**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

# **FORM 10-Q**

**(Mark One)**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

# **For the quarterly period ended September 30, 2006**

# **OR**

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXHANGE ACT OF 1934.**

**FOR THE TRANSITION PERIOD                    TO                     ..**

#### **Commission File No. 1-6830**

**ORLEANS HOMEBUILDERS, INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**                     |   | **59-0874323**              |
|----------------------------------|--------|-----------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  I.D. No.) |
| incorporation or  organization)  |   |                        |

 

**OneGreenwood Square, Suite 101**

**3333Street Road**

**Bensalem,PA 19020**

(Addressof principal executive offices)

 

Telephone:     **(215) 245-7500**

(Registrant’s telephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  x   No o

Indicateby check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  o   No x

Numberof shares of common stock, par value $0.10 per share, outstanding as of

# November8, 2006:      18,462,984

(excluding 235,147 shares held in Treasury).

 

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# **ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES**

|            | **PART 1  – FINANCIAL INFORMATION**                                                            |   |
|------------|-----------------------------------------------------------------------------------------------------|--------|
| ** ** |                                                                                                | Page   |
| Item 1.    | Financial Statements (unaudited)                                                                    |   |
|       |                                                                                                |   |
|       | Consolidated Balance Sheets at September 30, 2006 and  June 30, 2006                                | 1      |
|       |                                                                                                |   |
|       | Consolidated Statements of Operations for the Three  Months Ended September 30, 2006 and 2005       | 2      |
|       |                                                                                                |   |
|       | Consolidated Statements of Shareholders’ Equity for  the Three Months Ended September 30, 2006 | 3      |
|       |                                                                                                |   |
|       | Consolidated Statements of Cash Flows for the Three  Months Ended September 30, 2006 and 2005       | 4      |
|       |                                                                                                |   |
|       | Notes to Consolidated Financial Statements                                                          | 5      |
|       |                                                                                                |   |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         | 25     |
|       |                                                                                                |   |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                         | 46     |
|       |                                                                                                |   |
| Item 4.    | Controls and  Procedures                                                                            | 47     |
|       |                                                                                                |   |
| ** ** | **PART  II – OTHER INFORMATION**                                                               |   |
| ** ** |                                                                                                |   |
| Item  1A.  | Risk  Factors                                                                                       | 48     |
|       |                                                                                                |   |
| Item  6.   | Exhibits                                                                                            | 48     |

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

**(inthousands, except share amounts)**

 
| ** **                                                                                                               | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                               | ** ** | **2006**               | ** ** | **2006**          | ** ** |
| ** **                                                                                                               | ** ** | **(Unaudited)**        | ** ** | **(Audited)**     | ** ** |
| Assets                                                                                                                   |       |                   |       |              |       |
| Cash and cash  equivalents                                                                                               |       | $                      | 9,276      |              | $          | 15,964 |   |
| Restricted cash - due  from title company                                                                                |       | 9,892                  |       | 25,304            |       |
| Restricted cash -  customer deposits                                                                                     |       | 8,394                  |       | 9,293             |       |
| Real estate held for  development and sale:                                                                              |       |                   |       |              |       |
| Residential properties  completed or under construction                                                                  |       | 281,325                |       | 272,068           |       |
| Land held for  development or sale and improvements                                                                      |       | 588,764                |       | 544,574           |       |
| Inventory not owned -  Variable Interest Entities                                                                        |       | 89,448                 |       | 117,073           |       |
| Property and equipment,  at cost, less accumulated depreciation                                                          |       | 3,091                  |       | 3,344             |       |
| Intangible assets                                                                                                        |       | 4,329                  |       | 4,329             |       |
| Goodwill                                                                                                                 |       | 20,514                 |       | 20,514            |       |
| Receivables, deferred  charges and other assets                                                                          |       | 19,987                 |       | 21,178            |       |
| Land deposits and costs  of future development                                                                           |       | 22,687                 |       | 26,862            |       |
| Total Assets                                                                                                             |       | $                      | 1,057,707  |              | $          | 1,060,503 |   |
|                                                                                                                     |       |                   |       |              |       |
| Liabilities and  Shareholders’ Equity                                                                               |       |                   |       |              |       |
| Liabilities:                                                                                                             |       |                   |       |              |       |
| Accounts payable                                                                                                         |       | $                      | 31,264     |              | $          | 40,796 |   |
| Accrued expenses                                                                                                         |       | 47,868                 |       | 73,490            |       |
| Deferred taxes                                                                                                           |       | 697                    |       | 697               |       |
| Customer deposits                                                                                                        |       | 13,700                 |       | 16,209            |       |
| Obligations related to  inventory not owned - Variable Interest Entities                                                 |       | 78,081                 |       | 103,636           |       |
| Mortgage and other note  obligations                                                                                     |       | 479,114                |       | 422,608           |       |
| Subordinated notes                                                                                                       |       | 105,000                |       | 105,000           |       |
| Other notes payable                                                                                                      |       | 5,870                  |       | 5,885             |       |
| Total Liabilities                                                                                                        |       | 761,594                |       | 768,321           |       |
|                                                                                                                     |       |                   |       |              |       |
| Commitments and  contingencies (See Note L)                                                                              |       |                   |       |              |       |
|                                                                                                                     |       |                   |       |              |       |
| Redeemable common stock                                                                                                  |       | 240                    |       | 240               |       |
|                                                                                                                     |       |                   |       |              |       |
| Shareholders’ Equity:                                                                                               |       |                   |       |              |       |
| Common stock, $.10 par,  23,000,000 shares authorized, 18,698,131 shares issued at September 30, 2006 and  June 30, 2006 |       | 1,870                  |       | 1,870             |       |
| Capital in excess of  par value - common stock                                                                           |       | 71,491                 |       | 72,624            |       |
| Retained earnings                                                                                                        |       | 225,499                |       | 221,967           |       |
| Treasury stock, at cost  (235,147 and 337,324 shares held at September 30, 2006 and June 30, 2006,  respectively)        |       | (2,987                 | )          | (4,519            | )          |
| Total Shareholders’  Equity                                                                                         |       | 295,873                |       | 291,942           |       |
|                                                                                                                     |       |                   |       |              |       |
| Total Liabilities and Shareholders’ Equity                                                                          |       | $                      | 1,057,707  |              | $          | 1,060,503 |   |

 

See accompanying notes which are an integral part ofthe consolidated financial statements.

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

**(Unaudited)**

**(inthousands, except per share amounts)**

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Earned revenues                             |       |                             |       |   |   |
| Residential properties                      |       | $                                | 161,772    |   | $ | 157,963 |   |
| Land sales                                  |       | 408                              |       | — |   |
| Other income                                |       | 2,922                            |       | 1,678 |   |
|                                        |       | 165,102                          |       | 159,641 |   |
| Costs and  expenses                         |       |                             |       |   |   |
| Residential properties                      |       | 131,313                          |       | 123,285 |   |
| Land sales                                  |       | 374                              |       | — |   |
| Other                                       |       | 1,999                            |       | 1,609 |   |
| Selling, general and administrative         |       | 25,059                           |       | 21,347 |   |
| Interest:                                   |       |                             |       |   |   |
| Incurred                                    |       | 11,763                           |       | 6,816 |   |
| Less capitalized                            |       | (11,763                          | )          | (6,816 | ) |
|                                        |       | 158,745                          |       | 146,241 |   |
|                                        |       |                             |       |   |   |
| Income from  operations before income taxes |       | 6,357                            |       | 13,400 |   |
| Income tax  expense                         |       | 2,458                            |       | 5,622 |   |
|                                        |       |                             |       |   |   |
| Net income                                  |       | $                                | 3,899      |   | $ | 7,778 |   |
|                                        |       |                             |       |   |   |
| Basic earnings  per share                   |       | $                                | 0.21       |   | $ | 0.42 |   |
|                                        |       |                             |       |   |   |
| Diluted earnings  per share                 |       | $                                | 0.21       |   | $ | 0.41 |   |
|                                        |       |                             |       |   |   |
| Dividends  declared per share               |       | $                                | 0.02       |   | $ | 0.02 |   |
|                                        |       |                             |       |   |   |
| Basic weighted  average shares outstanding  |       | 18,363                           |       | 18,546 |   |
|                                        |       |                             |       |   |   |
| Diluted weighted shares  outstanding        |       | 18,673                           |       | 18,893 |   |

 

See accompanying notes which are an integral part ofthe consolidated financial statements.

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**ConsolidatedStatements of Shareholders’ Equity**

**(Unaudited)**

**(dollarsin thousands)**

 
| ** **                                 | ** ** | ** **            | ** ** | ** **         | ** ** | **Capital in**       | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------|------------|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Common Stock** | ** ** | **Excess of** | ** ** | ** **                | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Shares**            | ** ** | ** **         | ** ** | **Par Value -** | ** ** | **Retained**            | ** ** | **Shares** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Issued**            | ** ** | **Amount**         | ** ** | **Common Stock**     | ** ** | **Earnings**            | ** ** | **Held**   | ** ** | **Amount** | ** ** | **Total**  | ** ** |
| Balance at June  30, 2006                  |       | 18,698,131            |       | $                  | 1,870      |                      | $          | 72,624                  |       | $          | 221,967    |       | 337,324    |       | $          | (4,519 | ) | $ | 291,942 |   |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Shares awarded  under Stock Award Plan     |       |                  |       |               |       | 63                        |       |                    |       |       |       |       |       | 63         |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Fair market  value of stock options issued |       |                  |       |               |       | 365                       |       |                    |       |       |       |       |       | 365        |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Stock options,  net                        |       |                  |       |               |       | (2,379                    | )          |                    |       | (102,177   | )          | 1,532      |       | (847       | )          |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Tax benefit of  stock option exercises     |       |                  |       |               |       | 818                       |       |                    |       |       |       |       |       | 818        |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Dividends  declared                        |       |                  |       |               |       |                      |       | (367                    | )          |       |       |       |       | (367       | )          |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Net income                                 |       |                  |       |               |       |                      |       | 3,899                   |       |       |       |       |       | 3,899      |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Balance at September  30, 2006             |       | 18,698,131            |       | $                  | 1,870      |                      | $          | 71,491                  |       | $          | 225,499    |       | 235,147    |       | $          | (2,987 | ) | $ | 295,873 |   |

 

See accompanying noteswhich are an integral part of the consolidated financial statements.

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**Orleans Homebuilders, Inc. andSubsidiaries**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**           | ** ** |
| ** **                                                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                           |       |                             |       |   |   |
| Cash flows from  operating activities:                                         |       |                             |       |   |   |
| Net income                                                                     |       | $                                | 3,899      |   | $ | 7,778 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                  |       | 342                              |       | 311 |   |
| Write-off of real estate held for development and  sale                        |       | 2,800                            |       | — |   |
| Write-off of land deposits and costs of future  development                    |       | 1,921                            |       | 62 |   |
| Amortization of note discount                                                  |       | 6                                |       | 17 |   |
| Deferred taxes                                                                 |       | —                           |       | (304 | ) |
| Stock based compensation expense                                               |       | 456                              |       | 115 |   |
| Changes in  operating assets and liabilities:                                  |       |                             |       |   |   |
| Restricted cash - due from title company                                       |       | 15,412                           |       | 22,845 |   |
| Restricted cash - customer deposits                                            |       | 899                              |       | (4,009 | ) |
| Real estate held for development and sale                                      |       | (56,247                          | )          | (73,491 | ) |
| Receivables, deferred charges and other assets                                 |       | 1,191                            |       | (135 | ) |
| Land deposits and costs of future developments                                 |       | 4,324                            |       | (2,885 | ) |
| Accounts payable and other liabilities                                         |       | (35,181                          | )          | (44,485 | ) |
| Customer deposits                                                              |       | (2,509                           | )          | 5,878 |   |
| Net cash used in  operating activities                                         |       | (62,687                          | )          | (88,303 | ) |
|                                                                           |       |                             |       |   |   |
| Cash flows from  investing activities:                                         |       |                             |       |   |   |
| Purchases of property and equipment                                            |       | (89                              | )          | (287 | ) |
| Net cash used in  investing activities                                         |       | (89                              | )          | (287 | ) |
|                                                                           |       |                             |       |   |   |
| Cash flows from  financing activities:                                         |       |                             |       |   |   |
| Borrowings from loans secured by real estate assets                            |       | 75,002                           |       | 88,000 |   |
| Repayment of loans secured by real estate assets                               |       | (18,496                          | )          | (31,381 | ) |
| Repayment of other note obligations                                            |       | (21                              | )          | (144 | ) |
| Purchase of treasury stock                                                     |       | (847                             | )          | — |   |
| Tax benefit from exercise of stock options                                     |       | 818                              |       | — |   |
| Proceeds from stock options exercised                                          |       | —                           |       | 60 |   |
| Common stock dividend paid                                                     |       | (368                             | )          | (371 | ) |
| Net cash  provided by financing activities                                     |       | 56,088                           |       | 56,164 |   |
|                                                                           |       |                             |       |   |   |
| Net decrease in  cash and cash equivalents                                     |       | (6,688                           | )          | (32,426 | ) |
| Cash and cash  equivalents at beginning of year                                |       | 15,964                           |       | 62,576 |   |
| Cash and cash  equivalents at end of period                                    |       | $                                | 9,276      |   | $ | 30,150 |   |
|                                                                           |       |                             |       |   |   |
| Supplemental  disclosure of cash flow activities:                              |       |                             |       |   |   |
| Interest paid, net of amounts capitalized                                      |       | $                                | —     |   | $ | — |   |
| Income taxes  paid                                                             |       | $                                | 791        |   | $ | 15,582 |   |

 

See accompanying noteswhich are an integral part of the consolidated financial statements.

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**ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(A)                                                      Summary of Significant Accounting Policies:

The accompanying unauditedconsolidated financial statements are presented in accordance with therequirements for Form 10-Q and do not include all the disclosures required bygenerally accepted accounting principles for complete financial statements.  Reference is made to Form 10-K as of and forthe year ended June 30, 2006 for Orleans Homebuilders, Inc. and subsidiaries(the “Company”) for additional disclosures, including a summary of the Company’saccounting policies.

In the opinion ofmanagement, the consolidated financial statements contain all adjustments,consisting of normal recurring accruals, necessary to present fairly theconsolidated financial position of the Company for the periods presented.  The interim operating results of the Companymay not be indicative of operating results for the full year.

Certain prior year amounts have beenreclassified to conform with the fiscal 2007 presentation.

***Accounting forfinancial statement misstatements:***

InSeptember 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). SAB 108 was issued in order toeliminate the diversity of practice surrounding how public companies quantifyfinancial statement misstatements.

Traditionally,there have been two widely-recognized methods for quantifying the effects offinancial statement misstatements: the “roll-over” method and the “iron curtain”method. The roll-over method focuses primarily on the impact of a misstatementon the income statement—including the reversing effect of prior yearmisstatements—but its use can lead to the accumulation of misstatements in thebalance sheet. The iron-curtain method, on the other hand, focuses primarily onthe effect of correcting the period-end balance sheet with less emphasis on the

5

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reversingeffects of prior year errors on the income statement. The Company currentlyuses the roll-over method for quantifying identified financial statementmisstatements.

InSAB 108, the SEC staff established an approach that requires quantification offinancial statement misstatements based on the effects of the misstatements oneach of the company’s financial statements and the related financial statementdisclosures. This model is commonly referred to as a “dual approach” because itrequires quantification of errors under both the iron curtain and the roll-overmethods.

SAB108 permits existing public companies to initially apply its provisions eitherby (i) restating prior financial statements as if the “dual approach” hadalways been used or (ii) recording the cumulative effect of initially applyingthe “dual approach” as adjustments to the carrying values of assets andliabilities as of January 1, 2006 with an offsetting adjustment recorded to theopening balance of retained earnings. Use of the “cumulative effect” transitionmethod requires detailed disclosure of the nature and amount of each individualerror being corrected through the cumulative adjustment and how and when itarose.

TheCompany will initially apply the provisions of SAB 108 using the cumulativeeffect transition method in connection with the preparation of its annualfinancial statements for the fiscal year ending June 30, 2007.  The application of SAB 108 will not have amaterial impact on the Company’s financial statements.

***Accounting for defined benefitpensions and other postretirement benefits:***

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans” (“SFAS 158”).   SFAS 158 requires companies to recognize theoverfunded or underfunded status of a single-employer defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize the changes in that funded status in comprehensiveincome in the year in which the changes occur. In addition, SFAS 158 requires companies to measure the funded status ofa plan as of the date of its

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year-end statement offinancial position, with limited exceptions. The effective date for the adoption of SFAS 158 for publicly tradedcompanies is as of the end of the fiscal years ending after December 15, 2006.  The Company will adopt SFAS 158 as of June30, 2007 and its impact is to eliminate the Company’s intangible asset that wasrecognized in connection with the application of SFAS No. 87, “Employers’Accounting for  Pensions” (“SFAS 87”),reduce the Company’s other comprehensive income, and increase the Company’saccrued expenses.

***Accounting for variable interestentities:***

In January 2003, the FASBissued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities,an interpretation of ARB No. 51” (“FIN 46”).  The FASB issued a revised FIN 46 (“FIN 46-R”)in December 2003 which modifies and clarifies various aspects of the originalinterpretations.  A Variable InterestEntity (“VIE”) is created when (i) the equity investment at risk is notsufficient to permit the entity to finance its activities without additionalsubordinated financial support from other parties or (ii) equity holders either(a) lack direct or indirect ability to make decisions about the entity, (b) arenot obligated to absorb expected losses of the entity or (c) do not have theright to receive expected residual returns of the entity if they occur.  If an entity is deemed to be a VIE, pursuantto FIN 46-R, an enterprise that absorbs a majority of the expected losses ofthe VIE is considered the primary beneficiary and must consolidate the VIE.

Based on the provisions ofFIN 46-R, the Company has concluded that whenever it enters into an optionagreement to acquire land or lots from an entity and pays a significant depositthat is not unconditionally refundable, a VIE is created under condition (ii)(b) of the previous paragraph.  TheCompany has been deemed to have provided subordinated financial support, whichrefers to variable interests that will absorb some or all of an entity’sexpected theoretical losses if they occur. For each VIE created, the Company will compute expected losses andresidual returns based on the probability of future cash flows as outlined inFIN 46-R.  If the Company is deemed to bethe primary beneficiary of the VIE it will consolidate the VIE on its balancesheet.  The fair value of the VIEsinventory will be reported as “Inventory not owned – Variable InterestEntities.”

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At September 30, 2006, the Companyconsolidated fifteen VIEs as a result of its options to purchase land or lotsfrom the selling entities.  The Companypaid cash or issued letters of credit deposits to these fifteen VIEs totaling$8,932,000 and incurred additional pre-acquisition costs totaling $2,435,000.  The Company’s deposits and any costs incurredprior to acquisition of the land or lots represent the Company’s maximumexposure to loss. The fair value of the VIEs inventory is reported as “Inventorynot owned – Variable Interest Entities.” The Company recorded $89,448,000 inInventory Not Owned – Variable Interest Entities as of September 30, 2006.  The fair value of the property to be acquiredless cash deposits and pre-acquisition costs, which totaled $78,081,000 atSeptember 30, 2006, was reported on the balance sheet as “Obligations relatedto inventory not owned – Variable Interest Entities.” Creditors, if any, ofthese VIEs have no recourse against the Company.

The Company willcontinue to secure land and lots using options. Including the deposits and other costs capitalized in connection withthe VIEs discussed in the prior paragraph, the Company had total costs incurredto acquire land and lots at September 30, 2006 of approximately $34,054,000,including $19,348,000 of cash deposits. The total purchase price under thesecancelable contracts or options is approximately $437,345,000. The maximumexposure to loss is limited to the deposits, although some deposits arerefundable, and costs incurred prior to the acquisition of the land or lots.

***Accounting for share based payments***:

InDecember 2004, the FASB revised SFAS No. 123 through the issuance of SFAS No.123-R “Share Based Payment”, revised (“SFAS 123-R”).  SFAS 123-R waseffective for the Company commencing July 1, 2005.  SFAS 123-R, amongother things, eliminates the alternative to use the intrinsic value method ofaccounting for stock based compensation and requires entities to recognize thecost of employee services received in exchange for awards of equity instrumentsbased on the grant-date fair value of those awards.  The fair value basedmethod in SFAS 123-R is similar to the fair-value-based method in SFAS No. 123in most respects, subject to certain key differences.  As the Companypreviously adopted the fair value recognition provisions of SFAS No. 123prospectively for all stock awards granted, commencing on July 1, 2002, theimpact of the modified prospective adoption of SFAS 123-R did not have asignificant impact on the financial position or results of operations of theCompany.  The Company amortizescompensation expense on a

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straightline basis over the vesting period of each option grant.  The Company utilizes the Black-Scholes optionpricing model to calculate the compensation expense associated with stockoptions.  For the three months endedSeptember 30, 2006, the Company recorded pretax compensation expense associatedwith stock awards of $456,000.  Totalcompensation cost related to nonvested awards not yet recognized of $5,802,000will be recognized according to vesting schedules through March 2015.  For the three months ended September 30,2006, the Company recognized an $818,000 tax benefit resulting from theexercise of 200,000 non-qualified stock options by Michael T. Vesey, Presidentand Chief Operating Officer.

***Accounting for incometaxes:***

InJune 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes – An interpretation of FASB Statement 109” (“FIN 48”).  FIN 48 prescribes a more-likely than notrecognition threshold as well as a measurement attribute for the financialstatement recognition and measurement of tax positions taken or expected to betaken in a tax return.  FIN 48 iseffective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating theimpact of the adoption of FIN 48.

InDecember 2004, the FASB issued FASB Staff Position No. FAS 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deductionon Qualified Production Activities Provided by the American Jobs Creation Actof 2004” (“FSP FAS 109-1”). FSP FAS 109-1 clarifies that the deduction will betreated as a “special deduction” as described in Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes.” As such, thespecial deduction has no effect on deferred tax assets and liabilities existingat the date of enactment. The impact of the deduction will be reported in theperiod in which the deduction is claimed.   The Company files aconsolidated return on a calendar year.  Accordingly, the Company beganreflecting the special deduction with respect to its operations effectiveJanuary 1, 2005.  Its impact was to lower the effective tax provision inthe periods in which the deduction was claimed and that this benefit willincrease as the deduction is phased in under the statute.

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(B)                                                        Acquisitions:

***Peachtree Acquisition:***

On December 23, 2004, pursuant to an Asset PurchaseAgreement of the same date, the Company acquired, through a wholly-ownedsubsidiary, the real estate assets described below (the “Assets”) fromPeachtree Residential Properties, LLC, a North Carolina limited liabilitycompany, and Peachtree Townhome Communities, LLC, a North Carolina limitedliability company, which, at the time the Company acquired the assets, werewholly owned subsidiaries of Peachtree Residential Properties, Inc., a Georgiacorporation (collectively, “Peachtree Residential Properties”).

The Assets included: (a) improved and unimproved real property, (b) rights to acquire realestate under options or agreements, (c) equipment, (d) rights under certaincontracts for the sale of homes to be sold and leases for real property, (e)rights to certain tradenames and other intangibles, including contract backlog,(f) homes and other improvements under construction as of the closing, (g)certain plans, drawings, specifications, permits and rights under warrantiesand (h) governmental approvals and books and records associated with, orrelating to the foregoing.

The Company paid $29,300,000 in cash, to acquire theAssets.  The Company also assumed certainliabilities of Peachtree Residential Properties, less $200,000 to be retainedby the Company and applied towards the administration of certain home warrantyclaims.

***Realen Acquisition:***

On July 28, 2004, pursuantto a Purchase Agreement of the same date, the Company completed its acquisitionof all of the issued and outstanding partnership interests in Realen HomesL.P., a Pennsylvania limited partnership (“Realen Homes”), from Realen GeneralPartner, LLC, a Pennsylvania limited liability company, and DB Homes VentureL.P., a Pennsylvania limited partnership. The Company acquired the limitedpartner’s interest in Realen Homes and a subsidiary of the Company, RHGP LLC,acquired the general partner’s interest and serves as the general partner ofRealen Homes.

In accordance with thePurchase Agreement, the consideration paid by the Company consisted of: (i)$53,348,000 in cash delivered at closing, (ii) a promissory note of the

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Company in the aggregateprincipal amount of $5 million, payable over a period of up to two years, withan interest rate of 3% per year and (iii) a warranty holdback of $1.5 millionretained by the Company to be applied toward the administration of any warrantyclaims made against Realen Homes in excess of certain predetermined amounts.  The purchase price was determined based onRealen Homes’ book value at June 30, 2004, its management personnel, itsprofitability, its backlog and its land position.

The Company evaluated the$5,000,000 3% note in accordance with Accounting Principles Board Opinion No.21, “Interest on Receivables and Payables” (“APB 21”) and determined that itwas a below market rate note.  Inaccordance with APB 21, the Company estimated, based on current marketconditions that the Company would likely have been able to obtain similarfixed-rate financing from a third party at approximately 150 basis pointshigher than the note actually obtained. The Company imputed interest on the note at 4.5% and reduced thecarrying value of the note from $5,000,000 to $4,863,000.  The discount of $137,000 was recorded asinterest expense over the life of the note. The Company recorded the remaining $6,000 of the discount to interestexpense during the three months ended September 30, 2006.

The acquisition included,subject to specified exceptions, all assets and liabilities of Realen Homes,including land owned or under contract, homes under construction but not soldor sold but not delivered, sales offers and reservations, and model homes andfurnishings. The acquired assets were used by Realen Homes in the homebuildingbusiness in Pennsylvania and Illinois. The Company intends to continue to usethe acquired assets in the homebuilding business.

The Company accounted forthe acquisition as a purchase in accordance with SFAS No. 141, “BusinessCombinations.”  The purchase price wasallocated to goodwill for $13,327,000, which is defined as the fair value ofassets and liabilities acquired in excess of the purchase price, and tointangible assets for $500,000.  Theintangible assets represent the intangible value of the backlog acquired fromRealen Homes.  The intangible value ofthe backlog was amortized into cost of sales as the acquired backlog wasdelivered.  The Company amortized theremaining $6,000 of the

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intangible value of thebacklog acquired from Realen Homes during the three months ended September 30,2005.

***Masterpiece Acquisition:***

On July 28, 2003, theCompany acquired all of the issued and outstanding shares of Masterpiece Homesand entered into an employment agreement with the president of MasterpieceHomes.  Masterpiece Homes is anestablished homebuilder located in Orange City, Florida.  The terms of the stock purchase agreement andemployment agreement are as follows:  (i)$3,900,000 in cash, at closing; and (ii) $2,130,000 payable January 1, 2005(the “Contingent Stock Payment”), unless prior to that date the president isterminated for cause or terminates his employment without good reason, asdefined in the employment agreement; (iii) sale of 30,000 shares of the Company’scommon stock at $8 per share with a put option at the same price, (iv) stockoptions to purchase 45,000 shares of the Company’s common stock at $10.64 pershare vesting equally on December 31, 2004, 2005 and 2006; and (v) contingentpayments representing 25% of the pre-tax profits of Masterpiece Homes for thecalendar years ended December 31, 2004, 2005 and 2006.  The Company also incurred approximately$405,000 in acquisition costs to complete this transaction.  The aforementioned costs are considered partof the purchase price of Masterpiece Homes, except for the following items thatare considered part of, and contingent upon, the employment agreement:  (a) $710,000 of the $2,130,000 paid January 10, 2005; (b) stock options topurchase 45,000 shares of the Company’s common stock at $10.64 per share; and(c) contingent payments representing 25% of the pre-tax profits of MasterpieceHomes for the calendar years ended December 31, 2004, 2005 and 2006.

The Company accounted for these transactions inaccordance with SFAS No. 141, “Business Combinations”, whereby approximately$5,700,000 was considered to be part of the purchase price of the business andthe remainder part of employee compensation. That portion related to employee compensation will be charged to expenseover the period to which it relates. With respect to the amounts allocated to the purchase, such amounts wereallocated to the fair value of assets and liabilities acquired with the excessof approximately $3,007,000 allocated to goodwill.

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From July 28, 2003 throughSeptember 30, 2006, the Company recorded $330,000 in pretax compensationexpense associated with the stock options granted pursuant to the employmentagreement with the president of Masterpiece Homes, recognized $4,090,000 in contingentpayments representing 25% of the pre-tax profits of Masterpiece Homes, and paidthe Contingent Stock Payment of $2,130,000 on January 1, 2005 as required underthe terms of the acquisition agreement. See Note (M) below for additionaldiscussion relating to the Company’s employment agreement with the president ofMasterpiece Homes.

(C)                                                        Asset impairments - real estate held fordevelopment and sale:

The Company recognized long-lived asset impairmentlosses totaling $3,200,000 for the three months ended September 30, 2006.  The Company’s northern region recognized a$400,000 impairment loss relating to one undeveloped land parcel obtained inconnection with the Realen Homes acquisition. The Company’s Florida region recognized a $2,600,000 impairment lossrelating to real estate held for development and sale in the Palm Coast marketof the Florida region.  In addition, theCompany’s southern region recognized a $200,000 impairment loss primarilyrelating to a land development project in the Company’s Raleigh market.   The long-lived asset impairment losses werethe amounts by which the book value of the assets described above exceededtheir fair values.  The fair value of theassets was determined based on the current estimated sales price, less theestimated costs of construction and selling costs to dispose of theassets.  The long-lived asset impairmentlosses were included in the cost of residential properties on the ConsolidatedStatements of Operations.  The Companydid not have any long-lived asset impairment losses during the three monthsended September 30, 2005.

(D)                                                       Mortgage and other note obligations andsubordinated notes:

The $584,114,000outstanding balance at September 30, 2006 consists of $478,950,000 outstandingunder the Revolving Credit Facility, which is discussed below, $105,000,000outstanding pursuant to the sale and issuance of trust preferred securitiesdiscussed below, and $164,000 under mortgage obligations secured by land heldfor development and sale and improvements. The average month-end balance during the three months ended September30, 2006 was $568,111,000.

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***Revolving Credit Facility:***

At September 30, 2006,the Company had approximately $478,950,000 outstanding under the RevolvingCredit Facility.  In addition,approximately $47,392,000 of letters of credit and other assurances of theavailability of funds have been provided under the Revolving Credit Facility.

On December 22, 2004, Greenwood Financial,Inc., a wholly-owned subsidiary of the Company and other wholly-owned subsidiariesof the Company, as borrowers, and Orleans Homebuilders, Inc. as guarantor,entered into a Revolving Credit and Loan Agreement (as amended and restated onJanuary 24, 2006, the “Amended and Restated Credit Agreement”) for a$650,000,000 Senior Secured Revolving Credit and Letter of Credit Facility (the“Revolving Credit Facility”) with various banks as lenders.

Under and subject to the terms of the Amended and Restated CreditAgreement, the borrowers may borrow and re-borrow for the purpose of financingthe acquisition and development of real estate, the construction of homes andimprovements, for investment in joint ventures, for working capital and forsuch other appropriate purposes as may be approved by the lenders.  The Amended and Restated Credit Agreement isprimarily collateralized by real estate held for development and sale.  In addition, in connection with the Amendedand Restated Credit Agreement, the Company entered into an amended and restatedGuaranty Agreement.

The Revolving Credit Facility has a maturity date of December 20, 2008and may be increased to $750,000,000 under certain circumstances.  Borrowings and advances under the RevolvingCredit Facility bear interest on a per annum basis equal to the LIBOR MarketIndex Rate plus a non-default variable spread ranging from 165 basis points to225 basis points, depending upon the Company’s leverage ratio.  During the term of the Revolving CreditFacility, interest is payable monthly in arrears.  The September 30, 2006 interest rate was 7.45%,which included a 212.5 basis point spread.

The Company is subject to certain financial ratios and customarycovenants as set forth in the Amended and Restated Credit Agreement.  These financial ratios and covenants include,but are not limited to, debt service; consolidated adjustable tangible networth; leverage; investments in joint ventures, land held for development

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and sale and speculative inventory; and limitations on subordinated andpurchase money mortgage debt.  Asdescribed in note (M) below, the Amended and Restated Credit Agreement wasamended on November 1, 2006.  As part ofthe amendment, the maximum permitted ratio of all land owned which is notsubject to a qualifying agreement of sale and on which no unit has been or isbeing constructed to the  Company’sconsolidated adjusted tangible net worth was increased from 1.75-to-1.00 to1.85-to-1.00 as of September 30, 2006. At September 30, 2006, the Company’s ratio of all land owned which isnot subject to a qualifying agreement of sale and on which no unit has been oris being constructed to the Company’s consolidated adjusted tangible net worthwas 1.77-to-1.00.  As a result of theNovember 1, 2006 amendment, the Company was in compliance with all applicablefinancial ratios and covenants in the Amended and Restated Credit Agreement asof September 30, 2006.  See Note (M) foradditional discussion and disclosure of the amendment to the Amended andRestated Credit Agreement.

***Trust Preferred Securities:***

On November 23, 2005, the Company issued$75,000,000 of trust preferred securities which mature on January 30, 2036 andare callable, in whole or in part, at par plus accrued interest on or afterJanuary 30, 2011.  For the first tenyears, the securities have a fixed interest rate of 8.61% per annum.  Thereafter, the securities have a floatinginterest rate equal to three-month LIBOR plus 360 basis points per annum,resetting quarterly. In the event the Company fails to meet certain financialcovenants, the applicable rate of interest will be increased by 300 basispoints until such time as the Company is in compliance with the financialcovenants, then the interest rate will return to its original amount.  It is an event of default if the increasedinterest rate is in effect for four consecutive quarters.   The transaction is treated as debt forfinancial statement purposes.  TheCompany used proceeds from the sale of these securities to repay outstandingobligations under the Revolving Credit Facility discussed above.

On September 20, 2005, the Company issued$30,000,000 of trust preferred securities which mature on September 30, 2035and are callable, in whole or in part, at par plus accrued interest on or afterSeptember 30, 2010.  For the first tenyears, the securities have a fixed interest rate of 8.52% per annum.  Thereafter, the securities have a floatinginterest rate equal to three-month LIBOR plus 380 basis points per annum,resetting quarterly.  The transaction istreated as debt for financial

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statement purposes.  The Company used proceeds from the sale ofthese securities to fund land purchases and residential construction.  The obligations relating to the trustpreferred securities are subordinated to the Revolving Credit Facility.

(E)                                                         Redeemable Common Stock:

In connection with the Company’sacquisition of Parker and Lancaster Corporation on October 13, 2000, theCompany issued 300,000 shares of common stock of the Company to the formershareholders of Parker and Lancaster Corporation.  The former shareholders of Parker andLancaster Corporation had the right to cause the Company to repurchase thecommon stock approximately five years after the closing of the acquisition at aprice of $3.33 per share.  The redemptionfeature of these shares expired during the quarter ended December 31, 2005.

In connection with theCompany’s acquisition of Masterpiece Homes on July 28, 2003, the Company sold30,000 shares of common stock of the Company to the president of MasterpieceHomes at $8 per share.  The president ofMasterpiece Homes has the right to cause the Company to repurchase the commonstock at $8 per share by giving notice to the Company no later than the earlierof December 31, 2006 or 30 days after termination of his employment, asspecified in his employment agreement. See Note (M) below for additionaldiscussion relating to the Company’s employment agreement with the president ofMasterpiece Homes.

(F)                                                         Employee Retirement and Deferred CompensationPlans

***Employee Retirement Plan:***

On December 1, 2005, the Company adopted a non-qualified target defined benefit retirement plan, effective as of September 1, 2005, which covers a group of management employees of the Company.  This Supplemental Executive Retirement Plan (the “SERP”) is intended to provide to each participant an annual supplemental retirement benefit based upon their years of service with the Company and highest average compensation for five consecutive years.  The annual supplemental benefit for each participant will be adjusted based on the actual performance of the SERP compared to the target. The benefit is payable for life with a minimum of 10 years guaranteed. In order to qualify for normal retirement benefits, a participant must attain age 65 with at least five years of participation in the SERP. Early retirement

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will be permitted beginning at age 55, after 5 years of participation in the Plan. Early retirement benefits will be adjusted actuarially to reflect the early retirement date.

If a participant terminates employment with the Company prior to attaining his or her normal retirement date, other than by reason of early retirement, death or disability, the participant will forfeit all benefits under the SERP.

The Company can amend or terminate the SERP at any time. However, no termination will affect the participants’ accrued benefits as determined in accordance with the SERP or delay any payments to a participant beyond the time that such amount would otherwise be payable without regard to the amendment.

The Company used a 4% annual compensation increase and a 6.16% discount rate in its calculation of the present value of its projected benefit obligation at June 30, 2006.  The discount rate used represented the Moody’s AA bond rate for long-term bonds as of June 2006.  The Company recognized the following costs related to the SERP for the three months ended September 30, 2006:

 

| Net periodic pension cost:          |   |   |    |
|-------------------------------------|--------|--------|---------|
| Service cost                        |   | $      | 170,000 |   |
| Interest cost                       |   | 94,000 |    |
| Amortization of  prior service cost |   | 90,000 |    |
| Total net periodic  pension cost    |   | $      | 354,000 |   |

 

As the SERP was not adopteduntil December 1, 2005, the Company did not recognize any net periodic pensioncosts during the three months ended September 30, 2005.

***Deferred CompensationPlan:***

On December 1, 2005, the Company adopted an Executive Compensation Deferral Plan (the “Deferral Plan”) effective as of June 1, 2005.  Under the Plan, participants will have the ability to defer a portion of their compensation which will be credited to an account maintained by the Company for the participant. Amounts contributed by participants are always vested. Participant deferral accounts will be maintained by the Company for recordkeeping purposes only. Participants will have no interest in any assets which may be set aside by the Company to meet its obligations under the Deferral Plan. At September 30, 2006, the Company had obligations totaling $1,506,000 in connection with the Deferral Plan.  The deferred compensation is

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included in accrued expenses on the Company’s Consolidated Balance Sheet at September 30, 2006.

(G)                                                        Earnings Per Share:

Theweighted average number of shares used to compute basic earnings per commonshare and diluted earnings per common share and a reconciliation of thenumerator and denominator used in the computation for the three months endedSeptember 30, 2006 and 2005 are shown in the following table:

 

|                                                                                | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**           | ** ** |
| ** **                                                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(Unaudited)**                  | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**          | ** ** |
| Weighted average  common shares issued                                         |       | 18,698                           |       | 18,698 |   |
| Less: Average  treasury shares outstanding                                     |       | (335                             | )          | (152 | ) |
| Basic EPS shares                                                               |       | 18,363                           |       | 18,546 |   |
| Effect of  assumed shares issued under treasury stock method for stock options |       | 310                              |       | 347 |   |
| Diluted EPS  shares                                                            |       | 18,673                           |       | 18,893 |   |
|                                                                           |       |                             |       |   |   |
| Net income for basic  and diluted EPS                                          |       | $                                | 3,899      |   | $ | 7,778 |   |
|                                                                                |            |                                  |            |  |  |  |  |

 

(H)                                                       Residential Properties Completed or underConstruction:

Residentialproperties completed or under construction consist of the following:

 

|                                                               | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **(Unaudited)**              | ** ** | ** **              | ** ** |
| ** **                                                    | ** ** | **(in thousands)**      | ** ** |
| Under contract  for sale (backlog)                            |       | $                            | 120,802    |                    | $          | 124,073 |   |
| Unsold                                                        |       | 160,523                      |       | 147,995                 |       |
| Total residential  properties completed or under construction |       | $                            | 281,325    |                    | $          | 272,068 |   |

 

(I)                                                            Segment Reporting:

Statement of Financial Accounting Standards No. 131 “Disclosuresabout Segments of an Enterprise and Related Information” (“SFAS 131”)establishes standards for the manner in which public enterprises report segmentinformation about operating segments. The Company has determined that its operations primarily involve five

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reportable homebuilding segments operating in fourteenmarkets.   Revenues are primarily derivedfrom the sale of homes which the Company constructs.  The segments reported have been determined tohave similar economic characteristics including similar historical and expectedfuture operating performance, employment trends, land acquisitions and landconstraints, municipality behavior and to have met the other aggregationcriteria in SFAS 131.  The reportablehomebuilding segments include operations conducting business in the followingstates:

Northern: southeastern Pennsylvania, central New Jersey, southern New Jersey, and OrangeCounty, New York

Southern: Charlotte, Raleigh and Greensboro, North Carolina; Richmond and Tidewater,  Virginia

Florida: Orlando, Palm Coast, and Palm Bay, Florida

Midwestern: Chicago, Illinois

Western:  Phoenix, Arizona.

The Company’s evaluation of segment performance isbased on net income. Below is a summary of revenue, net income, and income taxexpense for each reportable segment for the three months ended September 30,2006 and 2005:

|                                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **(Unaudited)  (in thousands)**                 | ** ** |
| ** **                        | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **Total  Revenue**                | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Northern                          |       | $                                                    | 49,646     |   | $ | 59,296 |   |
| Southern                          |       | 74,113                                               |       | 59,834 |   |
| Florida                           |       | 18,417                                               |       | 17,896 |   |
| Midwestern                        |       | 21,426                                               |       | 21,261 |   |
| Western                           |       | —                                               |       | — |   |
| Corporate and  unallocated (1)    |       | 1,500                                                |       | 1,354 |   |
| Consolidated  Total               |       | $                                                    | 165,102    |   | $ | 159,641 |   |
|                              |       |                                                 |       |   |   |
| **Net  Income (Loss)**            |       |                                                 |       |   |   |
| Northern                          |       | $                                                    | 1,220      |   | $ | 5,226 |   |
| Southern                          |       | 4,382                                                |       | 2,208 |   |
| Florida                           |       | (579                                                 | )          | 759 |   |
| Midwestern                        |       | 1,047                                                |       | 792 |   |
| Western                           |       | (143                                                 | )          | — |   |
| Corporate and  unallocated (1)    |       | (2,028                                               | )          | (1,207 | ) |
| Consolidated  Total               |       | $                                                    | 3,899      |   | $ | 7,778 |   |
|                              |       |                                                 |       |   |   |
| **Income  Tax Expense (Benefit)** |       |                                                 |       |   |   |
| Northern                          |       | $                                                    | 794        |   | $ | 4,188 |   |
| Southern                          |       | 2,755                                                |       | 1,430 |   |
| Florida                           |       | (356                                                 | )          | 477 |   |
| Midwestern                        |       | 665                                                  |       | 490 |   |
| Western                           |       | (76                                                  | )          | — |   |
| Corporate and  unallocated        |       | (1,324                                               | )          | (963 | ) |
| Consolidated Total                |       | $                                                    | 2,458      |   | $ | 5,622 |   |

 

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(1) – Corporate and unallocated includes therevenues and expenses of the Company’s mortgage brokerage and propertymanagement operations as well as corporate level selling, general andadministrative expenses.  These selling,general, and administrative expenses are primarily comprised of corporatesalaries, bonuses, and benefits; accounting and consulting fees; corporatetravel expenses; net periodic pension costs; and compensation expense resultingfrom the fair valuation of stock options.

Below is as a summary of total assets andgoodwill for each reportable segment at September 30, 2006 and June 30, 2006:

 

|                                | ** ** | **September 30,**  | ** ** | **June 30,** | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2006**                | ** ** | **2006**          | ** ** |
| ** **                     | ** ** | **(Unaudited)**         | ** ** | ** **        | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| **Assets**                     |       |                    |       |              |       |
| North                          |       | $                       | 449,105    |              | $          | 437,535 |   |
| South                          |       | 325,850                 |       | 332,965           |       |
| Florida                        |       | 107,656                 |       | 122,809           |       |
| Midwest                        |       | 133,239                 |       | 126,901           |       |
| West                           |       | 36,592                  |       | 34,917            |       |
| Corporate and  unallocated (2) |       | 5,265                   |       | 5,376             |       |
| Consolidated  Total            |       | $                       | 1,057,707  |              | $          | 1,060,503 |   |
|                           |       |                    |       |              |       |
| **Goodwill**                   |       |                    |       |              |       |
| North                          |       | $                       | 7,918      |              | $          | 7,918 |   |
| South                          |       | 4,180                   |       | 4,180             |       |
| Florida                        |       | 3,007                   |       | 3,007             |       |
| Midwest                        |       | 5,409                   |       | 5,409             |       |
| Consolidated Total             |       | $                       | 20,514     |              | $          | 20,514 |   |

 

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(2) – Corporate and unallocatedincludes the intangible asset recorded in connection with the Company’ssupplemental executive retirement plan as well as the carrying value(historical cost less accumulated depreciation) of the Company’s partialownership interests in four corporate jets. See Note (E) for additional discussion and disclosure of thesupplemental executive retirement plan.

(J)                                                           Litigation

From time to time theCompany is named as a defendant in legal actions arising from its normalbusiness activities.  Although the amountof liability that could arise with respect to currently pending actions cannotbe accurately predicted, in the opinion of the Company any such liability willnot have a material adverse effect on the financial position, operating resultsor cash flows of the Company.

(K)                                                       Restructuring

During the three monthsended September 30, 2006, the Company reduced its workforce by approximately 67employees in response to decreased new order activity resulting from weakenedconditions in the U.S. housing market.  The workforce reductions occurred primarily in the Company’s northernregion and included general and administrative, sales, and constructionoverhead positions.   The Companyrecognized approximately $297,000 in severance expenses related to the workforce reduction during the three months ended September 30, 2006, of whichapproximately $173,000 was paid prior to September 30, 2006.    The costs were included in costs ofresidential properties and selling, general and administrative expenses in the Company’sConsolidated Statement of Operations for the three months ended September 30,2006.

(L)                                                         Commitments and Contingencies:

As of September 30, 2006,the Company owned or controlled approximately 16,347 building lots.  As part of the aforementioned building lots,the Company had contracted to purchase, or had under option, undeveloped landand improved lots for an aggregate purchase price of approximately $437,345,000which are expected to yield approximately 7,400 building lots.  Generally,the Company structures its land acquisitions so that it has the right to cancelits agreements to purchase undeveloped land and improved lots by forfeiture ofits deposit under the agreement. Furthermore,

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purchaseof the properties is usually contingent upon obtaining all governmentalapprovals and satisfaction of certain requirements by the Company and thesellers.

(M)                                                    Subsequent Events:

***Amended and RestatedCredit Agreement:***

On November 1, 2006, the Company’s Amendedand Restated Credit Agreement described in Note (D) above was amended asfollows:

·                  The required debt service ratio was reducedfrom 2.25-to-1.00 for the entire term of the revolving credit facility to2.25-to-1.00 at September 30, 2006; 2.00-to-1.00 at December 31, 2006;1.65-to-1.00 at March 31, 2007, 1.50-to-1.00 at June 30, 2007 through December31, 2007; 1.65-to-1.00 at March 31, 2008; and 1.80-to-1.00 at June 30, 2008through December 31, 2008.  In addition,the Company’s debt service ratio must be greater than or equal to 1.75-to-1.00as of the last day of at least two fiscal quarters in each rolling period offive consecutive quarters, beginning with the period of five consecutive fiscalquarters ending September 30, 2006.

·                  The definition of debt service included inthe calculation of the debt service ratio was modified to exclude the repaymentof the $5,000,000 note issued to the former owners of Realen Homes.  See Note (B) above for a discussion of theterms of the $5,000,000 note that was issued in connection with the acquisitionof Realen Homes.

·                  The non-default variable interest rate spreadwill be increased by 25 basis points when the Company’s debt service ratio isless than 2.25-to-1.00.

·                  The permitted ratio of all land owned whichis not subject to a qualifying agreement of sale and on which no unit has beenor is being constructed to the  Company’sconsolidated adjusted tangible net worth was reset to 1.85-to-1.00 at September30, 2006 through December 31, 2006; 1.75-to-1.00 at March 31, 2007 through June30, 2007; 1.65-to-1.00 at September 30, 2007 through December 31, 2007; and1.50-to-1.00 from March 31, 2008 through December 31, 2008.

·                  The permitted minimum consolidated tangiblenet worth was reset to 90% of the Company’s consolidated tangible net worth atSeptember 30, 2006 plus an

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amount equal to 50% of the net income earned duringeach fiscal quarter that ends after September 30, 2006 and all of the netproceeds of equity securities issued by the Company after September 30,2006.  In addition, the definition ofconsolidated tangible net worth was modified to exclude any intangible assetsrecognized in connection with the Company’s supplemental executive retirementplan.  Prior to the amendment to theAmended and Restated Credit Agreement, the permitted minimum consolidatedtangible net worth was defined as $180,000,000 plus an amount equal to 50% ofthe net income earned during each fiscal quarter that ended after December 31,2005 and all of the net proceeds of equity securities issued by the Companyafter December 31, 2005.

·                  The required financial metrics that allow forthe unsecured election provided under the Revolving Credit Facility wererevised to a leverage ratio that is less than or equal to 2.00-to-1.00; a debtservice ratio that is greater than or equal to 2.25-to-1.00; and a ratio of allland owned which is not subject to a qualifying agreement of sale and on whichno unit has been or is being constructed to the Company’s consolidated adjustedtangible net worth is less than or equal to 1.25-to-1.00.  If these financial metrics are in place fortwo consecutive quarters, then the Company may request a release of allcollateral under the Revolving Credit Facility.

***Restructuring:***

In October of 2006, theCompany completed its plan to reduce its workforce by approximately 112employees in response to decreased new order activity resulting from weakenedconditions in the U.S. housing market.  The workforce reductions took place in all of the Company’s regions andincluded general and administrative, sales, and construction overheadpositions.  The Company will recognizeapproximately $475,000 in severance related expenses in the second quarter offiscal 2007 related to the reductions. The workforce reductions were commensurate with the Company’s decreasednew order activity and production levels.

OnOctober 26, 2006, Mr. Robert Fitzsimmons’s employment as the president ofMasterpiece Homes, Inc. ended by mutual agreement.  Mr. Fitzsimmons will receive his base salaryand medical benefits through January 28, 2007. In addition, Mr. Fitzsimmons will receive an amount equal to 25% ofcertain pre-tax profits attributable to the operations of Masterpiece Homes forthe period January 1, 2006

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throughDecember 31, 2006.  Pursuant to hisemployment agreement, Mr. Fitzsimmons acquired options to purchase up to45,000 shares of the Company’s common stock at an exercise price of $10.64 pershare.  On April 4, 2005, Mr. Fitzsimmonsexercised 15,000 of these options.  Anadditional 15,000 options vested on December 31, 2005 and the remaining 15,000options will vest on December 31, 2006. Mr. Fitzsimmons will retain these options.

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**ORLEANSHOMEBUILDERS, INC. AND SUBSIDIARIES**

**Item 2.           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

OrleansHomebuilders, Inc. and its subsidiaries (collectively, the “Company”, “OHB” or “Orleans”)develop, build and market high-quality, single-family homes, townhomes andcondominiums to serve various homebuyer segments, including first-time, firstmove-up, second move-up, luxury and active adult.  The Company is currently engaged inresidential real estate development in the following fourteen markets:southeastern Pennsylvania; central New Jersey; southern New Jersey; OrangeCounty New York; Charlotte, Raleigh and Greensboro, North Carolina; Richmondand Tidewater, Virginia; Orlando, Palm Coast, and Palm Bay Florida; Chicago,Illinois; and Phoenix, Arizona.  TheCompany’s Charlotte, North Carolina market also includes operations in adjacentcounties in South Carolina.  The Companyhas operated in its Pennsylvania and New Jersey markets for over 85 years andbegan operations in its North Carolina and Virginia markets in fiscal 2001through the acquisition of Parker & Lancaster Corporation, a privately-heldresidential homebuilder.  The Companyentered the Orlando and Palm Coast, Florida markets on July 28, 2003 throughits acquisition of Masterpiece Homes, Inc. (“Masterpiece Homes”), aprivately-held residential homebuilder. On July 28, 2004, the Company entered the Chicago, Illinois marketthrough the acquisition of Realen Homes, L.P. (“Realen Homes”), an establishedprivately-held homebuilder with operations in southeastern Pennsylvania andChicago, Illinois.  On December 23, 2004,pursuant to an Asset Purchase Agreement of the same date, the Company acquired,through a wholly-owned subsidiary, certain real estate assets from PeachtreeResidential Properties, LLC, a North Carolina limited liability company andPeachtree Townhome Communities, LLC, a North Carolina limited liability companywhich, at the time the Company acquired the assets, were wholly-owned subsidiariesof Peachtree Residential Properties, Inc., a Georgia corporation (collectively,“Peachtree Residential Properties”).  InDecember 2005, the Company entered the Phoenix, Arizona market as a start-upoperation via the purchase of an undeveloped parcel of land.  The Results of Operations includes therevenue and expenses associated with certain real estate assets acquired fromPeachtree Residential Properties from December 22, 2004 through September 30,2006.

Referencesto a given fiscal year in this Quarterly Report on Form 10-Q are to the fiscalyear ended June 30th of that year.  Forexample, the phrases “fiscal 2007” or “2007 fiscal year” refer to the fiscalyear ended June 30, 2007.  When used inthis report, “northern region” refers to the Company’s markets in Pennsylvania,New Jersey and New York, which includes the southeastern Pennsylvaniaoperations of Realen Homes that were acquired on July 28, 2004; “southernregion”

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refersto the Company’s markets in North Carolina and Virginia; “Florida region”refers to the Company’s markets in Florida; “midwestern region” refers to theCompany’s market in Illinois; and “western region” refers to the Company’smarket in Arizona.

# **Results of Operations**

The following table sets forth certain details as to residential salesactivity.  The information provided isfor the three months ended September 30, 2006 and 2005 in the case ofresidential revenue earned and new orders, and as of September 30, 2006 and2005 in the case of backlog.

Asales contract or potential sale is classified as a new order and, therefore,becomes a part of backlog, at the time a homebuyer executes a contract topurchase a home from the Company.

 

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|                                                  | ** ** | **Three Months  Ended September 30,**               | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(in thousands, except homes  data)  (Unaudited)** | ** ** |
| ** **                                       | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| **Northern  Region**                             | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| **New  Jersey, New York and Pennsylvania**       | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Residential  revenue                             |       | $                                                                  | 48,591     |   | $ | 59,053 |   |
| Homes                                            |       | 96                                                                 |       | 137 |   |
| Average Price                                    |       | $                                                                  | 506        |   | $ | 431 |   |
| New Orders                                       |       | $                                                                  | 55,492     |   | $ | 92,164 |   |
| Homes                                            |       | 115                                                                |       | 176 |   |
| Average Price                                    |       | $                                                                  | 483        |   | $ | 524 |   |
| Backlog                                          |       | $                                                                  | 107,424    |   | $ | 283,632 |   |
| Homes                                            |       | 213                                                                |       | 574 |   |
| Average Price                                    |       | $                                                                  | 504        |   | $ | 494 |   |
| Net Income                                       |       | $                                                                  | 1,220      |   | $ | 5,226 |   |
|                                             |       |                                                               |       |   |   |
| **Southern  Region**                             |       |                                                               |       |   |   |
| **North  Carolina, South Carolina and Virginia** |       |                                                               |       |   |   |
| Residential  revenue                             |       | $                                                                  | 73,693     |   | $ | 59,800 |   |
| Homes                                            |       | 155                                                                |       | 156 |   |
| Average Price                                    |       | $                                                                  | 475        |   | $ | 383 |   |
| New Orders                                       |       | $                                                                  | 47,670     |   | $ | 113,660 |   |
| Homes                                            |       | 94                                                                 |       | 258 |   |
| Average Price                                    |       | $                                                                  | 507        |   | $ | 441 |   |
| Backlog                                          |       | $                                                                  | 127,621    |   | $ | 212,151 |   |
| Homes                                            |       | 241                                                                |       | 475 |   |
| Average Price                                    |       | $                                                                  | 530        |   | $ | 447 |   |
| Net Income                                       |       | $                                                                  | 4,382      |   | $ | 2,208 |   |
|                                             |       |                                                               |       |   |   |
| **Florida  Region**                              |       |                                                               |       |   |   |
| Residential  revenue                             |       | $                                                                  | 18,177     |   | $ | 17,879 |   |
| Homes                                            |       | 64                                                                 |       | 79 |   |
| Average Price                                    |       | $                                                                  | 284        |   | $ | 226 |   |
| New Orders                                       |       | $                                                                  | (1,878     | ) | $ | 32,039 |   |
| Homes                                            |       | 2                                                                  |       | 100 |   |
| Average Price                                    |       | $                                                                  | (939       | ) | $ | 320 |   |
| Backlog                                          |       | $                                                                  | 23,116     |   | $ | 100,362 |   |
| Homes                                            |       | 76                                                                 |       | 380 |   |
| Average Price                                    |       | $                                                                  | 304        |   | $ | 264 |   |
| Net Income  (Loss)                               |       | $                                                                  | (579       | ) | $ | 759 |   |
|                                             |       |                                                               |       |   |   |
| **Midwestern  Region**                           |       |                                                               |       |   |   |
| Residential  revenue                             |       | $                                                                  | 21,311     |   | $ | 21,231 |   |
| Homes                                            |       | 48                                                                 |       | 52 |   |
| Average Price                                    |       | $                                                                  | 444        |   | $ | 408 |   |
| New Orders                                       |       | $                                                                  | 16,479     |   | $ | 23,486 |   |
| Homes                                            |       | 38                                                                 |       | 55 |   |
| Average Price                                    |       | $                                                                  | 434        |   | $ | 427 |   |
| Backlog                                          |       | $                                                                  | 32,506     |   | $ | 60,478 |   |
| Homes                                            |       | 71                                                                 |       | 142 |   |
| Average Price                                    |       | $                                                                  | 458        |   | $ | 426 |   |
| Net Income                                       |       | $                                                                  | 1,047      |   | $ | 792 |   |
|                                             |       |                                                               |       |   |   |
| **Western  Region****(1)**                       |       |                                                               |       |   |   |
| Net Loss                                         |       | $                                                                  | (143       | ) | $ | — |   |
| ** **                                       |       |                                                               |       |   |   |
| **Corporate  and Unallocated**                   |       |                                                               |       |   |   |
| Net Loss                                         |       | $                                                                  | (2,028     | ) | $ | (1,207 | ) |
| ** **                                       |       |                                                               |       |   |   |
| **Combined  Regions**                            |       |                                                               |       |   |   |
| Residential revenue                              |       | $                                                                  | 161,772    |   | $ | 157,963 |   |
| Homes                                            |       | 363                                                                |       | 424 |   |
| Average Price                                    |       | $                                                                  | 446        |   | $ | 373 |   |
| New Orders                                       |       | $                                                                  | 117,763    |   | $ | 261,349 |   |
| Homes                                            |       | 249                                                                |       | 589 |   |
| Average Price                                    |       | $                                                                  | 473        |   | $ | 444 |   |
| Backlog                                          |       | $                                                                  | 290,667    |   | $ | 656,623 |   |
| Homes                                            |       | 601                                                                |       | 1,571 |   |
| Average Price                                    |       | $                                                                  | 484        |   | $ | 418 |   |
| Net Income                                       |       | $                                                                  | 3,899      |   | $ | 7,778 |   |

 

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(1)  Information on net loss isfor the period beginning December 1, 2005, the date the Company entered thisregion, through September 30, 2006.  Theregion did not generate residential revenue or new orders for the periodbeginning December 1, 2005, the date the Company entered this region, throughSeptember 30, 2006.

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**Ordersand Backlog**

New orders for the three months ended September 30, 2006 decreased$143,586,000, or 55.0%, to $117,763,000 on 249 homes, compared to $261,349,000on 589 homes for the three months ended September 30, 2005.  The average price per home of new ordersincreased by approximately 6.5% to $473,000 for the three months endedSeptember 30, 2006 compared to $444,000 for the three months ended September30, 2005.

The significant decrease in the Company’s new orders during the threemonths ended September 30, 2006 compared to the three months ended September30, 2005 was attributable to unfavorable market conditions in the housingindustry.  The major factors contributingto the unfavorable market conditions include increased new and resale homeinventory levels primarily caused by speculators attempting to sell their homesand decreased consumer confidence as reluctant homebuyers delay their purchasedecisions.  The Company believes thatthese market conditions will continue to have a negative impact on new ordersand new order pricing in the near-term, thereby further reducing futurerevenues, gross margins and net income.

In response to these unfavorable market conditions, the Company reducedits workforce by approximately 67 employees during the three months endedSeptember 30, 2006 and completed its plan reduce its workforce by an additional112 employees in October of 2006.  Theworkforce reductions took place in all of the Company’s regions and includedgeneral and administrative, sales, and construction overhead positions.   The Company recognized approximately$297,000 in severance expenses related to the September 2006 work forcereductions of which approximately $173,000 was paid prior to September 30,2006.  The Company will recognizeapproximately $475,000 in severance related expenses in connection with theOctober 2006 reductions during the second quarter of fiscal 2007 related to thereductions.  The workforce reductionswere commensurate with the Company’s decreased new order activity andproduction levels.

The backlog at September 30, 2006 decreased $365,956,000, or 55.7%, to$290,667,000 on 601 homes compared to the backlog at September 30, 2005 of$656,623,000 on 1,571 homes.  Thedecrease in the backlog was attributable to decreases in new orders in all ofthe Company’s regions.  The average priceper home included in the Company’s backlog increased 15.8% to $484,000 atSeptember 30, 2006 compared to $418,000 at September 30, 2005.

The Company experienced a cancellation rate of 32% for the three monthsended September 30, 2006, compared to 17% for the three months ended September30, 2005.   The increase in the

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cancellation rate is primarily attributable to investors exiting theCompany’s Palm Coast market in the Florida region.

***Northern Region:***

New orders for the three months ended September 30, 2006 decreased$36,672,000 on 2 homes to $55,492,000, or 39.8%, on 115 homes, compared to$92,164,000 on 176 homes for the three months ended September 30, 2005. Thedecrease in new orders was attributable to weakened market conditions in thehousing industry which placed downward pressure on demand.  The average price per home of new ordersdecreased by 7.8% to $483,000 for the three months ended September 30, 2006compared to $524,000 for the three months ended September 30, 2005.  The decrease in the average price per home ofnew orders was impacted by two factors. First, the Company experienced a shift in the mix of new orders for thethree months ended September 30, 2006 compared to the three months endedSeptember 30, 2005.  Specifically,multi-family homes, which typically have lower price points than single familyhomes, comprised a larger percentage of new orders than single family homes forthe three months ended September 30, 2006 when compared to the three monthsended September 30, 2005.  Second, theCompany offered increased sales incentives during the three months endedSeptember 30, 2006 when compared with the three months ended September 30, 2005in an effort to increase absorption rates and convert the Company’s inventoryinto cash.

The Company had 36 active selling communities in thenorthern region as of September 30, 2006 compared to 26 active sellingcommunities at September 30, 2005.  Theincrease in the community count was primarily attributable to the opening ofeight new selling communities during the three months ended September 30, 2006.

***Southern Region:***

New orders for the three months ended September 30, 2006 decreased$65,990,000 to $47,670,000, or 58.1%, on 94 homes compared to $113,660,000 on258 homes for the three months ended September 30, 2005.  The decrease in new orders was attributableto decreased demand in the region which began during the fourth quarter offiscal 2006 and has continued through the first quarter of fiscal 2007.  The overall decrease in new order dollars waspartially offset by an increase in the average price per home of new orders of15.0% to $507,000 for the three months ended September 30, 2006 compared to$441,000 for the three months ended September 30, 2005. This increase inthe average price per home of new orders was attributable to a product mixshift in which second time move-up and luxury homes comprised a larger

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percentage of new orders than entry level and first time move-up homesduring the three months ended September 30, 2006 compared to the three monthsended September 30, 2005.

The Company had 45 active selling communities in the southern region asof September 30, 2006 compared to 46 active selling communities as of September30, 2005.

***Florida Region:***

New orders for the three months ended September 30, 2006 decreased$33,917,000 as the Company’s cancellations outpaced new orders by $1,878,000during the quarter.  The Company had neworders of $32,039,000 on 100 homes for the three months ended September 30,2005.  The decrease in new orders was aresult of decreased demand and significantly increased cancellation rates asinvestors continued to exit various markets in the region.  The Company experienced a 97% cancellationrate in the Florida region for the three months ended September 30, 2006,compared to 25% for the three months ended September 30, 2005.  The increased cancellation rates have resultedin a significant increase in the Company’s new home inventory in theregion.  The Company is currentlyoffering significant sales incentives in an effort to increase absorption ratesand decrease its new home inventory levels.

The Company had seven active selling communities in the Florida regionas of September 30, 2006, compared to six active selling communities as ofSeptember 30, 2005.

***Midwestern Region:***

New orders for the three months ended September 30, 2006 decreased$7,007,000 to $16,479,000, or 29.8%, on 38 homes compared to $23,486,000 on 55homes for the three months ended September 30, 2005.    The decrease in new orders was primarilyattributable to softening demand in the market that began during the fourthquarter of fiscal 2006 and has continued through the first quarter of fiscal2007.  The average price per home of neworders increased by 1.6% to $434,000 for the three months ended September 30,2006 compared to $427,000 for the three months ended September 30, 2005.   The increase in the average price per homeof new orders was the result of a product mix shift in which single familyhomes comprised a larger percentage of new orders during the three months endedSeptember 30, 2006 compared to the three months ended September 30, 2005.  The mix shift was partially offset by areduction in the average price per home of new order as a result of salesincentives being offered in the region in an effort to increase absorptionrates, efficiently manage inventory levels and convert the Company’s inventoryto cash.

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The Company had nine active selling communities in the midwesternregion as of September 30, 2006, compared to seven active selling communitiesas of September 30, 2005.

# **TotalEarned Revenues**

Total earned revenues for the three months ended September 30, 2006increased $5,461,000, to $165,102,000, or 3.4%, compared to $159,641,000 forthe three months ended September 30, 2005. Residential revenue earned from the sale of residential homes included363 homes totaling $161,772,000 during the three months ended September 30,2006, as compared to 424 homes totaling $157,963,000 during the three monthsended September 30, 2005.  The averageselling price per home delivered increased by approximately 19.6% to $446,000for the three months ended September 30, 2006 compared to $373,000 for thethree months ended September 30, 2005.

***Northern Region:***

Residential revenue earned for the three months ended September 30,2006 decreased $10,462,000 to $48,591,000, or 17.8%, on 96 homes delivered as comparedto $59,053,000 on 137 homes delivered during the three months ended September30, 2005. The decrease in residential revenue earned was a result of reducednew order activity in the region which began during the second quarter offiscal 2006 and has continued through the first quarter of fiscal 2007.  The decrease was partially offset by anincrease in the average selling price per home delivered of 17.4% to $506,000for the three months ended September 30, 2006 from $431,000 for the threemonths ended September 30, 2005 as a result of a shift in the product mix ofhomes delivered.  Specifically, singlefamily homes, which typically have higher average sales prices than townhomesand condominiums, comprised a larger percentage of the total number of homesdelivered in the region during the three months ended September 30, 2006 whencompared to the three months ended September 30, 2005.

***Southern Region:***

Residential revenue earned for the three months ended September 30,2006 increased $13,893,000 to $73,693,000, or 23.2%, on 155 homes delivered ascompared to $59,800,000 on 156 homes delivered during the three months endedSeptember 30, 2005.  The increase inresidential revenue earned was attributable to an increase in the average priceper home delivered of 24.0% to $475,000 for the three months ended September30, 2006 from $383,000 for the three months ended September 30, 2005.   The increase in the average price per homedelivered was

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attributable to positive new order pricing trends in previous quarterscoupled with a change in the product mix of homes delivered during the threemonths ended September 30, 2006 compared to the three months ended September30, 2005.  Specifically, the Companydelivered a larger percentage of luxury and second move-up homes during thethree months ended September 30, 2006 than the three months ended September 30,2005.

***Florida Region:***

Residentialrevenue earned for the three months ended September 30, 2006 increased $298,000to $18,177,000, or 1.7%, on 64 homes, compared to $17,879,000 on 79 homes forthe three months ended September 30, 2005. The increase in residential revenue earned was primarily attributable toa 25.7% increase in the average selling price per home delivered to $284,000for the three months ended September 30, 2006 compared to $226,000 for thethree months ended September 30, 2005. The increase in the average selling price per home delivered wasattributable to positive pricing trends in the region in previous quarters anda continued shift in the region toward move-up homes which command greaterpricing power than entry level homes. The decrease in the number of homesdelivered was attributable to decreased new orders in previous quarters.

***Midwestern Region:***

Residential revenue earned for the three months ended September 30,2006 increased $80,000 to $21,311,000, or 0.4%, on 48 homes, compared to$21,231,000 on 52 homes for the three months ended September 30, 2005.  The average selling price per home deliveredincreased 8.8% to $444,000 for the three months ended September 30, 2006compared to $408,000 for the three months ended September 30, 2005.

# **OtherIncome**

Other income consists primarily of property management fees andmortgage processing income.  Other incomefor the three months ended September 30, 2006 increased $1,244,000 to$2,922,000, or 74.1%, compared to $1,678,000 for the three months endedSeptember 30, 2005.  The increase inother income was attributable to increases in forfeited customer deposits,interest income earned, mortgage processing revenue, and property managementrevenue during the three months ended September 30, 2006 compared to the threemonths ended September 30, 2005.  Inaddition, the Company recognized $550,000 of other income in connection withthe settlement of outstanding issues relating to a parcel of land in theCompany’s northern region that was previously under agreement of sale.

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# **Costsand Expenses**

Costs and expenses for the three months ended September 30, 2006increased $12,504,000 to $158,745,000, or 8.6%, when compared with the threemonths ended September 30, 2005.  Thecost of residential properties for the three months ended September 30, 2006increased $8,028,000 to $131,313,000, or 6.5%, when compared with the threemonths ended September 30, 2005.  The increasein the cost of residential properties was primarily attributable to an increasein residential properties revenue as well as increases in interest andconstruction costs.  The Company’sconsolidated gross profit margin decreased 3.2% to 18.8% for the three monthsended September 30, 2006 compared to 22.0% for the three months ended September30, 2005.

The decrease in Company’s consolidated gross profit margin wasattributable to decreases in gross profit margins in the Company’s northern andFlorida regions that were partially offset by increases in gross profit marginsin the Company’s southern and midwestern regions. The decreased gross profit margin in the Company’s northern region wasattributable to the recognition of a $400,000 impairment loss relating to oneundeveloped land parcel as well as increased sales incentives and increasedconstruction and interest costs.  Thedecreased gross profit margin in the Company’s Florida region was attributableto the recognition of a $2,600,000 impairment loss relating to Company’sresidential properties inventory in the Palm Coast market. The impairmentlosses recognized in the Company’s northern and Florida regions represented theamounts by which the book values of the undeveloped land parcel and the residentialproperties inventory described above exceeded the estimated fair values of theassets.  The increased gross profitmargins in the Company’s southern and midwestern regions were the result ofpositive home pricing trends in previous quarters that outpaced interest andconstruction cost increases.

Interest included in the costs and expenses of residential propertiesfor the three months ended September 30, 2006 and 2005 was $3,507,000 and$2,219,000, respectively.  The increasein interest included in the costs and expenses of residential properties wasattributable to increased interest rates on the Company’s variable rate debtduring fiscal 2006 coupled with additional interest payments on the Company’ssubordinated notes issued in fiscal 2006. The Company’s subordinated notes have higher interest rates than theCompany’s other debt.  The interestincurred during the construction periods is capitalized to inventory and thenexpensed to the cost of residential properties in the period in which the homesettles.

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The Company sells a variety of home types in various communities andregions, each yielding a different gross profit margin.  As a result, depending on the mix of bothcommunities and of home types delivered, the consolidated gross profit marginmay fluctuate up or down on a periodic basis and periodic profit margins maynot be representative of the consolidated gross profit margin for future years.

**Selling, General & Administrative Expenses**

For the three months ended September 30, 2006, selling, general andadministrative expenses increased $3,712,000 to $25,059,000, or 17.4%, whencompared with the three months ended September 30, 2005.  The increase was attributable to increases infixed selling and general and administrative expenses.

The increased general and administrative expenses for the three monthsended September 30, 2006 compared to the three months ended September 30, 2005was primarily attributable to four factors. First, the pre-acquisition costs associated with abandoned land developmentprojects increased to $1,521,000 during the three months ended September 30,2006 from $62,000 for the three months ended September 30, 2005 as the Companycontinued to evaluate the viability and profitability of its lots under optionagreements in a weakened housing market.   Second, the Company recognized $354,000 in expenses during the threemonths ended September 30, 2006 in connection with the adoption of asupplemental executive retirement plan during the second quarter of fiscal2006.  Third, the Company incurred highercompensation related expenses during the three months ended September 30, 2006,including expenses associated with the issuance of stock options, as a resultof the addition of two senior executives to the Company’s management teamduring the fourth quarter of fiscal 2006. Lastly, the Company incurred $167,000 in general and administrativeexpenses during the three months ended September 30, 2006 in connection withits start-up operations in the western region.

The increased fixed selling expenses for the three months endedSeptember 30, 2006 compared to the three months ended September 30, 2005was primarily attributable to increased sales office start-up expenses andincreased non-commission related salaries and wages as a result of an increasein the number of communities open during the first quarter of fiscal 2007compared with the first quarter of fiscal 2006.

The selling, general and administrative expenses as a percentage ofresidential revenue earned for the three months ended September 30, 2006increased 2.0% to 15.5% as compared to the 13.5%

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for the three months ended September 30, 2005.  The increased percentage was primarily due tothe increased fixed selling and general and administrative expenses discussedabove.

# **IncomeTax Expense**

Income tax expense for the three months ended September 30, 2006decreased $3,164,000 to $2,458,000, or 56.3% from $5,622,000 for the threemonths ended September 30, 2005. The decrease in income tax expense wasprimarily attributable to a decrease in income from operations before incometaxes for the three months ended September 30, 2006 compared to the threemonths ended September 30, 2005 as well as a decrease in the Company’seffective tax rate.

Income tax expense as a percentage of income from operations beforeincome taxes was 38.7% and 42.0% for the three months ended September 30, 2006and the three months ended September 30, 2005, respectively.  The decrease in income tax expense as a percentageof income from operations before taxes was attributable to two factors.  First, the Company experienced a shift in themix of income from operations before income taxes earned in each of the Company’sregions.  Specifically, the Company’ssouthern and midwestern regions, which have lower state tax rates than theCompany’s northern region, comprised a larger percentage of the Company’sincome from operations before income taxes during the three months endedSeptember 30, 2006 than during the three months ended September 30, 2005.  Second the Company’s effective tax ratedecreased for the three months ended September 30, 2006 compared to the threemonths ended September 30, 2005 as a result of a decrease in unfavorablepermanent differences resulting from stock option activity as well as increasedtax benefits resulting from the tax deduction on qualified productionactivities provided by the American Jobs Creation Act of 2004.

# **NetIncome**

Net income for the three months ended September 30, 2006 decreased$3,879,000, or 49.9%, to $3,899,000, compared with $7,778,000 for the threemonths ended September 30, 2005.  Thedecrease in net income was attributable to the decrease in gross profit marginscoupled with the increase in selling, general and administrative expensesdiscussed above.

**Liquidityand Capital Resources**

On an ongoing basis, theCompany requires capital to purchase and develop land, to construct homes, tofund related carrying costs and overhead and to fund various advertising andmarketing programs to facilitate sales. These expenditures include site preparation, roads, water and sewerlines, impact fees and earthwork, as well as the construction costs of thehomes and amenities.

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The Company’s sources ofcapital include funds derived from operations, sales of assets and variousborrowings, most of which are secured. The Company believes that funds generated from operations and financialcommitments from available lenders will provide sufficient capital for theCompany to meet its existing operating needs.

***Trust PreferredSecurities:***

OnNovember 23, 2005, the Company issued $75,000,000 of trust preferred securitieswhich mature on January 30, 2036 and are callable, in whole or in part, at parplus accrued interest on or after January 30, 2011.  For the first ten years, the securities havea fixed interest rate of 8.61% per annum. Thereafter, the securities have a floating interest rate equal tothree-month LIBOR plus 360 basis points per annum, resetting quarterly. In theevent the Company fails to meet certain financial covenants, the applicablerate of interest will be increased by 300 basis points until such time as theCompany is in compliance with the financial covenants, then the interest ratewill return to its original amount.   Itis an event of default if the increased interest rate is in effect for fourconsecutive quarters.   The transactionis treated as debt for financial statement purposes.  The Company used proceeds from the sale ofthese securities to repay outstanding obligations under the Revolving CreditFacility discussed below.

OnSeptember 20, 2005, the Company issued $30,000,000 of trust preferredsecurities which mature on September 30, 2035 and are callable, in whole or inpart, at par plus accrued interest on or after September 30, 2010.  For the first ten years, the securities havea fixed interest rate of 8.52% per annum. Thereafter, the securities have a floating interest rate equal tothree-month LIBOR plus 380 basis points per annum, resetting quarterly.  The transaction is treated as debt forfinancial statement purposes.  TheCompany used proceeds from the sale of these securities to fund land purchasesand residential construction.  Theobligations relating to the trust preferred securities are subordinated to theRevolving Credit Facility.

***Revolving Credit Facility:***

At September 30, 2006, the Company had $123,658,000 ofborrowing capacity under its secured revolving credit facility discussed below,of which $31,934,000 was available to be drawn based upon the Company’sborrowing base.  A majority of the Company’sdebt is variable rate, primarily based on 30-day LIBOR, and therefore, theCompany is exposed to market risk in connection with interest ratechanges.  At September 30, 2006, the30-day LIBOR rate of interest was 5.32%.

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OnDecember 22, 2004, Greenwood Financial, Inc., a wholly-owned subsidiary of theCompany and other wholly-owned subsidiaries of the Company, as borrowers, andOrleans Homebuilders, Inc. as guarantor, entered into a Revolving Credit andLoan Agreement (as amended and restated on January 24, 2006, the “Amended andRestated Credit Agreement”) for a $650,000,000 Senior Secured Revolving Creditand Letter of Credit Facility (the “Revolving Credit Facility”) with variousbanks as lenders.

Underand subject to the terms of the Amended and Restated Credit Agreement, theborrowers may borrow and re-borrow for the purpose of financing the acquisitionand development of real estate, the construction of homes and improvements, forinvestment in joint ventures, for working capital and for such otherappropriate purposes as may be approved by the lenders.  The Amended and Restated Credit Agreement isprimarily collateralized by real estate held for development and sale.  In addition, in connection with the Amendedand Restated Credit Agreement, the Company entered into an amended and restatedGuaranty Agreement.

TheRevolving Credit Facility has a maturity date of December 20, 2008 and may beincreased to $750,000,000 under certain circumstances.  Borrowings and advances under the RevolvingCredit Facility bear interest on a per annum basis equal to the LIBOR MarketIndex Rate plus a non-default variable spread ranging from 165 basis points to225 basis points, depending upon the Company’s leverage ratio.  During the term of the Revolving CreditFacility, interest is payable monthly in arrears.  The September 30, 2006 interest rate was7.45%, which included a 212.5 basis point spread.

TheCompany is subject to certain financial ratios and customary covenants as setforth in the Amended and Restated Credit Agreement.  These financial ratios and covenants include,but are not limited to, debt service; consolidated adjustable tangible networth; leverage; investments in joint ventures, land held for development andsale and speculative inventory; and limitations on subordinated and purchasemoney mortgage debt.  As described below,the Amended and Restated Credit Agreement was amended on November 1, 2006.  As part of the amendment, the maximumpermitted ratio of all land owned which is not subject to a qualifyingagreement of sale and on which no unit has been or is being constructed to theCompany’s consolidated adjusted tangible net worth was increased from1.75-to-1.00 to 1.85-to-1.00 as of September 30, 2006. At September 30, 2006,the Company’s ratio of all land owned which is not subject to a qualifyingagreement of sale and on which no unit has been or is being constructed to theCompany’s consolidated adjusted tangible net worth was 1.77-to-1.00.  As a result of the November 1, 2006

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amendment,the Company was in compliance with all applicable financial ratios andcovenants in the Amended and Restated Credit Agreement as of September 30,2006.

OnNovember 1, 2006, the Company’s Amended and Restated Credit Agreement describedabove was amended as follows:

·                  Therequired debt service ratio was reduced from 2.25-to-1.00 for the entire termof the revolving credit facility to 2.25-to-1.00 at September 30, 2006;2.00-to-1.00 at December 31, 2006; 1.65-to-1.00 at March 31, 2007, 1.50-to-1.00at June 30, 2007 through December 31, 2007; 1.65-to-1.00 at March 31, 2008; and1.80-to-1.00 at June 30, 2008 through December 31, 2008.  In addition, the Company’s debt service ratiomust be greater than or equal to 1.75-to-1.00 as of the last day of at leasttwo fiscal quarters in each rolling period of five consecutive quarters,beginning with the period of five consecutive fiscal quarters ending September30, 2006.

·                  Thedefinition of debt service included in the calculation of the debt serviceratio was modified to exclude the repayment of the $5,000,000 note issued tothe former owners of Realen Homes.  SeeNote (B) in the Notes to the Consolidated Financial Statements for a discussionof the terms of the $5,000,000 note that was issued in connection with theacquisition of Realen Homes.

·                  Thenon-default variable interest rate spread will be increased by 25 basis pointswhen the Company’s debt service ratio is less than 2.25-to-1.00.

·                  Thepermitted ratio of all land owned which is not subject to a qualifyingagreement of sale and on which no unit has been or is being constructed to theCompany’s consolidated adjusted tangible net worth was reset to 1.85-to-1.00 atSeptember 30, 2006 through December 31, 2006; 1.75-to-1.00 at March 31, 2007through June 30, 2007; 1.65-to-1.00 at September 30, 2007 through December 31,2007; and 1.50-to-1.00 from March 31, 2008 through December 31, 2008.

·                  Thepermitted minimum consolidated tangible net worth was reset to 90% of theCompany’s consolidated tangible net worth at September 30, 2006 plus an amountequal to 50% of the net income earned during each fiscal quarter that endsafter September 30, 2006 and all of the net proceeds of equity securitiesissued by the Company after September 30, 2006. In addition, the definition of consolidated tangible net worth wasmodified to exclude any intangible assets recognized in connection with the Company’ssupplemental executive retirement plan. Prior to the amendment to the Amended and

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Restated Credit Agreement, the permitted minimumconsolidated tangible net worth was defined as $180,000,000 plus an amountequal to 50% of the net income earned during each fiscal quarter that endedafter December 31, 2005 and all of the net proceeds of equity securities issuedby the Company after December 31, 2005.

·                  Therequired financial metrics that allow for the unsecured election provided underthe Revolving Credit Facility were revised to a leverage ratio that is lessthan or equal to 2.00-to-1.00; a debt service ratio that is greater than orequal to 2.25-to-1.00; and a ratio of all land owned which is not subject to aqualifying agreement of sale and on which no unit has been or is beingconstructed to the Company’s consolidated adjusted tangible net worth is lessthan or equal to 1.25-to-1.00. If these financial metrics are in place for twoconsecutive quarters, then the Company may request a release of all collateralunder the Revolving Credit Facility.

***Employee Retirement Plan:***

On December 1, 2005, the Company adopted a non-qualified target defined benefit retirement plan, effective as of September 1, 2005, which covers a group of management employees of the Company.  This Supplemental Executive Retirement Plan (the “SERP”) is intended to provide to each participant an annual supplemental retirement benefit based upon their years of service with the Company and highest average compensation for five consecutive years.  The annual supplemental benefit for each participant will be adjusted based on the actual performance of the SERP compared to the target. The benefit is payable for life with a minimum of 10 years guaranteed. In order to qualify for normal retirement benefits, a participant must attain age 65 with at least five years of participation in the SERP. Early retirement will be permitted beginning at age 55, after 5 years of participation in the Plan. Early retirement benefits will be adjusted actuarially to reflect the early retirement date.

If a participant terminates employment with the Company prior to attaining his or her normal retirement date, other than by reason of early retirement, death or disability, the participant will forfeit all benefits under the SERP.

The Company can amend or terminate the SERP at any time. However, no termination will affect the participants’ accrued benefits as determined in accordance with the SERP or delay any payments to a participant beyond the time that such amount would otherwise be payable without regard to the amendment.

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The Company used a 4% annual compensation increase and a 6.16% discount rate in its calculation of the present value of its projected benefit obligation at June 30, 2006.  The discount rate used represented the Moody’s AA bond rate for long-term bonds as of June 2006.  The Company recognized the following costs related to the SERP for the three months ended September 30, 2006:

| Net periodic pension cost:          |   |   |    |
|-------------------------------------|--------|--------|---------|
| Service cost                        |   | $      | 170,000 |   |
| Interest cost                       |   | 94,000 |    |
| Amortization of  prior service cost |   | 90,000 |    |
| Total net periodic  pension cost    |   | $      | 354,000 |   |

 

As the SERP was not adopted until December 1, 2005, the Company did notrecognize any net periodic pension costs during the three months endedSeptember 30, 2005.

***Deferred Compensation Plan:***

On December 1, 2005, the Company adopted an Executive Compensation Deferral Plan (the “Deferral Plan”) effective as of June 1, 2005.  Under the Plan, participants will have the ability to defer a portion of their compensation which will be credited to an account maintained by the Company for the participant. Amounts contributed by participants are always vested. Participant deferral accounts will be maintained by the Company for recordkeeping purposes only. Participants will have no interest in any assets which may be set aside by the Company to meet its obligations under the Deferral Plan. At September 30, 2006, the Company had obligations totaling $1,506,000 in connection with the Deferral Plan.  The deferred compensation is included in accrued expenses on the Company’s Consolidated Balance Sheet at September 30, 2006.

***Share Repurchase Program:***

In September 2005, the Board of Directors authorized the repurchase ofup to one million shares of the Company’s common stock.  The repurchases, which represent up to 5% ofthe Company’s 18.7 million shares of common stock currently outstanding, willbe made from time to time through open market purchases or privately negotiatedtransactions at the Company’s discretion and in accordance with the rules ofthe Securities and Exchange Commission. The amount and timing of the repurchases will depend on marketconditions and other factors.

TheCompany did not repurchase any shares under the share repurchase program duringthe three months ended September 30, 2006 or September 30, 2005.

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***Cash Flow Statement:***

Net cash used in operating activities for the three months endedSeptember 30, 2006 was $62,687,000, compared to net cash used in operatingactivities for the prior year three month period of $88,303,000.  The decrease was primarily attributable to adecrease in cash used for real estate held for development and sale relating tosite improvement costs for land previously acquired and land acquisitions. Thedecrease in cash used for accounts payable and other liabilities coupled withdecreased net income and increased write-offs associated with real estate heldfor development and sale and land deposits and costs of future development alsocontributed to the decrease in cash used in operating activities. Net cash usedin investing activities for the three months ended September 30, 2006 was$89,000, compared to $287,000 for the prior fiscal period.  This decrease was attributable to a decreasein fixed asset additions.   Net cashprovided by financing activities for the three months ended September 30, 2006was $56,088,000, compared to $56,164,000 for the prior fiscal period.

**LotPositions**

As of September 30, 2006, the Company owned or controlled approximately16,347 building lots.  Included in theaforementioned lots, the Company had contracted to purchase, or has underoption, undeveloped land and improved building lots for an aggregate purchaseprice of approximately $437,345,000 that are expected to yield approximately7,400 building lots.

***Undeveloped Land Acquisitions:***

In recent years, the process of acquiring desirable undeveloped landhas become extremely competitive, particularly in the northern region, mostlydue to the lack of available parcels suitable for development.  In addition, expansion of regulation in thehousing industry has increased the time it takes to acquire undeveloped landwith all of the necessary governmental approvals required to beginconstruction.  Generally, the Companystructures its land acquisitions so that it has the right to cancel itsagreements to purchase undeveloped land by forfeiture of its deposit under theagreement.  As of September 30, 2006, allbut one of the Company’s agreements to purchase undeveloped land werestructured in this manner.  For the threemonths ended September 30, 2006, the Company forfeited $1,016,000 of landdeposits and expensed an additional $505,000 of pre-acquisition costs relatedto the cancellation of purchase agreements. Included in the balance sheet captions “Inventory not owned – VariableInterest Entities” and “Land deposits and costs of future development,” atSeptember 30, 2006, the Company had $30,540,000 invested in 53 parcels ofundeveloped land, of which $16,150,000 was deposits, a

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portion of which is non-refundable. At September 30, 2006, overall undeveloped parcels of land undercontract had an aggregate purchase price of approximately $365,791,000 and wereexpected to yield approximately 6,663 building lots.

The Company attempts to further mitigate the risks involved inacquiring undeveloped land by structuring its undeveloped land acquisitions sothat the deposits required under the agreements coincide with certainbenchmarks in the governmental approval process, thereby limiting the amount atrisk.  This process allows the Company toperiodically review the approval process and make a decision on the viabilityof developing the acquired parcel based upon expected profitability.  In some circumstances the Company may berequired to make deposits solely due to the passage of time.  This structure still provides the Company anopportunity to periodically review the viability of developing the parcel ofland.  In addition, the Company primarilystructures its agreements to purchase undeveloped land to be contingent uponobtaining all governmental approvals necessary for construction.  Under most agreements, the Company securesthe responsibility for obtaining the required governmental approvals as theCompany believes that it has significant expertise in this area.  The Company intends to complete theacquisition of undeveloped land after all governmental approvals are inplace.  In certain circumstances,however, when all extensions have been exhausted, the Company must make adecision on whether to proceed with the purchase even though all governmentalapprovals have not yet been received.  Inthese circumstances, the Company performs reasonable due diligence to ascertainthe likelihood that the necessary governmental approvals will be granted.

***Improved Lot Acquisitions:***

The process of acquiring improved building lots from developers isextremely competitive.  The Companycompetes with many national homebuilders to acquire improved building lots,some of which have greater financial resources than the Company.  The acquisition of improved lots is usuallyless risky than the acquisition of undeveloped land as the contingencies andrisks involved in the land development process are borne by the developer.  In addition, governmental approvals aregenerally in place when the improved building lots are acquired.

At September 30, 2006, the Company had contracted to purchase or hadunder option approximately 737 improved building lots for an aggregate purchaseprice of approximately $71,554,000.  AtSeptember 30, 2006, the Company had $3,514,000 invested in these improvedbuilding lots, of which $3,198,000 is deposits. There were no deposits forfeited during the three months endedSeptember 30, 2006 with respect to improved building lots.

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TheCompany expects to utilize primarily the Revolving Credit Facility as describedabove as well as other existing capital resources, to finance the acquisitionsof undeveloped land and improved lots described above.  The Company anticipates completing a majorityof these acquisitions during the next several years.

**CriticalAccounting Policies**

For a discussion of the Company’s critical accounting policies, see “CriticalAccounting Policies” under Item 7 of the Company’s Annual Report on Form 10-Kfor fiscal year ended June 30, 2006 filed with the Securities and ExchangeCommission on September 11, 2006.

# **Recent AccountingPronouncements**

***Accounting forfinancial statement misstatements:***

InSeptember 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). SAB 108 was issued in order toeliminate the diversity of practice surrounding how public companies quantifyfinancial statement misstatements.

Traditionally,there have been two widely-recognized methods for quantifying the effects offinancial statement misstatements: the “roll-over” method and the “iron curtain”method. The roll-over method focuses primarily on the impact of a misstatementon the income statement—including the reversing effect of prior yearmisstatements—but its use can lead to the accumulation of misstatements in thebalance sheet. The iron-curtain method, on the other hand, focuses primarily onthe effect of correcting the period-end balance sheet with less emphasis on thereversing effects of prior year errors on the income statement. The Companycurrently uses the roll-over method for quantifying identified financialstatement misstatements.

InSAB 108, the SEC staff established an approach that requires quantification offinancial statement misstatements based on the effects of the misstatements oneach of the company’s financial statements and the related financial statementdisclosures. This model is commonly referred to as a “dual approach” because itrequires quantification of errors under both the iron curtain and the roll-overmethods.

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SAB108 permits existing public companies to initially apply its provisions eitherby (i) restating prior financial statements as if the “dual approach” hadalways been used or (ii) recording the cumulative effect of initially applyingthe “dual approach” as adjustments to the carrying values of assets andliabilities as of January 1, 2006 with an offsetting adjustment recorded to theopening balance of retained earnings. Use of the “cumulative effect” transitionmethod requires detailed disclosure of the nature and amount of each individualerror being corrected through the cumulative adjustment and how and when itarose.

TheCompany will initially apply the provisions of SAB 108 using the cumulativeeffect transition method in connection with the preparation of its annualfinancial statements for the fiscal year ending June 30, 2006.  The application of SAB 108 will not have amaterial impact on the Company’s financial statements.

***Accounting for defined benefit pensions and other postretirementbenefits:***

In September 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS158”).   SFAS 158 requires companies torecognize the overfunded or underfunded status of a single-employer definedbenefit postretirement plan as an asset or liability in its statement offinancial position and to recognize the changes in that funded status incomprehensive income in the year in which the changes occur.  In addition, SFAS 158 requires companies tomeasure the funded status of a plan as of the date of its year-end statement offinancial position, with limited exceptions. The effective date for the adoption of SFAS 158 for publicly traded companiesis as of the end of the fiscal years ending after December 15, 2006.  The Company will adopt SFAS 158 as of June30, 2007 and its impact is to eliminate the Company’s intangible asset that wasrecognized in connection with the application of SFAS No. 87, “Employers’Accounting for  Pensions” (“SFAS 87”),reduce the Company’s other comprehensive income, and increase the Company’saccrued expenses.

***Accounting for share based payments:***

In December 2004, the FASB revised SFAS No. 123through the issuance of SFAS No. 123-R “Share Based Payment”, revised (“SFAS123-R”).  SFAS 123-R was effective for the Company commencing July 1,2005.  SFAS 123-R, among other things, eliminates the alternative to usethe intrinsic value method of accounting for stock based compensation andrequires entities to recognize the cost of employee services received inexchange for awards of equity instruments based on the grant-date fair value ofthose awards.  The fair value based method in SFAS 123-R is similar to thefair-value-based method in SFAS No. 123 in most respects, subject to certainkey

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differences.  As the Company previously adoptedthe fair value recognition provisions of SFAS No. 123 prospectively for allstock awards granted, commencing on July 1, 2002, the impact of the modifiedprospective adoption of SFAS 123-R did not have a significant impact on thefinancial position or results of operations of the Company.  The Company amortizes compensation expense ona straight line basis over the vesting period of each option grant.  The Company utilizes the Black-Scholes optionpricing model to calculate the compensation expense associated with stockoptions.  For the three months endedSeptember 30, 2006, the Company recorded pretax compensation expense associatedwith stock awards of $456,000.  Totalcompensation cost related to nonvested awards not yet recognized of $5,802,000will be recognized according to vesting schedules through March 2015.  For the three months ended September 30,2006, the Company recognized an $818,000 tax benefit resulting from theexercise of 200,000 non-qualified stock options by Michael T. Vesey, Presidentand Chief Operating Officer.

***Accounting for income taxes:***

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes – An interpretation of FASBStatement 109” (“FIN 48”).  FIN 48prescribes a more-likely than not recognition threshold as well as ameasurement attribute for the financial statement recognition and measurementof tax positions taken or expected to be taken in a tax return, FIN 48 iseffective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating theimpact of the adoption of FIN 48.

In December 2004, the FASB issued FASB StaffPosition No. FAS 109-1, “Application of FASB Statement No. 109, Accounting forIncome Taxes, for the Tax Deduction on Qualified Production Activities Providedby the American Jobs Creation Act of 2004” (“FSP FAS 109-1”). FSP FAS 109-1clarifies that the deduction will be treated as a “special deduction” asdescribed in Statement of Financial Accounting Standards No. 109, “Accountingfor Income Taxes.” As such, the special deduction has no effect on deferred taxassets and liabilities existing at the date of enactment. The impact of thededuction will be reported in the period in which the deduction is claimed.  The Company files a consolidated return on a calendar year. Accordingly, the Company began reflecting the special deduction withrespect to its operations effective January 1, 2005.  Its impact was tolower the effective tax provision in the periods in which the deduction wasclaimed and that this benefit will increase as the deduction is phased in underthe statute.

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CautionaryStatement for Purposes of the “Safe Harbor” Provisions of the PrivateSecurities Litigation Reform Act of 1995

In addition to historical information, this report contains statementsrelating to future events or our future results.  These statements are forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), and are subject to the Safe Harbor provisions created by statute.  Generally words such as “may”, “will”, “should”,“could”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, and “believe”or the negative of or other variation on these and other similar expressionsidentify forward-looking statements. These forward-looking statements including, without limitation,statements with respect to potential liabilities relating to litigationcurrently pending against us, anticipated future dividends, anticipateddelivery of homes in backlog, expected warranty costs, future land acquisitionsand the availability if sufficient capital for us to meet our operating needs,are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements,whether as a result of new information, future events or otherwise.

Forward-looking statements are based on current expectationsand involve risks and uncertainties and our future results could differsignificantly from those expressed or implied by our forward-lookingstatements.

Many factors could cause our actual consolidated results to differmaterially from those expressed in any of our forward-looking statements.

**Item 3.****       Quantitativeand Qualitative Disclosures About Market Risk**

Market risk represents the risk of loss that may impact the financialposition, results of operations or cash flows of the Company, due to adversechanges in financial and commodity market prices and interest rates.  The Company’s principal market risk exposurecontinues to be interest rate risk.  Amajority of the Company’s debt is variable based on LIBOR or the prime rate,and, therefore, affected by changes in market interest rates.  Based on current operations, an increase ordecrease in interest rates of 100 basis points will result in a correspondingincrease or decrease in cost of sales and interest charges incurred by theCompany of approximately $4,790,000 in a fiscal year, a portion of which willbe capitalized and included in cost of sales as homes are delivered.  The Company believes that reasonably possiblenear-term interest rate changes will not result in a material negative effecton future earnings, fair values or cash flows of the Company.  Generally, the Company has been able torecover any increased costs of borrowing

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through increased selling prices; however, there is no assurance theCompany will be able to continue to increase selling prices to cover theeffects of any increase in near-term interest rates.

Changes in the prices of commodities that are a significant componentof home construction costs, particularly lumber, may result in unexpected shortterm increases in construction costs. Since the sales price of the Company’s homes is fixed at the time thebuyer enters into a contract to acquire a home and because the Companygenerally contracts to sell its homes before construction begins, any increasein costs in excess of those anticipated may result in gross margins lower thananticipated for the homes in the Company’s backlog.  The Company attempts to mitigate the marketrisks of price fluctuation of commodities by entering into fixed-pricecontracts with its subcontractors and material suppliers for a specified periodof time, generally commensurate with the building cycle.

There have been no material adverse changes to the Company’s (1)exposure to risk and (2) management of these risks, since June 30, 2006.

**Item 4.****       Controls andProcedures**

The Company’s management, with the participation of the Company’s ChiefExecutive Officer, President and Chief Operating Officer, and Chief FinancialOfficer, evaluated the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this report.  Based upon that evaluation, the ChiefExecutive Officer, President and Chief Operating Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures arefunctioning effectively to provide reasonable assurance that informationrequired to be disclosed by the Company in reports filed under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Security and Exchange Commission’s rules andforms and also to ensure information required to be disclosed is accumulatedand communicated to management.  Therehas been no change in the Company’s internal control over financial reportingduring the Company’s most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

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**PARTII.  OTHER INFORMATION**

**Item 1A.****       ****Risk Factors**

There has been no material changes in ourmarket risks during the three months ended September 30, 2006.  For additional information regarding marketrisk, see our Annual Report on Form 10-K for the year ended June 30, 2006.  

**Item 6****.       Exhibits.**
|        | 10.1   |   | First Amendment to the Amended and Restated  Revolving Credit Loan Agreement (incorporated by reference to Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed November 3, 2006). |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                               |
|   | 31.1*  |   | Certification of Jeffrey P. Orleans pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                    |
|   |   |   |                                                                                                                                                                                               |
|   | 31.2*  |   | Certification of Michael T. Vesey pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                      |
|   |   |   |                                                                                                                                                                                               |
|   | 31.3*  |   | Certification of Joseph A. Santangelo pursuant to  Section 302 Sarbanes-Oxley Act of 2002.                                                                                                         |
|   |   |   |                                                                                                                                                                                               |
|   | 32.1*  |   | Certification of Jeffrey P. Orleans pursuant to  Section 906 Sarbanes-Oxley Act of 2002.                                                                                                           |
|   |   |   |                                                                                                                                                                                               |
|   | 32.2*  |   | Certification of Michael T. Vesey pursuant to Section  906 Sarbanes-Oxley Act of 2002.                                                                                                             |
|   |   |   |                                                                                                                                                                                               |
|   | 32.3*  |   | Certification of Joseph A. Santangelo pursuant to  Section 906 Sarbanes-Oxley Act of 2002.                                                                                                         |

 

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* Exhibits filed herewithelectronically.

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SIGNATURES

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 theundersigned thereunto duly authorized.
|                  |   | ORLEANS HOMEBUILDERS, INC.               |
|------------------|--------|------------------------------------------|
|             |   | (Registrant)                             |
|             |   |                                     |
| November 9, 2006 |   | Michael T. Vesey                         |   |
|             |   | Michael T. Vesey                         |
|             |   | President and  Chief Operating Officer   |
|             |   |                                     |
|             |   |                                     |
| November 9, 2006 |   | Joseph A. Santangelo                     |   |
|             |   | Joseph A. Santangelo                     |
|             |   | Treasurer, Secretary and Chief Financial |
|             |   | Officer                                  |
|                  |        |                                          |  |  |

 

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**EXHIBIT INDEX**

31.1*                    Certification of Jeffrey P. Orleans pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*                    Certification of Michael T. Vesey pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

31.3*                    Certification of Joseph A. Santangelopursuant to Section 302 Sarbanes-Oxley Act of 2002.

32.1*                    Certification of Jeffrey P. Orleans pursuantto Section 906 Sarbanes-Oxley Act of 2002.

32.2*                    Certification of Michael T. Vesey pursuant toSection 906 Sarbanes-Oxley Act of 2002.

32.3*                    Certification of Joseph A. Santangelopursuant to Section 906 Sarbanes-Oxley Act of 2002.

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* Exhibits filed herewithelectronically.

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