**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(Mark One)**
| **x**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|------------|---------------------------------------------------------------------------------------------------------|
|       |                                                                                                    |
| ** ** | **For the quarterly period ended March 31, 2008**                                                  |
| ** ** | ** **                                                                                              |
| ** ** | **OR**                                                                                                  |
| ** ** | ** **                                                                                              |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXHANGE  ACT OF 1934** |

 

**For the transition period                    to                    **

 

#### **CommissionFile No. 1-6830**

#### ** **

**ORLEANS HOMEBUILDERS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**3333 Street Road, Suite 101**

**Bensalem, PA 19020**

(Address of principal executive offices)

 

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

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

 

Number of shares of commonstock, par value $0.10 per share, outstanding as ofMay 12, 2008:    18,839,141

(excluding 98,990 shares held in Treasury).

 

 

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

# ** **

| ** **  | ** **                                                                                                         | ** ** | **PAGE**   |
|-------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **  | **PART 1  – FINANCIAL INFORMATION**                                                                      |       |       |
|        |                                                                                                               |       |       |
| Item 1.     | Financial Statements  (unaudited)                                                                                  |       |       |
|        |                                                                                                               |       |       |
|        | Condensed Consolidated Balance  Sheets at March 31, 2008 and June 30, 2007                               |       | 1          |
|        |                                                                                                               |       |       |
|        | Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  March 31, 2008 and 2007 |       | 2          |
|        |                                                                                                               |       |       |
|        | Condensed  Consolidated Statements of Shareholders’ Equity for the Nine Months Ended  March 31, 2008     |       | 3          |
|        |                                                                                                               |       |       |
|        | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  March 31, 2008 and 2007           |       | 4          |
|        |                                                                                                               |       |       |
|        | Notes to Condensed Consolidated Financial Statements                                                               |       | 5          |
|        |                                                                                                               |       |       |
| Item 2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       | 21         |
|        |                                                                                                               |       |       |
| Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                        |       | 39         |
|        |                                                                                                               |       |       |
| Item 4.     | Controls and  Procedures                                                                                           |       | 40         |
|        |                                                                                                               |       |       |
| ** **  | **PART II  – OTHER INFORMATION**                                                                         | ** ** | ** ** |
|        |                                                                                                               |       |       |
| Item 1A.    | Risk Factors                                                                                                       |       | 40         |
|        |                                                                                                               |       |       |
| **Item 6.** | **Exhibits**                                                                                                       | ** ** | **42**     |

 

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**OrleansHomebuilders, Inc. and SubsidiariesCondensed Consolidated Balance Sheets (Unaudited) (dollars in thousands, except par value)**

 
| ** **                                                                                                                                                   | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| Assets:                                                                                                                                                      |       |               |       |              |       |
| Cash and cash equivalents                                                                                                                                    |       | $                  | 39,067     |              | $          | 19,991 |   |
| Restricted cash - due from title company                                                                                                                     |       | 9,256              |       | 25,483            |       |
| Restricted cash - customer deposits                                                                                                                          |       | 10,207             |       | 11,362            |       |
| Real estate held for development and sale:                                                                                                                   |       |               |       |              |       |
| Residential properties completed or under  construction                                                                                                      |       | 253,366            |       | 228,146           |       |
| Land held for development or sale and  improvements                                                                                                          |       | 380,892            |       | 511,872           |       |
| Inventory not owned - variable interest  entities                                                                                                            |       | 46,198             |       | 47,214            |       |
| Inventory not owned - other financial  interests                                                                                                             |       | 12,565             |       | —            |       |
| Property and equipment, at cost, less  accumulated depreciation                                                                                              |       | 1,747              |       | 2,555             |       |
| Deferred taxes                                                                                                                                               |       | —             |       | 23,480            |       |
| Goodwill                                                                                                                                                     |       | 4,180              |       | 4,180             |       |
| Receivables, deferred charges and other assets                                                                                                               |       | 23,565             |       | 23,559            |       |
| Land deposits and costs of future  development                                                                                                               |       | 10,413             |       | 13,102            |       |
| Total assets                                                                                                                                                 |       | $                  | 791,456    |              | $          | 910,944 |   |
|                                                                                                                                                         |       |               |       |              |       |
| Liabilities and shareholders’ equity:                                                                                                                   |       |               |       |              |       |
| Liabilities:                                                                                                                                                 |       |               |       |              |       |
| Accounts payable                                                                                                                                             |       | $                  | 48,411     |              | $          | 30,891 |   |
| Accrued expenses                                                                                                                                             |       | 50,302             |       | 26,303            |       |
| Deferred revenue                                                                                                                                             |       | 148                |       | —            |       |
| Customer deposits                                                                                                                                            |       | 15,341             |       | 15,392            |       |
| Obligations related to inventory not owned  - variable interest entities                                                                                     |       | 37,507             |       | 38,914            |       |
| Obligations related to inventory not owned  - other financial interests                                                                                      |       | 12,565             |       | —            |       |
| Mortgage and other note obligations                                                                                                                          |       | 406,132            |       | 469,123           |       |
| Subordinated notes                                                                                                                                           |       | 105,000            |       | 105,000           |       |
| Other notes payable                                                                                                                                          |       | 734                |       | 787               |       |
| Total liabilities                                                                                                                                            |       | 676,140            |       | 686,410           |       |
|                                                                                                                                                         |       |               |       |              |       |
| Commitments and contingencies (see note 15)                                                                                                                  |       |               |       |              |       |
|                                                                                                                                                         |       |               |       |              |       |
| Shareholders’ equity:                                                                                                                                   |       |               |       |              |       |
| Common stock, $0.10 par, 23,000,000 shares  authorized, 18,938,131 and 18,698,131 shares issued at March 31, 2008  and June 30, 2007, respectively |       | 1,894              |       | 1,870             |       |
| Capital in excess of par value - common  stock                                                                                                               |       | 74,184             |       | 73,012            |       |
| Accumulated other comprehensive loss                                                                                                                         |       | (1,862             | )          | (1,862            | )          |
| Retained earnings                                                                                                                                            |       | 42,988             |       | 154,003           |       |
| Treasury stock, at cost (148,990 and  196,490 shares held at March 31, 2007 and June 30, 2007,  respectively)                                      |       | (1,888             | )          | (2,489            | )          |
| Total shareholders’ equity                                                                                                                              |       | 115,316            |       | 224,534           |       |
|                                                                                                                                                         |       |               |       |              |       |
| Total liabilities and shareholders’ equity                                                                                                              |       | $                  | 791,456    |              | $          | 910,944 |   |

 

See accompanying notes whichare an integral part of the condensed consolidated financial statements.

 

1

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**OrleansHomebuilders, Inc. and SubsidiariesCondensed Consolidated Statements of Operations (Unaudited) (in thousands, except per share amounts)**

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                           | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Earned revenue:                                      |       |                             |       |                            |       |   |   |   |   |
| Residential properties                               |       | $                                | 109,018    |                            | $          | 128,886 |   | $ | 372,865 |   | $ | 443,830 |   |
| Land sales                                           |       | 1,912                            |       | 14,864                          |       | 11,322 |   | 17,069 |   |
| Other income                                         |       | 2,364                            |       | 2,244                           |       | 6,926 |   | 7,325 |   |
|                                                 |       | 113,294                          |       | 145,994                         |       | 391,113 |   | 468,224 |   |
| Costs and expenses:                                  |       |                             |       |                            |       |   |   |   |   |
| Residential properties                               |       | 110,908                          |       | 149,123                         |       | 361,286 |   | 415,763 |   |
| Land sales                                           |       | 1,635                            |       | 15,739                          |       | 47,677 |   | 17,344 |   |
| Other                                                |       | 1,566                            |       | 1,395                           |       | 5,001 |   | 4,906 |   |
| Selling, general and administrative                  |       | 19,309                           |       | 33,360                          |       | 62,172 |   | 88,802 |   |
| Impairment of goodwill                               |       | —                           |       | 16,334                          |       | — |   | 16,334 |   |
| Interest:                                            |       |                             |       |                            |       |   |   |   |   |
| Incurred                                             |       | 9,724                            |       | 10,946                          |       | 35,428 |   | 35,332 |   |
| Less capitalized                                     |       | (9,724                           | )          | (10,946                         | )          | (35,428 | ) | (35,332 | ) |
|                                                 |       | 133,418                          |       | 215,951                         |       | 476,136 |   | 543,149 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Loss from continuing operations before  income taxes |       | (20,124                          | )          | (69,957                         | )          | (85,023 | ) | (74,925 | ) |
| Income tax expense (benefit)                         |       | 26,987                           |       | (27,263                         | )          | 2,458 |   | (29,244 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Loss from continuing operations                      |       | (47,111                          | )          | (42,694                         | )          | (87,481 | ) | (45,681 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Discontinued operations:                             |       |                             |       |                            |       |   |   |   |   |
| Loss from discontinued operations, net of  taxes     |       | (8,634                           | )          | (9,201                          | )          | (21,704 | ) | (9,839 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Net loss                                             |       | $                                | (55,745    | )                               | $          | (51,895 | ) | $ | (109,185 | ) | $ | (55,520 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Basic loss per share:                                |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                |       | $                                | (2.54      | )                               | $          | (2.31 | ) | $ | (4.73 | ) | $ | (2.48 | ) |
| Discontinued operations                              |       | $                                | (0.47      | )                               | $          | (0.50 | ) | $ | (1.17 | ) | $ | (0.53 | ) |
| Net loss                                             |       | $                                | (3.01      | )                               | $          | (2.81 | ) | $ | (5.90 | ) | $ | (3.01 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Diluted loss per share:                              |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                |       | $                                | (2.54      | )                               | $          | (2.31 | ) | $ | (4.73 | ) | $ | (2.48 | ) |
| Discontinued operations                              |       | $                                | (0.47      | )                               | $          | (0.50 | ) | $ | (1.17 | ) | $ | (0.53 | ) |
| Net loss                                             |       | $                                | (3.01      | )                               | $          | (2.81 | ) | $ | (5.90 | ) | $ | (3.01 | ) |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Dividends declared per share                         |       | $                                | 0.02       |                            | $          | 0.02 |   | $ | 0.06 |   | $ | 0.06 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Basic weighted average shares outstanding            |       | 18,520                           |       | 18,491                          |       | 18,508 |   | 18,443 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Diluted weighted average shares outstanding          |       | 18,520                           |       | 18,491                          |       | 18,508 |   | 18,443 |   |

 

See accompanying notes whichare an integral part of the condensed consolidated financial statements.

 

2

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**OrleansHomebuilders, Inc. and SubsidiariesCondensed Consolidated Statements of Shareholders’ Equity (Unaudited) (dollars in thousands)**

** **
| ** **                                | ** ** | ** **            | ** ** | ** ** | ** ** | ** **                | ** ** | **Capital in** | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------|------------|---------------------------|------------|---------------------|------------|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** **            | ** ** | ** ** | ** ** | ** **                | ** ** | **Excess of**  | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Common Stock** | ** ** | **Other**  | ** ** | **Par Value -** | ** ** | ** **          | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Shares**            | ** ** | ** ** | ** ** | **Comprehensive**         | ** ** | **Common**          | ** ** | **Retained**            | ** ** | **Shares** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Issued**            | ** ** | **Amount** | ** ** | **Loss**                  | ** ** | **Stock**           | ** ** | **Earnings**            | ** ** | **Held**   | ** ** | **Amount** | ** ** | **Total**  | ** ** |
| Balance at June 30, 2007             |       | 18,698,131            |       | $          | 1,870      |                      | $          | (1,862              | )          | $                       | 73,012     |       | $          | 154,003    |       | 196,490    |       | $ | (2,489 | ) | $ | 224,534 |   |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| FIN 48 transition adjustment              |       |                  |       |       |       |                      |       |                |       | (715                    | )          |       |       |       |       | (715       | )          |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Shares awarded under stock award plan     |       |                  |       |       |       |                      |       | 230                 |       |                    |       |       |       |       |       | 230        |       |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Fair market value of stock options issued |       |                  |       |       |       |                      |       | 8                   |       |                    |       |       |       |       |       | 8          |       |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Stock options, net                        |       |                  |       |       |       |                      |       | 1,501               |       |                    |       |       |       |       |       | 1,501      |       |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Exercise of stock options                 |       |                  |       |       |       |                      |       | (543                | )          |                    |       | (47,500    | )          | 601        |       |  

58 |       |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Issuance of restricted stock              |       | 240,000               |       | 24         |       |                      |       | (24                 | )          |                    |       |       |       |       |       | —     |       |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Dividends paid on common stock            |       |                  |       |       |       |                      |       |                |       | (1,115                  | )          |       |       |       |       | (1,115     | )          |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Net loss                                  |       |                  |       |       |       |                      |       |                |       | (109,185                | )          |       |       |       |       | (109,185   | )          |
|                                      |       |                  |       |       |       |                      |       |                |       |                    |       |       |       |       |       |       |       |
| Balance at March 31, 2008            |       | 18,938,131            |       | $          | 1,894      |                      | $          | (1,862              | )          | $                       | 74,184     |       | $          | 42,988     |       | 148,990    |       | $ | (1,888 | ) | $ | 115,316 |   |

 

See accompanying notes whichare an integral part of the condensed consolidated financial statements.

 

3

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**OrleansHomebuilders, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**              | ** ** |
| ** **                                                                                 | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                                       |       |                            |       |   |   |
| Cash flows from operating activities:                                                      |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (109,185   | ) | $ | (55,523 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                              |       | 816                             |       | 960 |   |
| Write-off of real estate held for  development and sale                                    |       | 96,158                          |       | 57,186 |   |
| Write-off of land deposits and costs of  future development                                |       | 931                             |       | 20,272 |   |
| Write-off of goodwill                                                                      |       | —                          |       | 16,334 |   |
| Gain on sale of fixed assets                                                               |       | (173                            | )          | — |   |
| Amortization of note discount                                                              |       | —                          |       | 6 |   |
| Deferred taxes                                                                             |       | 23,480                          |       | (22,605 | ) |
| Stock based compensation expense                                                           |       | 1,739                           |       | 1,444 |   |
| Changes in operating assets and  liabilities:                                              |       |                            |       |   |   |
| Restricted cash - due from title company                                                   |       | 16,227                          |       | 15,963 |   |
| Restricted cash - customer deposits                                                        |       | 1,155                           |       | (818 | ) |
| Real estate held for development and sale                                                  |       | (1,698                          | )          | (28,848 | ) |
| Receivables, deferred charges and other  assets                                            |       | (6                              | )          | (482 | ) |
| Land deposits and costs of future  developments                                            |       | (11,198                         | )          | 2,101 |   |
| Accounts payable and other liabilities                                                     |       | 40,952                          |       | (73,329 | ) |
| Customer deposits                                                                          |       | (51                             | )          | 844 |   |
| Net cash provided by (used in) operating  activities                                       |       | 59,147                          |       | (66,495 | ) |
|                                                                                       |       |                            |       |   |   |
| Cash flows from investing activities:                                                      |       |                            |       |   |   |
| Purchases of property and equipment                                                        |       | (372                            | )          | (275 | ) |
| Proceeds from sale of fixed assets                                                         |       | 537                             |       | — |   |
| Net proceeds from disposition of business                                                  |       | 11,300                          |       | — |   |
| Net cash provided by (used in) investing  activities                                       |       | 11,465                          |       | (275 | ) |
|                                                                                       |       |                            |       |   |   |
| Cash flows from financing activities:                                                      |       |                            |       |   |   |
| Borrowings from loans secured by real  estate assets                                       |       | 57,000                          |       | 108,000 |   |
| Repayment of loans secured by real estate  assets                                          |       | (119,991                        | )          | (38,488 | ) |
| Repayment of other note obligations                                                        |       | (53                             | )          | (5,064 | ) |
| Liability associated with other financial  interests                                       |       | 12,565                          |       | — |   |
| Purchase of treasury stock                                                                 |       | —                          |       | (949 | ) |
| Tax benefit from exercise of stock options                                                 |       | —                          |       | 1,068 |   |
| Proceeds from stock options exercised                                                      |       | 58                              |       | 24 |   |
| Common stock cash dividend paid                                                            |       | (1,115                          | )          | (1,111 | ) |
| Net cash (used in) provided by financing  activities                                       |       | (51,536                         | )          | 63,480 |   |
|                                                                                       |       |                            |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                      |       | 19,076                          |       | (3,290 | ) |
| Cash and cash equivalents at beginning of year                                             |       | 19,991                          |       | 15,964 |   |
| Cash and cash equivalents at end of period                                                 |       | $                               | 39,067     |   | $ | 12,674 |   |

 

See accompanying notes whichare an integral part of the condensed consolidated financial statements.

 

4

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** **

**ORLEANSHOMEBUILDERS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share amounts)**

 

**1.****             ****BASIS OF PRESENTATION AND SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

Orleans Homebuilders, Inc.and its subsidiaries (collectively, the “Company”) market, develop and buildhigh-quality, single-family homes, townhomes and condominiums to serve varioustypes of homebuyers, including move-up, luxury, empty nester, active adult andfirst-time homebuyers.  The Company alsogenerates revenue from the sale of land.

 

During thethree and nine months ended March 31, 2008, the Company incurred a netloss of $55,745 and $109,185, respectively, compared to a net loss of $51,898and $55,523 for the three and nine months ended March 31, 2007,respectively.  The loss in the three andnine months ended March 31, 2008 included the establishment of a deferredtax asset valuation allowance in the amount of $43,544.  The homebuilding industry is cyclical andaffected by changes in national and local economic, business and otherconditions.  During the second half offiscal 2006 and all of fiscal 2007, the Company and the entire homebuildingindustry have faced several significant challenges in the housing and mortgagemarkets as a whole.  These challengescontinued throughout the nine months ended March 31, 2008 and includedecreased homebuyer demand due to lower consumer confidence in the overallhousing market, a general increase in economic uncertainty, increased uncertaintyin the overall mortgage market, increased underwriting standards and anincrease in foreclosures.  The Company isresponding to these unfavorable market conditions by attempting to maintainabsorption levels through the use of sales incentives, reevaluating itsindividual land holdings and reducing its land expenditures and emphasizingcost reductions to adjust for lower levels of production.

 

***Waiver***

 

The Company’s senior securedrevolving credit facility (See Note 4) contains financial and other restrictivecovenants and requirements that limit our ability to engage in certainactivities.  The Company’s senior securedrevolving credit facility also contains a cross-default provision so that adefault under the agreements or instruments governing our other debt couldcause a default under the Company’s senior secured revolving creditfacility.  Further, a default under thesenior secured revolving credit facility could prevent the Company from makingpayments required by the Company’s trust preferred securities.  If not cured, a payment default or otherevent of default could result in the acceleration of all or most of the Company’sdebt and permit lenders to foreclose upon any collateral securing thatdebt.  In addition, lenders may be ableto terminate any commitments they made to supply the Company with furtherfunds.  Under these circumstances, theCompany might not have sufficient funds or other resources to satisfy all ofits obligations.  The limitations imposedby the Company’s financing agreements on its ability to incur additional debtand to take other actions might significantly impair its ability to obtainother financing.

 

Based on the Company’sfinancial results for the quarter ended March 31, 2008, in particular thevaluation allowance recorded for the deferred tax asset, the Company determinedit was in default of certain of its covenants contained in its senior securedrevolving credit facility as further described in the following sentences.  On May 9, 2008, the Company received a limitedwaiver to the Amended and Restated Credit Agreement.  The waiver letter temporarily waived certaincovenants through and including September 15, 2008.  Absent the deferred tax asset valuationallowance of $43,544, the Company would have been in compliance with all of itsfinancial covenants for the fiscal quarter ended March 31, 2008.  However, as a result of this deferred taxasset valuation allowance in the current fiscal quarter, absent the executedwaiver letter, the Company would have been in violation of its minimum tangiblenet worth, maximum leverage, and maximum land to adjusted net worthcovenants.  The waiver letter waives suchcovenant defaults from the fiscal quarter ending March 31, 2008 throughand including September 15, 2008, unless another event of default occursor the Company fails to meet its new minimum tangible net worth and leverageratios.  As part of this waiver letter,the Company has also agreed to use its best efforts and work in good faith withthe agent bank to identify a material group of assets in the borrowing base forre-appraisal prior to September 15, 2008; provided that, any suchre-appraisals will not be used in calculating the borrowing base as of, or forany period ending prior to, and date prior to the end of the waiverperiod.  Subsequent to September 16,2008, in the event that a material amount of these asset re-appraisals areultimately determined to be lower than the lower of cost or existing appraisedvalues, absent an amendment to the credit facility, the Company’s netavailability under its Amended and Restated Credit Agreement could bematerially reduced from existing and/or anticipated levels, which would reducethe Company’s liquidity at such time. The Company currently anticipates it will amend its Amended and RestatedCredit Agreement for these and other matters during the first quarter of fiscal2009.  However, based upon these waiverletter terms, absent an amendment to the credit agreement or an extension ofthe waiver period prior to September 16, 2008, the Company currentlyexpects it would then be in default under the terms of its credit agreement on September 16,2008.  The Company can make no assurancesthat it will be able to comply with its covenants or will be able to obtainfurther waivers or amendments of its covenants in its financing agreements andinstruments, if necessary, upon acceptable terms or at all which could have amaterial adverse effect on the Company’s financial position, results ofoperations and cash flows.

 

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***Interim Financial Information***

 

Thesecondensed financial statements have been prepared in accordance with the rules ofthe Securities and Exchange Commission for interim financial statements and donot include all annual disclosures required by accounting principles generallyaccepted in the United States. These financial statements should be read inconjunction with the audited consolidated financial statements and notesthereto included in the Company’s Form 10-K for the fiscal year ended June 30,2007.  The June 30, 2007, amountswere derived from the Company’s audited financial statements, but do notinclude all disclosures required by accounting principles generally accepted inthe United States of America.  The condensedfinancial information as of March 31, 2008, and for the three and ninemonths ended March 31, 2008 and 2007, is unaudited, but in the opinion ofmanagement includes all adjustments, consisting of normal recurring accruals,that management considers necessary for a fair presentation of the Company’sconsolidated results of operations, financial position and cash flows.  Results for the three and nine months ended March 31,2008, are not necessarily indicative of results to be expected for the full fiscalyear 2008 or any other future periods.

 

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes-AnInterpretation 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. The Company adopted the provisions of FIN 48, as of July 1,2007.  See Note 12 below for additionaldiscussion regarding the impact of the implementation of FIN 48.

 

On December 31, 2007, the Company committed to exiting its Arizonamarket and, in connection with this decision, on that date disposed of itsentire land position and related work-in-process homes in Arizona, whichconstituted substantially all of its assets in the western region.  The Condensed Consolidated FinancialStatements have been reclassified for all prior periods presented to reflect thisbusiness as discontinued operations (see Note 13 – ‘Discontinued Operations’).

 

***Income Taxes***

 

Income taxes are accountedfor in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,“Accounting for Income Taxes”*,*(“SFAS 109”).  The Company records income taxes under theasset and liability method, whereby deferred tax assets and liabilities arerecognized based on the future tax consequences attributable to temporarydifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax basis and attributable to operatingloss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply in the years in which the temporary differences are expectedto be recovered or paid.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inearnings in the period when the changes are enacted.  SFAS 109 requires a reduction of the carryingamounts of deferred tax assets by a valuation allowance if, based on theavailable evidence, it is more likely than not that such assets will not berealized.  Accordingly, the need toestablish valuation allowances for deferred tax assets are assessedperiodically by the Company based on the SFAS 109 more-likely-than-notrealization threshold criterion.  In theassessment for a valuation allowance, appropriate consideration is given to allpositive and negative evidence related to the realization of the deferred tax assets.  This assessment considers, among othermatters, the nature, frequency and severity of current and cumulative losses,forecasts of future profitability, excess of appreciated asset value over thetax basis of net assets, the duration of statutory carryforward periods, theCompany’s experience with operating loss and tax credit carryforwards notexpiring unused, and tax planning alternatives. In making such assessments, significant weight is given to evidence thatcan be objectively verified.

 

At June 30, 2007, theCompany’s net deferred tax asset was $23,480. During the three and nine months ended March 31, 2008, the Companyestablished a deferred tax asset valuation allowance in the amount of$43,544.  The valuation allowance wasestablished due to the lack of evidence regarding the realization of theseassets in the foreseeable future.

 

**2.****              RECE****NT ACCOUNTING PRONOUNCEMENTS**

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”).  SFAS 157provides guidance for using fair value to measure assets and liabilities.   SFAS 157 will be effective for our fiscalyear ending June 30, 2009, except for nonfinancial assets and nonfinancialliabilities that are not recognized or disclosed at fair value on a recurringbasis, for which the effective date will be for our fiscal year ending June 30,2010.  The Company is currentlyevaluating this standard and has not yet determined what impact it would haveon our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 provides an entity with the option to measure many financialinstruments and certain other items at fair value.  Under the fair value option, an entity willreport unrealized gains and losses on those items at each subsequent reportingdate.  SFAS 159 is effective for fiscalyears beginning after November 15, 2007, which for the Company is thefiscal year ending June 30, 2009. We are currently evaluating this standard and have not yet determinedwhat impact, 

 

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ifany, the fair value option would have on our consolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—anamendment of ARB No. 51” (“SFAS 160”).  SFAS 160 requires that a noncontrollinginterest in a subsidiary be reported as equity and the amount of consolidatednet income specifically attributable to the noncontrolling interest beidentified in the consolidated financial statements.  It also calls for consistency in the mannerof reporting changes in the parent’s ownership interest and requires fair valuemeasurement of any noncontrolling equity investment retained in adeconsolidation.  SFAS 160 is effectivefor our fiscal year ending June 30, 2010. We are evaluating the impact the adoption of SFAS 160 will have on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).  SFAS 141(R) broadens the guidance of SFAS 141, extendingits applicability to all transactions and other events in which one entityobtains control over one or more other businesses.  It broadens the fair value measurement andrecognition of assets acquired, liabilities assumed, and interests transferredas a result of business combinations. SFAS 141(R) expandson required disclosures to improve the statement users’ abilities to evaluatethe nature and financial effects of business combinations.  SFAS 141(R) is effective for our fiscal year ending June 30,2010.  We are evaluating the impact theadoption of SFAS 141(R) willhave on our consolidated financial statements.

 

In December 2007, the United States Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin 110 (“SAB 110”) to amendthe SEC’s views discussed in Staff Accounting Bulletin 107 (“SAB 107”)regarding the use of the simplified method in developing an estimate ofexpected life of share options in accordance with SFAS No. 123(R).  SAB 110 is effective for us beginning in thefirst quarter of fiscal year 2009.  Wewill continue to use the simplified method until we have the historical datanecessary to provide a reasonable estimate of expected life in accordance withSAB 107, as amended by SAB 110.

 

InMarch 2008, the FASB issued SFAS 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of FASB 133, Accounting forDerivative Instruments and Hedging Activities.” This statement requires enhanced disclosures about an entity’sderivative and hedging activities and thereby improves the transparency offinancial reporting. The Statement is effective for financial statements forfiscal years and interim periods beginning after November 15, 2008, and isnot expected to have an impact on the Company’s financial statements.

 

**3.****             ****RESIDENTIAL PROPERTIES COMPLETEDOR UNDER CONSTRUCTION**

 

Residentialproperties completed or under construction consist of the following:

 
| ** **                                                    | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| Under contract for sale                                       |       | $                  | 154,493    |              | $          | 126,856 |   |
| Unsold                                                        |       | 98,873             |       | 101,290           |       |
| Total residential properties completed or  under construction |       | $                  | 253,366    |              | $          | 228,146 |   |

 

**4.****             ****MORTGAGE AND OTHER NOTEOBLIGATIONS AND SUBORDINATED NOTES**

 

The$406,132 outstanding balance in mortgage and other note obligations at March 31,2008, consists of $405,950 outstanding under the Revolving Credit Facility,which is discussed below, and $182 under mortgage obligations collateralized byland held for development and sale and improvements.  The average daily balance of the RevolvingCredit Facility during the nine months ended March 31, 2007, was $470,136.

 

The$105,000 outstanding balance in subordinated notes relates to the sale andissuance of trust preferred securities as discussed below.

 

***Revolving Credit Facility***

 

OnDecember 22, 2004, Greenwood Financial, Inc., a wholly-ownedsubsidiary of the Company and other wholly-owned subsidiaries of the Company,as borrowers, and Orleans Homebuilders, Inc., as guarantor, entered into aRevolving Credit and Loan Agreement for a $500,000 Senior Secured RevolvingCredit and Letter of Credit Facility with various banks as lenders (as amendedand restated and further amended, the “Revolving Credit Facility”).  The Revolving Credit and Loan Agreement wasamended on January 24, 2006, via the Amended and Restated Revolving Creditand Loan Agreement (the “Amended Credit Agreement”).  In connection with the Amended CreditAgreement, Orleans Homebuilders, Inc. entered into an amended Guarantyagreement, which was amended on September 6, 2007, by the First Amendmentto Guaranty.  The Amended and RestatedCredit Agreement was amended on November 1, 2006 (the “First Amendment”), February 7,2007 (the “Second Amendment”), May 8, 2007 (the “Third Amendment”), 

 

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September 6,2007 (the “Fourth Amendment”), and December 21, 2007 (the “Fifth Amendment”).  In addition, on May 9, 2008, the Companyreceived a limited waiver (the “waiver letter”) to the Amended CreditAgreement.

 

***Waiver:***

 

Absentthe deferred tax asset valuation allowance of $43,544 (see Note 1 above), theCompany would have been in compliance with all of the financial covenants inthe Amended Credit Agreement at March 31, 2008.  However, as a result of the deferred taxasset valuation allowance, absent the waiver letter, the Company would havebeen in default of the minimum consolidated tangible net worth, maximumleverage ratio, and maximum land to consolidated adjusted tangible net worthratio covenants set fort in the Amended Credit Agreement at March 31, 2008(the “Subject Covenants”).  Subject tocertain limitations, the waiver letter temporarily waives compliance with theSubject Covenants generally from January 1, 2008 through and including September 15,2008 (the “Waiver Period”), unless another event of default occurs or we failto comply with the covenants in the waiver letter.  Under the terms of the waiver letter, duringthe Waiver Period, the Company is required to maintain a minimum consolidatedtangible net worth of $90,000 at all times and a leverage ratio of not morethan 5.25 to 1.00 as of the last day of any fiscal quarter during the WavierPeriod.  The Company currentlyanticipates that it will comply with these covenants during the WaiverPeriod.  The land to consolidatedadjusted tangible net worth ratio will not be tested during the WaiverPeriod.  If the Company does not maintainthe required minimum consolidated tangible net worth or its leverage ratioexceeds the permissible maximum, then as of such date, the Waiver Period andthe limited waiver will end and non-compliance with the Subject Covenants willconstitute an event of default under the Amended Credit Agreement.  The Waiver Period and the limited waiver willalso end if there is any other event of default under the Amended CreditAgreement.  In addition, if the deferredtax asset valuation allowance is adjusted during the wavier period because oflegislation or otherwise, the minimum consolidated tangible net worth andmaximum leverage ratio will be adjusted accordingly based on the differencebetween the deferred tax asset valuation allowance of $43,544 at March 31,2008 and the adjusted amount of the deferred tax asset valuation allowance.

 

Inthe waiver letter, the Company also agreed that it will act in good faith anduse its best efforts to work with the agent lender during the Wavier Period toidentify a material group of assets in its borrowing base for reappraisal priorto September 15, 2008.  Thereappraisals will not be used in calculating the borrowing base during theWaiver Period.  After the termination ofthe Waiver Period, in the event that the reappraisals result in a determinationthat a material amount of the assets in the Company’s borrowing base have avalue lower than the cost and the existing appraised values, the netavailability under the Credit Facility could be materially reduced fromexisting or anticipated levels, absent an amendment to the creditfacility.  The Company could also berequired to repay a portion of the amount outstanding under the creditfacility.    Such a material reduction inthe net availability could reduce our liquidity by an amount that materiallyand adversely impacts our operations.

 

TheCompany currently anticipates that it will amend the Amended Credit Agreementto address the Subject Covenants and other matters during the first quarter ofFiscal 2009.  While the Company currentlyanticipates that it will be able to obtain an amendment to the Amended CreditAgreement before September 16, 2008, it has not yet begun negotiationswith its lenders with respect to this anticipated amendment and it can offer noassurances that it will be able to obtain an amendment on acceptable terms orat all.  Under the terms of the waiverletter, absent an amendment to the Amended Credit Agreement, unless the WaiverPeriod is extended beyond September 15, 2008, the Company currentlyexpects that it will be in default under the Amended Credit Agreement on September 16,2008, which could have a material adverse affect on the Company’sfinancial position, results of operations and cash flows.  Asexplained in more detail below, upon the occurrence and continuation of anevent of default under the Amended Credit Agreement, the lenders may demandimmediate payment in full of all indebtedness outstanding under the RevolvingCredit Facility, terminate their obligations to make any loans or advances, andexercise other remedies.

 

***Terms of the RevolvingCredit Facility:***

 

Theborrowing limit under the Revolving Credit Facility is $585,000, subject toincrease if certain conditions are met. Under and subject to the terms of the Revolving Credit Facility, the borrowersmay borrow and re-borrow for the purpose of financing the acquisition anddevelopment of real estate, the construction of homes and improvements, forinvestment in joint ventures, for working capital and for such otherappropriate corporate purposes as may be approved by the lenders.  Capitalized terms used below and nototherwise defined have the meanings set forth in the Amended and RestatedCredit Agreement.

 

Pursuantto the Fourth Amendment, and subject to the terms of the Revolving Credit Facility,approximately $464,000 of the $585,000 Revolving Credit Facility has a maturitydate of December 20, 2009, and the remaining $121,000 has a maturity dateof December 20, 2008.  Borrowingsand advances under the Revolving Credit Facility bear interest on a per annumbasis equal to the LIBOR Market Index Rate plus a non-default variable spreadranging from 250 basis points to 400 basis points, depending upon our leverageratio.  During the term of the RevolvingCredit Facility, interest is payable monthly in arrears.  At March 31, 2008, the interest rate was5.701313%, which included a 300 basis point spread.  However, the Company anticipates that as aresult of the deferred tax asset valuation reserve, and indirectly the terms ofits waiver letter discussed above, that the spread will increase to 400 basispoints during

 

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thefourth quarter of fiscal 2008****due to theCompany’s expected leverage ratio.

 

Thetotal amount of loans and advances outstanding at any time under the RevolvingCredit Facility may not exceed the lesser of the then-current borrowing baseavailability or the revolving sublimit as defined in the Revolving CreditFacility.  Pursuant to the Fourth Amendment,the revolving sublimit is $585,000, subject to reduction on December 20,2008.  The borrowing base availability isbased on the lesser of the appraised value or cost of real estate owned by usthat has been admitted to the borrowing base. As discussed above, the anticipated reappraisal of a material amount ofassets included in the borrowing base could, on or after September 16,2008, reduce the borrowing base availability by a material amount.  Various conditions must be satisfied in orderfor real estate to be admitted to the borrowing base, including that a mortgagein favor of lenders has been delivered to the agent for lenders and that allgovernmental approvals necessary to begin development of for-sale residentialhousing, other than building permits and certain other permits borrower in goodfaith believes will be issued within 120 days, have been obtained.  Depending on the stage of development of thereal estate, the loan to value or loan to cost advance rate in the borrowingbase ranges from 50% to 95% of the appraised value or cost of the real estate.

 

Assecurity for all obligations of borrowers to lenders under the Revolving CreditFacility, lenders have a first priority mortgage lien on all real estateadmitted to the borrowing base.  Inaddition, Orleans Homebuilders, Inc. has guaranteed the obligations of theborrowers to lenders pursuant to an amended Guaranty executed by OrleansHomebuilders, Inc. on January 26, 2006, and amended on September 6,2007.  Under the Guaranty, OrleansHomebuilders, Inc. granted lenders a security interest in any balance orassets in any deposit or other account that Orleans Homebuilders, Inc. haswith any lender.

 

TheRevolving Credit Facility contains customary covenants that, subject to certainexceptions, limit the ability of the Company to (among other things):

 

·                  Incuror assume other indebtedness, except certain permitted indebtedness;

·                  Grantor permit to exist any lien, except certain permitted liens;

·                  Enterinto any merger, consolidation or acquisition of all or substantially all theassets of another entity;

·                  Sell,assign, lease or otherwise dispose of all or substantially all of its assets;

·                  Enterinto any transaction with an affiliate that is not a borrower or a guarantorunder the Revolving Credit Facility, or a subsidiary of either;

·                  Paydividends in excess of $0.02 per share per quarter; or

·                  Redeemany stock.

 

TheRevolving Credit Facility also contains various financial covenants.  Among other things, the financial covenants,as amended, require that:

 

·                  Asof the last day of each fiscal quarter, the ratio of our Adjusted EBITDA todebt service for the prior four fiscal quarters cannot be not less than0.20-to-1.00 for the period ending June 30, 2008; 0.50-to-1.00 for theperiod ending September 30, 2008; 0.65-to-1.00 for the period ending December 31,2008, March 31, 2009 and June 30, 2009; and 1.00-to-1.00 for theperiod ending September 30, 2009. As a result of the Fourth and FifthAmendments, the Adjusted EBITDA to debt service covenant was waived for theperiods ending June 30, 2007, September 30, 2007, December 31,2007 and March 31, 2008.

·                  Wemust maintain a minimum consolidated tangible net worth of at least $192,000plus 50% of the positive net income earned after June 30, 2007 and all ofthe net proceeds of equity securities issued by us after June 30,2007.  In addition, the minimumconsolidated tangible net worth shall be reduced by after-tax inventoryimpairments up to a maximum aggregate amount of $35,000 and after-tax landsales impairments up to a maximum aggregate amount of $50,000, provided thatthe minimum consolidated tangible net worth is at least $130,000 at alltimes.  Under the terms of the waiverreceived by the Company on May 9, 2008, from January 1, 2008 throughand including September 15, 2008, the minimum consolidated tangible networth that the Company must maintain is generally reduced to at least $90,000.

·                  Asof the last day of each fiscal quarter, our leverage ratio cannot exceed4.00-to-1.00 for any fiscal quarters ending on or after December 31, 2007.  In addition, as of the last day of eachfiscal quarter ending on or after December 31, 2007, our leverage ratio,excluding the effect of inventory impairments and land sales impairments,cannot exceed 3.00-to-1.00.  Under theterms of the waiver received by the Company on May 9, 2008, from January 1,2008 through and including September 15, 2008, the Company’s leverageratio generally cannot exceed 5.25-to-1.00.

·                  Asof the last day of each fiscal quarter, the ratio of the book value of all landthat is not subject to a qualifying agreement of sale and on which no unit hasbeen or is being constructed to our consolidated adjusted tangible net worthcannot exceed 2.00-to-1.00 at March 31, 2008; 1.85-to-1.00 at June 30,2008, September 30, 2008 and December 31, 2008; and 1.75-to-1.00 at March 31,2009 through maturity.  Under the termsof the waiver received by the Company on May 9, 2008, from January 1,2008 through and including September 15, 2008, this ratio is notapplicable or tested.

·                  Wemust maintain a required liquidity level based on cash plus borrowing baseavailability and under this covenant, we must

 

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have (i) at least $10,000 of cash and cashequivalents (as defined) as of the reporting date of each borrowing basecertificate, and (ii) at least $15,000 of liquidity (as defined andincluding cash and cash equivalents) as of the date of each borrowing basecertificate, through July 31, 2008. Starting August 31, 2008, we must have (i) at least $15,000 ofcash and cash equivalents (as defined) as of the reporting date of eachborrowing base certificate, and (ii) at least $20,000 of liquidity (asdefined and including cash and cash equivalents) as of the date of eachborrowing base certificate.

·                  Undera minimum cash flow from operations ratio based on cash flow from operations tointerest incurred covenant, which is applicable starting with the twelve-monthperiod ending December 31, 2007, if the interest coverage ratio is lessthan 1.25-to-1.00, we must have a cash flow from operations to interestincurred ratio (as defined) of at least 1.50-to-1.00.  During the first four quarterly periodsduring which this covenant is applicable, even if the interest coverage ratiois less than 1.25-to-1.00, the cash flow from operations ratio may be less than1.50-to-1.00 during any one period, so long as it is greater than1.00-to-1.00.  Cash flow from operationsis calculated based on the last twelve months cash flow from operations andadjusted for interest expense and includes any amounts from the disposition ofmodel homes that are subject to a sale-leaseback transaction to the extent suchamounts are not otherwise included in net cash provided by operatingactivities.

 

Inaddition, the Revolving Credit Facility contains various financial covenantswith respect to the value of land in certain stages of development that may beowned by us, a borrower or any subsidiary of the Company and limits the numberof units which are not subject to a bona-fide agreement of sale that may be inthe inventory of any borrower, the Company or any subsidiary of the Company.

 

Atthe fiscal quarters ended September 30, 2006, December 31, 2006, March 31,2007, June 30, 2007, and March 31, 2008, we would have been in violationof certain financial covenants in the Amended and Restated Credit Agreement ifnot for the First Amendment, Second Amendment, Third Amendment, FourthAmendment and waiver letter, respectively.

 

TheRevolving Credit Facility provides that, subject to any applicable notice andcure provisions, each of the following (among others) is an event of default:

 

·                  Failureby borrowers to pay when due any amounts owing under the Revolving CreditFacility;

·                  Failureby the Company to observe or perform any promise, covenant, warranty,obligation, representation or agreement under the Revolving Credit Facility orany other loan document;

·                  Bankruptcyand other insolvency events with respect to any borrower or the Company;

·                  Dissolutionor reorganization of any borrower or the Company;

·                  Theentry of a judgment or judgments against borrower(s) or the Company: (i) inan aggregate amount that is at least $500 in excess of available insuranceproceeds, if such judgment or judgments are not dismissed or bonded within 30days; or (ii) that prevents borrowers from conveying lots and units in theordinary course of business if such judgment or judgments are not dismissed orbonded within 30 days; or the issuance of any writs of attachment, execution orgarnishment against any borrower or the Company;

·                  Anymaterial adverse change in the financial condition of a borrower or the Companywhich causes the lenders, in good faith, to believe that the performance of anyof the obligations under the Revolving Credit Facility is impaired or doubtfulfor any reason; and

·                  Specifiedcross defaults.

 

Uponthe occurrence and continuation of an event of default, after completion of anyapplicable grace or cure period, lenders may demand immediate payment in fullof all indebtedness outstanding under the Revolving Credit Facility, terminatetheir obligations to make any loans or advances or issue any letter of credit,set off and apply any and all deposits held by any lender for the credit oraccount of any borrower.  In addition,upon the occurrence of certain events of bankruptcy or other insolvency eventswith respect to any borrower or the Company, all indebtedness outstanding underthe Revolving Credit Facility shall be immediately due and payable without anyact or action by lenders.  A defaultunder our Revolving Credit Facility could also prevent us from making requiredpayments under our trust preferred securities, which would cause a defaultunder those securities.

 

***Trust Preferred Securities***

 

OnNovember 23, 2005, the Company issued $75,000 of trust preferred securitieswhich mature on January 30, 2036 and are callable, in whole or in part, atpar plus accrued interest on or after January 30, 2011.  For the first ten years, the securities havea fixed interest rate of 8.61% per annum, provided that certain covenant levelsare maintained.  Thereafter, thesecurities have a floating interest rate equal to three-month LIBOR plus 360basis points per annum, resetting quarterly.

 

Pursuant to the original Indenture, in the event theCompany fails to meet certain financial ratios for three of four consecutivequarters, the applicable rate of interest will be increased by 300 basis pointsuntil the Company is in compliance with the financial ratios, at

 

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which time the interest rate will return to itsoriginal amount.  On August 13,2007, the Company entered into Supplemental Indenture No. 1 (the “SupplementalIndenture”), which amended the terms of the securities by deferring thepotential start of this increased rate of interest for at least fourquarters.  But for the SupplementalIndenture, the Company would have been subject to the increased rate ofinterest starting with the first quarter of fiscal 2008.  Pursuant to the Supplemental Indenture, it isan event of default if the increased interest rate is in effect for eightconsecutive interest payment periods, starting with the quarterly interestpayment due on October 30, 2008.  The occurrence of an event ofdefault may trigger demand for immediate payment in full of all outstandingamounts.  An uncured event of default under the trust preferred securitiesalso constitutes an event of default under the Amended and Restated CreditAgreement.  At December 31, 2006, March 31, 2007, June 30,2007, September 30, 2007, December 31, 2007 and March 31, 2008,the Company failed to meet the interest coverage ratio.  The interest coverage ratio is the ratio ofAdjusted EBITDA to Debt Service, as defined in the Supplemental Indenture, forthe relevant accounting period.  The Company anticipates that it will notmeet the interest coverage ratio for the quarter endings June 30, 2008 or September 30,2008.  As a result, the Companyanticipates that it will begin to pay the increased rate of interest under the$75,000 of trust preferred securities starting with the quarterly interestpayment due on October 30, 2008.

 

To allow the Supplemental Indenture to becomeeffective, OHI Financing, Inc. established a $5,000 reserve fund for thebenefit of the holders of the trust preferred securities by posting a letter ofcredit with the trustee under the Supplemental Indenture, which is subject toincrease and may be drawn by the trustee and used in respect of the trustpreferred obligations.

 

Thesecurities are treated as debt obligations for financial statementpurposes.  The Company used proceeds fromthe sale of these securities to repay outstanding obligations under theRevolving Credit Facility discussed above.

 

OnSeptember 20, 2005, the Company issued $30,000 of trust preferredsecurities which mature on September 30, 2035 and are callable, in wholeor in part, at par plus accrued interest on or after September 30,2010.  For the first ten years, thesecurities have a fixed interest rate of 8.52% per annum. Thereafter, thesecurities have a floating interest rate equal to three-month LIBOR plus 380basis points per annum, resetting quarterly. The securities are treated as debtobligations for financial statement purposes. The Company used proceeds fromthe sale of these securities to fund land purchases and residentialconstruction.  The obligations relatingto the trust preferred securities are subordinated to the Revolving CreditFacility.

 

**5.****             ****LAND SALES**

 

Duringthe three and nine months ended March 31, 2008, the Company receivedproceeds on the sale of land of $1,912 and $36,048, respectively.  Of the $36,048 received during the ninemonths ended March 31, 2008, $11,322 was recognized as land sales revenue;$11,301 related to proceeds in the Company’s western region and was included indiscontinued operations; and $13,425 related to two parcels of land that weresold and subsequently subject to an option agreement (see Note 6 – ‘InventoryNot Owned – Other Financial Interests’). Due to the federal income tax losses recorded by the Company related tothese transactions, the Company received approximately $34,000 of federalincome tax refunds as a result of these transactions and other operations forits taxation year ended December 31, 2007, during the three and ninemonths ended March 31, 2008.  Priorto the closing of certain of the land sales that took place during the ninemonths ended March 31, 2008, the Company recorded assets impairments onthe land to be sold.

 

Thefollowing table shows these impairments by region:

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **March 31, 2008**    | ** ** |
| ** **                     | ** ** | **Parcels**                     | ** ** | **Impairment** | ** ** |
| ** **                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Southern                       |       | 2                               |       | $ | 5,008 |   |
| Midwestern                     |       | 2                               |       | 23,163 |   |
| Florida                        |       | 4                               |       | 8,385 |   |
| Total - continuing operations  |       | 8                               |       | $ | 36,556 |   |
| West - discontinued operations |       | 1                               |       | 20,706 |   |
| Total                          |       | 9                               |       | $ | 57,262 |   |

 

Landsale proceeds in the three and nine months ended March 31, 2007 wereprimarily attributable to the sale of a parcel of land in the southern regionfor approximately $13,600.

 

11

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**6.****             ****INVENTORY NOT OWNED – OTHERFINANCIAL INTERESTS**

 

Soldland that is subject to an option agreement is accounted for using the financemethod of accounting.  The optionprovides the Company with the option, but not the obligation, to repurchaseindividual lots on a periodic lot takedown schedule.  Detailsof the financing method of accounting are described below:

 

·      The costs associated withthe land parcel at the time it is sold are reported in ‘Inventory not owned –Other Financial Interests’ on the Company’s condensed consolidated balancesheet.

·      The cash received from thebuyer is reported as a liability within ‘Obligations related to inventory notowned – Other Financial Interests’ on the Company’s condensed consolidatedbalance sheet.  The liability is accretedat an interest rate consistent with the Company’s effective borrowing rate overthe life of the option.  The Company willreport interest incurred in connection with the accretion of theliability.  Interest incurred will besubject to capitalization into land and improvements costs.

·      The lot purchase price underthe option includes both the amount to repurchase the land sold at its originalcost to the buyer plus interest, as well as improvements made by the buyersubsequent to his purchase and prior to the Company’s repurchase.  Upon exercise of the option, the amount ofthe lot purchase price attributable to the original cost to the buyer plusinterest will be applied to the accreted liability. The amount of the lotpurchase price in excess of the accreted liability represents reimbursement tothe buyer for lot improvement costs and will be capitalized within land heldfor development or sale and improvements.  The cost of the lot within land held for development or sale andimprovements will be expensed through cost of residential properties and landsold in accordance with the Company’s policy.

·      Upon termination orexpiration of the option, we will recognize land sales revenue and cost of landsales.

 

**7.****             ****ASSET IMPAIRMENTS – REAL ESTATEHELD FOR DEVELOPMENT AND SALE**

 

TheCompany accounts for its real estate held for development and sale inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets” (“SFAS 144”).  SFAS144 requires that long-lived assets be reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying value of the asset maynot be recoverable.  Recoverability ofreal estate held for development and sale is measured by comparing the carryingvalue to the future undiscounted net cash flows expected to be generated by theasset.  The impairment loss is thedifference between the book value of the assets and the discounted future cashflows generated from expected revenue of the assets, less the associated costto complete and direct costs to sell. Estimated cash flows are discounted at a rate commensurate with theinherent risk of the assets and cash flows, which approximates fair value.  The estimates used in the determination ofthe estimated cash flows and fair value of the asset are based on factors knownto us at the time such estimates are made and our expectations of futureoperations.  These estimates of cashflows are significantly impacted by estimates of the amounts and timing ofrevenues and costs and other factors, which, in turn, are impacted by localmarket economic conditions and the actions of competitors.  Should the estimates or expectations used indetermining estimated cash flows or fair value decrease or differ from currentestimates in the future, we may be required to recognize additional impairmentsrelated to these assets or other assets.

 

12

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Thefollowing table represents inventory impairments by region for the three andnine months ended March 31, 2008 and 2007:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **March 31,**               | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **Communities**                  | ** ** | **Impairment** | ** ** | **Communities** | ** ** | **Impairment** | ** ** |
| ** **                     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Northern                       |       | 3                                |       | $3,776 |   | 7 |   | $9,409 |   |
| Southern                       |       | 6                                |       | 3,150 |   | 8 |   | 2,607 |   |
| Midwestern                     |       | 7                                |       | 6,451 |   | 5 |   | 9,347 |   |
| Florida                        |       | 3                                |       | 1,890 |   | 2 |   | 7,240 |   |
| Total - continuing operations  |       | 19                               |       | $15,267 |   | 22 |   | $28,603 |   |
| West - discontinued operations |       | —                           |       | — |   | 1 |   | 13,733 |   |
| Total                          |       | 19                               |       | $15,267 |   | 23 |   | $42,336 |   |

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **March 31,**              | ** ** |
| ** **                     | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **Communities**                 | ** ** | **Impairment** | ** ** | **Communities** | ** ** | **Impairment** | ** ** |
|                           |       |                            |       |   |   |   |   |   |   |   |   |
| Northern                       |       | 9                               |       | $ | 10,142 |   | 8 |   | $ | 13,309 |   |
| Southern                       |       | 9                               |       | 8,350 |   | 10 |   | 3,507 |   |
| Midwestern                     |       | 8                               |       | 16,119 |   | 6 |   | 9,597 |   |
| Florida                        |       | 4                               |       | 4,285 |   | 4 |   | 12,040 |   |
| Total - continuing operations  |       | 30                              |       | $ | 38,896 |   | 28 |   | $ | 38,453 |   |
| West - discontinued operations |       | —                          |       | — |   | 1 |   | 13,733 |   |
| Total                          |       | 30                              |       | $ | 38,896 |   | 29 |   | $ | 52,186 |   |

 

Inaddition, during the three and nine months ended March 31, 2007, theCompany recorded a $5,000 impairment to model homes - $2,450 in the Midwesternregion, $1,900 in the Southern region and $650 in the Northern region.

 

**8.     STOCK BASED COMPENSATION**

 

***Stock Option Plans***

 

OnAugust 26, 2004, the Company’s Board of Directors adopted the OrleansHomebuilders, Inc. 2004 Omnibus Stock Incentive Plan (as subsequentlyamended, the “2004 Stock Incentive Plan”), which is intended to function as anamendment, restatement and combination of all stock option and award plans ofthe Company other than the Orleans Homebuilders, Inc. Stock AwardPlan.  On December 6, 2007, the stockholders of theCompany approved the second amendment and restatement of the 2004 StockIncentive Plan to increase the number of shares of the Company’s common stockauthorized for issuance under the plan from 400,000 to 2,000,000 shares.

 

InDecember 2004, the FASB revised SFAS No. 123 through the issuance ofSFAS No. 123-R “Share-Based Payment”, revised (“SFAS 123-R”).  SFAS 123-R was effective for the Companycommencing July 1, 2005.  SFAS123-R, among other things, eliminates the alternative to use the intrinsicvalue method of accounting for stock based compensation and requires entitiesto recognize the cost of employee services received in exchange for awards ofequity instruments based on the grant-date fair value ofthose awards(with limited exceptions).  The fairvalue based method in SFAS 123-R is similar to the fair-value-based method inSFAS No. 123 in most respects, subject to certain key differences.  The Company previously adopted the fair valuerecognition provisions of SFAS No. 123 prospectively for all stock awardsgranted and, as such, the impact of the modified prospective adoption of SFAS123-R did not have a significant impact on the financial position or results ofoperations of the Company.

 

Duringthe three months ended March 31, 2008 and 2007, the Company recognized$535 and $453, respectively, of stock based compensation expense related tostock options.  During the nine monthsended March 31, 2008 and 2007, the Company recognized $1,501 and $1,183,respectively, of stock based compensation expense related to stock options.

 

13

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Thefollowing summarizes stock option activity for the Company’s stock option plansduring the nine months ended March 31, 2008:

 
| ** **                            | ** ** | ** ** | ** ** | **Weighted**           | ** ** |
|---------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                            | ** ** | **Shares** | ** ** | **Average Price** | ** ** |
| Outstanding at June 30, 2007     |       | 645,000    |       | $                      | 13.46      |   |
| Granted                               |       | 180,000    |       | 4.03                   |       |
| Exercised                             |       | (47,500    | )          | 1.23                   |       |
| Repricing adjustment(1)               |       | —     |       | (10.95                 | )          |
| Cancelled                             |       | —     |       | N/A                    |       |
| Outstanding at March 31, 2008    |       | 777,500    |       | $                      | 8.65       |   |
|                                  |       |       |       |                   |       |
| Exercisable at March 31, 2008(2) |       | 170,000    |       | $                      | 11.47      |   |

----

(1) Optionsto acquire 240,000 shares at $15.60 were repriced to $4.65 during the ninemonths ended March 31, 2008.

(2) 50,000of the 170,000 options exercisable at March 31, 2008 have a market valuein excess of the strike price.

 

Theintrinsic value of the stock options exercised during the three and nine monthsended March 31, 2008, was $218 and $218 respectively.  The intrinsic value of stock optionsexercised during the three months and nine months ended March 31 2007, was$300 and $2,671, respectively.

 

Duringthe nine months ended March 31, 2008, the Company repriced an option toacquire 240,000 shares and granted options to acquire an additional 180,000shares.  There were no options granted orrepriced during the three months ended March 31, 2008.

 

Thefollowing table summarizes information about the Company’s stock options at March 31,2008:

 
| ** **              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | **Outstanding**              | ** ** | **Average**                  | ** ** | **Average** | ** ** | **Exercisable** | ** ** | **Average** | ** ** |
| **Range of**       | ** ** | **at March 31,**   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **at March 31,** | ** ** | **Exercise** | ** ** |
| **Exercise Price** | ** ** | **2008**                     | ** ** | **Life**                     | ** ** | **Price** | ** ** | **2008** | ** ** | **Price** | ** ** |
| $                       | 1.19       |                         | 50,000     |                         | 0.1        |   | $ | 1.19 |   | 50,000 |   | $ | 1.19 |   |
| 4.03                    |       | 180,000                      |       | 9.7                          |       | 4.03 |   | — |   | N/A |   |
| 4.65                    |       | 240,000                      |       | 9.7                          |       | 4.65 |   | — |   | N/A |   |
| 10.64                   |       | 30,000                       |       | 5.3                          |       | 10.64 |   | 30,000 |   | 10.64 |   |
| 15.63                   |       | 250,000                      |       | 8.2                          |       | 15.63 |   | 62,500 |   | 15.63 |   |
| 21.60                   |       | 27,500                       |       | 6.4                          |       | 21.60 |   | 27,500 |   | 21.60 |   |
|                    |       | 777,500                      |       | 8.0                          |       | $ | 8.65 |   | 170,000 |   | $ | 11.47 |   |
|                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |

 

Theaggregate intrinsic value for outstanding stock options and for stock optionsthat are exercisable as of March 31, 2008 was $839 and $232, respectively.

 

TheCompany uses the Black-Scholes option pricing model to determine the aggregatefair value of the stock options granted. The aggregate fair value of theCompany’s stock option grants are amortized to compensation expense over theirrespective vesting periods and included in selling, general and administrativeexpenses on the Consolidated Statements of Operations. The Company typicallyissues shares of common stock from treasury stock upon the exercise of stockoptions, but such shares may also be newly issued.

 

Asof March 31, 2008, there was a total of $2,510 of unrecognizedcompensation expense related to time based non-vested stock options.

 

***Stock Award Plans***

 

InOctober 2003, the Board of Directors adopted the Orleans Homebuilders, Inc.Stock Award Plan (the “Stock Award Plan”). The Stock Award Plan provides forthe grant of stock awards of up to an aggregate of 400,000 shares of theCompany’s common stock.  

 

14

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TheStock Award Plan allows for the payment of all or a portion of the incentivecompensation awarded under the Company’s bonus compensation plans to be paid bymeans of a transfer of shares of common stock. The plan has a ten year life and is open to all employees of the Companyand its subsidiaries.  The value of timebased restricted stock awards are determined by their intrinsic value (as ifthe underlying shares were vested and issued) on the grant date.  At March 31, 2008, the Company hadawarded 395,904 shares of common stock under the Stock Award Plan and 4,096shares of the common stock available to issue under the Stock Award Plan.

 

Duringthe nine months ended March 31, 2008, the Company granted stock awards for240,000 shares.  No stock awards weregranted during the three months ended March 31, 2008.  During the three and nine months ended March 31,2007, the Company did not grant any stock awards.

 

Duringthe three months ended March 31, 2008 and 2007, the Company recognized $89and $35, respectively, of stock based compensation expense related to stockawards.  During the nine months ended March 31,2008 and 2007, the Company recognized $282 and $211, respectively, of stockbased compensation expense related to stock awards.

 

Asof March 31, 2008, there was a total of $4,507 of unrecognizedcompensation expense related to time based non-vested restricted stock awards.That cost is expected to be recognized over a weighted average period of 6.3years.

 

**9.     EMPLOYEE RETIREMENT PLAN**

 

OnDecember 1, 2005, the Company adopted an unfunded, non-qualified targetdefined benefit retirement plan, effective as of September 1, 2005, whichcovers a group of management employees of the Company.  The Company owns life insurance policies onall participants in the Supplemental Executive Retirement Plan (“SERP”).  This SERP, which was amended on March 13,2006, and again on September 27, 2007, is intended to provide theparticipants with an annual supplemental retirement benefit based upon theiryears of service with the Company and highest average compensation for fiveconsecutive years.  The annualsupplemental benefit for each participant will be adjusted based on the actualperformance of the SERP compared to the target.

 

TheCompany adopted SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans” (“SFAS 158”) effective June 30,2007.  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 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.

 

TheCompany used a 4% annual compensation increase and a 6.10% discount rate in itscalculation of the present value of its projected benefit obligation.  The discount rate used represented the Moody’sAA bond rate for long-term bonds as of June 2007.

 

TheCompany recognized the following costs related to the SERP for the three andnine months ended March 31, 2008 and 2007:

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                         | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net periodic pension cost:         |       |                             |       |                            |       |   |   |   |   |
| Service cost                       |       | $                                | 153        |                            | $          | 201 |   | $ | 459 |   | $ | 572 |   |
| Interest cost                      |       | 84                               |       | 127                             |       | 254 |   | 348 |   |
| Amortization of prior service cost |       | 104                              |       | 91                              |       | 311 |   | 272 |   |
| Amortization of actuarial gain     |       | (46                              | )          | —                          |       | (138 | ) | — |   |
| Total net periodic pension cost    |       | $                                | 295        |                            | $          | 419 |   | $ | 886 |   | $ | 1,192 |   |

 

15

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**10.  LOSS PER SHARE**

 

Theweighted average number of shares used to compute basic loss per common shareand diluted loss per common share and a reconciliation of the numerator and denominatorused in the computation for the three and nine months ended March 31, 2008and 2007 are shown in the following table:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                                     | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Numerator:                                                     | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations for basic and diluted EPS      |       | $                                | (47,111    | )                               | $          | (42,694 | ) | $ | (87,481 | ) | $ | (45,681 | ) |
|                                                           |       |                             |       |                            |       |   |   |   |   |
| Denominator:                                                   | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding (in thousands)      |       | 18,520                           |       | 18,491                          |       | 18,508 |   | 18,443 |   |
|                                                           |       |                             |       |                            |       |   |   |   |   |
| Basic/Diluted loss per common share from continuing operations |       | $                                | (2.54      | )                               | $          | (2.31 | ) | $ | (4.73 | ) | $ | (2.48 | ) |

 

Assumedshares (in thousands) under treasury stock method for stock options of 58 and108 for the three months ended March 31, 2008 and 2007, respectively, and74 and 182 for the nine months ended March 31, 2008 and 2007,respectively, were not included in the computation of diluted earnings pershare because the impact was anti-dilutive for those periods.

 

**11.  COMPREHENSIVE LOSS**

 

Forthe three and nine months ended March 31, 2008 and 2007, totalcomprehensive loss equals net loss.

 

**12.  INCOME TAXES**

 

The Company recordedincome tax expense from continuing operations in the amount of $26,987 for thethree months ended March 31, 2008, as compared to an income tax benefit inthe amount of $27,260 for the three months ended March 31, 2007.  Forthe nine months ended March 31, 2008, the Company recorded tax expensefrom continuing operations of $2,458 as compared to an income tax benefit inthe amount of $29,241for the nine months ended March 31, 2007.  TheCompany no longer believes that it can reliably estimate its projectedeffective tax rate for the year.  During the quarter ended March 31,2008, a valuation allowance was established for the deferred tax assets due tothe lack of sufficient objective evidence regarding the realization of theseassets in the foreseeable future.  The valuation allowance established during the three and nine monthsended March 31, 2008 amounted to $43,544. SFAS 109 requires that companies assess whether a valuation allowanceshould be established based on the consideration of all available evidenceusing a “more likely than not” standard. In making such judgments, significant weight is given to evidence thatcan be objectively verified.  SFAS 109provides that a cumulative loss in recent years is significant negativeevidence in considering whether deferred tax assets are realizable and alsorestricts the amount of reliance on projections of future taxable income tosupport the recovery of deferred tax assets. The ultimate realization of these deferred tax assets is dependent uponthe generation of future taxable income during the periods in which thosetemporary differences become deductible. Changes in existing tax laws could also affect actual tax results andthe valuation of deferred tax assets over time. In the nine months ended March 31, 2007, the income tax benefitexceeded the amount that would haveresulted from the application of the federal statutory tax rate primarily as aresult of the effect of state income taxes, net of the associated federal taxbenefit, partly offset by the impact of the prior year income taxreturn-to-accrual adjustment.

 

Asdiscussed in Note 1, in June 2006, the FASB issued FIN 48.  FIN 48 prescribes a more likely than notrecognition threshold and measurement attribute for tax positions taken orexpected to be taken in a tax return. This interpretation also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods,disclosure and transition.  Theevaluation of a tax position in accordance with this interpretation is atwo-step process.  In the first step,recognition, the Company determines whether it is more-likely-than-not that atax position will be sustained upon examination, including resolution of anyrelated appeals or litigation processes, based on the technical merits of theposition.  The second step addressesmeasurement of a tax position that meets the more-likely-than-notcriteria.  The tax position is measuredat the largest amount of benefit that is more than 50 percent likely to berealized upon ultimate settlement. Differences between tax positions taken in a tax return and amountsrecognized in the financial statements will generally result in: (a) anincrease in a liability for income taxes payable or a reduction of an incometax refund receivable, (b) a reduction in a deferred tax asset or anincrease in a deferred tax liability or (c) both (a) and (b).  Tax positions that previously failed to meetthe more-likely-than-not recognition threshold should be recognized in thefirst subsequent financial reporting period in which 

 

16

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thatthreshold is met.  Previously recognizedtax positions that no longer meet the more-likely-than-not recognitionthreshold should be de-recognized in the first subsequent financial reportingperiod in which that threshold is no longer met.  Use of a valuation allowance as described inSFAS 109 is not an appropriate substitute for the de-recognition of a taxposition.  The requirement to assess theneed for a valuation allowance for deferred tax assets based on sufficiency offuture taxable income is unchanged by this interpretation.

 

Asof July 1, 2007, the Company adopted the provisions of FIN 48.  The Company recognized the cumulative effectof applying its provisions by reducing its July 1, 2007 retained earningsopening balance by $715 with a corresponding increase to the appropriate taxliability accounts.  The amount ofunrecognized tax benefit as of July 1, 2007 after the FIN 48 adjustmentwas $2,535.  This amount relates tounrecognized tax positions that, if recognized, would affect the annualeffective tax rate of the Company.  TheCompany’s unrecognized tax liability results primarily from the varyingapplication of statutes, regulations and interpretations including recent statetax cases regarding similar issues.  TheCompany anticipates that it will pay substantially all of the balance associatedwith its uncertain tax positions within the next three months as it has enteredinto a voluntary disclosure agreement to resolve an issue.

 

TheCompany files income tax returns at the U.S. federal level and in various stateand local jurisdictions.  The Company isno longer subject to U.S. federal, state or local income tax examinations bytax authorities for calendar years before 2003.

 

TheCompany recognizes interest and penalties accrued in relation to unrecognizedtax benefits in tax expense.  At July 1,2007, the Company had accrued approximately $1,300 for the payment of interestand penalties.

 

Theimpact of the adoption of FIN 48 on retained earnings as of July 1, 2007is as follows:

 
| Retained earning as of June 30, 2007                                  |   | $    | 154,003 |   |
|----------------------------------------------------------------------------|--------|------|---------|--------|
| Impact of adoption of FIN 48 on retained earnings as of July 1,  2007 |   | (715 | )       |
| Retained earnings as of July 1, 2007                                  |   | $    | 153,288 |   |

 

**13.  DISCONTINUED OPERATIONS**

 

OnDecember 31, 2007, the Company specifically committed to exiting itsArizona market and, in connection with this decision, on that date, it disposedof its entire land position and its related work-in-process homes in Arizona,which constituted substantially all of its assets in Arizona.  The Company has historically reported thisbusiness as the western region operating segment.  The disposed work-in-process inventory andland assets constituted substantially all of the Company’s assets in thewestern region.  As such, all chargesassociated with the western region are included as a discontinued operation.

 

Asthe western region represented a component of the Company’s business, theconsolidated financial statements have been reclassified for all periodspresented to present this business as discontinued operations. Prior to thesale, during the second quarter of fiscal 2008, an impairment charge of $20,706was recognized to reduce the carrying value of the land and work-in-processsold to its fair value less costs to sell. Costs and expenses directlyassociated with this business have been reclassified as discontinued operationson the consolidated statement of operations. Corporate expenses such as generalcorporate overhead have not been allocated to discontinued operations.  Summarized financial information for thewestern region is set forth below:

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                            | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating loss                        |       | $                                | (130       | )                               | $          | (14,159 | ) | $ | (21,704 | ) | $ | (15,141 | ) |
| Tax expense (benefit)                 |       | 8,504                            |       | (4,958                          | )          | — |   | (5,302 | ) |
| Net loss from discontinued operations |       | $                                | (8,634     | )                               | $          | (9,201 | ) | $ | (21,704 | ) | $ | (9,839 | ) |

 

Discontinuedoperations have not been segregated in the condensed consolidated statement ofcash flows. Therefore amounts for certain captions will not agree withrespective data in the condensed consolidated statement of operations.

 

17

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**14.  SEGMENT REPORTING**

 

SFASNo. 131 “Disclosures about Segments of an Enterprise and RelatedInformation” establishes standards for the manner in which public enterprisesreport segment information about operating segments.  The Company has determined that itsoperations primarily involve four reportable homebuilding segments operating ineleven markets.  Revenues are primarilyderived from 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 met the other aggregation criteria inSFAS 131.  The reportable homebuildingsegments include operations conducting business in the following markets:

 

Northern:

·      Southeastern Pennsylvania;

·      Central New Jersey;

·      Southern New Jersey; and

·      Orange County, New York

 

Southern:

·      Charlotte, North Carolina (includingadjacent counties in South Carolina);

·      Raleigh, North Carolina;

·      Greensboro, North Carolina;

·      Richmond, Virginia; and

·      Tidewater, Virginia

 

Midwestern:

·      Chicago, Illinois

 

Florida:

·      Orlando, Florida

 

TheCompany’s evaluation of segment performance is based on income from continuingoperations.  Below is a summary ofrevenue and income (loss) from continuing operations for each reportablesegment for the three and nine months ended March 31, 2008 and 2007:

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                   | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Total Revenue**                            |       |                             |       |                            |       |   |   |   |   |
| Northern                                     |       | $                                | 51,923     |                            | $          | 44,574 |   | $ | 158,200 |   | $ | 141,887 |   |
| Southern                                     |       | 47,940                           |       | 69,727                          |       | 159,045 |   | 205,784 |   |
| Midwestern                                   |       | 6,623                            |       | 14,781                          |       | 36,742 |   | 55,689 |   |
| Florida                                      |       | 5,156                            |       | 15,376                          |       | 30,111 |   | 60,250 |   |
| Corporate and unallocated(1)                 |       | 1,652                            |       | 1,536                           |       | 7,015 |   | 4,614 |   |
| Consolidated Total                           |       | $                                | 113,294    |                            | $          | 145,994 |   | $ | 391,113 |   | $ | 468,224 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| **Income (Loss) from Continuing Operations** |       |                             |       |                            |       |   |   |   |   |
| Northern                                     |       | $                                | (5,546     | )                               | $          | (19,598 | ) | $ | (13,819 | ) | $ | (22,967 | ) |
| Southern                                     |       | (2,188                           | )          | (3,110                          | )          | (8,713 | ) | 2,349 |   |
| Midwestern                                   |       | (16,089                          | )          | (7,004                          | )          | (38,620 | ) | (9,673 | ) |
| Florida                                      |       | (17,385                          | )          | (11,834                         | )          | (25,979 | ) | (11,618 | ) |
| Corporate and unallocated(1)                 |       | (5,903                           | )          | (1,148                          | )          | (350 | ) | (3,772 | ) |
| Consolidated Total                           |       | $                                | (47,111    | )                               | $          | (42,694 | ) | $ | (87,481 | ) | $ | (45,681 | ) |

 

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(1) Corporateand unallocated include the revenue and expenses of the Company’s mortgagebrokerage and property management operations as well as corporate level selling,general, administrative expenses. These selling, general, and administrativeexpenses are primarily comprised of corporate salaries, bonuses, and benefits;accounting and consulting fees; corporate travel expenses; net periodic pensioncosts; and compensation expense resulting from the fair valuation of stockoptions.

 

18

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**15.  COMMITMENTS AND CONTINGENCIES**

 

AtMarch 31, 2008, the Company had outstanding bank letters of credit, suretybonds and financial security agreements amounting to $116,529, as collateralfor completion of improvements at various developments of the Company.

 

Asof March 31, 2008, the Company owned or controlled approximately 8,242building lots.  As part of theaforementioned building lots, the Company has contracted to purchase, or hadunder option, undeveloped land and improved lots for an aggregate purchaseprice of $154,682, which are expected to yield approximately 2,443 buildinglots.  Generally, the Company structuresits land acquisitions so that it has the right to cancel its agreements topurchase undeveloped land and improved lots by forfeiture of its deposit underthe agreement.  Furthermore, purchase ofthe properties is usually contingent upon obtaining all governmental approvalsand satisfaction of certain requirements by the Company and the sellers.

 

Fromtime to time, the Company is named as defendant in legal actions arising fromits normal business activities.  Althoughthe amount of any liability that could arise with respect to currently pendingactions cannot be accurately predicted, in the opinion of the Company any suchliability will not have a material adverse effect on the financial position oroperating results of the Company.

TheCompany accrues the cost for warranty and customer satisfaction into the costof its homes as a liability at closing for each unit based on the Company’sindividual budget per unit. These liabilities are reviewed on a quarterly basisand generally closed to earnings within nine to 12 months for unusedamounts with any excess amounts expensed as identified as a change inestimate.  Any significant materialdefects are generally under warranty with the Company’s supplier.  The Company has not historically incurred anysignificant litigation requiring additional specific reserves for its productofferings (e.g., mold litigation).

 

Generally, the Companyprovides all of its homebuyers with a limited one year warranty as toworkmanship.  Under certaincircumstances, this warranty may be extended to two years.  In practice, the Company may extend thiswarranty period with the ultimate goal of satisfying the customer.  In addition, the Company enrolls all of itshomes in a limited warranty program with a third party provider (with thepremium paid for this program included in the individual unit budgets describedabove).  This limited warranty programgenerally covers certain defects for periods of one to two years and majorstructural defects for up to ten years. Actual costs incurred are paid for by the third party provider.

 

The Company’s warrantyand customer satisfaction costs are charged to cost of sales at the time eachhome is closed and title and possession have been transferred to thehomebuyer.  The amount charged toadditions represents warranty and customer satisfaction costs factored into thecost of each home.  The amount recordedas charges incurred represents the actual warranty and customer satisfactioncost incurred for the period presented. Certain costs to complete, not included as warranty costs, have beenexcluded from the rollforward below:

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **March 31,**              | ** ** |
| ** **                     | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Balance at beginning of period |       | $                               | 2,908      |   | $ | 2,188 |   |
| Warranty costs accrued         |       | 2,024                           |       | 3,408 |   |
| Actual warranty costs incurred |       | (2,154                          | )          | (3,208 | ) |
| Balance at end of period       |       | $                               | 2,778      |   | $ | 2,388 |   |

 

Inaddition to the contingencies described above, see discussion in Note 4regarding the contingencies surrounding the Company’s ability to renegotiatethe Revolving Credit Facility.

 

**16.  GOODWILL**

 

Duringthe three and nine months ended March 31, 2007, the Company recordedimpairment charges related to the goodwill that arose from the Realen Homes andMasterpiece Homes acquisitions.  Theseimpairment charges were necessary due to the slower than expected absorptionrates experienced in the third quarter of fiscal year 2007, increased salesincentives and lower margins, which resulted from the deteriorating marketconditions in the regions in which Realen Homes and Masterpiece Homes operate.  The deteriorating market conditions were theresult of decreased consumer demand, changes in the sub-prime mortgage marketand increased underwriting standards. The changes in the sub-prime mortgage market were the result of risingdelinquencies and defaults by borrowers as they experienced financialdifficulties due to the rising interest rates that were occurring during thethird quarter of fiscal year 2007.  Thiscredit deterioration led to the bankruptcies of major sub-prime mortgagelenders, an overall lending capacity decline and the tightening of lendingstandards.  As a result, the availabilityof mortgage lending for buyers decreased.

 

19

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Theimpairment charges taken during the third quarter of fiscal year 2007 wereestimates based on the then currently available projections for fiscal year2008 and beyond, management’s best estimates of market conditions and the fairmarket value of assets and liabilities at March 31, 2007.

 

RealenHomes Goodwill:

 

Forthe three and nine months ended March 31, 2007, a goodwill impairmentcharge of $13,327 related to the goodwill arising from the Company’sacquisition of Realen Homes was recognized. The impairment charge was necessary due to declining market conditionsin both the midwestern and northern regions in which Realen Homesoperated.  As a result, the operatingincome and cash flows for these regions were less than expected for the threeand nine moths ended March 31, 2007. Based on these results, the Company’s earnings forecast for the nexteight fiscal years were revised.

 

MasterpieceHomes Goodwill:

 

Forthe three and nine months ended March 31, 2007, a goodwill impairmentcharge of $3,007 related to the goodwill arising from the Company’s acquisitionof Masterpiece Homes was recognized.  Theimpairment charge was necessary due to declining market conditions in theFlorida region.  As a result, theoperating income and cash flows for Florida were less than expected for thethree and nine moths ended March 31, 2007. Based on these results, the Company’s earnings forecast for the nexteight fiscal years were revised.

 

**17.  SUBSEQUENT EVENTS**

 

Asmore fully described in Note 4, on May 9, 2008, the Company received alimited waiver (the “waiver letter”) to the Amended and Restated CreditAgreement.  Subject to certainconditions, the waiver temporarily waived compliance with certain covenantsthrough and including September 15, 2008. Absent the deferred tax asset valuation allowance of $43,544 (see Note 1above), the Company would have been in compliance with all of its financialcovenants for the fiscal quarter ended March 31, 2008.  However, as a result of this deferred taxasset valuation allowance in the current fiscal quarter, absent the executedwaiver letter, the Company would have been in violation of its minimum tangiblenet worth, maximum leverage, and maximum land to adjusted net worthcovenants.  Generally, the waiver letterwaives such covenant defaults January 1, 2008 through and including September 15,2008, unless another event of default occurs or the Company fails to meet itsnew minimum tangible net worth and leverage ratios set forth in the waiverletter.

 

20

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

OrleansHomebuilders, Inc., a Delaware corporation, and its subsidiaries(collectively, the “Company”, “OHB”, “Orleans”, “we”, “us” or “our”) market,develop and build high-quality, single-family homes, townhomes and condominiumsto serve various types of homebuyers, including move-up, luxury, empty nester,active adult and first-time homebuyers. We believe this broad range of home designs gives us flexibility toaddress economic and demographic trends within our markets.  The Company has been in operation since 1918and is currently engaged in residential real estate development in thefollowing eleven markets: southeastern Pennsylvania; central New Jersey; southernNew Jersey; Orange County, New York; Charlotte, Raleigh and Greensboro, NorthCarolina; Richmond and Tidewater, Virginia; Chicago, Illinois; and Orlando,Florida.  The Company’s Charlotte, NorthCarolina market also includes operations in adjacent counties in SouthCarolina.  The Company has operated inthe Pennsylvania and New Jersey markets for approximately 90 years.  Operations began in the North Carolina andVirginia markets in fiscal 2001 through the acquisition of Parker &Lancaster Corporation (“PLC”), a privately-held residential homebuilder.  We entered the Orlando, Florida market on July 28,2003 through our acquisition of Masterpiece Homes, Inc., now MasterpieceHomes, LLC (“Masterpiece Homes”), a privately-held residentialhomebuilder.  On July 28, 2004, weentered the Chicago, Illinois market through the acquisition of Realen Homes,L.P. (“Realen Homes”), a privately-held homebuilder with operations in Chicago,Illinois and southeastern Pennsylvania. On December 23, 2004, pursuant to an Asset Purchase Agreement ofthe same date, we acquired, through a wholly-owned subsidiary, certain realestate assets from Peachtree Residential Properties, LLC, a North Carolinalimited liability company and Peachtree Townhome Communities, LLC, a North Carolinalimited liability company which, at the time we acquired the assets, werewholly-owned subsidiaries of Peachtree Residential Properties, Inc., aGeorgia corporation (collectively, “Peachtree Residential Properties”).  In December 2005, the Company enteredthe Phoenix, Arizona market as a start-up operation via the purchase of anundeveloped parcel of land.  On December 31,2007, the Company committed to exiting its Arizona market and, in connectionwith this decision, on that date it disposed of its entire land position andits related work-in-process homes in Arizona, which constituted substantiallyall of its assets in the western region. The Condensed Consolidated Financial Statements have been reclassified forall prior periods presented to reflect this business as discontinued operations(see Note 13 – ‘Discontinued Operations’).

 

Referencesto a given fiscal year in this Quarterly Report on Form 10-Q is to thefiscal year ended June 30th of that year. For example, the phrases “fiscal 2008”, “2008 fiscal year” or “yearended June 30, 2008” refer to the fiscal year ending June 30,2008.  When used in this report, the “northernregion” segment refers to our markets in Pennsylvania, New Jersey and New York,which includes the southeastern Pennsylvania operations of Realen Homes thatwere acquired on July 28, 2004; the “southern region” segment refers toour markets in North Carolina and Virginia, as well as the adjacent counties inSouth Carolina; the “midwestern region” segment refers to our market inIllinois; the “Florida region” segment refers to our market in Florida; and the“western region” segment refers to our former market in Arizona.

 

**Critical Accounting Policies**

 

The preparation of financial statements and relateddisclosures in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements and revenues andexpenses during the period reported.  Thefollowing accounting policy involves a “critical accounting estimate” becauseit is particularly dependent on estimates and assumptions made by managementabout matters that are highly uncertain at the time the accounting estimates ismade. See Item 7 - “Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Critical Accounting Policies” in our Annual Reporton Form 10-K for the fiscal year ended June 30, 2007, for othercritical accounting policies.

 

*Valuation of Deferred Tax Assets*

 

We record income taxes under the asset and liabilitymethod, whereby deferred tax assets and liabilities are recognized based on thefuture tax consequences attributable to temporary differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and attributable to operating loss and tax creditcarryforwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply in the yearsin which the temporary differences are expected to be recovered or paid.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in earnings in the periodwhen the changes are enacted.

 

SFAS 109, *Accountingfor Income Taxes,*(“SFAS 109”) requires a reduction of the carryingamounts of deferred tax assets by a valuation allowance if, based on theavailable evidence, it is more likely than not that such assets will not berealized.  Accordingly, the need toestablish a valuation allowance against deferred tax assets is assessedperiodically based on the SFAS 109 more-likely-than-not realization thresholdcriterion.  In the assessment for avaluation allowance, appropriate consideration is given to all positive andnegative evidence related to the realization of the deferred tax assets.  This assessment considers, among othermatters, the nature, 

 

21

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frequency and severity of current and cumulativelosses, forecasts of future profitability, excess of appreciated asset valueover the tax basis of net assets, the duration of statutory carryforwardperiods, our experience with operating loss and tax credit carryforwards not expiringunused, and tax planning alternatives.

 

During the three and nine months ended March 31,2008, we established a deferred tax asset valuation allowance in the amount of$43.5 million.  The valuation allowancewas established due to the lack of objectively verifiable evidence regardingthe realization of these assets in the foreseeable future.  Our analysis of the need for a valuationallowance recognizes that we have incurred a cumulative loss and also consideredthe continued difficult current market conditions, as well as losses andimpairment charges with respect to certain real estate held for development orsale.

 

We believe that theaccounting estimate for the valuation of deferred tax assets is a criticalaccounting estimate because judgment is required in assessing the likely futuretax consequences of events that have been recognized in our financialstatements or tax returns. We based our estimate of deferred tax assets andliabilities on current tax laws and rates and, in certain cases, business plansand other expectations about future outcomes. Changes in existing tax laws or rates could affect actual tax resultsand future business results, including further market deterioration, may affectthe amount of deferred tax liabilities or the valuation of deferred tax assetsover time.  Changes that are notanticipated in our current estimates could have a material period-to-periodimpact on our financial position or results of operations.

 

**Results of Operations**

 

***New Orders, Residential Revenues and Backlog:***

 

Duringthe second half of fiscal 2006 and all of fiscal 2007, we and the entirehousing industry have faced several significant challenges in the housing andmortgage markets as a whole.  Thesechallenges continued throughout the nine months ended March 31, 2008 andinclude decreased homebuyer demand due to lower consumer confidence in theoverall housing market and increased economic uncertainty, increaseduncertainty in the overall mortgage market, increased underwriting standardsand an increase in foreclosures.  Webelieve that overall economic conditions and conditions in the housing andmortgage markets will remain difficult in the near term and these conditionsmay continue to have a negative impact on new orders and new order pricing, therebyfurther reducing revenues, gross margins and net income.  We are responding to these unfavorable marketconditions by attempting to maintain absorption levels through the use of salesincentives, reevaluating our individual land holdings, reducing our landexpenditures and emphasizing cost reductions to adjust for lower levels ofproduction.  Further decreases in demandfor our homes may require us to further increase the use of sales incentivesand to take other steps to reduce expenditures and expenses.

 

22

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Forthe tables below setting forth certain details as to residential salesactivities, the information is provided for the three and nine months ended March 31,2008 and 2007 in the case of residential revenue earned and new orders, and asof March 31, 2008 and 2007 in the case of backlog.  We consider a sales contract or a potentialsale to be classified as a new order and, therefore, become a part of backlog, at the timea homebuyer executes a contract to purchase a home from the Company.

 
| ** **                     | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                | ** ** |
| **New orders**                 |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 121,170    |       | $          | 201,110    |       | $ | (79,940 | ) | (39.7 | )% |
| Units                          |       | 266                                                 |       | 437        |       | (171       | )          | (39.1 | )% |
| Average sales price            |       | $                                                   | 456        |       | $          | 460        |       | $ | (4 | ) | (0.9 | )% |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 109,018    |       | $          | 128,886    |       | $ | (19,868 | ) | (15.4 | )% |
| Units                          |       | 243                                                 |       | 304        |       | (61        | )          | (20.1 | )% |
| Average sales price            |       | $                                                   | 449        |       | $          | 424        |       | $ | 25 |   | 5.9 | % |

 
| ** **                     | ** ** | **Nine months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**               | ** ** |
| **New orders**                 |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 368,433    |       | $          | 471,248    |       | $ | (102,815 | ) | (21.8 | )% |
| Units                          |       | 853                                                |       | 1,053      |       | (200       | )          | (19.0 | )% |
| Average sales price            |       | $                                                  | 432        |       | $          | 448        |       | $ | (16 | ) | (3.6 | )% |
|                           |       |                                               |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 372,865    |       | $          | 443,830    |       | $ | (70,965 | ) | (16.0 | )% |
| Units                          |       | 829                                                |       | 1,044      |       | (215       | )          | (20.6 | )% |
| Average sales price            |       | $                                                  | 450        |       | $          | 425        |       | $ | 25 |   | 5.9 | % |

 
| ** **          | ** ** | **March 31,**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | **(dollars in thousands)** | ** ** |
| **Backlog**         |       |                                 |       |       |       |       |       |   |   |
| Dollars             |       | $                                    | 313,481    |       | $          | 362,094    |       | $ | (48,613 | ) | (13.4 | )% |
| Units               |       | 633                                  |       | 724        |       | (91        | )          | (12.6 | )% |
| Average sales price |       | $                                    | 495        |       | $          | 500        |       | $ | (5 | ) | (1.0 | )% |

 

Neworders for the three months ended March 31, 2008 decreased $79.9 million,or 39.7%, to $121.2 million on 266 homes, compared to $201.1 million on 437homes for the three months ended March 31, 2007.  The average price per home decreased byapproximately 0.9% to $456 thousand for the three months ended March 31,2008 compared to $460 thousand for the three months ended March 31, 2007.

 

Neworders for the nine months ended March 31, 2008 decreased $102.8 million,or 21.8%, to $368.4 million on 853 homes, compared to $471.2 million on 1,053homes for the nine months ended March 31, 2007.  The average price per home of new ordersdecreased by approximately 3.6% to $432 thousand for the nine months ended March 31,2008 compared to $448 thousand for the nine months ended March 31, 2007.

 

Thedecrease in new orders for the three and nine months ended March 31, 2008is attributable to the continued deterioration in the overall housing andmortgage markets during the period. Additionally, during the three and nine months ended March 31,2007, we made significant efforts to reduce inventory levels which led to anunusual increase in new orders during the prior year period.  The decrease in the average sales price onnew orders generally represents a response to the deterioration in marketconditions by us in an effort to increase absorption through the use ofmarketing incentives and price reductions.

 

23

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Residentialrevenues earned for the three months ended March 31, 2008 decreased $19.9million, or 15.4%, to $109.0 million on 243 homes, compared to $128.9 millionon 304 homes for the three months ended March 31, 2007.  Residential revenues earned for the ninemonths ended March 31, 2008 decreased $71.0 million, or 16.0%, to $372.9million on 829 homes, compared to $443.8 million on 1,044 homes for the ninemonths ended March 31, 2007.

 

Thedecrease in residential revenues earned is primarily the result of effortstaken by us to reduce inventory levels during the prior year period, as notedabove.  We offered significant pricediscounts in order to drive the sales of standing inventory, most of which wasdelivered during the nine months ended March 31, 2007.  We believe that we have reduced our completedhome inventory levels to appropriate levels given the current market conditionsin which we operate.

 

Changesin backlog are the net result of changes in net new orders and residentialrevenues earned.

 

Cancellationrates for the three months ended March 31, 2008 were 31.3% of new orderscompared to 19.5% for the three months ended March 31, 2007.  Cancellations for the nine months ending March 31,2008 were 26.2% of new orders compared to 24.3% for the nine months ended March 31,2007.  This increase is primarily theresult of higher cancellations during the three and nine months ended March 31,2008 in our Northern and Midwestern regions.

 

***Northern Region:***

*** ***
| ** **                     | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                | ** ** |
| **New orders**                 |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 48,478     |       | $          | 77,209     |       | $ | (28,731 | ) | (37.2 | )% |
| Units                          |       | 100                                                 |       | 152        |       | (52        | )          | (34.2 | )% |
| Average sales price            |       | $                                                   | 485        |       | $          | 508        |       | $ | (23 | ) | (4.5 | )% |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 49,761     |       | $          | 43,263     |       | $ | 6,498 |   | 15.0 | % |
| Units                          |       | 102                                                 |       | 93         |       | 9          |       | 9.7 | % |
| Average sales price            |       | $                                                   | 488        |       | $          | 465        |       | $ | 23 |   | 4.9 | % |

 
| ** **                     | ** ** | **Nine months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**               | ** ** |
| **New orders**                 |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 147,950    |       | $          | 180,268    |       | $ | (32,318 | ) | (17.9 | )% |
| Units                          |       | 322                                                |       | 363        |       | (41        | )          | (11.3 | )% |
| Average sales price            |       | $                                                  | 459        |       | $          | 497        |       | $ | (38 | ) | (7.6 | )% |
|                           |       |                                               |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 157,811    |       | $          | 138,585    |       | $ | 19,226 |   | 13.9 | % |
| Units                          |       | 325                                                |       | 289        |       | 36         |       | 12.5 | % |
| Average sales price            |       | $                                                  | 486        |       | $          | 480        |       | $ | 6 |   | 1.3 | % |

 
| ** **          | ** ** | **March 31**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | **(dollars in thousands)** | ** ** |
| **Backlog**         |       |                                 |       |       |       |       |       |   |   |
| Dollars             |       | $                                    | 134,774    |       | $          | 142,206    |       | $ | (7,432 | ) | (5.2 | )% |
| Units               |       | 252                                  |       | 268        |       | (16        | )          | (6.0 | )% |
| Average sales price |       | $                                    | 535        |       | $          | 531        |       | $ | 4 |   | 0.8 | % |

 

24

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Ournorthern region is comprised of our Southeastern Pennsylvania; Central NewJersey; Southern New Jersey and Orange County, New York markets.  We believe that our geographic mix in thismarket allows us to compete better than if we were situated in one or twoconcentrated markets.  In the northernregion, we currently build homes primarily targeted toward move-up, luxury,empty nester and active adult homebuyers.

 

Thedecrease in new orders for the northern region noted above is the result ofdecreases in the average sales price, coupled with a decrease in the number ofunits.  The decrease in average salesprice is the result of changes in product mix changes and increases in salesincentives offered in order to increase orders. Additionally, during the three and nine months ended March 31,2007, we took specific efforts to reduce inventory levels, thereby increasingnew orders for that period.  The decreasein the number of units is primarily the result of deteriorating marketconditions.

 

***Southern Region:***

*** ***
| ** **                     | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                | ** ** |
| **New orders**                 |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 59,124     |       | $          | 91,856     |       | $ | (32,732 | ) | (35.6 | )% |
| Units                          |       | 127                                                 |       | 179        |       | (52        | )          | (29.1 | )% |
| Average sales price            |       | $                                                   | 466        |       | $          | 513        |       | $ | (47 | ) | (9.2 | )% |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 47,715     |       | $          | 55,652     |       | $ | (7,937 | ) | (14.3 | )% |
| Units                          |       | 104                                                 |       | 112        |       | (8         | )          | (7.1 | )% |
| Average sales price            |       | $                                                   | 459        |       | $          | 497        |       | $ | (38 | ) | (7.6 | )% |

 
| ** **                     | ** ** | **Nine months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**               | ** ** |
| **New orders**                 |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 167,889    |       | $          | 197,523    |       | $ | (29,634 | ) | (15.0 | )% |
| Units                          |       | 367                                                |       | 394        |       | (27        | )          | (6.9 | )% |
| Average sales price            |       | $                                                  | 457        |       | $          | 501        |       | $ | (44 | ) | (8.8 | )% |
|                           |       |                                               |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 157,915    |       | $          | 190,879    |       | $ | (32,964 | ) | (17.3 | )% |
| Units                          |       | 331                                                |       | 396        |       | (65        | )          | (16.4 | )% |
| Average sales price            |       | $                                                  | 477        |       | $          | 482        |       | $ | (5 | ) | (1.0 | )% |

 
| ** **          | ** ** | **March 31**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | **(dollars in thousands)** | ** ** |
| **Backlog**         |       |                                 |       |       |       |       |       |   |   |
| Dollars             |       | $                                    | 140,502    |       | $          | 160,288    |       | $ | (19,786 | ) | (12.3 | )% |
| Units               |       | 279                                  |       | 300        |       | (21        | )          | (7.0 | )% |
| Average sales price |       | $                                    | 504        |       | $          | 534        |       | $ | (30 | ) | (5.6 | )% |

 

Oursouthern region is comprised of our Charlotte, Raleigh and Greensboro, NorthCarolina and the Richmond and Tidewater, Virginia markets.  The Charlotte, North Carolina market alsoincludes operations in adjacent counties in South Carolina.  The Company in its southern region currentlybuilds homes targeted toward move-up and luxury homebuyers.

 

Thedecrease in new orders for the three months ended March 31, 2008 comparedto the three months ended March 31, 2007 is primarily driven by thedeteriorating market conditions, particularly in our Charlotte, Richmond andRaleigh markets.  The decrease in neworders for the nine months ended March 31, 2008 compared to the ninemonths ended March 31, 2007 is primarily the result of the deterioratingmarket conditions noted above, partially offset by new communities that wereopen during the nine months ended 

 

25

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March 31,2008 that were not open during the nine months ended March 31, 2007.  These new communities, on average, had alower average selling price, which resulted in the decrease in selling pricenoted above.  Additionally, our southernregion increased sales incentives in existing communities in an effort to drivesales growth, which negatively impacted average sales price.

 

Thedecrease in residential revenues earned for the three and nine months ended March 31,2008 compared to the three and nine months ended March 31, 2007 isprimarily the result of the decline in market conditions for this region duringthe second half of fiscal 2007 and the first nine months of fiscal 2008.

 

***Midwestern Region:***

 

| ** **                     | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                | ** ** |
| **New orders**                 |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 12,704     |       | $          | 17,892     |       | $ | (5,188 | ) | (29.0 | )% |
| Units                          |       | 34                                                  |       | 38         |       | (4         | )          | (10.5 | )% |
| Average sales price            |       | $                                                   | 374        |       | $          | 471        |       | $ | (97 | ) | (20.6 | )% |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 6,501      |       | $          | 15,289     |       | $ | (8,788 | ) | (57.5 | )% |
| Units                          |       | 17                                                  |       | 38         |       | (21        | )          | (55.3 | )% |
| Average sales price            |       | $                                                   | 382        |       | $          | 402        |       | $ | (20 | ) | (5.0 | )% |

 

| ** **                     | ** ** | **Nine months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**               | ** ** |
| **New orders**                 |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 39,672     |       | $          | 64,047     |       | $ | (24,375 | ) | (38.1 | )% |
| Units                          |       | 107                                                |       | 143        |       | (36        | )          | (25.2 | )% |
| Average sales price            |       | $                                                  | 371        |       | $          | 448        |       | $ | (77 | ) | (17.2 | )% |
|                           |       |                                               |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 35,062     |       | $          | 59,101     |       | $ | (24,039 | ) | (40.7 | )% |
| Units                          |       | 79                                                 |       | 140        |       | (61        | )          | (43.6 | )% |
| Average sales price            |       | $                                                  | 444        |       | $          | 422        |       | $ | 22 |   | 5.2 | % |

 

| ** **          | ** ** | **March 31**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | **(dollars in thousands)** | ** ** |
| **Backlog**         |       |                                 |       |       |       |       |       |   |   |
| Dollars             |       | $                                    | 32,542     |       | $          | 42,284     |       | $ | (9,742 | ) | (23.0 | )% |
| Units               |       | 83                                   |       | 84         |       | (1         | )          | (1.2 | )% |
| Average sales price |       | $                                    | 392        |       | $          | 503        |       | $ | (111 | ) | (22.1 | )% |

 

Inour midwestern region, we have operations in the Chicago area.  The Company in its midwestern regioncurrently builds homes primarily targeted toward the move-up homebuyer.  The midwestern region has experienced anoverall decline in the demand for new homes, increased price competition aswell as lower consumer confidence and slower economic activity in this market.  The Company has responded to the marketconditions in this region by offering larger sales incentives than are offeredin our other markets.

 

Duringthe three and nine months ended March 31, 2008, both new order dollars andthe number of units sold decreased as compared to the same periods in the prioryear.  This decrease is primarily theresult of the deteriorating economic and market conditions noted above andreduced inventory levels.  Additionally,we closed out of three communities during fiscal 2007 and the first half offiscal 2008, as a result of which these communities contributed little to nonew orders for the three and nine months ended March 31, 2008, 

 

26

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althoughthis impact was partially offset by the opening of three new communities.  The decrease in the average selling price ofnew orders is primarily the result of increased sales incentives offered in aneffort to drive sales growth and improve absorption, as well as a change in productmix as a result of the closed communities noted above.  The decrease in residential revenues earnedis primarily the result of the overall decline in market conditions in thisregion.

 

***Florida Region:***

 
| ** **                     | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                | ** ** |
| **New orders**                 |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 864        |       | $          | 14,153     |       | $ | (13,289 | ) | (93.9 | )% |
| Units                          |       | 5                                                   |       | 68         |       | (63        | )          | (92.6 | )% |
| Average sales price            |       | $                                                   | 173        |       | $          | 208        |       | $ | (35 | ) | (16.8 | )% |
|                           |       |                                                |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                                |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                   | 5,041      |       | $          | 14,682     |       | $ | (9,641 | ) | (65.7 | )% |
| Units                          |       | 20                                                  |       | 61         |       | (41        | )          | (67.2 | )% |
| Average sales price            |       | $                                                   | 252        |       | $          | 241        |       | $ | 11 |   | 4.6 | % |

 
| ** **                     | ** ** | **Nine months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**               | ** ** |
| **New orders**                 |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 12,922     |       | $          | 29,410     |       | $ | (16,488 | ) | (56.1 | )% |
| Units                          |       | 57                                                 |       | 153        |       | (96        | )          | (62.7 | )% |
| Average sales price            |       | $                                                  | 227        |       | $          | 192        |       | $ | 35 |   | 18.2 | % |
|                           |       |                                               |       |       |       |       |       |   |   |
| **Residential revenue earned** |       |                                               |       |       |       |       |       |   |   |
| Dollars                        |       | $                                                  | 22,077     |       | $          | 55,265     |       | $ | (33,188 | ) | (60.1 | )% |
| Units                          |       | 94                                                 |       | 219        |       | (125       | )          | (57.1 | )% |
| Average sales price            |       | $                                                  | 235        |       | $          | 252        |       | $ | (17 | ) | (6.7 | )% |

 
| ** **          | ** ** | **March 31**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | **(dollars in thousands)** | ** ** |
| **Backlog**         |       |                                 |       |       |       |       |       |   |   |
| Dollars             |       | $                                    | 5,663      |       | $          | 17,316     |       | $ | (11,653 | ) | (67.3 | )% |
| Units               |       | 19                                   |       | 72         |       | (53        | )          | (73.6 | )% |
| Average sales price |       | $                                    | 298        |       | $          | 241        |       | $ | 57 |   | 23.7 | % |

 

Theabove table reflects results from our Florida region for the three and ninemonths ended March 31, 2008 and 2007. In the Florida region, we have operations in the Orlando market.  The nine months ended March 31, 2008 andthe three and nine months ended March 31, 2007, also reflect results fromthe Palm Bay market from which we substantially exited during the first quarterof fiscal 2008 and the Palm Coast market from which we substantially exitedduring the second quarter of fiscal 2008. The Company in the Florida region currently builds homes primarilytargeted toward first-time, move-up and entry level homebuyers.

 

Thedecrease in new orders for the three and nine months ended March 31, 2008,as compared to the three and nine months ended March 31, 2007, isprimarily the result of the continued deterioration of market conditions inthis region.  New orders were alsonegatively impacted by our exit from the Palm Bay and Palm Coast markets, asnoted above.  During the three and ninemonths ended March 31, 2007, we offered increased sales incentives in aneffort to reduce excess inventory levels. The decline in residential revenue earned is primarily the result of theoverall decline in market conditions, as well as our exit from the Palm Bay andPalm Coast markets, as noted above.

 

27

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Additionally,demand in the Florida region for first-time buyers has decreased due to thetightening of the mortgage markets and the inability of a large portion of thetargeted demographic to obtain financing for new home purchases.  As the average sales price in the Floridaregion is significantly less than the average sales price in our other regions,we believe that the targeted demographic in this region is more prone touncertainties in the mortgage markets, especially the sub-prime mortgagemarket.

 

***Costs and Expenses:***

 

***Residential Properties:***

 
| ** **                     | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**                | ** ** |
| **Residential Properties**     |       |                                                |       |       |       |       |       |   |   |
| Earned revenue                 |       | $                                                   | 109,018    |       | $          | 128,886    |       | $ | (19,868 | ) | (15.4 | )% |
| Cost of residential properties |       | 110,908                                             |       | 149,123    |       | (38,215    | )          | (25.6 | )% |
| Gross profit margin            |       | $                                                   | (1,890     | )          | $          | (20,237    | )          | $ | 18,347 |   | (90.7 | )% |
| Gross profit margin %          |       | (1.7                                                | )%         | (15.7      | )%         |       |       |   |   |

 
| ** **                     | ** ** | **Nine months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(dollars in thousands)**               | ** ** |
| **Residential Properties**     |       |                                               |       |       |       |       |       |   |   |
| Earned revenue                 |       | $                                                  | 372,865    |       | $          | 443,830    |       | $ | (70,965 | ) | (16.0 | )% |
| Cost of residential properties |       | 361,286                                            |       | 415,763    |       | (54,477    | )          | (13.1 | )% |
| Gross profit margin            |       | $                                                  | 11,579     |       | $          | 28,067     |       | $ | (16,488 | ) | (58.7 | )% |
| Gross profit margin %          |       | 3.1                                                | %          | 6.3        | %          |       |       |   |   |

 

Thecosts of residential properties for the three months ended March 31, 2008,compared to the three months ended March 31, 2007 decreased primarily as aresult of decreased residential revenue earned, coupled with a decrease inlong-lived asset impairment losses recorded during the three months ended March 31,2008.  Impairments of residentialproperty in the amount of $15.3 million and $33.6 million were recorded in thethree months ended March 31, 2008 and 2007, respectively.  Gross profit percentage for the three monthsended March 31, 2008 was (1.7)%, as compared to (15.7)% for the threemonths ended March 31, 2007. Without the impairments, the gross profit percentage would haveincreased from 10.4% during the three months ended March 31, 2007 to 12.3%during the three months ended March 31, 2008.

 

Thecosts of residential properties for the nine months ended March 31, 2008compared to the nine months ended March 31, 2007, decreased primarily as aresult of decreased residential revenue earned, coupled with a decrease inlong-lived asset impairment losses recorded during the nine months ended March 31,2008.  Impairments of residentialproperty in the amount of $38.9 million and $43.5 million were recorded in thenine months ended March 31, 2008 and 2007, respectively.  Gross profit percentage for the nine monthsended March 31, 2008 was 3.1%, which was a decrease from 6.3% for the ninemonths ended March 31, 2007. Without the impairments, the gross profit percentage would havedecreased from 16.1% during the nine months ended March 31, 2007 to 13.5%during the nine months ended March 31, 2008.

 

Inaddition, we sell a variety of home types in various communities and regions,each yielding a different gross profit margin. As a result, depending on themix of both communities and home types delivered, the consolidated gross profitmargin may fluctuate up and down on a periodic basis and periodic profitmargins may not be representative of the consolidated gross profit margin forthe entire year or future years.

 

Interestincluded in the costs and expenses of residential properties and land sold forthe three and nine months ended March 31, 2008 was $7,817 and $16,740,respectively.  Interest included in thecosts and expenses of residential properties and land sold for the three andnine months ended March 31, 2007 was $3,997 and $11,797,respectively.  The interest incurredduring the construction period is capitalized to inventory and then expensed tothe cost of residential properties in the period in which the home settles.

 

28

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***Selling, General and Administrative:***

 
| ** **                               | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                               | ** ** | **(dollars in thousands)**                | ** ** |
| **Selling, General and  Administrative** |       |                                                |       |       |       |       |       |   |   |
| Selling and advertising                  |       | $                                                   | 6,629      |       | $          | 9,026      |       | $ | (2,397 | ) | (26.6 | )% |
| Commissions                              |       | 4,181                                               |       | 5,356      |       | (1,175     | )          | (21.9 | )% |
| General and administrative               |       | 8,499                                               |       | 18,978     |       | (10,479    | )          | (55.2 | )% |
| Total                                    |       | $                                                   | 19,309     |       | $          | 33,360     |       | $ | (14,051 | ) | (42.1 | )% |
|                                     |       |                                                |       |       |       |       |       |   |   |
| ** **                               | ** ** | **Nine months ended March 31**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | **%Change** | ** ** |
| ** **                               | ** ** | **(dollars in thousands)**                | ** ** |
| **Selling, General and  Administrative** |       |                                                |       |       |       |       |       |   |   |
| Selling and advertising                  |       | $                                                   | 21,303     |       | $          | 25,134     |       | $ | (3,831 | ) | (15.2 | )% |
| Commissions                              |       | 14,102                                              |       | 17,499     |       | (3,397     | )          | (19.4 | )% |
| General and administrative               |       | 26,767                                              |       | 46,169     |       | (19,402    | )          | (42.0 | )% |
| Total                                    |       | $                                                   | 62,172     |       | $          | 88,802     |       | $ | (26,630 | ) | (30.0 | )% |

 

Sellingand advertising costs include amortization of deferred marketing costs andother selling costs. These costs decreased primarily as a result of reducedsales office headcount, as part of headcount reductions that took place in July 2007.

 

Thedecrease in commission expense is primarily attributable to the decrease inresidential revenues as noted above. Commission expense as a percentage ofresidential revenue decreased to 3.8% for both the three and nine months ended March 31,2008, respectively, and from 4.2% and 3.9% for the three and nine months ended March 31,2007, respectively.

 

Thedecrease in general and administrative costs is attributable to decreases inpayroll expense, relating to the headcount reductions that were completed in July 2007and overall decreases in controllable costs as we adjusted to the decline inmarket conditions. Included in general and administrative costs for the threemonths ended March 31, 2008 and 2007 were $0.1 million and $10.8 million,respectively, related to the write-off of abandoned projects and otherpre-acquisition costs. Write-off of abandoned projects and otherpre-acquisition costs were $0.9 million and $20.2 million for the nine monthsended March 31, 2008 and 2007, respectively.

 

DuringJuly, 2007, we completed a round of headcount reductions. The headcountreductions were taken in several stages throughout the prior and current fiscalyear and across all of our regions in response to the general downturn in the homebuildingindustry. Additionally, we completed another round of headcount reductions in January 2008.This most recent headcount reduction affected all of our regions andrepresented a 14% decrease in total employee count.

 

29

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***Land Sales and Other Income:***

 
| ** **                 | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)**                | ** ** |
| **Land sales**             |       |                                                |       |       |       |   |   |
| Earned revenue             |       | $                                                   | 1,912      |       | $          | 14,864 |   | $ | (12,952 | ) |
| Costs and expenses         |       | 1,635                                               |       | 15,739     |       | (14,104 | ) |
| Gross profit (loss)        |       | $                                                   | 277        |       | $          | (875 | ) | $ | 1,152 |   |
|                       |       |                                                |       |       |       |   |   |
| **Other income (expense)** |       |                                                |       |       |       |   |   |
| Other income               |       | $                                                   | 2,364      |       | $          | 2,244 |   | $ | 120 |   |
| Other expense              |       | $                                                   | 1,566      |       | $          | 1,395 |   | $ | 171 |   |
|                       |       |                                                |       |       |       |   |   |
| ** **                 | ** ** | **Nine months ended March 31**  | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)**                | ** ** |
| **Land sales**             |       |                                                |       |       |       |   |   |
| Earned revenue             |       | $                                                   | 11,322     |       | $          | 17,069 |   | $ | (5,747 | ) |
| Costs and expenses         |       | 47,677                                              |       | 17,344     |       | 30,333 |   |
| Gross loss                 |       | $                                                   | (36,355    | )          | $          | (275 | ) | $ | (36,080 | ) |
|                       |       |                                                |       |       |       |   |   |
| **Other income (expense)** |       |                                                |       |       |       |   |   |
| Other income               |       | $                                                   | 6,926      |       | $          | 7,325 |   | $ | (399 | ) |
| Other expense              |       | $                                                   | 5,001      |       | $          | 4,906 |   | $ | 95 |   |
|                            |            |                                                     |            |            |            |  |  |  |  |  |  |

 

Duringthe three and nine months ended March 31, 2008, the Company receivedproceeds on the sale of land of $1.9 million and $36.0 million, respectively. Ofthe $36.0 received during the nine months ended March 31, 2008, $11.3million was recognized as land sales revenue; $11.3 related to proceeds in theCompany’s western region and was included in discontinued operations; and $13.4million related to two parcels of land that were sold and subsequently subjectto an option and accounted for as a financing transaction. In addition, theCompany received approximately $34.0 million of federal income tax refunds as aresult of these transactions and other operations during the three and nine monthsended March 31, 2008. Land sales for the three and nine months ended March 31,2007 were $14.9 million and $17.1 million, respectively. Land sale proceeds inthe three and nine months ended March 31, 2007 were primarily attributableto the sale of a parcel of land in the southern region for approximately $13.6million. Land sales costs and expenses during the nine months ended March 31,2008 included impairments to land in the amount of $36.6 million.

 

Otherincome consists primarily of property management fees and mortgage processingincome, while other expense consists primarily of the costs of propertymanagement and mortgage processing, along with depreciation expense for theCompany.

 

Ourmortgage processing business assists homebuyers in obtaining financing directlyfrom unaffiliated lenders. We do not fund or service the mortgage loans, nor dowe assume any credit or interest rate risk in connection with originating themortgages.

 

30

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***Income Taxes and Loss from Continuing Operations:***

 
| ** **                                  | ** ** | **Three months ended March 31** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)**                | ** ** |
|                                        |       |                                                |       |       |       |   |   |
| Pre-tax loss from continuing operations     |       | $                                                   | (20,124    | )          | $          | (69,957 | ) | $ | 49,833 |   |
| Income tax expense (benefit)                |       | 26,987                                              |       | (27,263    | )          | 54,250 |   |
| Loss from continuing operations, net of tax |       | $                                                   | (47,111    | )          | $          | (42,694 | ) | $ | (4,417 | ) |
|                                        |       |                                                |       |       |       |   |   |
| ** **                                  | ** ** | **Nine months ended March 31**  | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)**                | ** ** |
|                                        |       |                                                |       |       |       |   |   |
| Pre-tax loss from continuing operations     |       | $                                                   | (85,023    | )          | $          | (74,925 | ) | $ | (10,098 | ) |
| Income tax expense (benefit)                |       | 2,458                                               |       | (29,244    | )          | 31,702 |   |
| Loss from continuing operations, net of tax |       | $                                                   | (87,481    | )          | $          | (45,681 | ) | $ | (41,800 | ) |

 

Theeffective income tax rate has decreased to (2.9)% for the nine months ended March 31,2008 from 39.0% for the nine months ended March 31, 2007. The significantchange in the Company’s tax rate was a result of the establishment of a valuation allowance against thedeferred tax assets due to the lack of objectively verifiable evidence regardingthe realization of these assets in the foreseeable future.  The valuationallowance established during the nine months ended March 31, 2007 amountedto $43,544.

 

***Loss from Discontinued Operations:***

 

OnDecember 31, 2007, the Company specifically committed to exiting itsArizona market and, in connection with this decision, on that date, it disposedof its entire land position and its related work-in-process homes in Arizona. Wehave historically reported this business as the western region operating segment.The disposed work-in-process inventory and land assets constitutedsubstantially all of our assets in the western region. As such, all chargesassociated with the western region are included as a discontinued operation.

 

Lossfrom discontinued operations was $8.6 million or a loss of $0.47 per share forthe three months ended March 31, 2008 compared to a loss of $9.2 millionor $0.50 per share for the three months ended March 31, 2007. For the ninemonths ended March 31, 2008, the loss from discontinued operations was $21.7million or $1.17 per share compared to a loss of $9.8 million or $0.53 pershare for the nine months ended March 31, 2007. The loss in the ninemonths ended March 31, 2008 includes impairment charges to reduce thecarrying value of the land prior to being sold in the amount of $20.7 million. Theloss in the three and nine months ended March 31, 2007, includesimpairment charges in the amount of $13.7 million. See Note 13 to ourconsolidated financial statements in Item 1 of this Part 1.

 

***Impairment of Goodwill:***

 

Duringthe three and nine months ended March 31, 2007, the Company recordedimpairment charges related to the goodwill that arose from the Realen Homes andMasterpiece Homes acquisitions. The impairment charges related to the goodwillthat arose from the Realen Homes and Masterpiece Homes acquisitions werenecessary due to slower than expected absorption rates experienced in the thirdquarter of fiscal year 2007, increased sales****incentives and lower margins**,**which resultedfrom the deteriorating market conditions in the regions in which Realen Homesand Masterpiece Homes operate. The deteriorating market conditions were theresult of decreased consumer demand, changes in the sub-prime mortgage marketand increased underwriting standards. The changes in the sub-prime mortgagemarket were the result of rising delinquencies and defaults by borrowers asthey experienced financial difficulties due to the rising interest ratesthat were occurring during the third quarter of fiscal year 2007 and otherfactors. This credit deterioration led to the bankruptcies of major sub-primemortgage lenders, an overall lending capacity decline and the tightening oflending standards.

 

Theimpairment charges taken during the third quarter of fiscal year 2007 wereestimates based on the then currently available projections for fiscal year2008 and beyond, management’s best estimates of market conditions and the fairmarket value of assets and liabilities at March 31, 2007.

 

31

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RealenHomes Goodwill:

 

Forthe three and nine months ended March 31, 2007, a goodwill impairmentcharge of $13.3 million related to the goodwill arising from the Company’sacquisition of Realen Homes was recognized. The impairment charge was necessarydue to declining market conditions in both the midwestern and northern regionsin which Realen Homes operated. As a result, the operating income and cashflows for these regions were less than expected for the three and nine mothsended March 31, 2007. Based on these results, the Company’s earningsforecast for the next eight fiscal years were revised.

 

MasterpieceHomes Goodwill:

 

Forthe three and nine months ended March 31, 2007, a goodwill impairmentcharge of $3.0 million related to the goodwill arising from the Company’sacquisition of Masterpiece Homes was recognized. The impairment charge wasnecessary due to declining market conditions in the Florida region. As aresult, the operating income and cash flows for Florida were less than expectedfor the three and nine moths ended March 31, 2007. Based on these results,the Company’s earnings forecast for the next eight fiscal years were revised.

 

**Deferred Tax Assets**

 

During the three and ninemonths ended March 31, 2008, we established a deferred tax asset valuationallowance of $43.5 million. Our net deferred tax assets consist primarily ofinventory valuation adjustments, net operating loss carryforwards, goodwillimpairments, and reserves and accruals that are not currently deductible fortax purposes offset in part by capitalized interest. Some or all of thesedeferred tax assets could expire unused if we are unable to generate taxableincome in the future sufficient to utilize them or we enter into transactionsthat limit our ability to use them. If a material portion of our deferred taxassets expire unused, it could have a material negative impact on our financialposition or results of operations. In the event it becomes more likely than notthat some or all of the deferred tax assets will be realized, we will adjustour valuation allowance. Depending on the amount and timing of taxable incomewe ultimately generate in the future, as well as other factors, we couldrecognize no benefit from our deferred tax assets, in accordance with ourcurrent estimate, or we could recognize some or all of their full benefit.

 

**Liquidity and Capital Resources**

 

Onan ongoing basis, we require capital for expenditures to purchase and developland, to construct homes, to fund related carrying costs and overhead and tofund various advertising and marketing programs to facilitate sales. These expenditures include site preparation, roads, water and sewer lines,impact fees and earthwork, as well as the construction costs of the homes andamenities.  Our sources of capital include funds derived from operations,sales of assets and various borrowings, most of which are secured.  In aneffort to increase liquidity, we may pursue sales on parcels of land, as wellas alternatives for selling a portion of our model home portfolio and otherassets; however, we can offer no assurances as to whether or when suchtransactions will occur or whether the transactions will be on termsadvantageous to us.

 

Asof March 31, 2008, we had $151.0 million of borrowing capacity under oursecured revolving credit facility discussed below, of which approximately $43.6million was available to be drawn based upon our monthly borrowing basecertificate as of March 31, 2008. A majority of our debt is variable rate,based on the 30-day LIBOR rate, and therefore, we are exposed to market risk inconnection with interest rate changes. At March 31, 2008, the 30-day LIBORrate of interest was 2.70313%.

 

TheCompany received approximately $34 million of federal income tax refunds as aresult of certain land sale transactions and other operations that werecompleted during the second quarter of fiscal year 2008. The proceeds wereprimarily used to pay down debt.

 

Subjectto our ability to obtain an amendment to our senior secured revolving creditfacility or an extension of a waiver of our breach of certain financialcovenants on or before September 15, 2008 as discussed below, we believethat cash on hand, funds generated from operations and financial commitmentsfrom available lenders will provide sufficient capital for us to meet ourexisting operating needs. We can offer no assurances that we will be able toobtain waivers or amendments of the covenants, if required, upon acceptableterms or at all. In the event we are unable to obtain an amendment or waiverextension before September 16, 2008, we anticipate that we will be indefault on that date under or senior secured revolving credit facility. Such adefault may result in our inability to have sufficient liquidity and capitalresources to meet our operating needs at that time.

 

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***Revolving Credit Facility***

 

OnDecember 22, 2004, Greenwood Financial, Inc., a wholly-ownedsubsidiary of the Company and other wholly-owned subsidiaries of the Company,as borrowers, and Orleans Homebuilders, Inc., as guarantor, entered into aRevolving Credit and Loan Agreement for a $500,000 Senior Secured RevolvingCredit and Letter of Credit Facility with various banks as lenders (as amendedand restated and further amended, the “Revolving Credit Facility”). TheRevolving Credit and Loan Agreement was amended on January 24, 2006, viathe Amended and Restated Revolving Credit and Loan Agreement (the “AmendedCredit Agreement”). In connection with the Amended Credit Agreement, OrleansHomebuilders, Inc. entered into an amended Guaranty agreement, which wasamended on September 6, 2007, by the First Amendment to Guaranty. TheAmended and Restated Credit Agreement was amended on November 1, 2006 (the“First Amendment”), February 7, 2007 (the “Second Amendment”), May 8,2007 (the “Third Amendment”), September 6, 2007 (the “Fourth Amendment”),and December 21, 2007 (the “Fifth Amendment”). In addition, on May 9,2008, the Company received a limited waiver (the “waiver letter”) to theAmended Credit Agreement.

 

***Waiver:***

 

Absentthe deferred tax asset valuation allowance of $43.5 million, the Company wouldhave been in compliance with all of the financial covenants in the AmendedCredit Agreement at March 31, 2008. However, as a result of the deferredtax asset valuation allowance, absent the waiver letter, the Company would havebeen in default of the minimum consolidated tangible net worth, maximumleverage ratio, and maximum land to consolidated adjusted tangible net worthratio covenants set fort in the Amended Credit Agreement at March 31, 2008(the “Subject Covenants”). Subject to certain limitations, the waiver lettertemporarily waives compliance with the Subject Covenants generally from January 1,2008 through and including September 15, 2008 (the “Waiver Period”),unless another event of default occurs or we fail to comply with the covenantsin the waiver letter. Under the terms of the waiver letter, during the WaiverPeriod, the Company is required to maintain a minimum consolidated tangible networth of $90.0 million at all times and a leverage ratio of not more than 5.25to 1.00 as of the last day of any fiscal quarter during the Wavier Period. TheCompany currently anticipates that it will comply with these covenants duringthe Waiver Period. The land to consolidated adjusted tangible net worth ratiowill not be tested during the Waiver Period. If the Company does not maintainthe required minimum consolidated tangible net worth or its leverage ratioexceeds the permissible maximum, then as of such date, the Waiver Period andthe limited waiver will end and non-compliance with the Subject Covenants willconstitute an event of default under the Amended Credit Agreement. The WaiverPeriod and the limited waiver will also end if there is any other event ofdefault under the Amended Credit Agreement. In addition, if the deferred taxasset valuation allowance is adjusted during the wavier period because oflegislation or otherwise, the minimum consolidated tangible net worth andmaximum leverage ratio will be adjusted accordingly based on the differencebetween the deferred tax asset valuation allowance of $43.5 million at March 31,2008 and the adjusted amount of the deferred tax asset valuation allowance.

 

Inthe waiver letter, the Company also agreed that it will act in good faith anduse its best efforts to work with the agent lender during the Wavier Period toidentify a material group of assets in its borrowing base for reappraisal priorto September 15, 2008. The reappraisals will not be used in calculatingthe borrowing base during the Waiver Period. After the termination of theWaiver Period, in the event that the reappraisals result in a determinationthat a material amount of the assets in the Company’s borrowing base have avalue lower than the cost and the existing appraised values, the netavailability under the Credit Facility could be materially reduced fromexisting or anticipated levels, absent an amendment to the credit facility. TheCompany could also be required to repay a portion of the amount outstandingunder the credit facility. Such a material reduction in the net availabilitycould reduce our liquidity by an amount that is materially and adverselyimpacts our operations.

 

TheCompany currently anticipates that it will amend the Amended Credit Agreementto address the Subject Covenants and other matters during the first quarter ofFiscal 2009. While the Company currently anticipates that it will be able toobtain an amendment to the Amended Credit Agreement before September 16,2008, it has not yet begun negotiating with its lenders with respect to thisanticipated amendment and it can offer no assurances that it will be able toobtain an amendment on acceptable terms or at all. Under the terms of the waiverletter, absent an amendment to the Amended Credit Agreement, unless the WaiverPeriod is extended beyond September 15, 2008, the Company currentlyexpects that it will be in default under the Amended Credit Agreement on September 16,2008. As explained in more detail below, upon the occurrence and continuationof an event of default under the Amended Credit Agreement, the lenders maydemand immediate payment in full of all indebtedness outstanding under theRevolving Credit Facility, terminate their obligations to make any loans oradvances, and exercise other remedies.

 

***Terms of the RevolvingCredit Facility:***

 

Theborrowing limit under the Revolving Credit Facility is $585.0 million, subjectto increase if certain conditions are met. Under and subject to the terms ofthe Revolving Credit Facility, the borrowers may borrow and re-borrow for thepurpose of financing the acquisition and development of real estate, theconstruction of homes and improvements, for investment in joint ventures, forworking capital and for such other appropriate corporate purposes as may beapproved by the lenders. Capitalized terms used below and not

 

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otherwisedefined have the meanings set forth in the Amended and Restated CreditAgreement.

 

Pursuantto the Fourth Amendment, and subject to the terms of the Revolving CreditFacility, approximately $464.0 million of the $585.0 million Revolving CreditFacility has a maturity date of December 20, 2009, and the remaining$121.0 million has a maturity date of December 20, 2008. Borrowings andadvances under the Revolving Credit Facility bear interest on a per annum basisequal to the LIBOR Market Index Rate plus a non-default variable spread rangingfrom 250 basis points to 400 basis points, depending upon our leverage ratio. Duringthe term of the Revolving Credit Facility, interest is payable monthly inarrears. At March 31, 2008, the interest rate was 5.701313%, whichincluded a 300 basis point spread. However, the Company anticipates that as aresult of the deferred tax asset valuation reserve, and indirectly the terms ofits waiver letter discussed above, that the spread will increase to 400 basispoints during the fourth quarter of fiscal 2008****dueto the Company’s expected leverage ratio.

 

Thetotal amount of loans and advances outstanding at any time under the RevolvingCredit Facility may not exceed the lesser of the then-current borrowing baseavailability or the revolving sublimit as defined in the Revolving CreditFacility. Pursuant to the Fourth Amendment, the revolving sublimit is $585.0million, subject to reduction on December 20, 2008. The borrowing baseavailability is based on the lesser of the appraised value or cost of realestate owned by us that has been admitted to the borrowing base. As discussedabove, the anticipated reappraisal of a material amount of assets included inthe borrowing base could, on or after September 16, 2008, reduce theborrowing base availability by a material amount. Various conditions must besatisfied in order for real estate to be admitted to the borrowing base,including that a mortgage in favor of lenders has been delivered to the agentfor lenders and that all governmental approvals necessary to begin developmentof for-sale residential housing, other than building permits and certain otherpermits borrower in good faith believes will be issued within 120 days, havebeen obtained. Depending on the stage of development of the real estate, theloan to value or loan to cost advance rate in the borrowing base ranges from50% to 95% of the appraised value or cost of the real estate.

 

Assecurity for all obligations of borrowers to lenders under the Revolving CreditFacility, lenders have a first priority mortgage lien on all real estate admittedto the borrowing base. In addition, Orleans Homebuilders, Inc. hasguaranteed the obligations of the borrowers to lenders pursuant to an amendedGuaranty executed by Orleans Homebuilders, Inc. on January 26, 2006,and amended on September 6, 2007. Under the Guaranty, Orleans Homebuilders, Inc.granted lenders a security interest in any balance or assets in any deposit orother account that Orleans Homebuilders, Inc. has with any lender.

 

TheRevolving Credit Facility contains customary covenants that, subject to certainexceptions, limit the ability of the Company to (among other things):

 

·                 Incur or assume otherindebtedness, except certain permitted indebtedness;

·                 Grant or permit to exist anylien, except certain permitted liens;

·                 Enter into any merger,consolidation or acquisition of all or substantially all the assets of anotherentity;

·                 Sell, assign, lease orotherwise dispose of all or substantially all of its assets;

·                 Enter into any transactionwith an affiliate that is not a borrower or a guarantor under the RevolvingCredit Facility, or a subsidiary of either;

·                 Pay dividends in excess of$0.02 per share per quarter; or

·                 Redeem any stock.

 

TheRevolving Credit Facility also contains various financial covenants. Amongother things, the financial covenants, as amended, require that:

 

·                 As of the last day of eachfiscal quarter, the ratio of our Adjusted EBITDA to debt service for the priorfour fiscal quarters cannot be not less than 0.20-to-1.00 for the period endingJune 30, 2008; 0.50-to-1.00 for the period ending September 30, 2008;0.65-to-1.00 for the period ending December 31, 2008, March 31, 2009and June 30, 2009; and 1.00-to-1.00 for the period ending September 30,2009. As a result of the Fourth and Fifth Amendments, the Adjusted EBITDA todebt service covenant was waived for the periods ending June 30, 2007, September 30,2007, December 31, 2007 and March 31, 2008.

·                 We must maintain a minimumconsolidated tangible net worth of at least $192.0 million plus 50% of thepositive net income earned after June 30, 2007 and all of the net proceedsof equity securities issued by us after June 30, 2007. In addition, theminimum consolidated tangible net worth shall be reduced by after-tax inventoryimpairments up to a maximum aggregate amount of $35.0 million and after-taxland sales impairments up to a maximum aggregate amount of $50.0 million,provided that the minimum consolidated tangible net worth is at least $130.0million at all times. Under the terms of the waiver received by the Company on May 9,2008, from January 1, 2008 through and including September 15, 2008,the minimum consolidated tangible net worth that the Company must maintain isgenerally reduced to at least $90.0 million.

·                 As of the last day of eachfiscal quarter, our leverage ratio cannot exceed 4.00-to-1.00 for any fiscalquarters ending on or after December 31, 2007. In addition, as of the lastday of each fiscal quarter ending on or after December 31, 2007, ourleverage ratio, excluding the effect of inventory impairments and land salesimpairments, cannot exceed 3.00-to-1.00. Under

 

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the terms of the waiverreceived by the Company on May 9, 2008, from January 1, 2008 throughand including September 15, 2008, the Company’s leverage ratio generallycannot exceed 5.25-to-1.00.

·                 As of the last day of eachfiscal quarter, the ratio of the book value of all land that is not subject toa qualifying agreement of sale and on which no unit has been or is beingconstructed to our consolidated adjusted tangible net worth cannot exceed2.00-to-1.00 at March 31, 2008; 1.85-to-1.00 at June 30, 2008, September 30,2008 and December 31, 2008; and 1.75-to-1.00 at March 31, 2009through maturity. Under the terms of the waiver received by the Company on May 9,2008, from January 1, 2008 through and including September 15, 2008,this ratio is not applicable or tested.

·                 We must maintain a requiredliquidity level based on cash plus borrowing base availability and under thiscovenant, we must have (i) at least $10.0 million of cash and cashequivalents (as defined) as of the reporting date of each borrowing basecertificate, and (ii) at least $15.0 million of liquidity (as defined andincluding cash and cash equivalents) as of the date of each borrowing basecertificate, through July 31, 2008. Starting August 31, 2008, we musthave (i) at least $15.0 million of cash and cash equivalents (as defined)as of the reporting date of each borrowing base certificate, and (ii) atleast $20.0 million of liquidity (as defined and including cash and cashequivalents) as of the date of each borrowing base certificate.

·                 Under a minimum cash flowfrom operations ratio based on cash flow from operations to interest incurredcovenant, which is applicable starting with the twelve-month period ending December 31,2007, if the interest coverage ratio is less than 1.25-to-1.00, we must have acash flow from operations to interest incurred ratio (as defined) of at least1.50-to-1.00. During the first four quarterly periods during which thiscovenant is applicable, even if the interest coverage ratio is less than1.25-to-1.00, the cash flow from operations ratio may be less than 1.50-to-1.00during any one period, so long as it is greater than 1.00-to-1.00. Cash flowfrom operations is calculated based on the last twelve months cash flow fromoperations and adjusted for interest expense and includes any amounts from thedisposition of model homes that are subject to a sale-leaseback transaction tothe extent such amounts are not otherwise included in net cash provided byoperating activities.

 

Inaddition, the Revolving Credit Facility contains various financial covenantswith respect to the value of land in certain stages of development that may beowned by us, a borrower or any subsidiary of the Company and limits the numberof units which are not subject to a bona-fide agreement of sale that may be inthe inventory of any borrower, the Company or any subsidiary of the Company.

 

At the fiscal quartersended September 30, 2006, December 31, 2006, March 31, 2007, June 30,2007, and March 31, 2008, we would have been in violation of certainfinancial covenants in the Amended and Restated Credit Agreement if not for theFirst Amendment, Second Amendment, Third Amendment, Fourth Amendment and waiverletter, respectively.

 

TheRevolving Credit Facility provides that, subject to any applicable notice andcure provisions, each of the following (among others) is an event of default:

 

·                 Failure by borrowers to paywhen due any amounts owing under the Revolving Credit Facility;

·                 Failure by the Company toobserve or perform any promise, covenant, warranty, obligation, representationor agreement under the Revolving Credit Facility or any other loan document;

·                 Bankruptcy and other insolvencyevents with respect to any borrower or the Company;

·                 Dissolution orreorganization of any borrower or the Company;

·                 The entry of a judgment orjudgments against borrower(s) or the Company: (i) in an aggregateamount that is at least $0.5 million in excess of available insurance proceeds,if such judgment or judgments are not dismissed or bonded within 30 days; or (ii) thatprevents borrowers from conveying lots and units in the ordinary course ofbusiness if such judgment or judgments are not dismissed or bonded within 30days; or the issuance of any writs of attachment, execution or garnishmentagainst any borrower or the Company;

·                 Any material adverse changein the financial condition of a borrower or the Company which causes thelenders, in good faith, to believe that the performance of any of theobligations under the Revolving Credit Facility is impaired or doubtful for anyreason; and

·                 Specified cross defaults.

 

Uponthe occurrence and continuation of an event of default, after completion of anyapplicable grace or cure period, lenders may demand immediate payment in fullof all indebtedness outstanding under the Revolving Credit Facility, terminatetheir obligations to make any loans or advances or issue any letter of credit,set off and apply any and all deposits held by any lender for the credit oraccount of any borrower. In addition, upon the occurrence of certain events ofbankruptcy or other insolvency events with respect to any borrower or theCompany, all indebtedness outstanding under the Revolving Credit Facility shallbe immediately due and payable without any act or action by lenders. A defaultunder our Revolving Credit Facility could also prevent us from making requiredpayments under our trust preferred securities, which would cause a defaultunder those securities.

 

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***Trust Preferred Securities***

 

On November 23,2005, we issued $75.0 million of trust preferred securities which mature on January 30,2036, and are callable, in whole or in part, at par plus accrued interest on orafter January 30, 2011. For the first ten years, the securities have afixed interest rate of 8.61% per annum, provided that certain covenant levelsare maintained. Thereafter, the securities have a floating interest rate equalto three-month LIBOR plus 360 basis points per annum, resetting quarterly.

 

Pursuantto the original Indenture, in the event we fail to meet certain financialratios for three of four consecutive quarters, the applicable rate of interest willbe increased by 300 basis points until we are in compliance with the financialratios, at which time the interest rate will return to its original amount. On August 13,2007, we entered into Supplemental Indenture No. 1 (the “SupplementalIndenture”), which amended the terms of the securities by deferring thepotential start of this increased rate of interest for at least four quarters. Butfor the Supplemental Indenture, we would have been subject to the increasedrate of interest starting with the first quarter of fiscal 2008. Pursuant tothe Supplemental Indenture, it is an event of default if the increased interestrate is in effect for eight consecutive interest payment periods, starting withthe quarterly interest payment due on October 30, 2008.  Theoccurrence of an event of default may trigger demand for immediate payment infull of all outstanding amounts.  An uncured event of default under thetrust preferred securities also constitutes an event of default under theAmended and Restated Credit Agreement.  At December 31, 2006, March 31,2007, June 30, 2007, September 30, 2007, December 31, 2007 and March 31,2008, we failed to meet the interest coverage ratio. The interest coverageratio is the ratio of Adjusted EBITDA to Debt Service, as defined in theSupplemental Indenture, for the relevant accounting period.  We anticipatethat we will not meet the interest coverage ratio for the quarters ending June 30,2008 and September 30, 2008. As a result, we anticipate that we will beginto pay the increased rate of interest under the $75.0 million of trustpreferred securities starting with the quarterly interest payment due on October 30,2008. We believe that the Supplemental Indenture has substantially eliminatedthe possibility for an event of default as a result of making eight consecutiveincreased interest rate payments under the Trust Preferred Securities until atleast September 2010.

 

Toallow the Supplemental Indenture to become effective, OHI Financing, Inc.established a $5.0 million reserve fund for the benefit of the holders of thetrust preferred securities by posting a letter of credit with the trustee underthe Supplemental Indenture, which is subject to increase and may be drawn bythe trustee and used in respect of the trust preferred obligations.

 

The securities aretreated as debt obligations for financial statement purposes. We used proceedsfrom the sale of these securities to repay outstanding obligations under theRevolving Credit Facility discussed above.

 

On September 20,2005, we issued $30.0 million of trust preferred securities which matureon September 30, 2035 and are callable, in whole or in part, at par plusaccrued interest on or after September 30, 2010. For the first ten years,the securities have a fixed interest rate of 8.52% per annum. Thereafter, thesecurities have a floating interest rate equal to three-month LIBOR plus 380basis points per annum, resetting quarterly. The securities are treated as debtobligations for financial statement purposes. We used proceeds from the sale ofthese securities to fund land purchases and residential construction. Theobligations relating to the trust preferred securities are subordinated to theRevolving Credit Facility.

 

***Employee Retirement Plan***

 

OnDecember 1, 2005, we adopted an unfunded, non-qualified target definedbenefit retirement plan, effective as of September 1, 2005, which covers agroup of management employees of the Company. We own life insurance policies onall participants in the Supplemental Executive Retirement Plan (“SERP”). ThisSERP, which was amended and restated on September 27, 2007, is intended toprovide the participants with an annual supplemental retirement benefit basedupon their years of service with us and highest average compensation for fiveconsecutive years. The annual supplemental benefit for each participant will beadjusted based on the actual performance of the SERP compared to the target. Thebenefit is payable for life with a minimum of 10 years guaranteed. In order toqualify for normal retirement benefits, a participant must attain age 65 withat least five years of participation in the SERP. Early retirement will bepermitted beginning at age 55, after 5 years of participation in the SERP. Earlyretirement benefits will be adjusted actuarially to reflect the earlyretirement date.

 

Ifa participant terminates employment with us prior to attaining his or hernormal retirement age, other than by reason of early retirement, death ordisability, the participant generally will forfeit all benefits under the SERP.

 

Wecan amend or terminate the SERP at any time. However, no amendment ortermination will affect the participants’ accrued benefits as determined inaccordance with the SERP or delay any payments to a participant beyond the timethat such amount would otherwise be payable without regard to the amendment.

 

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***Cash Flow Statement***

 

Netcash provided by operating activities for the nine months ended March 31,2008 was $59.1 million, compared to net cash used in operating activities forthe nine months ended March 31, 2007 of $66.5 million. This change wasprimarily due to a $41.0 million source of cash from the increase in accountspayable and other accrued liabilities in the nine months ended March 31,2008 as compared with a $73.3 million use of cash in the comparable period ofthe prior fiscal year. This was coupled with having a smaller use of cash fromreal estate held for development and sale. These items which increased cashflow from operations were partially offset by a use of cash from land depositsand costs of future development in the amount of $11.2 million in the ninemonths ended March 31, 2008, as compared to a source of cash in the amountof $2.1 million in the nine months ended March 31, 2007.

 

Netcash provided by investing activities for the nine months ended March 31,2008 was $11.5 million, compared to net cash used in investing activities of$.3 million for the nine months ended March 31, 2007. Net cash provided byinvesting activities for the nine months ended March 31, 2008 primarilyrelated to the disposition of assets related to the western region.

 

Netcash used in financing activities for the nine months ended March 31, 2008was $51.5 million, compared to net cash provided by financing activities of$63.5 million for the nine months ended March 31, 2007. Cash used infinancing activities primarily relates to net paydowns on our credit facilityduring the nine months ended March 31, 2008. The paydown is the result ofthe cash provided by operating activities noted above. In the nine months endedMarch 31, 2007, we have net borrowings on our credit facility, which wasdue the cash used in operating activities note above.

 

**Lot Positions**

 

Asof March 31, 2008, we owned or controlled approximately 8,242 buildinglots. Included in the aforementioned lots, we had contracted to purchase, orhas under option, undeveloped land and improved building lots for an aggregatepurchase price of approximately $154.7 million that are expected to yieldapproximately 2,443 building lots. The table below shows our lots by region:

 
| ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Lots under** | ** ** | ** **       | ** ** | **Total**          | ** ** | ** **        | ** ** |
|------------|------------|------------|------------|------------------|------------|---------------------|------------|------------------|------------|--------------------|------------|-------------------|------------|
| ** ** | ** ** | ** ** | ** ** | **Percent**      | ** ** | **option or**  | ** ** | **Percent**      | ** ** | **owned and** | ** ** | ** **        | ** ** |
| ** ** | ** ** | **Lots**   | ** ** | **of lots** | ** ** | **agreement**       | ** ** | **of lots** | ** ** | **controlled**     | ** ** | **Percent**       | ** ** |
| ** ** | ** ** | **owned**  | ** ** | **owned**        | ** ** | **of sale**    | ** ** | **controlled**   | ** ** | **lots**           | ** ** | **of total** | ** ** |
| Northern   |       | 2,949      |       | 50.8             | %          | 1,542               |       | 63.1             | %          | 4,491              |       | 54.5              | %          |
| Southern   |       | 2,157      |       | 37.2             | %          | 555                 |       | 22.7             | %          | 2,712              |       | 32.9              | %          |
| Midwestern |       | 411        |       | 7.1              | %          | 287                 |       | 11.8             | %          | 698                |       | 8.5               | %          |
| Florida    |       | 282        |       | 4.9              | %          | 59                  |       | 2.4              | %          | 341                |       | 4.1               | %          |
|       |       |       |       |             |       |                |       |             |       |               |       |              |       |
| Total      |       | 5,799      |       | 100.0            | %          | 2,443               |       | 100.0            | %          | 8,242              |       | 100.0             | %          |

 

***Undeveloped LandAcquisitions:***

 

Inrecent years, the process of acquiring desirable undeveloped land has beenextremely competitive, particularly in the northern region, mostly due to thelack of available parcels suitable for development. In addition, expansion ofregulation in the housing industry has increased the time it takes to acquireundeveloped land with all of the necessary governmental approvals required tobegin construction. Generally, we structure our land acquisitions so that wehave the right to cancel our agreements to purchase undeveloped land byforfeiture of our deposit under the agreement. As of March 31, 2008, allbut one of our agreements to purchase undeveloped land was structured in thismanner. Included in the balance sheet captions “Inventory not owned – VariableInterest Entities” and “Land deposits and costs of future development,” at March 31,2008 we had $9.9 million invested in 13 parcels of undeveloped land, of which$7.4 million is cash deposits, a portion of which is non-refundable. At March 31,2008, overall undeveloped parcels of land under contract had an aggregatepurchase price of approximately $83.5 million and were expected to yieldapproximately 7,413 building lots.

 

Weattempt to further mitigate the risks involved in acquiring undeveloped land bystructuring our undeveloped land acquisitions so that the deposits requiredunder the agreements coincide with certain benchmarks in the governmentalapproval process, thereby limiting the amount at risk. This process allows usto periodically review the approval process and make a decision on theviability of developing the parcel to be acquired based upon expectedprofitability. In some circumstances we may be required to make depositssolely due to the passage of time. This structure still provides us anopportunity to periodically review the viability of developing the parcel ofland. In addition, we primarily structure our agreements to purchaseundeveloped land to be contingent upon obtaining all governmental approvalsnecessary for construction. Under most agreements, we secure the responsibilityfor obtaining the required

 

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governmentalapprovals as we believe that we have significant expertise in this area. Weintend to complete the acquisition of undeveloped land only after all governmentalapprovals are in place. In certain rare circumstances, however, when allextensions have been exhausted, we must make a decision on whether to proceedwith the purchase even though all governmental approvals have not yet beenreceived. In these circumstances, we perform reasonable due diligence toascertain the likelihood that the necessary governmental approvals will begranted.

 

***Improved Lot Acquisitions:***

 

Theprocess of acquiring improved building lots from developers is extremelycompetitive. We compete with many national homebuilders to acquire improvedbuilding lots, some of which have greater financial resources than us. Theacquisition of improved lots is usually less risky than the acquisition ofundeveloped land as the contingencies and risks involved in the landdevelopment process are borne by the developer rather than us. In addition,governmental approvals are generally in place when the improved building lotsare acquired.

 

AtMarch 31, 2008, we had contracted to purchase or had under optionapproximately 888 improved building lots, which include lots that were sold,but for accounting purposes are treated as a financing obligation because theyare subject to an option agreement, for an aggregate purchase price ofapproximately $71.2 million. At March 31, 2008, we had $1.7 million, allof which are deposits, invested in these improved building lots. There were nodeposits forfeited during the three and nine months ended March 31, 2008with respect to improved building lots.

 

Weexpect to utilize primarily the Revolving Credit Facility as described above aswell as other existing capital resources, to finance the acquisitions ofundeveloped land and improved lots described above. We anticipate completing amajority of these acquisitions during the next several years.

 

**Recent Accounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value tomeasure assets and liabilities. SFAS 157 will be effective for our fiscal yearending June 30, 2009, except for nonfinancial assets and nonfinancialliabilities that are not recognized or disclosed at fair value on a recurringbasis, for which the effective date will be for our fiscal year ending June 30,2010. The Company is currently evaluating this standard and has not yetdetermined what impact it would have on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 provides an entity with theoption to measure many financial instruments and certain other items at fairvalue. Under the fair value option, an entity will report unrealized gains andlosses on those items at each subsequent reporting date. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007, which for the Companyis the fiscal year ending June 30, 2009. We are currently evaluating thisstandard and have not yet determined what impact, if any, the fair value optionwould have on our consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51”(“SFAS 160”). SFAS 160 requires that a noncontrolling interest in a subsidiarybe reported as equity and the amount of consolidated net income specificallyattributable to the noncontrolling interest be identified in the consolidatedfinancial statements. It also calls for consistency in the manner of reportingchanges in the parent’s ownership interest and requires fair value measurement ofany noncontrolling equity investment retained in a deconsolidation. SFAS 160 iseffective for our fiscal year ending June 30, 2010. We are evaluating theimpact the adoption of SFAS 160 will have on our consolidated financialstatements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141(R) broadens the guidance of SFAS 141,extending its applicability to all transactions and other events in which oneentity obtains control over one or more other businesses. It broadens the fairvalue measurement and recognition of assets acquired, liabilities assumed, andinterests transferred as a result of business combinations. SFAS 141(R) expands on required disclosures toimprove the statement users’ abilities to evaluate the nature and financialeffects of business combinations. SFAS 141(R) is effective for our fiscal year ending June 30,2010. We are evaluating the impact the adoption of SFAS 141(R) will have on our consolidated financialstatements.

 

InDecember 2007, the United States Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin 110 (“SAB 110”) to amend the SEC’s viewsdiscussed in Staff Accounting Bulletin 107 (“SAB 107”) regarding the use of thesimplified method in developing an estimate of expected life of share optionsin accordance with SFAS No. 123(R). SAB 110 is effective for us beginningin the first quarter of fiscal year 2009. We will continue to use thesimplified method until we have the historical data necessary to provide areasonable estimate of expected life in accordance with SAB 107, as amended bySAB 110.

 

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In March 2008, theFASB issued SFAS 161, “Disclosures about Derivative Instruments and HedgingActivities, an amendment of FASB 133, Accounting for Derivative Instruments andHedging Activities.”  This statementrequires enhanced disclosures about an entity’s derivative and hedgingactivities and thereby improves the transparency of financial reporting. TheStatement is effective for financial statements for fiscal years and interimperiods beginning after November 15, 2008 and is not expected to have animpact on the Company’s financial statements.

 

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

 

In addition to historicalinformation, this report contains statements relating to future events or ourfuture results. These statements are forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), andare subject to the Safe Harbor provisions created by statute. Generally wordssuch as “may”, “will”, “should”, “could”, “would”, “anticipate”, “expect”, “intend”,“estimate”, “plan”, “continue” and “believe” or the negative of or other variationon these and other similar expressions identify forward-looking statements. Theseforward-looking statements including, without limitation, statements withrespect to an anticipated amendment to our senior secured revolving creditfacility, anticipate compliance with covenants in our credit facility andwaiver letter, anticipated defaults under our credit agreement, anticipatedrealization of deferred tax assets, the substantial elimination of thepossibility of certain defaults under the Company’s $75 million issue of trustpreferred securities until at least September 2010, anticipated taxrefunds, potential effects of changes in financial and commodity market pricesand interest rates, potential liabilities relating to litigation currentlypending against us, anticipated future dividends, anticipated delivery of homesin backlog, future market conditions, anticipated delivery of backlog,appropriateness of completed home inventory levels and the overall direction ofthe housing market, expected warranty costs, future land acquisitions and theavailability of sufficient capital for us to meet our operating needs are madeonly as of the date of this report. We do not undertake to update or revise theforward-looking statements, whether as a result of new information, futureevents or otherwise. For additional information on some potential risks, seethe Company’s Annual Report on Form 10-K for the fiscal year ended June 30,2007.

 

Forward-lookingstatements are based on current expectations and involve risks anduncertainties and our future results could differ significantly from thoseexpressed or implied by our forward-looking statements.

 

Many factors could causeour actual consolidated results to differ materially from those expressed inany of our forward-looking statements.

 

**ITEM 3.****                            ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Marketrisk represents the risk of loss that may impact the financial position,results of operations or cash flows of the Company, due to adverse changes infinancial and commodity market prices and interest rates. The Company’sprincipal market risk exposure continues to be interest rate risk. A majorityof the Company’s debt is variable based on LIBOR, and, therefore, affected bychanges 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 $4.1 million in a fiscal year, a portion of which willbe capitalized and included in cost of sales as homes are delivered. TheCompany believes that reasonably possible near-term interest rate changes willnot result in a material negative effect on future earnings, fair values or cashflows of the Company.

 

Changesin the prices of commodities that are a significant component of homeconstruction costs, particularly lumber, may result in unexpected shortterm increases in construction costs. Since the sale price of the Company’s homesis fixed at the time the buyer enters into a contract to acquire a home andbecause the Company generally contracts to sell its homes before constructionbegins, any increase in costs in excess of those anticipated may result ingross margins lower than anticipated for the homes in the Company’s backlog. TheCompany attempts to mitigate the market risks of price fluctuation ofcommodities by entering into fixed-price contracts with its subcontractors andmaterial suppliers for a specified period of time, generally commensurate withthe building cycle.

 

Therehave been no material adverse changes to the Company’s (i) exposure tomarket risk and (ii) management of these risks, since June 30, 2007.

 

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**ITEM 4.****                            ****CONTROLSAND PROCEDURES**

 

TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer, President and Chief Operating Officer, Executive Vice President andChief Financial Officer and Vice President and Controller evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report. Based upon that evaluation, the ChiefExecutive Officer, President and Chief Operating Officer, Executive VicePresident and Chief Financial Officer and Vice President and Controllerconcluded that the Company’s disclosure controls and procedures are functioningeffectively to provide reasonable assurance that information required to bedisclosed by the Company in reports filed under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the Security and Exchange Commission’s rules and forms andalso to ensure information required to be disclosed is accumulated andcommunicated to management including the Chief Executive Officer, President andChief Operating Officer, Executive Vice President and Chief Financial Officerand Vice President and Controller as appropriate to allow timely decisionsregarding required disclosure.

 

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.

 

**PART II. OTHERINFORMATION**

 

**ITEM1A.****                   ****RISKFACTORS**

 

Therehave been no material changes in our market risks during the three and ninemonths ended March 31, 2008, except as noted below. For additionalinformation regarding market risk, see our Annual Report on Form 10-K forthe year ended June 30, 2007.

 

***Unless we are able to obtain an amendment to oursenior secured credit facility or an extension of the current waiver, weanticipate that we will be in default under or senior secured credit facilityon September 16, 2008.***

 

OnMay 9, 2008, the Company received a limited waiver with respect to certainfinancial covenants in our Amended and Restated Credit Agreement. Unlessextended, the waiver expires no later than September 16, 2008. If certainevents occur, it could expire earlier. We currently anticipate that we will beable to obtain an acceptable amendment to our Amended Credit Agreement andavoid a default on September 16, 2008. However, we have not yet begunnegotiating with our lenders with respect to this anticipated waiver and we can give noassurances that we will be able to obtain an amendment on acceptable terms orat all. If we are unable to obtain an amendment, we expect to be in default on September 16,2008. If we are in default, our lenders will be able to exercise their remediesunder the Amended Credit Agreement, including declaring all amounts outstandingdue and payable. Under these circumstances, we might not have sufficient fundsor other resources to satisfy all of our obligations, which could have amaterial adverse affect on the Company’s financial position, results ofoperations and cash flows.

 

***The anticipated reappraisal of a material amount ofassets in our borrowing base could decrease our liquidity and materially andadversely impact our operations.***

 

 As part of the recent waiver we obtainedwith respect to certain financial covenants in our senior secured revolvingcredit facility, we agreed to use our best efforts and work in good faith withthe agent bank to identify a material group of assets in the borrowing base forreappraisal prior to September 15, 2008. Subsequent to September 16,2008, in the event that the reappraisals result in a determination that amaterial amount of the assets in our borrowing base have a value lower than thecost and the existing appraised values, the net availability under the creditfacility could be materially reduced from existing or anticipated levels,absent an amendment to the credit facility. Such a reduction in netavailability could require us to repay a portion of the amounts outstandingunder our credit facility or otherwise have a material adverse effect on ourability to fund our continuing operations, which could have amaterial adverse affect on the Company’s financial position, results ofoperations and cash flows.

 

***The financingagreements governing our debt contain various covenants that limit ourdiscretion in the operation of our business and could lead to acceleration ofdebt.***

 

Oursenior secured revolving credit facility contains financial and otherrestrictive covenants and requirements that limit our ability to engage incertain activities. For example, we are subject to covenants requiring us tomaintain a minimum consolidated tangible net worth, minimum liquidity, and minimumleverage, interest coverage and cash flow ratios and there are variousfinancial covenants with respect to the value of land in certain stages ofdevelopment that we may own and limits on the number of units which arenot subject to a bona-fide agreement of sale that may be in our inventory.In addition, the agreements and instruments governing our other debt, such asour trust preferred securities, contain other covenants and requirements. Failureto comply with any of the covenants or requirements in our existing or futurefinancing agreements or instruments could result in an event of default underthose agreements or instruments. Our senior secured revolving credit facilityalso contains a cross-default provision so that a default under the

 

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agreementsor instruments governing our other debt could cause a default under our seniorsecured revolving credit facility. Further, a default under our senior securedrevolving credit facility could prevent us from making payments required by ourtrust preferred securities. If not cured, a payment default or other event ofdefault could result in the acceleration of all or most of our debt and permitlenders to foreclose upon any collateral securing that debt. In addition,lenders may be able to terminate any commitments they made to supply uswith further funds. Under these circumstances, we might not have sufficientfunds or other resources to satisfy all of our obligations. The limitationsimposed by our financing agreements on our ability to incur additional debt andto take other actions might significantly impair our ability to obtain otherfinancing, which could have a material adverse affect on the Company’sfinancial position, results of operations and cash flows.

 

***We may not beable to utilize all of our deferred tax assets.***

 

Duringthe three and nine months ended March 31, 2008, we established a deferredtax asset valuation allowance of $43.5 million. Our net deferred tax assetsconsist primarily of inventory valuation adjustments, net operating losscarryforwards, goodwill impairments, and reserves and accruals that are notcurrently deductible for tax purposes offset in part by capitalizedinterest. Some or all of these deferred tax assets could expire unused if weare unable to generate taxable income in the future sufficient to utilize themor we enter into transactions that limit our right to use them. If a materialportion of our deferred tax assets expire unused, it could have a materialnegative impact on our financial position or results of operations, which couldhave a material adverse affect on the Company’s financial position, results ofoperations and cash flows.

 

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**ITEM 6.****                            ****EXHIBITS**

 
| 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  Garry P. Herdler pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.      |
|   |   |                                                                                                     |
| 32.1*  |   | Certification of  Jeffrey P. Orleans pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.    |
|   |   |                                                                                                     |
| 32.2*  |   | Certification of  Michael T. Vesey pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |
|   |   |                                                                                                     |
| 32.3*  |   | Certification of  Garry P. Herdler pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.      |

 

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*Exhibits filed herewith electronically

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|              |   | ORLEANS HOMEBUILDERS, INC.       |
|-------------------|--------|---------------------------------------|
|              |   | (Registrant)                          |
|              |   |                                  |
| May 12, 2008 |   | Jeffrey P. Orleans                    |
|              |   | Jeffrey P. Orleans                    |
|              |   | Chairman of the Board and Chief       |
|              |   | Executive Officer                     |
|              |   | (Principal Executive Officer)         |
|              |   |                                  |
| May 12, 2008 |   | Michael T. Vesey                      |
|              |   | Michael T. Vesey                      |
|              |   | President and Chief Operating Officer |
|              |   |                                  |
| May 12, 2008 |   | Garry P. Herdler                      |
|              |   | Garry P. Herdler                      |
|              |   | Executive Vice President and          |
|              |   | Chief Financial Officer               |
|              |   | (Principal Financial Officer)         |
|              |   |                                  |
| May 12, 2008 |   | Mark D. Weaver                        |
|              |   | Mark D. Weaver                        |
|              |   | Vice President and                    |
|              |   | Controller                            |
|              |   | (Principal Accounting Officer)        |

 

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**EXHIBIT INDEX**

 
| 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 Garry P. Herdler pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.      |
| 32.1* |   | Certification of Jeffrey P. Orleans pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.    |
| 32.2* |   | Certification of Michael T. Vesey pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
| 32.3* |   | Certification of Garry P. Herdler pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.      |

 

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*Exhibits filed herewith electronically

 

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