire in the future utilizing option contracts, in some cases on a “rolling” basis. Generally, in an option contract, we obtain the right to purchase lots in consideration for an option deposit. In the event we elect not to purchase the lots within a specified period of time, we forfeit the option deposit. Our option contracts do not contain provisions requiring specific performance. This practice limits our risk and avoids a greater demand on our liquidity. At December 31, 2004, we had the right to acquire 21,164 lots under option agreements with approximately $41.8 million in non-refundable cash option deposits and $22.1 million in letters of credit at risk. Because of increased demand for finished lots in certain of our markets, our ability to acquire lots using rolling options has been reduced or has become significantly more expensive.

     We own and have the right under option contracts to acquire undeveloped parcels of real estate that we intend to develop into finished lots. We develop our land in phases (generally fewer than 100 lots at a time for each home series in a subdivision) in order to limit our risk in a particular project and to efficiently employ available liquidity. Building permits and utilities are available and zoning is suitable for the current intended use of substantially all of our undeveloped land. When developed, these lots generally will be used in our homebuilding activities. See “ Forward-Looking Statements ” below.

3

     The table below shows the carrying value of land and land under development, by state, as of December 31, 2004, 2003 and 2002 (in thousands).

     The table below shows the number of lots owned and under option (excluding lots in housing completed or under construction), by state, as of December 31, 2004, 2003 and 2002.

      Labor and Raw Materials . Generally, the materials used in our homebuilding operations are standard items carried by major suppliers. We generally contract for most of our materials and labor at a fixed price during the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Increases in the cost of building materials, particularly lumber, and subcontracted labor may reduce Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher sales prices. From time to time and to varying degrees, we may experience shortages in the availability of building materials and/or labor in each of our markets. These shortages and delays may result in delays in the delivery of homes under construction, reduced Home Gross Margins, or both. See “ Forward-Looking Statements ” below.

4

      Warranty . Our homes are sold with limited warranties that generally provide for ten years of structural coverage (“structural warranty”), two years of coverage for plumbing, electrical and heating, ventilation and air conditioning systems, and one year of coverage for workmanship and materials (“general warranty”). Warranty reserves are initially established as homes close on a per-unit basis in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. Reserves are determined based upon historical experience with respect to similar product types and geographical areas. Certain factors are given consideration in determining the per-house reserve amount, including: (1) the historical range of amounts paid per house; (2) the historical average amount paid per house; (3) any warranty expenditures included in (1) and (2) not considered to be normal and recurring; (4) improvements in quality control and construction techniques expected to impact future warranty expenditures; and (5) conditions that may affect certain projects and require higher per-house reserves for those specific projects.

     Warranty expenditures are tracked on a house-by-house basis and are charged against the warranty reserve established for the house. Any expenditure incurred within 120 days of closing a home is recorded against the estimate to complete land development and home construction accrual, unless it is clear that the expenditure is a warranty claim. Expenditures incurred after 120 days of closing a home are considered warranty expenditures. Additional reserves are established for known unusual warranty-related expenditures not covered by the initial warranty reserves. If warranty expenditures for an individual house exceed the related reserve, then costs in excess of the reserve are evaluated in the aggregate to determine if an adjustment to housing cost of sales should be recorded.

      Seasonal Nature of Business . Our homebuilding business is seasonal to the extent that certain of our operations, especially in the northernmost markets, are subject to weather-related slowdowns. Delays in development and construction activities resulting from adverse weather conditions could increase our risk of buyer cancellations and contribute to higher costs for interest, materials and labor. In addition, homebuyer preferences and demographics influence the seasonal nature of our business. See “ Forward-Looking Statements ” below.

      Backlog. As of December 31, 2004 and 2003, homes under contract but not yet delivered (“Backlog”) totaled 6,505 and 5,593, respectively, with estimated sales values of $1.92 billion and $1.60 billion, respectively. Based on our past experience, assuming no significant change in market conditions and mortgage interest rates, we anticipate that approximately 70% to 75% of our December 31, 2004 Backlog will close under existing sales contracts during the first nine months of 2005. The remaining 25% to 30% of the homes in Backlog are not expected to close under existing contracts due to cancellations. See “ Forward-Looking Statements ” below. The table below discloses, by market, our Backlog for the years ended December 31, 2004 and 2003 (dollars in thousands).

     In 2004, we experienced strong demand for homes in Arizona, where our Backlog significantly increased year-over-year. Additionally, our Backlog increased in Florida, in part resulting from the acquisition of certain assets of Crawford Homes, Inc. in 2003 and of Watson Home Builders, Inc. in 2004. In 2004, we slowed the pace of new home offerings in certain communities in Virginia by releasing fewer homes to the market to allow construction to catch up with the Backlog in this market.

5

     The 13% increase in orders for 2004 compared with 2003 was impacted by the extraordinary levels of demand experienced in Nevada and California during the first half of 2004. During the second half of 2004, we saw our overall level of net home orders decline to a level comparable to the same period in 2003. This decline was driven by Nevada and California, primarily due to a reduction in the number of net home orders per active community. Higher home order cancellations during the second half of 2004, compared with the same period in 2003, in both of these markets also contributed to the reduced number of net home orders. In addition, the net home orders received in California during the 2004 fourth quarter were impacted by a temporary reduction in the number of active communities, due in part to a higher than anticipated sales pace resulting from the exceptional demand for new homes in the state through the first half of 2004. Notwithstanding these changes in California and Nevada, we generally maintained the significant price increases realized in these markets earlier in the year.

      Marketing and Sales . Our homes are sold under various commission arrangements by our own sales personnel and by cooperating brokers and referrals in the realtor community. In marketing our homes, we primarily use on-site model homes, advertisements in local newspapers, radio, billboards and other signage, magazines and illustrated brochures. We also market our homes on our internet website, www.richmondamerican.com , and utilize a variety of other internet sites to advertise our homes and communities.

      Title Operations . American Home Title provides title agency services to our homebuyers in Virginia, Maryland, Colorado, Florida, Texas and Delaware. AHT Reinsurance, Inc., a wholly-owned subsidiary of MDC, reinsures existing title insurance policies issued to our homebuyers in California, Nevada and Utah. We are evaluating opportunities to provide title agency services in our other markets.

      Competition . The homebuilding industry is fragmented and highly competitive. We compete with numerous homebuilders, including a number that are larger and have greater financial resources. Homebuilders compete for customers, desirable financing, land, building materials and subcontractor labor. Competition for home orders primarily is based upon price, style, financing provided to prospective purchasers, location of property, quality of homes built, customer service and general reputation in the community. We also compete with subdivision developers and land development companies when acquiring land.

      Mortgage Interest Rates. Our homebuilding operations are dependent upon the availability and cost of mortgage financing. Increases in home mortgage interest rates may reduce the demand for homes and home mortgages and, generally, will reduce home mortgage refinancing activity, which could negatively impact our business. We are unable to predict future changes in home mortgage interest rates or the impact such changes may have on our operating activities and results of operations. See “ Forward-Looking Statements ” below.

      Regulation . Our homebuilding operations are subject to continuing compliance requirements mandated by applicable federal, state and local statutes, ordinances, rules and regulations, including zoning and land use ordinances, building codes, contractors’ licensing laws, state insurance laws, federal and state human resources laws and regulations and health and safety regulations and laws (including, but not limited to, those of the Occupational Safety and Health Administration). Various localities in which we operate have imposed (or may impose in the future) fees on developers to fund schools, road improvements and low and moderate-income housing. See “ Forward-Looking Statements ” below.

     From time to time, various municipalities in which we operate restrict or place moratoriums on the availability of utilities, including water and sewer taps. Additionally, certain jurisdictions in which we operate have proposed or enacted growth initiatives that may restrict the number of building permits available in any given year. Although no assurances can be given as to future conditions or governmental actions, in general, we believe that we have, or can obtain, water and sewer taps and building permits for our land inventory and land held for development. See “ Forward-Looking Statements ” below.

     Our homebuilding operations also are affected by environmental laws and regulations pertaining to availability of water, municipal sewage treatment capacity, land use, hazardous waste disposal, naturally occurring radioactive materials, building materials, population density and preservation of endangered species, natural terrain and vegetation. Due to these considerations, we generally obtain an environmental site assessment for parcels of land that we acquire. The particular environmental laws and regulations that apply to any given homebuilding project vary greatly according to the site’s location, the site’s environmental conditions and the present and former uses of the site. These environmental laws and regulations may result in project delays, causing us to incur substantial compliance and other costs, and/or

6

prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. See “ Forward-Looking Statements ” below.

      Bonds and Letters of Credit. In many cases, we are required to obtain bonds and letters of credit in support of our related obligations with respect to subdivision improvement, homeowners association dues and start-up expenses, warranty work, contractors license fees, earnest money deposits, etc. At December 31, 2004, we had issued and outstanding performance bonds and letters of credit totaling $306.8 million and $94.7 million, respectively, including $25.6 million in letters of credit issued by HomeAmerican. In the event any such bonds or letters of credit issued by third parties are called, we would be obligated to reimburse the issuer of the bond or letter of credit. See “ Forward-Looking Statements ” below.

Financial Services Segment.

   Mortgage Lending Operations.

      General . HomeAmerican is a full-service mortgage lender and is the principal originator of mortgage loans for our homebuyers. Through office locations in each of our markets and a centralized loan origination center, HomeAmerican originates mortgage loans primarily for our homebuyers. HomeAmerican also brokers mortgage loans for origination by outside lending institutions for our homebuyers.

     HomeAmerican is authorized to originate Federal Housing Administration-insured (“FHA”), Veterans Administration-guaranteed (“VA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) and other private investor mortgage loans. HomeAmerican also is an authorized loan servicer for FNMA, FHLMC and the Government National Mortgage Association (“GNMA”) and, as such, is subject to the rules and regulations of these organizations.

     Substantially all of the mortgage loans originated by HomeAmerican are sold to investors within 45 days of origination. We use HomeAmerican’s secured warehouse line of credit, other borrowings and Company generated funds to finance these mortgage loans until they are sold.

      Portfolio of Mortgage Loan Servicing . Mortgage loan servicing involves the collection of principal, interest, taxes and insurance premiums from the borrower and the remittance of such funds to the mortgage loan investor, local taxing authorities and insurance companies. The servicer is paid a fee to perform these services. HomeAmerican obtains the servicing rights related to the mortgage loans it originates. Certain mortgage loans are sold “servicing released” (the servicing rights are included with the sale of the corresponding mortgage loans). In 2004, 51% of the mortgage loans were sold “servicing released”. The servicing rights on the remainder of the mortgage loans generally are sold under minibulk contracts within two months of the sale of the mortgage loan. HomeAmerican intends to continue selling servicing rights on all mortgage loans originated in the future. See “ Forward-Looking Statements ” below.

     HomeAmerican’s portfolio of mortgage loan servicing at December 31, 2004 consisted of servicing rights with respect to 2,906 single-family loans, 99% of which were less than one year old. This includes 2,330 single-family loans for which the servicing rights had been sold but not transferred to the purchasers as of December 31, 2004. HomeAmerican anticipates transferring these servicing rights in the first half of 2005. These loans are secured by mortgages on properties in eleven states, with interest rates on the loans ranging from approximately 4.25% to 6.00% and averaging 5.77%. The underlying value of a servicing portfolio generally is determined based on the interest rates and the annual servicing fee rates, gross of guarantee fees, currently .44% for FHA/VA loans and .25% for conventional loans applicable to the loans comprising the portfolio.

      Pipeline. HomeAmerican’s mortgage loans in process that had not closed (the “Pipeline”) at December 31, 2004 had aggregate principal balances of $1.3 billion. An estimated 70% to 75% of the Pipeline at December 31, 2004 is anticipated to close during the first nine months of 2005. If mortgage interest rates decline, a smaller percentage of these loans would be expected to close. See “ Forward-Looking Statements ” below.

      Forward Sales Commitments. HomeAmerican 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 HomeAmerican include forward sales securities commitments, private investor sales commitments and commitments to originate mortgage loans. HomeAmerican utilize the sales commitments to manage the price risk on fluctuations in interest rates on our mortgage loans owned and commitments to originate mortgage loans. Such contracts are the only significant

7

financial derivative instruments utilized by the Company and are generally settled within 45 days of origination. Due to this hedging philosophy, the market risk associated with HomeAmerican’s mortgages is limited.

      Competition. The mortgage industry is fragmented and highly competitive. In each of the locations in which it originates loans, HomeAmerican competes with numerous banks, thrifts and other mortgage bankers, many of which are larger and have greater financial resources. Competitive factors include pricing, loan terms, underwriting criteria and customer service.

   Insurance Operations.

     American Home Insurance provides third party homeowners, auto and other types of casualty insurance to our homebuyers.

Employees.

     At December 31, 2004, we employed approximately 3,600 employees. We consider our employee relations to be very good.

PART II

Pursuant to Rule 416 under the Securities Act of 1933, as amended, the following registration statements on Form S-8 are deemed to cover the additional number of shares of the Company’s common stock as listed below, as a result of the adjustments to account for such stock split:

10

Item 6. Selected Financial and Other Data.

     The data in this table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements. Weighted-average shares and per share amounts have been adjusted for the effects of the 10% stock dividend distributed on March 23, 2004 and the 1.3 for 1 stock split effective January 10, 2005 (in thousands, except per share and unit amounts).

SELECTED FINANCIAL DATA

11

12

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     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-K, 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.” 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, we provide title agency services through American Home Title and Escrow Company (“American Home Title”) to our homebuyers in Virginia, Maryland, Colorado, Florida, Texas and Delaware.

RESULTS OF OPERATIONS

Overview

     The economic climate for the homebuilding industry was excellent in 2004, and we were able to capitalize on the fundamentals that drove the housing market, such as increasing consumer confidence, improving job growth, low interest rates and a limited supply of land in high-demand markets. We also were able to capitalize on the economies of scale that we experienced as a large, well-capitalized homebuilder. Earnings per share increased by 79% to $8.79 in 2004. Our net income of $391 million represents the 7th consecutive year for record earnings, and our total revenues of $4 billion marks our 11th consecutive annual record. In addition, we achieved all-time highs for home closings and Home Gross Margins, as defined below.

     Strong demand for homes in most of our markets in 2004, particularly during the first half of the year, led to our highest-ever level of annual orders for 14,248 homes. These strong orders enabled us to end the year with a record Backlog, as defined below, of over 6,500 homes valued at nearly $2 billion, representing a year-over-year value increase of 20%.

     Our financial position continued to strengthen in 2004. Total stockholders’ equity at year-end exceeded $1.4 billion, or $32.80 per outstanding share, and our yearend debt-to-capital ratio, net of cash, was .19. Earlier in 2004, the term of our homebuilding line of credit was extended to five years, and we increased our borrowing capacity to $700 million. Additionally in 2004, we expanded our shelf registration to $1 billion, earmarking $500 million for our medium-term notes program. In December 2004, we issued $250 million of 10-year medium-term senior notes at a coupon rate of 5 3/8%. We ended the year with more than $1 billion in cash and borrowing capacity. In January 2005, we further increased our borrowing capacity under our homebuilding line of credit to $1.058 billion, with the ability to expand to $1.25 billion with lender approval.

     We declared a 10% stock dividend in February 2004 and, in January 2005, we completed a 1.3 for 1 stock split. As a result of these actions, we have effectively tripled our quarterly dividend payment over the last 24 months. In addition, we repurchased 155,000 shares of stock in 2004, adjusted for the 1.3 for 1 stock split, and we have 2,145,000 additional shares authorized for repurchase.

     We made significant progress in 2004 in furthering our expansion efforts in markets across the country, evidenced by a 22% increase in our actively selling communities. We acquired control of certain assets of Watson Home Builders, Inc. in Jacksonville and Patriot Homes and others in southern New Jersey in the third quarter of 2004. These transactions significantly expanded our presence in two of the country’s strongest housing markets. Also, in January 2005, we acquired the right to purchase approximately 1,200 finished lots in the Central Valley of California from Del Valle Homes.

     As a merchant homebuilder, we are focused on maximizing risk-adjusted returns. While we will complete some level of development work on lots when the returns justify the risk, generally we will not develop master-planned communities. We attempt to focus on the largest demand segments within a given market, which generally is the first-time and first-time move-up buyer. As a result, more than 80% of our homebuyers fall into these two categories.

     Our objective is to achieve a major market share in each of our markets. The markets in which we operate have been selected because of their potential for population and employment growth. We attempt to establish homebuilding operations in the best markets in the country. When we enter a market, our goal is to be one of the top builders in that market. We have accomplished this goal in most of the markets we have operated in since the mid-1980s.

13

     When opening a new homebuilding project, our land strategy generally is to acquire no more than a 2 ¹ / 2 year supply of lots to avoid overexposure to any single sub-market. We prefer to acquire finished lots using rolling options or in phases for cash. However, we will acquire entitled land for development into finished lots when we determine that the risk is justified. Our Asset Management Committees, composed of members of our senior management, generally meet weekly to review all proposed land acquisitions and takedowns of lots under option. In evaluating land and lot acquisition opportunities, our objective is to increase our land under option and reduce the percentage of land owned.

Consolidated Results.

     The following discussion for both consolidated results of operations and segment results refers to the year ended December 31, 2004, compared with the same period in 2003, and the year ended December 31, 2003, compared with the same period in 2002. The table below summarizes our results of operations (in thousands, except per share amounts). Earnings per share for prior periods have been restated to reflect the effect of the 10% stock dividend distributed on March 23, 2004 and the 1.3 for 1 stock split effective January 10, 2005.

      2004 Compared With 2003 . The 37% growth in revenues primarily resulted from a 24% increase in the number of homes closed to 13,876, as well as an increase of $29,100 in our average home selling price.

     Income before income taxes increased 83% in 2004. The increase primarily was due to an 83% increase in homebuilding segment operating profit, partially offset by a 35% decrease in financial services segment operating profit. The homebuilding segment profit increase principally was the result of the increases in home closings and average selling prices described above and a 360 basis point increase in Home Gross Margins. The financial services segment profit decrease primarily was due to a 21% decrease in gains on sales of mortgage loans and a 19% increase in general and administrative expenses resulting from HomeAmerican’s expanded loan origination activity. The improvement in homebuilding operating profits more than offset a 36% increase in total corporate expenses.

      2003 Compared With 2002 . The 26% increase in revenues primarily resulted from a 26% increase in the number of homes closed to 11,211.

     Income before income taxes increased 27% in 2003. The increase primarily was due to a 33% increase in homebuilding segment operating profit and a 17% increase in financial services segment operating profit. The homebuilding segment profit increase principally was the result of the home closing increases described above and a 110 basis point increase in Home Gross Margins. The financial services segment profit increase primarily was due to a 46% increase in gains on sales of mortgage loans and a 19% increase in loan origination fees, partially offset by higher general and administrative expenses resulting from HomeAmerican’s expanded loan origination activity. These improvements in homebuilding and financial services operating profits more than offset a 40% increase in corporate general and administrative expenses and a $9.3 million charge for expenses related to the redemption of our $175 million 8 3/8% senior notes due 2008.

14

15

      Home Sales Revenues and Homes Closed. Home sales revenues in 2004 increased 38% over 2003. The improvement resulted from a 24% increase in home closings, as well as an increase of $29,100 in our average home selling price.

     Our home closings were higher in 2004, compared with 2003, in all of our markets except Colorado. Home closings particularly were strong in Nevada, Arizona, California and Virginia, primarily due to the strong demand for new homes in these markets which resulted in a higher Backlog of homes to begin the year, as compared with the start of the prior year. In addition, our recently entered markets in Utah, Texas, Florida and Illinois contributed an increase of 1,231 home closings in 2004. We closed fewer homes in 2004, compared with 2003, in Colorado, primarily due to lower home orders resulting from fewer average active subdivisions in this market.

      Average Selling Price Per Home Closed. The average selling price per home closed increased by $29,100 to $283,400 in 2004, compared with $254,300 in 2003. The increase is partially attributable to closing a greater number of homes in California and Virginia, where average home selling prices are significantly above the Company average. We also closed significantly more homes in Nevada, where our average selling price increased $60,900, or 33%, over 2003. These increases partially were offset by the impact of higher home closings in Arizona, Utah, Texas and Florida, where average selling prices were more than $90,000 lower than the Company average. The following table displays our average selling price per home closed by market for the years indicated below (in thousands).

      Home Gross Margins. We define “Home Gross Margins” to mean home sales revenues less cost of goods sold (which primarily includes land and construction costs, capitalized interest, a reserve for warranty expense and financing and closing costs) as a percent of home sales revenues. Home Gross Margins were 27.7% for the year ended December 31, 2004, compared with 24.1% in 2003. The increase in our Home Gross Margins primarily was due to strong demand for homes and increased selling prices in many of our markets, particularly in Nevada, California and Virginia. In addition, we closed 33% more homes in Nevada, where we realized significantly higher Home Gross Margins than the Company average. These Home Gross Margin increases partially were offset by the impact of a greater number of homes closed in Florida, Utah and Texas in 2004, where Home Gross Margins were lower than the Company average. We were able to minimize the impact of labor and material

16

cost increases by leveraging our national purchasing power, thus limiting the impact on Home Gross Margins across the Company.

     Future Home Gross Margins may be impacted by, among other things: (1) increased competition, which could affect our ability to raise home prices and 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 Nevada, California and Arizona, and (6) other general risk factors. See “ Forward-Looking Statements ” below.

      Orders for Homes and Backlog . Home orders during 2004 particularly were strong in Arizona, despite having fewer actively selling communities than a year ago, aided by the continued strong demand for new homes in this market. Also, we received a combined increase of 1,324 home orders in 2004 from our new markets in Utah, Texas, Florida, Illinois and Philadelphia/Delaware Valley. Colorado home orders were lower for 2004, compared with 2003, primarily resulting from a reduction in the number of our active Colorado subdivisions. In addition, we intentionally slowed the pace of new home orders over the last year in Virginia, one of the country’s strongest markets for new homes, to allow construction activities to catch-up with our Backlog of homes sold but not yet started in this market.

     The 13% increase in orders for 2004 compared with 2003 was impacted by the extraordinary levels of demand experienced in Nevada and California during the first half of 2004. During the second half of 2004, we saw our overall level of net home orders decline to a level comparable to the same period in 2003. This decline was driven by Nevada and California, primarily due to a reduction in the number of net home orders per active community. Higher home order cancellations during the second half of 2004, compared with the same period in 2003, in both of these markets also contributed to the reduced number of net home orders. In addition, the net home orders received in California during the 2004 fourth quarter were impacted by a temporary reduction in the number of active communities, due in part to a higher than anticipated sales pace resulting from the exceptional demand for new homes in the state through the first half of 2004. Notwithstanding these changes in California and Nevada, we generally maintained the significant price increases realized in these markets earlier in the year.

     We believe that both California and Nevada provide favorable environments for continued strength in the demand for new homes for the foreseeable future, particularly in our locations and price points, and we have allocated significant capital for growth in these markets in 2005. As a result, we expect to have approximately twice as many active communities in Nevada by the end of the 2005 first quarter as we had a year earlier. Additionally, in California, we plan to add as many as ten active communities during the first quarter of 2005. Assuming no material changes in market conditions and anticipation of continued increases in active communities in most of our markets in 2005, we believe that our home order comparisons will improve as the 2005 year progresses beyond the first quarter. See “ Forward-Looking Statements ” below.

     Homes under contract but not yet delivered (“Backlog”) at December 31, 2004 increased 16% to 6,505 homes with an estimated sales value of $1.92 billion, compared with the Backlog of 5,593 homes with an estimated sales value of $1.60 billion at December 31, 2003. Assuming no significant change in market conditions or mortgage interest rates, we expect approximately 70% to 75% of our Backlog to close under existing sales contracts during the first nine months of 2005. The remaining 25% to 30% of the homes in Backlog are not expected to close under existing contracts due to cancellations. See “ Forward-Looking Statements ” below.

      Marketing . Marketing expenses (which include sales commissions, advertising, amortization of deferred marketing costs, model home expenses and other costs) totaled $198.5 million in 2004, compared with $162.1 million in 2003. The increase in 2004 primarily was due to increases of (1) $24.5 million in sales commissions resulting from our increased home sales revenues; (2) $7.7 million in product advertising and deferred marketing amortization in connection with the increased number of active subdivisions and greater number of home closings in 2004; and (3) $3.7 million in salaries and benefits attributable to our expanding homebuilding operations in new and existing markets.

      General and Administrative. General and administrative expenses totaled $181.6 million in 2004, compared with $138.5 million in 2003. The increase in 2004 primarily was due to increased compensation and other employee

17

benefit costs associated with the expanded operations in many of our markets, most notably California, Colorado, Nevada and Virginia, and in our new markets in Utah, Texas, Florida, Philadelphia/Delaware Valley and Illinois.

Homebuilding Activities — 2003 Compared With 2002 (dollars in thousands).

18

      Home Sales Revenues and Homes Closed. Home sales revenues in 2003 increased 26% compared with 2002. The increase resulted from home closings which reached 11,211 for 2003, 26% higher than 2002.

     Our home closings were higher in 2003, compared with 2002, in all of our markets except Colorado. Home closings particularly were strong in Nevada and Arizona, primarily due to the strong demand for new homes in these markets. In addition, the newly entered markets in Utah, Texas and Florida contributed an increase of 429 home closings in 2003. We closed fewer homes in 2003, compared with 2002, in Colorado, primarily due to lower home orders in this market, resulting from fewer active subdivisions and the more challenging economic conditions experienced in this market.

      Average Selling Price Per Home Closed. The average selling price per home closed remained relatively consistent at $254,300 in 2003, compared with $254,000 in 2002. Average selling prices increased in Maryland, Virginia and Arizona, primarily resulting from the ability to increase sales prices due to the strong demand for new homes in these markets throughout 2003. Also, a greater number of homes were closed in relatively higher-priced subdivisions in the above noted markets, as well as in Colorado and Utah. These increases partially were offset by the impact of increased home closings in Nevada, Utah, Texas and Florida, where selling prices are lower than the Company average. The following table displays our average selling price per home closed by market for the years indicated below (in thousands).

      Home Gross Margins. Home Gross Margins were 24.1% for the year ended December 31, 2003, compared with 23.0% in 2002. The increase in Home Gross Margins primarily was attributable to increased demand and higher home selling prices in many of our markets, as well as the impact of corporate initiatives directed at reducing construction costs. Additionally, insurance recoveries relating to warranty expenses incurred in prior periods for water intrusion issues in Colorado and reductions in previous estimates to complete land development and construction in certain markets contributed to this increase. These Home Gross Margin increases partially were offset by the impact of higher incentives in Colorado, as well as a greater number of homes closed in 2003 in Florida, Utah and Texas, where Home Gross Margins were lower than the Company average.

      Orders for Homes and Backlog . Home orders during 2003 particularly were strong in Nevada and Arizona, aided by the continued strong demand for new homes in these markets. Also, we received a combined 725 home orders in 2003 from our new markets in Utah, Texas and Florida. Colorado home orders were lower for 2003, compared with 2002, primarily resulting from the reduced number of active subdivisions and the challenging economic environment

19

discussed above. We received net orders for 2,690 homes during the fourth quarter of 2003, 39% higher than net orders for 1,931 homes for the same period in 2002.

     Record home orders received during 2003 contributed to the 39% increase in Backlog at December 31, 2003 to 5,593 homes with an estimated sales value of $1.60 billion, compared with the Backlog of 4,035 homes with an estimated sales value of $1.12 billion at December 31, 2002.

      Marketing . Marketing expenses totaled $162.1 million in 2003, compared with $125.1 million in 2002. The increase in 2003 primarily was due to (1) increased sales commissions resulting from our increased home sales revenues; (2) higher product advertising and deferred marketing amortization in connection with the increased number of active subdivisions and greater number of home closings in 2003; (3) increased sales overhead resulting from our expanding home sales activities; and (4) higher salaries and benefits attributable to our expanding homebuilding operations in new and existing markets.

      General and Administrative. General and administrative expenses totaled $138.5 million in 2003, compared with $105.5 million in 2002. The increase in 2003 primarily was due to increased compensation and other administrative costs associated with the expanded operations in many of our markets, most notably Arizona, Nevada, California and Virginia, and in our new markets of Utah, Texas, Florida, Philadelphia/Delaware Valley and Illinois.

    Title Operations.

     American Home Title provides title agency services to our homebuyers in Virginia, Maryland, Colorado, Florida, Texas and Delaware. AHT Reinsurance, Inc., a wholly-owned subsidiary of MDC, reinsures existing title insurance policies issued to our homebuyers in California, Nevada and Utah. We are evaluating opportunities to provide title agency services in our other markets. Income before income taxes from title operations totaled $5.0 million, $3.1 million and $2.4 million, respectively, in 2004, 2003 and 2002.

   Land Sales.

     Revenue from land sales totaled $8.9 million, $1.3 million and $6.0 million in 2004, 2003 and 2002, respectively. The land sales in 2004 primarily were in Florida, Texas and Colorado. The land sales in 2003 were in Virginia, Utah and Northern California. Land sales in 2002 primarily were in Colorado and Utah. Gross profits from these sales were $0.1 million, $0.5 million and $1.4 million in 2004, 2003 and 2002, respectively.

    Asset Impairment Charges.

     No homebuilding asset impairment charges were recorded by the Company in 2004, 2003 or 2002.

    New Homebuilding Operations.

     In September 2003, we expanded our operations in the Florida homebuilding market by one of our subsidiaries acquiring certain assets of Crawford Homes, Inc. in Jacksonville, Florida and hiring approximately 40 of its former employees. The assets acquired included approximately 550 lots and 165 homes under construction in 15 subdivisions. In September 2004, this same subsidary acquired certain assets of Watson Home Builders, Inc. in Jacksonville and hired approximately 55 of its former employees. The assets acquired included control of approximately 2,000 lots and 330 homes under construction in 18 subdivisions. At December 31, 2004, we controlled more than 2,500 lots in this market. During 2004, this subsidiary received 446 home orders and closed 452 homes in Jacksonville.

     We expanded into the Houston and Philadelphia/Delaware Valley markets in the 2003 second quarter and into the West Florida and Chicago markets in the third quarter of 2003. Each of these expansion efforts was initiated by hiring a division president to manage start-up operations. In September 2004, we expanded our Philadelphia/Delaware Valley operations by acquiring control of approximately 600 residential lots from Patriot Homes, LLC, and others, in southern New Jersey. As of December 31, 2004, we controlled 4,174 lots in all of these markets.

     In January 2005, we expanded our California operations by acquiring control of approximately 1,200 finished residential lots in the Central Valley of California from Del Valle Homes.

20