**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

# **FORM 10-Q**

** **

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

** **

# **For the quarterly periodended March 31, 2007**

 

# **OR**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXHANGE ACT OF 1934.

** **

**FOR THETRANSITION PERIOD                    TO                     .**

** **

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

 

**ORLEANSHOMEBUILDERS, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

**OneGreenwood Square, Suite 101**

**3333Street Road**

**Bensalem,PA 19020**

(Addressof principal executive offices)

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

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check mark whether the registrantis a  large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (Checkone):

 

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------|--------|-------------------------------|

 

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

 

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

# **May 8, 2007:     18,501,641**

(excluding196,490 shares held in Treasury).

 

 

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**ORLEANSHOMEBUILDERS, INC. AND SUBSIDIARIES**
|            | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** |
|------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** ** | ** ** | **PART 1  — FINANCIAL INFORMATION**                                                            |       |       |       |
| Item 1.    |       | Financial  Statements (unaudited)                                                                   |       |       |       |
|       |       | Consolidated Balance  Sheets at March 31, 2007 and June 30, 2006                                    |       |       |       |
|       |       | Consolidated  Statements of Operations for the Three and Nine Months Ended March 31, 2007  and 2006 |       |       |       |
|       |       | Consolidated  Statements of Shareholders’ Equity for the Nine Months Ended March 31, 2007      |       |       |       |
|       |       | Consolidated  Statements of Cash Flows for the Nine Months Ended March 31, 2007 and 2006            |       |       |       |
|       |       | Notes to  Consolidated Financial Statements                                                         |       |       |       |
| Item 2.    |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations         |       |       |       |
| Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                         |       |       |       |
| Item 4.    |       | Controls and  Procedures                                                                            |       |       |       |
| ** ** | ** ** | **PART II — OTHER  INFORMATION**                                                               | ** ** | ** ** | ** ** |
| Item  1A.  |       | Risk Factors                                                                                        |       |       |       |
| Item 6.    |       | Exhibits                                                                                            |       |       |       |

 

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

**(unaudited)**

**(inthousands, except share amounts)**

 
| ** **                                                                                                            | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                            | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| Assets                                                                                                                |       |               |       |              |       |
| Cash and cash  equivalents                                                                                            |       | $                  | 12,674     |              | $          | 15,964 |   |
| Restricted cash - due  from title company                                                                             |       | 9,341              |       | 25,304            |       |
| Restricted cash -  customer deposits                                                                                  |       | 10,111             |       | 9,293             |       |
| Real estate held for  development and sale:                                                                           |       |               |       |              |       |
| Residential  properties completed or under construction                                                               |       | 245,385            |       | 272,068           |       |
| Land held for  development or sale and improvements                                                                   |       | 543,319            |       | 544,574           |       |
| Inventory not  owned - Variable Interest Entities                                                                     |       | 56,044             |       | 117,073           |       |
| Property and equipment,  at cost, less accumulated depreciation                                                       |       | 2,659              |       | 3,344             |       |
| Deferred taxes                                                                                                        |       | 21,908             |       | —            |       |
| Intangible assets                                                                                                     |       | 4,329              |       | 4,329             |       |
| Goodwill                                                                                                              |       | 4,180              |       | 20,514            |       |
| Receivables, deferred  charges and other assets                                                                       |       | 21,660             |       | 21,178            |       |
| Land deposits and costs  of future development                                                                        |       | 12,888             |       | 26,862            |       |
| Total Assets                                                                                                          |       | $                  | 944,498    |              | $          | 1,060,503 |   |
|                                                                                                                  |       |               |       |              |       |
| Liabilities and  Shareholders’ Equity                                                                            |       |               |       |              |       |
| Liabilities:                                                                                                          |       |               |       |              |       |
| Accounts payable                                                                                                      |       | $                  | 18,000     |              | $          | 40,796 |   |
| Accrued expenses                                                                                                      |       | 27,041             |       | 73,490            |       |
| Deferred taxes                                                                                                        |       | —             |       | 697               |       |
| Customer  deposits                                                                                                    |       | 17,053             |       | 16,209            |       |
| Obligations  related to inventory not owned - Variable Interest Entities                                              |       | 47,406             |       | 103,636           |       |
| Mortgage and  other note obligations                                                                                  |       | 492,120            |       | 422,608           |       |
| Subordinated  notes                                                                                                   |       | 105,000            |       | 105,000           |       |
| Other notes  payable                                                                                                  |       | 827                |       | 5,885             |       |
| Total  Liabilities                                                                                                    |       | 707,447            |       | 768,321           |       |
|                                                                                                                  |       |               |       |              |       |
| Commitments and  contingencies (See Note N)                                                                           |       |               |       |              |       |
|                                                                                                                  |       |               |       |              |       |
| Redeemable common stock                                                                                               |       | —             |       | 240               |       |
|                                                                                                                  |       |               |       |              |       |
| Shareholders’ Equity:                                                                                            |       |               |       |              |       |
| Common stock, $0.10  par, 23,000,000 shares authorized, 18,698,131 shares issued at March 31, 2007  and June 30, 2006 |       | 1,870              |       | 1,870             |       |
| Capital in excess of  par value - common stock                                                                        |       | 72,337             |       | 72,624            |       |
| Retained earnings                                                                                                     |       | 165,333            |       | 221,967           |       |
| Treasury stock, at cost  (196,490 and 337,324 shares held at March 31, 2007 and June 30, 2006,  respectively)    |       | (2,489             | )          | (4,519            | )          |
| Total Shareholders’  Equity                                                                                      |       | 237,051            |       | 291,942           |       |
|                                                                                                                  |       |               |       |              |       |
| Total Liabilities and  Shareholders’ Equity                                                                      |       | $                  | 944,498    |              | $          | 1,060,503 |   |

 

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

1

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

**(Unaudited)**

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

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Earned revenues                                      |       |                             |       |                            |       |   |   |   |   |
| Residential properties                               |       | $                                | 128,886    |                            | $          | 207,843 |   | $ | 443,830 |   | $ | 586,718 |   |
| Land sales                                           |       | 14,864                           |       | —                          |       | 17,069 |   | 1,353 |   |
| Other income                                         |       | 2,244                            |       | 2,072                           |       | 7,326 |   | 6,136 |   |
|                                                 |       | 145,994                          |       | 209,915                         |       | 468,225 |   | 594,207 |   |
| Costs and  expenses                                  |       |                             |       |                            |       |   |   |   |   |
| Residential properties                               |       | 162,856                          |       | 161,411                         |       | 429,496 |   | 453,998 |   |
| Land sales                                           |       | 15,739                           |       | —                          |       | 17,344 |   | 1,150 |   |
| Other                                                |       | 1,397                            |       | 1,407                           |       | 4,913 |   | 4,631 |   |
| Selling, general and administrative                  |       | 33,784                           |       | 25,864                          |       | 90,204 |   | 74,439 |   |
| Impairment of goodwill                               |       | 16,334                           |       | —                          |       | 16,334 |   | — |   |
| Interest:                                            |       |                             |       |                            |       |   |   |   |   |
| Incurred                                             |       | 12,485                           |       | 10,779                          |       | 36,871 |   | 26,497 |   |
| Less capitalized                                     |       | (12,485                          | )          | (10,779                         | )          | (36,871 | ) | (26,497 | ) |
|                                                 |       | 230,110                          |       | 188,682                         |       | 558,291 |   | 534,218 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Income / (loss)  from operations before income taxes |       | (84,116                          | )          | 21,233                          |       | (90,066 | ) | 59,989 |   |
| Income tax  expense / (benefit)                      |       | (32,218                          | )          | 8,424                           |       | (34,543 | ) | 23,986 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Net income /  (loss)                                 |       | $                                | (51,898    | )                               | $          | 12,809 |   | $ | (55,523 | ) | $ | 36,003 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Basic earnings /  (loss) per share                   |       | $                                | (2.81      | )                               | $          | 0.69 |   | $ | (3.01 | ) | $ | 1.94 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Diluted earnings  / (loss) per share                 |       | $                                | (2.81      | )                               | $          | 0.68 |   | $ | (3.01 | ) | $ | 1.91 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Dividends  declared per share                        |       | $                                | 0.02       |                            | $          | 0.02 |   | $ | 0.06 |   | $ | 0.06 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Basic weighted  average shares outstanding           |       | 18,491                           |       | 18,445                          |       | 18,443 |   | 18,514 |   |
|                                                 |       |                             |       |                            |       |   |   |   |   |
| Diluted weighted  average shares outstanding         |       | 18,491                           |       | 18,781                          |       | 18,443 |   | 18,854 |   |

 

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

2

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Statements of Shareholders’ Equity**

**(Unaudited)**

**(dollarsin thousands)**

 
| ** **                                 | ** ** | ** **            | ** ** | ** **         | ** ** | **Capital in**       | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------|------------|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Common Stock** | ** ** | **Excess of** | ** ** | ** **                | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Shares**            | ** ** | ** **         | ** ** | **Par Value -** | ** ** | **Retained**            | ** ** | **Shares** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Issued**            | ** ** | **Amount**         | ** ** | **Common Stock**     | ** ** | **Earnings**            | ** ** | **Held**   | ** ** | **Amount** | ** ** | **Total**  | ** ** |
| Balance at June  30, 2006                  |       | 18,698,131            |       | $                  | 1,870      |                      | $          | 72,624                  |       | $          | 221,967    |       | 337,324    |       | $          | (4,519 | ) | $ | 291,942 |   |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Redeemable  common stock expired           |       |                  |       |               |       | 240                       |       |                    |       |       |       |       |       | 240        |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Shares awarded  under Stock Award Plan     |       |                  |       |               |       | 177                       |       |                    |       |       |       |       |       | 177        |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Fair market  value of stock options issued |       |                  |       |               |       | 1,183                     |       |                    |       |       |       |       |       | 1,183      |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Stock options,  net                        |       |                  |       |               |       | (2,955                    | )          |                    |       | (140,834   | )          | 2,030      |       | (925       | )          |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Tax benefit of  stock option exercises     |       |                  |       |               |       | 1,068                     |       |                    |       |       |       |       |       | 1,068      |       |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Dividends paid  on common stock            |       |                  |       |               |       |                      |       | (1,111                  | )          |       |       |       |       | (1,111     | )          |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Net loss                                   |       |                  |       |               |       |                      |       | (55,523                 | )          |       |       |       |       | (55,523    | )          |
|                                       |       |                  |       |               |       |                      |       |                    |       |       |       |       |       |       |       |
| Balance at March 31,  2007                 |       | 18,698,131            |       | $                  | 1,870      |                      | $          | 72,337                  |       | $          | 165,333    |       | 196,490    |       | $          | (2,489 | ) | $ | 237,051 |   |

 

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

3

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**OrleansHomebuilders, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                              | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                              | ** ** | **March 31,**              | ** ** |
| ** **                                                                              | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                                                    |       |                            |       |   |   |
| Cash flows from  operating activities:                                                  |       |                            |       |   |   |
| Net income / (loss)                                                                     |       | $                               | (55,523    | ) | $ | 36,003 |   |
| Adjustments to  reconcile net income / (loss) to net cash used in operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                           |       | 960                             |       | 928 |   |
| Write-off of real estate held for development and  sale                                 |       | 57,186                          |       | — |   |
| Write-off of land deposits and costs of future  development                             |       | 20,272                          |       | 1,255 |   |
| Write-off of Goodwill                                                                   |       | 16,334                          |       | — |   |
| Amortization of note discount                                                           |       | 6                               |       | 50 |   |
| Deferred taxes                                                                          |       | (22,605                         | )          | (304 | ) |
| Stock based compensation expense                                                        |       | 1,444                           |       | 392 |   |
| Changes in  operating assets and liabilities:                                           |       |                            |       |   |   |
| Restricted cash - due from title company                                                |       | 15,963                          |       | 18,813 |   |
| Restricted cash - customer deposits                                                     |       | (818                            | )          | 348 |   |
| Real estate held for development and sale                                               |       | (28,848                         | )          | (255,465 | ) |
| Receivables, deferred charges and other assets                                          |       | (482                            | )          | (2,957 | ) |
| Land deposits and costs of future developments                                          |       | 2,101                           |       | (5,299 | ) |
| Accounts payable and other liabilities                                                  |       | (73,329                         | )          | (13,746 | ) |
| Customer deposits                                                                       |       | 844                             |       | 2,984 |   |
| Net cash used in  operating activities                                                  |       | (66,495                         | )          | (216,998 | ) |
|                                                                                    |       |                            |       |   |   |
| Cash flows from  investing activities:                                                  |       |                            |       |   |   |
| Purchases of property and equipment                                                     |       | (275                            | )          | (894 | ) |
| Net cash used in  investing activities                                                  |       | (275                            | )          | (894 | ) |
|                                                                                    |       |                            |       |   |   |
| Cash flows from  financing activities:                                                  |       |                            |       |   |   |
| Borrowings from loans secured by real estate assets                                     |       | 108,000                         |       | 190,959 |   |
| Repayment of loans secured by real estate assets                                        |       | (38,488                         | )          | (91,384 | ) |
| Borrowings from subordinated notes                                                      |       | —                          |       | 105,000 |   |
| Repayment of other note obligations                                                     |       | (5,064                          | )          | (3,560 | ) |
| Purchase of treasury stock                                                              |       | (949                            | )          | (3,303 | ) |
| Proceeds from Stock Award Plan                                                          |       | —                          |       | 284 |   |
| Tax benefit from exercise of stock options                                              |       | 1,068                           |       | 249 |   |
| Proceeds from stock options exercised                                                   |       | 24                              |       | 59 |   |
| Common stock dividend paid                                                              |       | (1,111                          | )          | (742 | ) |
| Net cash  provided by financing activities                                              |       | 63,480                          |       | 197,562 |   |
|                                                                                    |       |                            |       |   |   |
| Net decrease in  cash and cash equivalents                                              |       | (3,290                          | )          | (20,330 | ) |
| Cash and cash  equivalents at beginning of year                                         |       | 15,964                          |       | 62,576 |   |
| Cash and cash  equivalents at end of period                                             |       | $                               | 12,674     |   | $ | 42,246 |   |
|                                                                                    |       |                            |       |   |   |
| Supplemental  disclosure of cash flow activities:                                       |       |                            |       |   |   |
| Interest paid, net of amounts capitalized                                               |       | $                               | —     |   | $ | — |   |
| Income taxes  paid                                                                      |       | $                               | 1,500      |   | $ | 25,919 |   |

 

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

4

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**ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(A)                              Summary of Significant Accounting Policies:

The accompanying unauditedconsolidated financial statements are presented in accordance with therequirements for Form 10-Q and do not include all the disclosures required bygenerally accepted accounting principles for complete financialstatements.  Reference is made to Form10-K as of and for the year ended June 30, 2006 for Orleans Homebuilders, Inc.and subsidiaries (the “Company”) for additional disclosures, including asummary of the Company’s accounting policies.

In the opinion of management, the consolidatedfinancial statements contain all adjustments, consisting of normal recurringaccruals, necessary for a fair statement of the consolidated financial positionof the Company for the periods presented. The interim operating results of the Company may not be indicative ofoperating results for the full year.

***Accounting for financial statement misstatements:***

InSeptember 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 wasissued in order to eliminate the diversity of practice surrounding how publiccompanies quantify financial statement misstatements.

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

5

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

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

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

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

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatements of Financial Accounting Standards (“SFAS”) 158.  SFAS 158 requires companies to recognize theoverfunded or underfunded status of a single-employer defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize changes in that funded status in comprehensive incomein the year in which the changes occur. In addition, SFAS 158 requires companies to measure the funded status ofa plan as of the date of its year-end statement of financial position, withlimited exceptions.  The effective datefor the adoption of SFAS 158 for publicly traded companies, as it relates tothe recognition provisions is as of the end of the fiscal years ending afterDecember 15, 2006.  The measurementprovisions are effective for fiscal years ending after December 15, 2008,however early application is encouraged. The Company will adopt SFAS 158 as of June 30, 2007.  The impact of this application is to eliminatethe Company’s intangible asset 

6

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thatwas recognized in connection with the application of SFAS No. 87, “Employers’Accounting for Pensions” (“SFAS 87”). The Company’s intangible asset related to SFAS 87 at March 31, 2007 isapproximately $4,329,000.  Additionally,the Company’s other comprehensive income will be reduced and accrued expenseswill be increased by the current period gains or losses and the prior servicecosts that have not been recognized as a component of net periodic pensioncost.

***Accounting for variable interest entities:***

In January 2003, the FASBissued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities,an interpretation of ARB No. 51” (“FIN 46”). The FASB issued a revised FIN 46 (“FIN 46-R”) in December 2003 whichmodifies and clarifies various aspects of the original interpretations.  A Variable Interest Entity (“VIE”) is createdwhen (i) the equity investment at risk is not sufficient to permit the entityto finance its activities without additional subordinated financial supportfrom other parties or (ii) equity holders either (a) lack direct or indirectability to make decisions about the entity, (b) are not obligated to absorbexpected losses of the entity or (c) do not have the right to receive expectedresidual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to FIN 46-R, an enterprisethat absorbs a majority of the expected losses of the VIE is considered theprimary beneficiary and must consolidate the VIE.

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

At March 31, 2007, the Company consolidatedtwelve VIEs as a result of its options to purchase land or lots from theselling entities.  The Company paid cashor issued 

7

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letters of credit deposits to these twelveVIEs totaling $5,970,000 and incurred additional pre-acquisition costs totaling$2,668,000.  The Company’s deposits andany costs incurred prior to acquisition of the land or lots represent theCompany’s maximum exposure to loss. The fair value of the VIEs inventory isreported as “Inventory not owned — Variable Interest Entities.” The Companyrecorded $56,044,000 in Inventory Not Owned — Variable Interest Entities as ofMarch 31, 2007.  The fair value of theproperty to be acquired less cash deposits and pre-acquisition costs, whichtotaled $47,406,000 at March 31, 2007, was reported on the balance sheet as “Obligationsrelated to inventory not owned — Variable Interest Entities.” Creditors, ifany, of these VIEs have no recourse against the Company.

The Company will continue to secure land andlots using options.  Including thedeposits and other costs capitalized in connection with the VIEs discussed inthe prior paragraph, the Company had total costs incurred to acquire land andlots at March 31, 2007 of approximately $21,526,000, including $12,436,000 ofcash deposits. The total purchase price under these cancelable contracts oroptions is approximately $185,887,000. The maximum exposure to loss is limitedto the deposits, although some deposits are refundable, and costs incurredprior to the acquisition of the land or lots.

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

In December 2004, the FASBrevised SFAS No. 123 through the issuance of SFAS No. 123-R “Share BasedPayment”, revised (“SFAS 123-R”).  SFAS 123-R was effective for theCompany commencing July 1, 2005.  SFAS 123-R, among other things,eliminates the alternative to use the intrinsic value method of accounting forstock based compensation and requires entities to recognize the cost ofemployee services received in exchange for awards of equity instruments basedon the grant-date fair value of those awards.  The fair value based methodin SFAS 123-R is similar to the fair-value-based method in SFAS No. 123 in mostrespects, subject to certain key differences.  As the Company previouslyadopted the fair value recognition provisions of SFAS No. 123 prospectively forall stock awards granted, commencing on July 1, 2002, the impact of themodified prospective adoption of SFAS 123-R did not have a significant impacton the financial position or results of operations of the Company.  The Company amortizes compensation expense ona straight line basis over the vesting period of each option grant.  The Company utilizes the Black-Scholes optionpricing model to calculate the compensation expense 

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associated with stockoptions.  For the nine months ended March31, 2007, the Company recorded pretax compensation expense associated withstock awards of $1,360,000.  Totalcompensation cost related to non-vested awards not yet recognized of $7,349,000will be recognized according to vesting schedules through March 2015.  For the nine months ended March 31, 2007, theCompany recognized a $1,068,000 tax benefit resulting from the exercise of250,000 stock options by Michael T. Vesey, President and Chief OperatingOfficer, Joseph A. Santangelo, former Chief Financial Officer and Kyle Upper,Executive Vice President.

***Accounting for income taxes:***

In June 2006, the FASBissued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes —An interpretation of FASB Statement 109” (“FIN 48”).  FIN 48 prescribes a more-likely than notrecognition threshold as well as a measurement attribute for the financialstatement recognition and measurement of tax positions taken or expected to betaken in a tax return.  FIN 48 iseffective for fiscal years beginning after December 15, 2006.  We will be required to adopt thisinterpretation in the first quarter of fiscal year 2008.  The Company is currently evaluating theimpact of the adoption of FIN 48.

In December 2004, the FASBissued FASB Staff Position No. FAS 109-1, “Application of FASB Statement No.109, Accounting for Income Taxes, for the Tax Deduction on Qualified ProductionActivities Provided by the American Jobs Creation Act of 2004” (“FSP FAS 109-1”).FSP FAS 109-1 clarifies that the deduction will be treated as a “specialdeduction” as described in Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes.” As such, the special deduction has no effect ondeferred tax assets and liabilities existing at the date of enactment. Theimpact of the deduction will be reported in the period in which the deductionis claimed.   The Company files a consolidated return on a calendar year. Accordingly, the Company began reflecting the special deduction withrespect to its operations effective January 1, 2005.  Its impact was tolower the effective tax provision in the periods in which the deduction wasclaimed.  This benefit will increase asthe deduction is phased in under the statute.

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***Inventory Impairment:***

SFAS No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) requireslong-lived assets to be tested for recoverability whenever events or changesindicate that the carrying amount may not be recoverable.  Based on deteriorating market conditions thatbegan in 2006 and continued through March 31, 2007 and increasing uncertaintyof the availability of mortgage lending for buyers as a result of the recentchanges in the sub-prime mortgage market, the Company believes that there havebeen significant events that required a review of the recoverability oflong-lived assets.

The uncertainty in mortgagelending caused by the recent changes in the sub-prime mortgage market is theresult of rising delinquencies and defaults by borrowers as they experiencefinancial difficulties due to rising interest rates.  This credit deterioration has led to the bankruptciesof major sub-prime mortgage lenders, an overall lending capacity decline andthe tightening of lending standards. These factors have led to the reduction in the pool of potential resale/ existing home buyers.

See Note (E), below, forimpairment charges taken during the three and nine months ended March 31, 2007related to these assets.

***Goodwill and Other Intangibles:***

Effective July 1, 2001, theCompany adopted the provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets” (“SFAS 142”), which establishes standards for financial accounting andreporting for intangible assets acquired individually or with a group of otherassets and for the reporting of goodwill and other intangible assets acquiredin a business acquisition subsequent to initial accounting under SFAS No. 141, “BusinessCombinations” (“SFAS 141”).  Inaccordance with SFAS 142, upon adoption of SFAS 142, the Company discontinuedthe amortization relating to all existing indefinite lived intangible assets.

SFAS 142 requires an annualassessment of goodwill and non-amortizable intangible assets to determinepotential impairment of such assets. When required by certain triggering events, the Company reviews itsassessment of goodwill on a quarterly basis. See Note (D), below, for impairments related to the March 31, 2007assessment.

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***New Accounting Pronouncements:***

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 provides guidance for using fairvalue to measure assets and liabilities. SFAS 157 will be effective for the Company’s fiscal year ending June 30,2009.  The Company is currentlyevaluating this standard and have not yet determined what impact it would haveon our consolidated financial statements.

In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 provides an entity with the optionto measure many financial instruments and certain other items at fairvalue.  Under the fair value option, anentity will report unrealized gains and losses on those items at eachsubsequent reporting date.  SFAS 159 iseffective for fiscal years beginning after November 15, 2007, which for theCompany is the fiscal year ending June 30, 2009.  The Company is currently evaluating thisstandard and have not yet determined what impact, if any, the fair value optionwould have on our consolidated financial statements.

(B)                                Acquisitions:

***Peachtree Acquisition:***

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

The Assets included: (a) improved and unimproved real property, (b) rights to acquire realestate under options or agreements, (c) equipment, (d) rights under certaincontracts for the sale of homes to be sold and leases for real property, (e) rightsto certain tradenames and other intangibles, including contract backlog, (f)homes and other improvements under construction as of the closing, (g) certainplans, 

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drawings, specifications, permits and rights underwarranties and (h) governmental approvals and books and records associatedwith, or relating to the foregoing.

The Company paid $29,300,000 in cash, to acquire theAssets.  The Company also assumed certainliabilities of Peachtree Residential Properties, less $200,000 that wasretained by the Company and applied towards the administration of certain homewarranty claims.

***Realen Homes Acquisition:***

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

In accordance with thePurchase Agreement, the consideration paid by the Company consisted of: (i)$53,348,000 in cash delivered at closing, (ii) a promissory note of the Companyin the aggregate principal amount of $5,000,000, payable over a period of up totwo years, with an interest rate of 3% per year and (iii) a warranty holdbackof $1,500,000 retained by the Company to be applied toward the administrationof any warranty claims made against Realen Homes in excess of certainpredetermined amounts.  The purchaseprice was determined based on Realen Homes’ book value at June 30, 2004, itsmanagement personnel, its profitability, its backlog and its landposition.  The warranty holdback wassettled during the second quarter of fiscal year 2007.

The Company evaluated the$5,000,000 3% note in accordance with Accounting Principles Board Opinion No.21, “Interest on Receivables and Payables” (“APB 21”) and determined that itwas a below market rate note.  Inaccordance with APB 21, the Company estimated, based on current marketconditions that the Company would likely have been able to obtain similarfixed-rate financing from a third party at approximately 150 basis pointshigher than the note actually assumed. The Company imputed interest on the note at 4.5% and reduced thecarrying value of the 

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note from $5,000,000 to$4,863,000.  The discount of $137,000 wasrecorded as interest expense over the life of the note.  The Company recorded the remaining $6,000 ofthe discount to interest expense during the current fiscal year.  The $5,000,000 note was repaid in full duringthe second quarter of fiscal year 2007.

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

The Company accounted forthe acquisition as a purchase in accordance with SFAS No. 141, “BusinessCombinations.”  The purchase price wasallocated to goodwill for $13,327,000, which is defined as the fair value ofassets and liabilities acquired in excess of the purchase price, and tointangible assets for $500,000.  Duringthe three and nine months ended March 31, 2007, the Company recorded animpairment charge of $13,327,000 on the goodwill.  See Note (D) for additional discussionrelated to the impairment of goodwill.  Theintangible assets represented the intangible value of the backlog acquired fromRealen Homes.  The intangible value ofthe backlog was amortized into cost of sales as the acquired backlog wasdelivered.  The Company amortized theremaining $6,000 of the intangible value of the backlog acquired from RealenHomes during the three months ended September 30, 2005.

***Masterpiece Homes Acquisition:***

On July 28, 2003, theCompany acquired all of the issued and outstanding shares of Masterpiece Homesand entered into an employment agreement with the president of MasterpieceHomes.  Masterpiece Homes is anestablished homebuilder located in Orange City, Florida.  The terms of the stock purchase agreement andemployment agreement are as follows:  (i)$3,900,000 in cash, at closing; and (ii) $2,130,000 payable January 1, 2005(the “Contingent Stock Payment”), unless prior to that date the president isterminated for cause or terminates his employment without good reason, asdefined in the employment agreement; (iii) sale of 30,000 shares of the Company’scommon stock at $8 per share with a put option at the same price, 

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(iv) stock options topurchase 45,000 shares of the Company’s common stock at $10.64 per sharevesting equally on December 31, 2004, 2005 and 2006; and (v) contingentpayments representing 25% of the pre-tax profits of Masterpiece Homes for thecalendar years ended December 31, 2004, 2005 and 2006.  The Company also incurred approximately$405,000 in acquisition costs to complete this transaction.  The aforementioned costs are considered partof the purchase price of Masterpiece Homes, except for the following items thatare considered part of, and contingent upon, the employment agreement:  (a) $710,000 of the $2,130,000 paid January 10, 2005; (b) stock options topurchase 45,000 shares of the Company’s common stock at $10.64 per share; and(c) contingent payments representing 25% of the pre-tax profits of MasterpieceHomes for the calendar years ended December 31, 2004, 2005 and 2006.

The Company accounted forthese transactions in accordance with SFAS No. 141, “Business Combinations”,whereby approximately $5,700,000 was considered to be part of the purchaseprice of the business and the remainder part of employee compensation.  That portion related to employee compensationwill be charged to expense over the period to which it relates.  With respect to the amounts allocated to thepurchase, such amounts were allocated to the fair value of assets andliabilities acquired with the excess of approximately $3,007,000 allocated togoodwill.  During the three and ninemonths ended March 31, 2007, the Company recorded an impairment charge of$3,007,000 on the goodwill.  See Note (D)for additional discussion related to the impairment of goodwill.

From July 28, 2003 throughMarch 31, 2007, the Company recorded $338,000 in pretax compensation expenseassociated with the stock options granted pursuant to the employment agreementwith the president of Masterpiece Homes, recognized $3,177,000 in contingentpayments representing 25% of the pre-tax profits of Masterpiece Homes, and paidthe Contingent Stock Payment of $2,130,000 on January 1, 2005 as required underthe terms of the acquisition agreement. See Note (M) below for additional discussion relating to the Company’semployment agreement with the president of Masterpiece Homes.

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(C)                                Certain transactions with related parties:

In November 2006, theCompany entered into an agreement of sale to purchase 23 townhouse lots fromMr. Russell Parker, the president of the Company’s subsidiary, Parker &Lancaster Corporation.  The purchaseprice is calculated at 20% of the net sales price, less lot improvement costs,and is payable on a per lot basis at the time of conveyance of a completed homeon the improved lot to a third party purchaser. The total purchase price of the townhouse lots is $874,000 and isconsidered to approximate fair value of the land.

(D)                               Goodwill:

During the three and ninemonths ended March 31, 2007, the Company recorded impairment charges related tothe goodwill that arose from the Realen Homes and Masterpiece Homesacquisitions.  No impairment chargesrelated to goodwill were taken during the three and nine months ended March 31,2006.  See Note (B) for additionaldiscussions regarding these acquisitions.

The impairment chargesrelated to the goodwill that arose from the Realen Homes and Masterpiece Homesacquisitions were necessary due to slower than expected absorption rates in thethird quarter, increased sales incentives and lower margins, which resultedfrom the deteriorating market conditions in the regions in which Realen Homesand Masterpiece Homes operate.  Thedeteriorating market conditions are the result of decreased consumer demand,recent changes in the sub-prime mortgage market and increased underwritingstandards.  The recent changes in thesub-prime mortgage market are the result of rising delinquencies and defaultsby borrowers as they experience financial difficulties due to rising interestrates.  This credit deterioration has ledto the bankruptcies of major sub-prime mortgage lenders, an overall lendingcapacity decline and the tightening of lending standards.  As a result, the availability of mortgagelending for buyers has decreased.

The impairment charges taken during the third quarterare estimates based on the currently available projections for fiscal year 2008and beyond, management’s best estimates of current market conditions and thefair market value of assets and liabilities at March 31, 2007.  The Company will monitor these projectionsand estimates during the fourth quarter of fiscal year 2007 and make anyadjustments to the estimated charges deemed necessary at such time.

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***Realen Homes Goodwill:***

For the three and ninemonths ended March 31, 2007, a goodwill impairment charge of $13,327,000related to the goodwill arising from the Company’s acquisition of Realen Homeswas recognized.  The impairment chargewas necessary due to declining market conditions in both the midwestern andnorthern regions in which Realen Homes operated, as noted above.  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 theseresults, the Company’s earnings forecast for the next eight fiscal years wererevised.

***Masterpiece Homes Goodwill:***

For the three and ninemonths ended March 31, 2007, a goodwill impairment charge of $3,007,000 relatedto the goodwill arising from the Company’s acquisition of Masterpiece Homes wasrecognized.  The impairment charge wasnecessary due to declining market conditions in the Florida region, as notedabove.  As a result, the operating incomeand cash flows for Florida were less than expected for the three and nine mothsended March 31, 2007.  Based on theseresults, the Company’s earnings forecast for the next eight fiscal years wererevised.

(E)                                 Asset impairments — real estate held fordevelopment and sale:

As a result of increased sales incentives offered during fiscal year2007 and a decrease in anticipated absorption rates at various communities, theCompany recognized long-lived asset impairment losses totaling $47,336,000 and$57,186,000 during the three and nine months ended March 31, 2007,respectively.  The Company’s northernregion recognized an impairment loss of $9,409,000 and $13,309,000 during thethree and nine months ended March 31, 2007, respectively, relating to eightcommunities. The Company’s Florida region recognized an impairment loss of$7,240,000 and $12,040,000 during the three and nine months ended March 31,2007, respectively, primarily relating to two communities.  In addition, the Company’s southern regionrecognized an impairment loss of $2,607,000 and $3,507,000 during the three andnine months ended March 31, 2007, respectively, relating to sevencommunities.  Further, the Company’smidwestern region recognized an impairment loss of $9,347,000 and $9,597,000,during the three and nine months ended March 31, 2007, respectively, 

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relating to three communities, while the Company’s western regionrecognized a $13,733,000 impairment loss during the three and nine months endedMarch 31, 2007, relating to lot positions in one community.  As noted above, these long-lived assetimpairment losses were the result of increased sales incentives offered duringthe three and nine months ended March 31, 2007. The incentives were increased in an effort to generate additional new ordersin deteriorating market conditions. Additionally, the Company recognized a $5,000,000 impairment lossrelating to model home inventory.  Thisimpairment loss relates to 51 model homes in three of the Company’sregions.  The long-lived asset impairmentlosses were the amounts by which the book value of the assets described aboveexceeded their fair values.  The fairvalue of the assets was determined based on the current estimated sales price,less the estimated costs of construction and selling costs to dispose of theassets.  The long-lived asset impairmentlosses were included in the cost of residential properties on the ConsolidatedStatements of Operations.  The Companydid not have any long-lived asset impairment losses during the three and nine monthperiods ended March 31, 2006.

(F)                                 Mortgage and other note obligations andsubordinated notes:

The $597,120,000 outstanding balance at March31, 2007 consists of $491,950,000 outstanding under the Revolving CreditFacility, which is discussed below, $105,000,000 outstanding pursuant to the saleand issuance of trust preferred securities discussed below, and $170,000 undermortgage obligations secured by land held for development and sale andimprovements.  The average daily balanceduring the nine months ended March 31, 2007 was $586,676,000.

***Revolving Credit Facility:***

At March 31, 2007, the Company had$491,950,000 outstanding under the Revolving Credit Facility.  In addition, approximately $34,475,000 ofletters of credit and other assurances of the availability of funds have beenprovided under the Revolving Credit Facility.

On January 24, 2006, Greenwood Financial,Inc., a wholly-owned subsidiary of the Company and other wholly-ownedsubsidiaries of the Company, as borrowers, and Orleans Homebuilders, Inc., asguarantor, entered into an Amended and Restated Revolving Credit and LoanAgreement (as amended, the “Amended and Restated Credit Agreement”) for a$650,000,000 Senior Secured Revolving Credit and Letter 

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of Credit Facility (the “Revolving CreditFacility”) with various banks as lenders. The Amended and Restated Credit Agreement was amended on November 1,2006, February 7, 2007 and May 8, 2007. See Note (O) for additional discussion regarding the May 8, 2007amendment.

Underand subject to the terms of the Amended and Restated Credit Agreement, theborrowers may borrow and re-borrow for the purpose of financing the acquisitionand development of real estate, the construction of homes and improvements, forinvestment in joint ventures, for working capital and for such other appropriatepurposes as may be approved by the lenders. The Amended and Restated Credit Agreement is primarily collateralized byreal estate held for development and sale.

TheRevolving Credit Facility has a maturity date of December 20, 2008 and may beincreased to $750,000,000 under certain circumstances.  Borrowings and advances under the RevolvingCredit Facility bear interest on a per annum basis equal to the LIBOR MarketIndex Rate plus a non-default variable spread ranging from 165 basis points to262.5 basis points, depending upon the Company’s leverage ratio and debtservice ratio.  During the term of theRevolving Credit Facility, interest is payable monthly in arrears.  At March 31, 2007, the interest rate was 7.695%,which included a 237.5 basis point spread.

TheCompany is subject to certain financial ratios and customary covenants as setforth in the Amended and Restated Credit Agreement.  These financial ratios and covenants include,but are not limited to, debt service; consolidated adjusted tangible net worth;leverage; investments in joint ventures, land held for development and sale andspeculative inventory; and limitations on subordinated and purchase moneymortgage debt.  The Amended and RestatedCredit Agreement was amended on November 1, 2006 (“First Amendment”), February7, 2007 (“Second Amendment”) and May 8, 2007 (“Third Amendment”).  The Third Amendment was effective as of March31, 2007 and included amendments to certain financial covenants.  As a result of the Third Amendment, theCompany was in compliance with its financial covenants at March 31, 2007.  Absent the Third Amendment, at March 31, 2007and as a result of the Company’s inventory and goodwill impairment charges andabandoned project charges, the Company would have been in violation of its debtservice ratio covenant, tangible net worth covenant and certain owned land toconsolidated adjusted tangible net worth ratio covenant and in default underthe 

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Amendedand Restated Credit AGreement.  See belowfor additional discussion and disclosure of the First and Second Amendment andNote (O) below for additional discussion and disclosure of the Third Amendment.

***First Amendment to the Amended and Restated Credit Agreement:***

On November 1, 2006, the Company’s Amendedand Restated Credit Agreement described above was amended as follows:

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

·                  The definition of debt service included inthe calculation of the debt service ratio was modified to exclude the repaymentof the $5,000,000 note issued to the former owners of Realen Homes.  See Note (B) of the Notes to the ConsolidatedFinancial Statements for a discussion of the terms of the $5,000,000 note thatwas issued in connection with the acquisition of Realen Homes.

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

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

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·                  The permitted minimum consolidated tangiblenet worth was reset to 90% of the Company’s consolidated tangible net worth atSeptember 30, 2006 plus an amount equal to 50% of the net income earned duringeach fiscal quarter that ends after September 30, 2006 and all of the netproceeds of equity securities issued by the Company after September 30,2006.  In addition, the definition ofconsolidated tangible net worth was modified to exclude any intangible assetsrecognized in connection with the Company’s supplemental executive retirementplan.  Prior to the First Amendment tothe Amended and Restated Credit Agreement, the permitted minimum consolidatedtangible net worth was defined as $180,000,000 plus an amount equal to 50% ofthe net income earned during each fiscal quarter that ended after December 31,2005 and all of the net proceeds of equity securities issued by the Companyafter December 31, 2005.  This covenantwas further amended by the Second Amendment and the Third Amendment.

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

***Second Amendment to******Amended and RestatedCredit Agreement:***

On February 7, 2007, the Company’s Amendedand Restated Credit Agreement was amended as follows:

·                  Adjusted EBITDA as defined in the Amended andRestated Credit Agreement was revised for the debt service ratio covenant.  For purposes of the debt service ratiocovenant, the revised Adjusted EBITDA includes add-backs for inventoryimpairments and abandoned project write-offs, plus certain other non-cashcharges and extraordinary losses, minus certain other non-cash credits andextraordinary gains.

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·                  The required debt service ratio was reducedfrom 1.65-to-1.00 to 1.50-to-1.00 at March 31, 2007.  This ratio was further amended by the ThirdAmendment.

·                  The permitted ratio of all land owned whichis not subject to a qualifying agreement of sale and on which no unit has beenor is being constructed to the  Company’sconsolidated adjusted tangible net worth was reset to 1.90-to-1.00 at December31, 2006 and 1.90-to-1.00 at March 31, 2007. This ratio was further amended by the Third Amendment.

***Third Amendment to the Amended and Restated CreditAgreement***

Subsequentto March 31, 2007 and prior to filing the Company’s Quarterly Report on Form10-Q for the third fiscal quarter of 2007, the Company entered into the ThirdAmendment to the Amended and Restated Credit Agreement (“Third Amendment”).  The Third Amendment was effective as of March31, 2007 and included amendments to certain financial covenants.  As a result of the amendment, the Company wasin compliance with its financial covenants at March 31, 2007.  Absent the Third Amendment, at March 31, 2007and as a result of the Company’s inventory and goodwill impairment charges andabandoned project charges, the Company would have been in violation of its debtservice ratio covenant, tangible net worth covenant and certain owned land toconsolidated adjusted tangible net worth ratio covenant and in default underthe Amended and Restated Credit Agreement. See Note (O) below for additional discussion and disclosure of the ThirdAmendment.

***Trust Preferred Securities:***

On November 23, 2005, the Company issued$75,000,000 of trust preferred securities which mature on January 30, 2036 andare callable, in whole or in part, at par plus accrued interest on or afterJanuary 30, 2011.  For the first tenyears, the securities have a fixed interest rate of 8.61% per annum.  Thereafter, the securities have a floatinginterest rate equal to three-month LIBOR plus 360 basis points per annum,resetting quarterly.  The securities aretreated as debt obligations for financial statement purposes.  The Company used proceeds from the sale ofthese securities to repay outstanding obligations under the Revolving CreditFacility discussed above.

In the event the Company fails to meetcertain financial ratios for three of four consecutive quarters, the applicablerate of interest will be increased by 300 basis points until such time as theCompany is in compliance with the financial ratios, at 

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which time the interest rate will return toits original amount.  It is an event ofdefault if the increased interest rate is in effect for four consecutiveinterest payment periods.  The occurrenceof an event of default may trigger demand for immediate payment in full of alloutstanding amounts, whereupon all outstanding amounts will be immediately dueand payable.  An uncured event of defaultunder the trust preferred securities also constitutes an event of default underthe Amended and Restated Credit Agreement. At March 31, 2007, the Company failed to meet the interest coverageratio of 1.75-to-1.00.  Under theindenture, the interest coverage ratio is defined as the Company’s EBITDA todebt service for the trailing twelve month period.  The Company also failed to meet thisfinancial ratio as of the quarter ended December 31, 2006.  The Company anticipates that it will not meetthe interest coverage ratio for the quarter ending June 30, 2007.  As a result, the Company anticipates that itwill begin to pay the increased rate of interest under the $75,000,000 of trustpreferred securities starting with the quarterly interest payment due onOctober 30, 2007.  The Company can offerno assurance that the increased rate of interest will not be in effect for fourconsecutive interest payment periods thereby triggering an event of defaultunder the $75,000,000 of trust preferred securities.

On September 20, 2005, the Company issued$30,000,000 of trust preferred securities which mature on September 30, 2035and are callable, in whole or in part, at par plus accrued interest on or afterSeptember 30, 2010.  For the first tenyears, the securities have a fixed interest rate of 8.52% per annum.  Thereafter, the securities have a floatinginterest rate equal to three-month LIBOR plus 380 basis points per annum,resetting quarterly.  The securities aretreated as debt obligations for financial statement purposes.  The Company used proceeds from the sale ofthese securities to fund land purchases and residential construction.  The obligations relating to the trustpreferred securities are subordinated to the Revolving Credit Facility.

(G)                                Redeemable Common Stock

In connection with theCompany’s acquisition of Parker and Lancaster Corporation on October 13, 2000,the Company issued 300,000 shares of common stock of the Company to the formershareholders of Parker and Lancaster Corporation.  The former shareholders of Parker andLancaster Corporation had the right to cause the 

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Company to repurchase thecommon stock approximately five years after the closing of the acquisition at aprice of $3.33 per share.  The redemptionfeature of these shares expired during the quarter ended December 31, 2005.

In connection with theCompany’s acquisition of Masterpiece Homes on July 28, 2003, the Company sold30,000 shares of common stock of the Company to the president of MasterpieceHomes at $8 per share.  The president ofMasterpiece Homes has the right to cause the Company to repurchase the commonstock at $8 per share by giving notice to the Company no later than the earlierof March 31, 2007 or 30 days after termination of his employment, as specifiedin his employment agreement. The redemption feature of these shares expiredduring the quarter ended December 31, 2006. See Note (M) below for additional discussion relating to the Company’semployment agreement with the president of Masterpiece Homes

(H)                               Employee Retirement and Deferred CompensationPlans

***Employee Retirement Plan:***

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

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

 

23

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

The Company used a 4% annual compensation increase and a 6.16% discount rate in its calculation of the present value of its projected benefit obligation at June 30, 2006.  The discount rate used represented the Moody’s AA bond rate for long-term bonds as of June 2006.  The Company recognized the following costs related to the SERP for the period ended March 31, 2007:
|                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**          | ** ** |
| Net periodic pension  cost:         |       |                             |       |                            |       |   |   |   |   |
| Service cost                        |       | $                                | 201,000    |                            | $          | 134,000 |   | $ | 572,000 |   | $ | 314,000 |   |
| Interest cost                       |       | 127,000                          |       | 77,000                          |       | 348,000 |   | 180,000 |   |
| Amortization of prior  service cost |       | 91,000                           |       | 83,000                          |       | 272,000 |   | 194,000 |   |
| Total net periodic  pension cost    |       | $                                | 419,000    |                            | $          | 294,000 |   | $ | 1,192,000 |   | $ | 688,000 |   |
|                                |       |                             |       |                            |       |   |   |   |   |

 

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

***Deferred Compensation Plan:***

On December 1, 2005, the Company adopted an Executive Compensation Deferral Plan (the “Deferral Plan”) effective as of June 1, 2005.  Under the Plan, participants will have the ability to defer a portion of their compensation which will be credited to an account maintained by the Company for the participant. Amounts contributed by participants are always vested. Participant deferral accounts will be maintained by the Company for recordkeeping purposes only. Participants will have no interest in any assets which may be set aside by the Company to meet its obligations under the Deferral Plan. At March 31, 2007, the Company had obligations totaling $1,735,000 in connection with the Deferral Plan.  The deferred compensation is included in accrued expenses on the Company’s Consolidated Balance Sheet at March 31, 2007.

24

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(I)                                    Earnings (Loss) Per Share:

The weighted average numberof shares used to compute basic earnings (loss) per common share and dilutedearnings (loss) per common share and a reconciliation of the numerator anddenominator used in the computation for the three and nine months ended March31, 2007 and 2006 are shown in the following table:
|                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                                              | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                              | ** ** | **(in thousands)**          | ** ** |
| Weighted average common  shares issued                                  |       | 18,698                           |       | 18,698                          |       | 18,698 |   | 18,698 |   |
| Less: Average treasury  shares outstanding                              |       | (207                             | )          | (253                            | )          | (255 | ) | (184 | ) |
| Basic EPS shares                                                        |       | 18,491                           |       | 18,445                          |       | 18,443 |   | 18,514 |   |
| Effect of assumed  shares under treasury stock method for stock options |       | —                           | (1)        | 336                             |       | — | (1) | 340 |   |
| Diluted EPS shares                                                      |       | 18,491                           |       | 18,781                          |       | 18,443 |   | 18,854 |   |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) for basic and diluted EPS                             |       | $                                | (51,898    | )                               | $          | 12,809 |   | $ | (55,523 | ) | $ | 36,003 |   |
|                                                                         |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

----

(1) For the three and ninemonths ended March 31, 2007, the Company used basic shares outstanding tocompute diluted earnings per common share as the use of the diluted sharesoutstanding was anti-dilutive on the diluted earnings per share calculation.

(J)                                   Residential Properties Completed or underConstruction:

Residential properties completed or underconstruction consist of the following:
|                                                              | ** ** | **March 31,  2007** | ** ** | **June 30,  2006** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**  | ** ** |
| Under contract for sale  (backlog)                           |       | $                        | 132,810    |                    | $          | 124,073 |   |
| Unsold                                                       |       | 112,575                  |       | 147,995                 |       |
| Total residential properties completed or under construction |       | $                        | 245,385    |                    | $          | 272,068 |   |

 

(K)                               Segment Reporting:

Statementof Financial Accounting Standards No. 131 “Disclosures about Segments ofan Enterprise and Related Information” (“SFAS 131”) establishes standards forthe manner in which public enterprises report segment information aboutoperating segments.  The Company hasdetermined that its operations primarily involve five reportable homebuildingsegments operating in fourteen markets. The reportable homebuilding segments include operations conductingbusiness in the following states:

25

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Northern:  southeasternPennsylvania, central New Jersey, southern New Jersey, and Orange County, NewYork

Southern:  Charlotte, Raleigh and Greensboro, NorthCarolina; Richmond and Tidewater, Virginia

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

Midwestern:  Chicago, Illinois

Western:  Phoenix, Arizona.

The Company’s evaluation of segment performance isbased on net income (loss). Below is a summary of revenue, net income (loss),and income tax expense (benefit) for each reportable segment for the three andnine months ended March 31, 2007 and 2006:
|                                  | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                       | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(in thousands)**          | ** ** |
|                             |       |                             |       |                            |       |   |   |   |   |
| **Total Revenue**                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Northern                         |       | $                                | 44,574     |                            | $          | 90,213 |   | $ | 141,887 |   | $ | 240,167 |   |
| Southern                         |       | 69,727                           |       | 71,539                          |       | 205,784 |   | 210,496 |   |
| Florida                          |       | 14,781                           |       | 24,382                          |       | 55,689 |   | 61,494 |   |
| Midwestern                       |       | 15,376                           |       | 22,005                          |       | 60,250 |   | 77,168 |   |
| Western                          |       | —                           |       | —                          |       | — |   | — |   |
| Corporate and  unallocated (1)   |       | 1,536                            |       | 1,776                           |       | 4,615 |   | 4,882 |   |
| Consolidated Total               |       | $                                | 145,994    |                            | $          | 209,915 |   | $ | 468,225 |   | $ | 594,207 |   |
|                             |       |                             |       |                            |       |   |   |   |   |
| **Net Income (Loss)**            |       |                             |       |                            |       |   |   |   |   |
| Northern                         |       | $                                | (19,598    | )                               | $          | 9,341 |   | $ | (22,967 | ) | $ | 24,816 |   |
| Southern                         |       | (3,110                           | )          | 3,353                           |       | 2,349 |   | 9,672 |   |
| Florida                          |       | (7,004                           | )          | 1,045                           |       | (9,673 | ) | 2,542 |   |
| Midwestern                       |       | (11,834                          | )          | 950                             |       | (11,618 | ) | 3,979 |   |
| Western                          |       | (9,203                           | )          | (100                            | )          | (9,493 | ) | (106 | ) |
| Corporate and  unallocated (1)   |       | (1,149                           | )          | (1,780                          | )          | (4,121 | ) | (4,900 | ) |
| Consolidated Total               |       | $                                | (51,898    | )                               | $          | 12,809 |   | $ | (55,523 | ) | $ | 36,003 |   |
|                             |       |                             |       |                            |       |   |   |   |   |
| **Income Tax Expense (Benefit)** |       |                             |       |                            |       |   |   |   |   |
| Northern                         |       | $                                | (12,741    | )                               | $          | 7,037 |   | $ | (14,933 | ) | $ | 17,321 |   |
| Southern                         |       | (1,954                           | )          | 2,088                           |       | 1,477 |   | 6,029 |   |
| Florida                          |       | (4,293                           | )          | 633                             |       | (5,927 | ) | 1,539 |   |
| Midwestern                       |       | (7,534                           | )          | 642                             |       | (7,397 | ) | 2,576 |   |
| Western                          |       | (4,957                           | )          | (72                             | )          | (5,116 | ) | (72 | ) |
| Corporate and  unallocated (1)   |       | (739                             | )          | (1,904                          | )          | (2,647 | ) | (3,407 | ) |
| Consolidated Total               |       | $                                | (32,218    | )                               | $          | 8,424 |   | $ | (34,543 | ) | $ | 23,986 |   |

----

(1) Corporate and unallocated includes the revenuesand expenses of the Company’s mortgage brokerage and property managementoperations as well as corporate level selling, general and administrativeexpenses.  These selling, general, andadministrative expenses are primarily comprised of corporate salaries, bonuses,and benefits; accounting and consulting fees; corporate travel expenses; netperiodic pension costs; and compensation expense resulting from the fairvaluation of stock options.

26

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Below is as a summary of total assets and goodwillfor each reportable segment at March 31, 2007 and June 30, 2006:
|                                | ** ** | **March 31,**      | ** ** | **June 30,** | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2007**                | ** ** | **2006**          | ** ** |
| ** **                     | ** ** | **(In thousands)** | ** ** |
| **Assets**                     |       |                    |       |              |       |
| Northern                       |       | $                       | 419,521    |              | $          | 437,535 |   |
| Southern                       |       | 298,499                 |       | 332,965           |       |
| Florida                        |       | 81,948                  |       | 122,809           |       |
| Midwestern                     |       | 109,116                 |       | 126,901           |       |
| Western                        |       | 30,371                  |       | 34,917            |       |
| Corporate and  unallocated (2) |       | 5,043                   |       | 5,376             |       |
| Consolidated  Total            |       | $                       | 944,498    |              | $          | 1,060,503 |   |
| ** **                     |       |                    |       |              |       |
| **Goodwill**                   |       |                    |       |              |       |
| Northern                       |       | $                       | —     |              | $          | 7,918 |   |
| Southern                       |       | 4,180                   |       | 4,180             |       |
| Florida                        |       | —                  |       | 3,007             |       |
| Midwestern                     |       | —                  |       | 5,409             |       |
| Consolidated Total             |       | $                       | 4,180      |              | $          | 20,514 |   |

----

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

(L)                                 Litigation:

The Company is currentlyinvolved in three separate actions involving injuries on the job allegedlysuffered by employees of its subcontractors in which the potential claim andultimate outcome is currently unknown. The injuries range from various fractures requiring surgery to low backand neck injuries.  Given the uncertaintysurrounding the ultimate outcome of the claims, the Company has not recordedany 

27

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reserve with respect tothese claims at March 31, 2007.   TheCompany is self-insured up to $2,000,000 for each general liability claim witha $25,000,000 general liability umbrella policy thereafter.  See Note (N) for additional information onthe Company’s self-insurance policy. With respect to these claims, the Company is aggressively pursuing theinsurance and indemnification available to it from its subcontractors.  While the Company currently believes that theultimate outcome of these claims, individually and in the aggregate, will nothave a material adverse effect on the financial position, operating results orcash flows of the Company, litigation is subject to inherent uncertainties.  If an unfavorable outcome were to occur,there exists the possibility of a material adverse impact on the Company’s netincome in the period in which the unfavorable outcome occurs.

In addition, from time totime the Company is named as a defendant in legal actions arising from itsnormal business activities.  Although theamount of liability that could arise with respect to currently pending actionscannot be accurately predicted, in the opinion of the Company any suchliability will not have a material adverse effect on the financial position,operating results or cash flows of the Company. However, there can be no guarantees that such liabilities will not bematerial.

(M)                            Restructuring:

During the nine months endedMarch 31, 2007, the Company reduced its workforce by approximately 170employees in response to decreased new order activity resulting from weakenedconditions in the U.S. housing market.  The workforce reductions took place in all of the Company’s regionsduring the six months ended December 31, 2006 and included general andadministrative, sales, and construction overhead positions and the Companyrecognized $766,000 in severance expenses related to the work force reductionsfor the same period.  The workforcereduction was completed during the six months ended December 31, 2006 and noseverance expense was recorded during the three months ended March 31,2007.  The costs were included in costsof residential properties and selling, general and administrative expenses inthe Company’s Consolidated Statement of Operations for the nine months endedMarch 31, 2007. The workforce reductions were commensurate with the Company’sdecreased new order activity and production levels.

28

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On October 26, 2006, Mr.Robert Fitzsimmons’s employment as the president of Masterpiece Homes, Inc.ended by mutual agreement.  Mr.Fitzsimmons received his base salary and medical benefits through January 28,2007.  In addition, Mr. Fitzsimmonsreceived an amount equal to 25% of certain pre-tax profits attributable to theoperations of Masterpiece Homes for the period January 1, 2006 through December31, 2006.  Pursuant to his employmentagreement, Mr. Fitzsimmons acquired options to purchase up to 45,000shares of the Company’s common stock at an exercise price of $10.64 pershare.  On April 4, 2005, Mr. Fitzsimmonsexercised 15,000 of these options.  Anadditional 15,000 options vested on December 31, 2005 and the remaining 15,000options vested on December 31, 2006.  Mr.Fitzsimmons will retain these options.

In November 2006, theCompany terminated the employment of Joel A. Armstrong, Executive VicePresident of the Company.  Under theterms of Mr. Armstrong’s employment agreement, he is entitled to continueto receive his base salary and any bonus to which he is entitled for the nextconsecutive 12 months. For thenine months ended March 31, 2007, the Company recognized approximately$1,100,000 in severance expenses related to Mr. Armstrong’s termination.

(N)                               Commitments and Contingencies:

As of March 31, 2007, the Companyowned or controlled approximately 11,850 building lots.  As part of the aforementioned building lots,the Company had contracted to purchase, or had under option, undeveloped landand improved lots for an aggregate purchase price of approximately $185,887,000which are expected to yield approximately 3,520 building lots.  Generally, the Company structures its landacquisitions so that it has the right to cancel its agreements to purchaseundeveloped land and improved lots by forfeiture of its deposit under theagreement. Furthermore, purchase of the properties is usually contingent uponobtaining all governmental approvals and satisfaction of certain requirementsby the Company and the sellers.

Until February 2004, generalliability claims were fully insured, subject to applicable policy limits andexclusions. Thereafter, because of increasing insurance costs, the Companyself-insures the first $2,000,000 of each general liability claim in itsnorthern, midwestern and western regions. The Company’s southern and Florida regions continue to maintainconventional general liability policies. At March 31, 

29

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2007 and June 30, 2006 theCompany has recorded self insurance reserves of $1,199,000 and $1,128,000,respectively.  The reserves include anestimate of expected settlements on pending claims, defense costs and aprovision for claims incurred but not reported. These estimates are based on the Company’s assessment of potentialliability using an analysis of available information with respect to pending claims,historical experience and current cost trends. The amount of the Company’s ultimate liability in respect of thesematters may differ materially from these estimates.

(O)                               Subsequent Events:

***Third Amendment to Amended andRestated Credit Agreement:***

On May 8, 2007, the Company’sAmended and Restated Credit Agreement, described in Note (F), was amended asfollows:

·                  Thepermitted minimum consolidated tangible net worth covenant was reset to$205,000,000 at March 31, 2007, plus an amount equal to 50% of positive netincome earned by the Company during each fiscal quarter that ends after March31, 2007 and all of the net proceeds of equity securities issued by the Companyafter March 31, 2007.

·                  Thepermitted ratio of the book value of all land owned that is not subject to aqualifying agreement of sale and on which no unit has been or is beingconstructed to the Company’s consolidated adjusted tangible net worth was resetto 2.10-to-1.00 at March 31, 2007 through June 30, 2007.

·                  Therequired debt service ratio was reduced to 1.30-to-1.00 at March 31, 2007 andto 0.50-to-1.00 at June 30, 2007.

·                  Forany borrowing base certificate that is dated as of a date that is on or afterMarch 31, 2007 and on or before August 31, 2007, the maximum borrowing baseavailability attributable to units not subject to a qualifying agreement ofsale was increased from 30% of the aggregate borrowing base availabilityattributable to the total units to the lesser of (a) 45% of the aggregateborrowing base availability attributable to total units, and (b) $105,000,000.

30

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**ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES**

**Item 2****.****                                                          ****Management’s Discussion andAnalysis of**

###### **FinancialCondition and Results of Operations**

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

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

31

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Company’smarkets in Florida; “midwestern region” refers to the Company’s market inIllinois; and “western region” refers to the Company’s market in Arizona.

**Results of Operations**

The following table sets forth certain details as to residential salesactivity.  The information provided isfor the three and nine months ended March 31, 2007 and 2006 in the case ofresidential revenue earned and new orders, and as of March 31, 2007 and 2006 inthe case of backlog.

A sales contract or potential sale is classified as a new order and,therefore, becomes a part of backlog, at the time a homebuyer executes acontract to purchase a home from the Company.
| ** **                                    | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)**                | ** ** |
| ** **                                    | ** ** | **Amount**                                          | ** ** | **Homes** | ** ** | **Average  Price** | ** ** | **Amount** | ** ** | **Homes** | ** ** | **Average  Price** | ** ** |
| **Northern Region**                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Pennsylvania, New  Jersey and New York:       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Residential revenue  earned                   |       | $                                                   | 138,585    |   | 289 |   | $ | 480 |   | $ | 239,303 |   | 510 |   | $ | 469 |   |
| New orders                                    |       | 180,268                                             |       | 363 |   | 497 |   | 191,509 |   | 349 |   | 549 |   |
| Backlog                                       |       | 142,206                                             |       | 268 |   | 531 |   | 202,727 |   | 374 |   | 542 |   |
| Net income (loss)                             |       | (22,967                                             | )          | n/a |   | n/a |   | 24,816 |   | n/a |   | n/a |   |
|                                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Southern Region**                           |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| North Carolina, South  Carolina And Virginia: |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Residential revenue  earned                   |       | $                                                   | 190,879    |   | 396 |   | $ | 482 |   | $ | 210,328 |   | 527 |   | $ | 399 |   |
| New orders                                    |       | 197,523                                             |       | 394 |   | 501 |   | 288,994 |   | 639 |   | 452 |   |
| Backlog                                       |       | 160,288                                             |       | 300 |   | 534 |   | 236,957 |   | 485 |   | 489 |   |
| Net income                                    |       | 2,349                                               |       | n/a |   | n/a |   | 9,672 |   | n/a |   | n/a |   |
|                                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Florida Region**                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Residential revenue  earned                   |       | $                                                   | 55,265     |   | 219 |   | $ | 252 |   | $ | 60,086 |   | 248 |   | $ | 242 |   |
| New orders                                    |       | 29,410                                              |       | 153 |   | 192 |   | 62,952 |   | 193 |   | 326 |   |
| Backlog                                       |       | 17,316                                              |       | 72 |   | 241 |   | 89,068 |   | 304 |   | 293 |   |
| Net income (loss)                             |       | (9,673                                              | )          | n/a |   | n/a |   | 2,542 |   | n/a |   | n/a |   |
|                                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Midwestern Region**                         |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Residential revenue  earned                   |       | $                                                   | 59,101     |   | 140 |   | $ | 422 |   | $ | 77,001 |   | 183 |   | $ | 421 |   |
| New orders                                    |       | 64,047                                              |       | 143 |   | 448 |   | 78,074 |   | 179 |   | 436 |   |
| Backlog                                       |       | 42,284                                              |       | 84 |   | 503 |   | 59,296 |   | 135 |   | 439 |   |
| Net income (loss)                             |       | (11,618                                             | )          | n/a |   | n/a |   | 3,979 |   | n/a |   | n/a |   |
|                                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Western Region (1)**                        |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                      |       | (9,493                                              | )          | n/a |   | n/a |   | (106 | ) | n/a |   | n/a |   |
| ** **                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Corporate and unallocated**                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                      |       | (4,121                                              | )          | n/a |   | n/a |   | (4,900 | ) | n/a |   | n/a |   |
| ** **                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Combined Regions**                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Residential revenue  earned                   |       | $                                                   | 443,830    |   | 1,044 |   | $ | 425 |   | $ | 586,718 |   | 1,468 |   | $ | 400 |   |
| New orders                                    |       | 471,248                                             |       | 1,053 |   | 448 |   | 621,529 |   | 1,360 |   | 457 |   |
| Backlog                                       |       | 362,094                                             |       | 724 |   | 500 |   | 588,048 |   | 1,298 |   | 453 |   |
| Net income (loss)                             |       | (55,523                                             | )          | n/a |   | n/a |   | 36,003 |   | n/a |   | n/a |   |

----

(1)  Information on netloss is for the period beginning December 1, 2005, the date the Company enteredthis region, through March 31, 2007.  Theregion did not generate residential revenue or new orders for the periodbeginning December 1, 2005, the date the Company entered this region, throughMarch 31, 2007.

32

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##  

| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)**                 | ** ** |
| ** **                                    | ** ** | **Amount**                                           | ** ** | **Homes** | ** ** | **Average  Price** | ** ** | **Amount** | ** ** | **Homes** | ** ** | **Average  Price** | ** ** |
| **Northern Region**                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pennsylvania, New Jersey  and New York:       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Residential revenue  earned                   |       | $                                                    | 43,263     |   | 93 |   | $ | 465 |   | $ | 90,105 |   | 184 |   | $ | 490 |   |
| New orders                                    |       | 77,209                                               |       | 152 |   | 508 |   | 52,267 |   | 92 |   | 568 |   |
| Backlog                                       |       | 142,206                                              |       | 268 |   | 531 |   | 202,727 |   | 374 |   | 542 |   |
| Net income (loss)                             |       | (19,598                                              | )          | n/a |   | n/a |   | 9,341 |   | n/a |   | n/a |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Southern Region**                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North Carolina, South  Carolina and Virginia: |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Residential revenue  earned                   |       | $                                                    | 55,652     |   | 112 |   | $ | 497 |   | $ | 71,445 |   | 172 |   | $ | 415 |   |
| New orders                                    |       | 91,856                                               |       | 179 |   | 513 |   | 100,027 |   | 209 |   | 479 |   |
| Backlog                                       |       | 160,288                                              |       | 300 |   | 534 |   | 236,957 |   | 485 |   | 489 |   |
| Net income (loss)                             |       | (3,110                                               | )          | n/a |   | n/a |   | 3,353 |   | n/a |   | n/a |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Florida Region**                            | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential revenue  earned                   |       | $                                                    | 14,682     |   | 61 |   | $ | 241 |   | $ | 24,359 |   | 97 |   | $ | 251 |   |
| New orders                                    |       | 14,153                                               |       | 68 |   | 208 |   | 13,889 |   | 41 |   | 339 |   |
| Backlog                                       |       | 17,316                                               |       | 72 |   | 241 |   | 89,068 |   | 304 |   | 293 |   |
| Net income (loss)                             |       | (7,004                                               | )          | n/a |   | n/a |   | 1,045 |   | n/a |   | n/a |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Midwestern Region**                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential revenue  earned                   |       | $                                                    | 15,289     |   | 38 |   | $ | 402 |   | $ | 21,934 |   | 51 |   | $ | 430 |   |
| New orders                                    |       | 17,892                                               |       | 38 |   | 471 |   | 30,581 |   | 68 |   | 450 |   |
| Backlog                                       |       | 42,284                                               |       | 84 |   | 503 |   | 59,296 |   | 135 |   | 439 |   |
| Net income (loss)                             |       | (11,834                                              | )          | n/a |   | n/a |   | 950 |   | n/a |   | n/a |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Western Region (1)**                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                      |       | (9,203                                               | )          | n/a |   | n/a |   | (100 | ) | n/a |   | n/a |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Corporate and unallocated**                 | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                      |       | (1,149                                               | )          | n/a |   | n/a |   | (1,780 | ) | n/a |   | n/a |   |
|                                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Combined Regions**                          | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential revenue  earned                   |       | $                                                    | 128,886    |   | 304 |   | $ | 424 |   | $ | 207,843 |   | 504 |   | $ | 412 |   |
| New orders                                    |       | 201,110                                              |       | 437 |   | 460 |   | 196,764 |   | 410 |   | 480 |   |
| Backlog                                       |       | 362,094                                              |       | 724 |   | 500 |   | 588,048 |   | 1,298 |   | 453 |   |
| Net income (loss)                             |       | (51,898                                              | )          | n/a |   | n/a |   | 12,809 |   | n/a |   | n/a |   |

----

(1)  Information on netloss is for the period beginning December 1, 2005, the date the Company enteredthis region, through March 31, 2007.  Theregion did not generate residential revenue or new orders for the periodbeginning December 1, 2005, the date the Company entered this region, throughMarch 31, 2007.

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**Three and Nine Months Ended March 31, 2007**

**Orders and Backlog**

New orders for thenine months ended March 31, 2007 decreased $150,281,000, or 24.2%, to$471,248,000 on 1,053 homes, compared to $621,529,000 on 1,360 homes for thenine months ended March 31, 2006.  Theaverage price per home of new orders decreased by approximately 2.1% to $448,000for the nine months ended March 31, 2007 compared to $457,000 for the ninemonths ended March 31, 2006.  The Companyis currently utilizing and will continue to utilize sales incentives in all ofits markets in an effort to increase customer demand and absorption rates, andreduce new home inventory levels where applicable.

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Neworders for the three months ended March 31, 2007 increased $4,346,000, or 2.2%,to $201,110,000 on 437 homes, compared to $196,764,000 on 410 homes for thethree months ended March 31, 2006.  Theaverage price per home of new orders decreased by approximately 4.1% to$460,000 for the three months ended March 31, 2007 compared to $480,000 for thethree months ended March 31, 2006.

Thesignificant decrease in the Company’s new orders during the nine months endedMarch 31, 2007 compared to the nine months ended March 31, 2006 wasattributable to unfavorable market conditions in the housing industry.  The major factors contributing to theunfavorable market conditions include a) increased new and resale homeinventory levels, b) decreased homebuyer demand due to lower consumerconfidence in the overall housing market and c) increasing uncertainty in thesub-prime mortgage market and increased underwriting standards.  The decrease in homebuyer demand as a resultof lower consumer confidence can be attributed to concerns of prospectivebuyers of new homes about the direction of home prices, which has increasedgeneral homebuyer uncertainty regarding whether now is the best time to buy ahome.  The Company continues to respondto this uncertainty by increasing sales incentives and offering limited timepromotions with the objective of improving new orders and reducing homeinventory levels.  The uncertainty in thesub-prime mortgage market is the result of rising delinquencies and defaults byborrowers as they experience financial difficulties due to rising interestrates.  This credit deterioration has ledto the bankruptcies of major sub-prime mortgage lenders, an overall lendingcapacity decline and the tightening of lending standards.  Although the Company has minimal directinvolvement in the sub-prime markets, these factors may make it more difficultfor our potential customers to sell their existing homes.  The Company believes that the aforementionedmarket conditions will continue to have a negative impact on new orders and neworder pricing in the near-term, thereby further reducing future revenues.  Although new orders increased slightly in thethree months ended March 31, 2007 compared to the three months ended March 31,2006, the Company believes the aforementioned unfavorable market conditionscontinue to exist.

Inresponse to these unfavorable market conditions, the Company reduced itsworkforce by approximately 170 employees during the nine months ended March 31,2007. The workforce reductions took place in all of the Company’s regions andincluded general and administrative, sales, and construction overheadpositions.   For the nine months endedMarch 31, 2007, the Company recognized approximately $766,000 in severanceexpenses related to the work force reductions, none of which was recognized inthe third quarter of fiscal year 2007. The majority 

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ofseverance had been paid out as of December 31, 2006.  The workforce reductions were commensuratewith the Company’s decreased new order activity and production levels.  In November 2006, the Company terminated theemployment of Joel A. Armstrong, Executive Vice President of the Company.  Under the terms of Mr. Armstrong’s employmentagreement, he is entitled to continue to receive his base salary and any bonusto which he is entitled for the consecutive 12 months following histermination. For the nine months ended March 31, 2007, the Company recognizedapproximately $1,100,000 in severance expenses related to Mr. Armstrong’stermination.

Thebacklog at March 31, 2007 decreased $225,954,000, or 38.4%, to $362,094,000 on724 homes compared to the backlog at March 31, 2006 of $588,048,000 on 1,298homes.  The decrease in the backlog wasattributable to decreases in new orders in all of the Company’s regions for thenine months ended March 31, 2007.  Theaverage price per home included in the Company’s backlog increased 10.4% to$500,000 at March 31, 2007 compared to $453,000 at March 31, 2006.  The increase in the average price per home inbacklog was attributable to a change in product mix of homes in backlog,specifically in the southern region. There were more luxury and second move-up homes in backlog in thesouthern region at March 31, 2007 when compared to March 31, 2006.

TheCompany experienced a cancellation rate of 24.3% for the nine months endedMarch 31, 2007, compared to 18.8% for the nine months ended March 31,2006.   The cancellation rate hasincreased in the majority of regions in which the Company operates whencompared with the nine months ended March 31, 2006.  The increase in cancellation rates for thenine months ended March 31, 2007 is primarily attributable to a) increasinguncertainty in the sub-prime mortgage market, as discussed above, and increasedunderwriting standards; b) lower consumer confidence in the overall housingmarket leading to uncertainty by current homebuyers of their ability to selltheir existing home and thereby afford the purchase of a new home; and c) lowerconsumer confidence in the overall housing market leading to uncertainty aboutthe direction of home prices and the value of their new home purchase.

Forthe three months ended March 31, 2007, the Company experienced a cancellationrate of 19.5% compared to 19.6% for the three months ended March 31, 2006.

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***Northern Region:***

New orders for the nine months ended March 31, 2007 decreased$11,241,000 to $180,268,000, or 5.9%, on 363 homes, compared to $191,509,000 on349 homes for the nine months ended March 31, 2006.  The decrease in new orders was attributableto decreased homebuyer demand due to lower consumer confidence in the overallhousing market. The decrease in homebuyer demand as a result of lower consumerconfidence can be attributed to concerns of prospective buyers of new homesabout the direction of home prices, which has increased general uncertainty asto whether now is the best time to buy a home. The Company believes that it has substantially eliminated its excesscompleted home inventory in its northern region as of March 31, 2007 so thatits completed home inventory is now more consistent with current demand.   The Company will continue to monitor theseinventory levels on a regular basis and further adjustments in inventory levelsmay be necessary.

The average price per home of new orders decreased by 9.5% to $497,000for the nine months ended March 31, 2007 compared to $549,000 for the ninemonths ended March 31, 2006.  Thedecrease in the average price per home of new orders was impacted by twofactors.  First, the Company experienceda shift in the mix of new orders for the nine months ended March 31, 2007compared to the nine months ended March 31, 2006.  Specifically, multi-family homes, whichtypically have lower price points than single family homes, comprised a largerpercentage of new orders than single family homes for the nine months endedMarch 31, 2007 when compared to the nine months ended March 31, 2006.  Second, the Company offered increased salesincentives during the nine months ended March 31, 2007 when compared with thenine months ended March 31, 2006 in an effort to increase absorption rates andconvert the Company’s inventory into cash.

New orders for the three months ended March 31, 2007 increased$24,942,000 to $77,209,000, or 47.7%, on 152 homes, compared to $52,267,000 on92 homes for the three months ended March 31, 2006. The increase in new orderswas attributable to an increase in sales incentives offered in an effort toincrease customer demand in an overall sluggish housing market.  The average price per home of new orders decreasedby 10.6% to $508,000 for the three months ended March 31, 2007 compared to$568,000 for the three months ended March 31, 2006.  The decrease in the average price per home ofnew orders was caused primarily by two factors. First, the Company experienced a shift in the mix of new orders for thethree months ended March 31, 2007 compared to the three months ended March 31,2006.  Specifically, multi-family homes,which typically have lower price points than single family homes, comprised alarger percentage of new orders than single family homes for the three monthsended March 31, 2007 when compared to the three months ended March 31,2006.  Second, the Company offeredincreased sales incentives 

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during the three months ended March 31, 2007 when compared with thethree months ended March 31, 2006 in an effort to increase absorption rates andconvert the Company’s inventory into cash.

The Company had 38 active selling communities in thenorthern region as of March 31, 2007 compared to 26 active selling communitiesat March 31, 2006.   The increase inactive selling communities relates to the addition of 17 new communities,offset by the closing of five communities.

***Southern Region:***

New orders for the nine months ended March 31, 2007 decreased$91,471,000 to $197,523,000, or 31.7%, on 394 homes compared to $288,994,000 on639 homes for the nine months ended March 31, 2006.  The decrease in new orders was attributableto decreased demand in the region which began during the fourth quarter offiscal 2006 and has continued through the third quarter of fiscal 2007.  The decreased demand is primarily due tolower consumer confidence in the overall housing market.  The Company believes that it hassubstantially eliminated its excess completed home inventory in its southernregion as of March 31, 2007 so that its completed home inventory is now moreconsistent with current demand.  TheCompany will continue to monitor these inventory levels on a regular basis andfurther adjustments in inventory levels may be necessary.  The overall decrease in new order dollars waspartially offset by an increase in the average price per home of new orders of10.8% to $501,000 for the nine months ended March 31, 2007 compared to $452,000for the nine months ended March 31, 2006. This increase in the average priceper home of new orders was attributable to a product mix shift in which secondtime move-up and luxury homes comprised a larger percentage of new orders thanentry level and first time move-up homes during the nine months ended March 31,2007 compared to the nine months ended March 31, 2006.

New orders for the three months ended March 31, 2007 decreased$8,171,000 to $91,856,000, or 8.2%, on 179 homes compared to $100,027,000 on209 homes for the three months ended March 31, 2006.  The decrease in new orders was attributableto decreased demand in the region which began during the fourth quarter offiscal 2006 and has continued through the third quarter of fiscal 2007.  The overall decrease in new order dollars waspartially offset by an increase in the average price per home of new orders of7.1% to $513,000 for the three months ended March 31, 2007 compared to $479,000for the three months ended March 31, 2006. This increase in the average price per home of new orders was attributableto a product mix shift in which second time move-

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up and luxury homes comprised a larger percentage of new orders thanentry level and first time move-up homes during the three months ended March31, 2007 compared to the three months ended March 31, 2006.

The Company had 48 active selling communities in the southern region asof March 31, 2007 compared to 46 active selling communities as of March 31,2006.

***Florida Region:***

New orders for the nine months ended March 31, 2007 decreased$33,542,000 to $29,410,000, or 53.3%, on 153 homes compared to $62,952,000 on193 homes for the nine months ended March 31, 2006.  The decrease in new orders was a result ofdecreased homebuyer demand due to lower consumer confidence in the overallhousing market and a significant increase in cancellation rates.  The Company experienced a 42.0% cancellationrate in the Florida region for the nine months ended March 31, 2007, comparedto 35.2% for the nine months ended March 31, 2006.  As a result of the cancellations and otherunfavorable market conditions, the Company has offered sales incentives in aneffort to increase absorption rates and to further decrease its new homeinventory levels.  As a result of thesales incentives, new home orders increased in the latter part of the ninemonth period, and as a result, the Company believes that it has substantiallyeliminated its excess completed home inventory in its Florida region as ofMarch 31, 2007 so that its completed home inventory is now more consistent withcurrent demand.  The Company willcontinue to monitor these inventory levels on a regular basis and furtheradjustments in inventory levels may be necessary.  The average price per home of new ordersdecreased by 41.1% to $192,000 for the nine months ended March 31, 2007compared to $326,000 for the nine months ended March 31, 2006.  The decrease in average price per home of neworders was primarily a result of increased sales incentives being offered bythe Company in an effort to decrease its new home inventory levels.

New orders for the three months ended March 31, 2007 increased $264,000to $14,153,000, or 1.9%, on 68 homes compared to $13,889,000 on 41 homes forthe three months ended March 31, 2006. The increase in new orders was a result of a decrease in cancellationrates for the quarter and the Company offering sales incentives in an effort toincrease absorption rates and to further decrease its new home inventorylevels.  The Company experienced a 28.4%cancellation rate in the Florida region for the three months ended March 31,2007, compared to 49.4% for the three months ended March 31, 2006.  The decreased cancellation rate is due to anincrease in orders for the period as a result of increased sales incentives andthe fact that many investors have exited the 

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market prior to the beginning of the quarter ending March 31,2007.  The average price per home of neworders decreased by 38.6% to $208,000 for the three months ended March 31, 2007compared to $339,000 for the three months ended March 31, 2006.  The decrease in average price per home of neworders was primarily a result of increased sales incentives being offered bythe Company in an effort to decrease its new home inventory levels.

The Company had six active selling communities in the Florida region asof March 31, 2007, compared to five active selling communities as of March 31,2006.

***Midwestern Region:***

New orders for the nine months ended March 31, 2007 decreased$14,027,000 to $64,047,000, or 18.0%, on 143 homes compared to $78,074,000 on 179homes for the nine months ended March 31, 2006.    The decrease in new orders, which beganduring the fourth quarter of fiscal 2006, primarily was a result of decreasedhomebuyer demand due to lower consumer confidence in the overall housingmarket.  The Company has responded tothis decreased homebuyer demand by increasing sales incentives and offeringlimited time promotions with the objective of improving new orders and reducinghome inventory levels.  As a result ofthe sales incentives, new home orders increased in the latter part of the ninemonth period resulting in a decrease in the Company’s midwestern region newhome inventory level, including model homes, at March 31, 2007 when comparedwith March 31, 2006.  The Companybelieves that it has substantially eliminated its excess completed homeinventory in its Midwestern region as of March 31, 2007 so that its completedhome inventory is now more consistent with current demand.  The Company will continue to monitor theseinventory levels on a regular basis and further adjustments in inventory levelsmay be necessary.  The average price perhome of new orders increased by 2.8% to $448,000 for the nine months endedMarch 31, 2007 compared to $436,000 for the nine months ended March 31, 2006.

New orders for the three months ended March 31, 2007 decreased$12,689,000 to $17,892,000, or 41.5%, on 38 homes compared to $30,581,000 on 68homes for the three months ended March 31, 2006.    The decrease in the dollar amount of neworders was a result of the Company offering sales incentives in an effort toimprove new orders and reduce new home inventory levels.  The average price per home of new ordersincreased by 4.7% to $471,000 for the three months ended March 31, 2007compared to $450,000 for the three months ended March 31, 2006.

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The Company had seven active selling communities inthe northern region as of March 31, 2007 compared to nine active sellingcommunities at March 31, 2006.

***Western Region***

As of March 31, 2007, the Company has not startedselling homes in the western region.  TheCompany anticpates that it will begin selling homes in one community in thewestern region during the fourth quarter of fiscal 2007.

# **TotalEarned Revenues**

Total earned revenues for the nine months ended March 31, 2007 decreased$125,982,000, to $468,225,000, or 21.2%, compared to $594,207,000 for the ninemonths ended March 31, 2006.  Residentialrevenue earned from the sale of residential homes included 1,044 homes totaling$443,830,000 during the nine months ended March 31, 2007, as compared to 1,468homes totaling $586,718,000 during the nine months ended March 31, 2006.  The average selling price per home deliveredincreased by approximately 6.4% to $425,000 for the nine months ended March 31,2007 compared to $400,000 for the nine months ended March 31, 2006.  Customer discounts increased to 7.1% ofresidential revenue earned for the nine months ended March 31, 2007 compared to1.8% for the same period in the prior year. The decrease in residential revenue earned is due to the decrease in neworder activity and increase in customer discounts, as described above.

Total earned revenues for the three months ended March 31, 2007decreased $63,921,000, to $145,994,000, or 30.5%, compared to $209,915,000 forthe three months ended March 31, 2006. Residential revenue earned from the sale of residential homes included304 homes totaling $128,886,000 during the three months ended March 31, 2007,as compared to 504 homes totaling $207,843,000 during the three months endedMarch 31, 2006.  The average sellingprice per home delivered increased by approximately 2.8% to $424,000 for thethree months ended March 31, 2007 compared to $412,000 for the three monthsended March 31, 2006.  Customer discountsincreased to 9.9% of residential revenue earned for the three months endedMarch 31, 2007 compared to 1.6% for the same period in the prior year.  The decrease in residential revenue earned isdue to the decrease in new order activity and increase in customer discounts asdescribed above.

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***Northern Region:***

Residential revenue earned for the nine months ended March 31, 2007decreased $100,718,000 to $138,585,000, or 42.1%, on 289 homes delivered ascompared to $239,303,000 on 510 homes delivered during the nine months endedMarch 31, 2006. The decrease in residential revenue earned primarily was aresult of reduced new order activity in the region which began during thesecond quarter of fiscal 2006 and has continued through the third quarter offiscal 2007.  The decrease was partiallyoffset by an increase in the average selling price per home delivered of 2.3%to $480,000 for the nine months ended March 31, 2007 from $469,000 for the ninemonths ended March 31, 2006 as a result of a shift in the product mix of homesdelivered. Specifically, in the region the Company delivered a largerpercentage of luxury homes during the nine months ended March 31, 2007 whencompared to the same period in the prior fiscal year.  Customer discounts increased to 7.2% ofresidential revenue earned for the nine months ended March 31, 2007 compared to1.5% for the same period in the prior year. The increase in customer discounts contributed to the decrease inresidential revenue earned.

Residential revenue earned for the three months ended March 31, 2007decreased $46,842,000 to $43,263,000, or 52.0%, on 93 homes delivered ascompared to $90,105,000 on 184 homes delivered during the three months endedMarch 31, 2006. The decrease in residential revenue earned was primarily aresult of reduced new order activity in the region which began during thesecond quarter of fiscal 2006 and has continued through the third quarter offiscal 2007.  The decrease was alsoattributable to a decrease in the average selling price per home delivered of5.0%, to $465,000 for the three months ended March 31, 2007 from $490,000 forthe three months ended March 31, 2006 as a result of a shift in the product mixof homes delivered and an increase in customer discounts.  Customer discounts increased to 10.3% ofresidential revenue earned for the three months ended March 31, 2007 comparedto 1.5% for the same period in the prior year.

***Southern Region:***

Residential revenue earned for the nine months ended March 31, 2007decreased $19,449,000 to $190,879,000, or 9.2%, on 396 homes delivered ascompared to $210,328,000 on 527 homes delivered during the nine months endedMarch 31, 2006.  The decrease inresidential revenue earned was a result of reduced new order activity in theregion which began during the fourth quarter of fiscal 2006 and has continuedthrough the third quarter of fiscal 2007. The decrease was partially offset by an increase in the average sellingprice per home delivered of 20.8% to $482,000 for the nine months ended March31, 2007 from $399,000 for the nine months ended March 31, 2006. The increasein the average price per home delivered was attributable to a 

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change in the product mix of homes delivered during the nine monthsended March 31, 2007 compared to the nine months ended March 31, 2006.  Specifically, in the region, the Companydelivered a larger percentage of luxury and second move-up homes during thenine months ended March 31, 2007 than the nine months ended March 31,2006.  Customer discounts increased to5.4% of residential revenue earned for the nine months ended March 31, 2007compared to 2.9% for the same period in the prior year.  The increase in customer incentives alsocontributed to the decrease in residential revenue earned.

Residential revenue earned for the three months ended March 31, 2007decreased $15,793,000 to $55,652,000, or 22.1%, on 112 homes delivered ascompared to $71,445,000 on 172 homes delivered during the three months endedMarch 31, 2006.  The decrease inresidential revenue earned was a result of reduced new order activity in theregion which began during the fourth quarter of fiscal 2006 and has continuedthrough the third quarter of fiscal 2007. The decrease was partially offset by an increase in the average sellingprice per home delivered of 19.6% to $497,000 for the three months ended March31, 2007 from $415,000 for the three months ended March 31, 2006. The increasein the average price per home delivered was attributable to a change in theproduct mix of homes delivered during the three months ended March 31, 2007compared to the three months ended March 31, 2006.  Specifically, in the region, the Companydelivered a larger percentage of luxury and second move-up homes during thethree months ended March 31, 2007 than the three months ended March 31,2006.  Customer discounts increased to8.3% of residential revenue earned for the three months ended March 31, 2007compared to 2.5% for the same period in the prior year.  The increase in customer incentives alsocontributed to the decrease in residential revenue earned.

***Florida Region:***

Residentialrevenue earned for the nine months ended March 31, 2007 decreased $4,821,000 to$55,265,000, or 8.0%, on 219 homes, compared to $60,086,000 on 248 homes forthe nine months ended March 31, 2006. The decrease in residential revenue earned was primarily attributable toreduced new order activity in the region during prior quarters and the Companyoffering sales incentives on its new home inventory in an effort to decreaseits new home inventory levels.  Customerdiscounts increased to 12.1% of residential revenue earned for the nine monthsended March 31, 2007 compared to 0.2% for the same period in the prioryear.  The average selling price per homeincreased 4.1% to $252,000 for the nine months ended March 31, 2007 from$242,000 for the nine months ended March 31, 2006.  The increase in average selling 

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priceper home is primarily a result of product mix, specifically related to onecommunity that did not generate residential revenue in the prior fiscal yearperiod.

Residentialrevenue earned for the three months ended March 31, 2007 decreased $9,677,000to $14,682,000, or 39.7%, on 61 homes, compared to $24,359,000 on 97 homes forthe three months ended March 31, 2006. The decrease in residential revenue earned was primarily attributable toreduced new order activity in the region during prior quarters and the Companyoffering sales incentives to increase sales and decrease its new home inventorylevels.  Customer discounts increased to11.6% of residential revenue earned for the three months ended March 31, 2007compared to 0.2% for the same period in the prior year.  The average selling price per home decreased4.2% to $241,000 for the three months ended March 31, 2007 from $251,000 forthe three months ended March 31, 2006. The decrease in average selling price per home is primarily a result ofthe increase in customer discounts.

***Midwestern Region:***

Residential revenue earned for the nine months ended March 31, 2007decreased $17,900,000 to $59,101,000, or 23.2%, on 140 homes, compared to$77,001,000 on 183 homes for the nine months ended March 31, 2006.  The decrease in residential revenue earnedprimarily was a result of reduced new order activity in the region which beganduring the fourth quarter of fiscal 2006 and has continued for the first ninemonths of fiscal 2007.  The decrease waspartially offset by an increase in the average selling price per home deliveredof 0.2% to $422,000 for the nine months ended March 31, 2007 from $421,000 forthe nine months ended March 31, 2006. Customer discounts increased to 7.5% ofresidential revenue earned for the nine months ended March 31, 2007 compared to0.8% for the same period in the prior year. The increase in customer discounts also contributed to the decrease inresidential revenue earned.

Residential revenue earned for the three months ended March 31, 2007decreased $6,645,000 to $15,289,000, or 30.3%, on 38 homes, compared to$21,934,000 on 51 homes for the three months ended March 31, 2006.  The average selling price per home delivereddecreased 6.4% to $402,000 for the three months ended March 31, 2007 comparedto $430,000 for the three months ended March 31, 2006.  The decrease in residential revenue earnedprimarily was a result of reduced new order activity in the region which beganduring the fourth quarter of fiscal 2006 and has continued for the first ninemonths of fiscal 2007.  Customerdiscounts increased to 12.2% of residential revenue earned for the three monthsended March 31, 2007 compared to 1.0% for the 

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same period in the prior year. The increase in customer discounts also contributed to the decrease inresidential revenue earned.

**LandSales**

Land sales for the nine months ended March 31, 2007 increased$15,716,000 to $17,069,000, compared to $1,353,000 for the same period in theprior year.  The increase in land saleswas primarily attributable to the sale of a parcel of land in the southernregion for approximately $13,600,000. Additionally, the Company sold several smaller parcels and scattered lotinventory across various regions.

Land sales for the three months ended March 31, 2007 was$14,864,000.  These sales were primarilyattributable to the sale of a parcel of land in the southern region forapproximately $13,600,000.  Additionally,the Company sold several smaller parcels and scattered lot inventory acrossvarious regions.  The Company recognizedno land sales for the three months ended March 31, 2006.

# **OtherIncome**

Other income consists primarily of property management fees andmortgage processing income.  Other incomefor the nine months ended March 31, 2007 increased $1,190,000 to $7,326,000, or19.4%, compared to $6,136,000 for the nine months ended March 31, 2006.  The increase in other income was primarilyattributable to increases in title insurance services, property managementrevenue and miscellaneous income, partially offset by decreases in mortgageprocessing income, during the nine months ended March 31, 2007 compared to thenine months ended March 31, 2006.  TheCompany recognized miscellaneous income of $550,000 in Other Income inconnection with the settlement of a parcel of land in the Company’s northernregion that was previously under agreement of sale.

Other income for the three months ended March 31, 2007 increased$172,000 to $2,244,000, or 8.3%, compared to $2,072,000 for the three monthsended March 31, 2006.  The increase inother income was primarily attributable to increases in income from titleinsurance services and interest income earned during the three months endedMarch 31, 2007 compared to the three months ended March 31, 2006.

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# **Costsand Expenses**

***Cost of Residential Properties:***

The cost of residential properties, including inventory impairments of$57,186,000, for the nine months ended March 31, 2007, decreased $24,502,000 to$429,496,000, or 5.4%, when compared with $453,998,000 for the nine monthsended March 31, 2006.  The decrease inthe cost of residential properties was primarily attributable to a decrease inresidential properties revenue, partially offset by inventory impairmentcharges and increases in interest and warranty costs.

The cost of residential properties, including inventory impairments of$47,336,000, for the three months ended March 31, 2007, increased $1,445,000 to$162,856,000, or 0.9%, when compared with $161,411,000 for the three monthsended March 31, 2006.  The increase inthe cost of residential properties was primarily attributable to inventoryimpairment charges and increases in interest and warranty costs, partiallyoffset by a decrease in residential properties revenue.

***Inventory Impairments:***

As a result of increased sales incentives offered during fiscal year2007, a decrease in anticipated absorption rates at various communities,increasing uncertainty with respect to the sub-prime mortgage market and increasedmortgage underwriting standards and a slower than anticipated pace of neworders, the Company recorded impairments to residential properties completed orunder construction of $6,750,000, which includes $5,000,000 relating to modelhome inventory, and land held for development or sale and improvement of$50,436,000 for the nine months ended March 31, 2007.  The impairment on model homes relates to 51model homes in three of the Company’s regions. Additionally, the Company is currently contemplating severalalternatives for selling a portion of its model home portfolio; however, theCompany can offer no assurances as to whether or when such a transaction willoccur.  The Company recognized noimpairment losses in the previous year period. The impairment losses were charged to the cost of residential propertiesand were recorded in all of our homebuilding segments, most notably withrespect to communities in the western, northern, Florida and midwesternregions, but also communities in the southern region.  The impairment losses recognized representthe amounts by which the book values of the residential properties and landheld for development and sale exceeded the estimated fair value of the assets.

As a result of increased sales incentives offered during the second andthird quarters of fiscal year 2007, a decrease in anticipated absorption ratesat various communities, increasing uncertainty in regards to the sub-primemortgage market and increased mortgage underwriting standards, as discussed above,and a slower than anticipated pace of new orders and increases in salesincentives 

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required to generate new home sales, the Company recorded impairmentsto land held for development or sale and improvement of $42,336,000 for thethree months ended March 31, 2007. Additionally, the Company recognized a $5,000,000 impairment relating tomodel home inventory.  This impairmentloss relates to 51 model homes in three of the Company’s regions.  The Company recognized no impairment lossesin the previous year period.  Theimpairment losses were charged to the cost of residential properties and wererecorded in all of our homebuilding segments, most notably with respect tocommunities in the western, northern, Florida and midwestern regions, but alsocommunities in the southern regions.

The Company will continue to assess its residential propertiescompleted or under construction and land held for development or sale andimprovement considering changing market conditions.  Continued deterioration in demand and marketconditions could result in a reevaluation of the Company’s inventory, which mayresult in additional impairments to residential properties and land held fordevelopment or sale and improvements. See Liquidity and Capital Resources below for discussion on the effectof inventory impairments on the Company’s liquidity.

***Gross Profit Margin:***

The Company’s consolidated gross profit margins were (26.4)% and 3.2%during the three and nine months ended March 31, 2007, respectively, comparedwith 22.3% and 22.6% during the same periods in fiscal 2006.

The Company’s consolidated gross profit margins, excluding inventoryimpairments of $47,336,000 and $57,186,000, were 10.4% and 16.1% during thethree and nine months ended March 31, 2007, respectively, compared with grossprofit margins of 22.3% and 22.6% for the same periods in fiscal 2006, duringwhich the Company recorded no inventory impairments.

The decrease inthe Company’s consolidated gross profit margins, excluding inventoryimpairments, was primarily attributable to reduced gross profit margins in theCompany’s northern, Florida and midwestern regions that were partially offsetby an increase in gross profit margins in the Company’s southern region.  These decreases primarily resulted fromoffering higher sales incentives in order to generate new orders and reduce newhome inventory, as well as increases in interest, the cost of land and warrantyrelated costs.

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

***Interest Included in Cost of Residential Properties:***

Interest included in the costs and expenses of residential propertieswas $3,997,000 and $11,797,000 during the three and nine months ended March 31,2007, respectively, compared with $3,218,000 and $8,648,000 during the sameperiods in fiscal 2006.  The increase ininterest included in the costs and expenses of residential properties wasattributable to increased interest rates on the Company’s variable rate debtduring fiscal 2006 and fiscal 2007 coupled with interest payments on theCompany’s subordinated notes issued in fiscal 2006.  The Company’s subordinated notes have higherinterest rates than the Company’s other debt. The interest incurred during the construction periods is capitalized toinventory and then expensed to the cost of residential properties in the periodin which the home settles.  

**Selling,General & Administrative Expenses:**

The Company’s Selling,General and Administrative Expenses include selling and advertising costs,commissions and other general and administrative costs.  For the nine months ended March 31, 2007,selling, general and administrative expenses increased $15,765,000 to$90,204,000, or 21.2%, when compared with $74,439,000 for the nine months endedMarch 31, 2006.  The increase wasattributable to increases in selling and advertising costs, abandoned projectsand severance compensation, partially offset by a decrease in commissions andother incentive compensation.  Selling,general and administrative expenses as a percentage of residential revenueearned for the nine months ended March 31, 2007 increased to 20.3% compared to12.7% in the same period in the prior fiscal year.  Selling, general and administrative expenses,excluding abandoned projects and severance compensation of $22,138,000, as apercentage of residential revenue earned for the nine months ended March 31,2007, increased to 15.3% compared to 12.5% in the same period in the priorfiscal year, during which there were abandoned project charges of $1,255,000.

For the three months endedMarch 31, 2007, selling, general and administrative expenses increased$7,920,000 to $33,784,000, or 30.6%, when compared with $25,864,000 for thethree months ended March 31, 2006.  Theincrease was attributable to increases in selling and 

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advertising costs and abandoned projects, partially offset by adecrease in commissions and other incentive compensation.  Selling, general and administrative expensesas a percentage of residential revenue earned for the three months ended March31, 2007 increased to 26.2% compared to 12.4% in the same period in the priorfiscal year.  Selling, general andadministrative expenses, excluding abandoned projects of $10,664,000, as apercentage of residential revenue earned for the three months ended March 31,2007, increased to 17.9% compared to 12.3% in the same period in the prior fiscalyear, during which there were abandoned project charges of $328,000.

***Selling and Advertising:***

For the nine months ended March 31, 2007, selling and advertising costsincreased $5,637,000 to $25,182,000, or 28.8%, when compared with the ninemonths ended March 31, 2006.  Selling andadvertising costs includes advertising, community sales office expense, modelhome expense, amortization of deferred marketing costs and other selling costs.  The increase in selling and advertising wasprimarily due to an increase in advertising costs in an effort to generatehomebuyer traffic; an increase in landscaping expense in an effort to make thecommunities more attractive to homebuyers; and an increase in the amortizationof deferred marketing costs and other sales office expenses primarilyattributable to an increase in communities open when compared with the sameperiod in the prior fiscal year.

For the three months ended March 31, 2007, selling and advertisingcosts increased $2,323,000 to $9,066,000, or 34.5%, when compared with thethree months ended March 31, 2006.  Theincrease in selling and advertising was primarily due to an increase in theamortization of deferred marketing costs and other sales office expenses, suchas advertising and maintenance, primarily attributable to an increase incommunities open when compared with the same period in the prior fiscal year.

***Commissions:***

The Company’s commission expense was $5,356,000 and $17,499,000 duringthe three and nine months ended March 31, 2007, respectively, compared with$7,216,000 and $20,722,000 during the same periods in fiscal 2006.  The Company’s commission expense as apercentage of residential revenue earned was 4.2% and 3.9% during the three andnine months ended March 31, 2007, respectively, compared with 3.5% and 3.5%during the same periods in fiscal 2006. The fiscal 2007 third quarter and year-to-date decrease in commissionexpense is related to the decrease in residential property revenue whencompared with the same periods in the prior fiscal 

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year.  The increase incommissions as a percentage of residential revenue earned is a result of addedincentives in an attempt to increase new home orders.

***General and Administrative:***

At the end of fiscal year 2006 and the beginning of fiscal year 2007,the Company’s backlog began to decline due to the unfavorable market conditionsin the homebuilding industry.  Theseunfavorable conditions have continued. In addition, the Company’s cancellations began to increase resulting inan increase in homes in inventory.  As aresult, the Company began to increase sales incentives in an effort to increasenew orders and backlog and reduce inventory. As a result of these unfavorable conditions in the homebuildingindustry, the Company also began to review its land under option and agreementsof sale to determine if the economics of the transaction were acceptable to theCompany given the state of the market in the homebuilding industry.  For those agreements deemed unfavorable, theCompany attempted to renegotiate the transaction.  If the transaction could not be renegotiatedon terms favorable to the Company, the option or agreement of sale wasterminated resulting in the abandoned project write-off described below.

The Company will continue to assess its land under option and agreementof sale considering changing market conditions. Continued deterioration in demand and market conditions could result ina reevaluation of the Company’s remaining land and lots under option andagreements of sale, which may result in additional abandoned projectwrite-offs.  See Liquidity and CapitalResources section below for discussion on the effect of abandoned projectwrite-offs on the Company’s liquidity.

For the nine months ended March 31, 2007, general and administrativecosts increased $13,351,000 to $47,523,000, or 39.1%, when compared with thenine months ended March 31, 2006.  Theincrease in general and administrative costs was primarily due to a) anincrease of $19,017,000 in abandoned project write-offs, which represents duediligence costs and deposits on land projects under option which the Companyelected not to pursue; b) an increase of $1,066,000 for severance compensation; c) an increase of $1,440,000 incharges for a supplemental executive retirement plan, which was adopted duringthe second quarter of fiscal 2006, and expenses associated with the issuance ofstock options, as a result of the addition of two senior executives; d) anincrease of $649,000 in connection with the Company’s start-up operation in itswestern region, offset by; e) a decrease in salaries, related to restructuring,and incentive compensation.

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For the three months ended March 31, 2007, general and administrativecosts increased $7,457,000 to $19,362,000, or 62.6%, when compared with thethree months ended March 31, 2006.  Theincrease in general and administrative costs was primarily due to a) anincrease of $10,336,000 in abandoned project write-offs, which represents duediligence costs and deposits on land projects under option which the Companyelected not to pursue; b) an increase of $466,000 in charges for a supplementalexecutive retirement plan, which was adopted during the second quarter offiscal 2006, and expenses associated with the issuance of stock options, as aresult of the addition of two senior executives, offset by; d) a decrease insalaries and incentive compensation.

**Impairmentof Goodwill:**

During the three and nine months ended March 31, 2007, the Companyrecorded impairment charges related to the goodwill that arose from the RealenHomes and Masterpiece Homes acquisitions. No impairment charges related to goodwill were taken during the threeand nine months ended March 31, 2006. See Note (B) to the Company’s Consolidated Financial Statements foradditional discussions regarding these acquisitions.

The impairment charges related to the goodwill that arose from theRealen Homes and Masterpiece Homes acquisitions were necessary due to slowerthan expected absorption rates in the third quarter, increased sales incentivesand lower margins, which resulted from the deteriorating market conditions inthe regions in which Realen Homes and Masterpiece Homes operate.  The deteriorating market conditions are theresult of decreased consumer demand, recent changes in the sub-prime mortgagemarket and increased underwriting standards. The recent changes in the sub-prime mortgage market are the result ofrising delinquencies and defaults by borrowers as they experience financialdifficulties due to rising interest rates. This credit deterioration has led to the bankruptcies of major sub-primemortgage lenders, an overall lending capacity decline and the tightening oflending standards.

The impairment charges taken during the third quarter are estimatesbased on the currently available projections for fiscal year 2008 and beyond,management’s best estimates of current market conditions and the fair marketvalue of assets and liabilities at March 31, 2007.  The Company will monitor these projectionsand estimates during the fourth quarter of fiscal year 2007 and make anyadjustments to the estimated charges deemed necessary at such time.

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***Realen Homes Goodwill:***

For the three and nine months ended March 31, 2007, a goodwillimpairment charge of $13,327,000 related to the goodwill arising from theCompany’s acquisition of Realen Homes was recognized.  The impairment charge was necessary due todeclining market conditions in both the midwestern and northern regions inwhich Realen Homes operated, as noted above. As a result, the operating income and cash flows for these regions wereless than expected for the three and nine moths ended March 31, 2007.  Based on these results, the Company’searnings forecast for the next eight fiscal years were revised.

***Masterpiece Homes Goodwill:***

For the three and nine months ended March 31, 2007, a goodwillimpairment charge of $3,007,000 related to the goodwill arising from theCompany’s acquisition of Masterpiece Homes was recognized.  The impairment charge was necessary due todeclining market conditions in the Florida region, as noted above.  As a result, the operating income and cashflows for Florida were less than expected for the three and nine moths endedMarch 31, 2007.  Based on these results,the Company’s earnings forecast for the next eight fiscal years were revised.

# **IncomeTax Expense / (Benefit)****:**

Income tax expense for the nine months ended March 31, 2007 decreased$58,529,000 to an income tax benefit of $34,543,000 for the nine months endedMarch 31, 2007.  The decrease in incometax expense was primarily attributable to a decrease in income from operationsbefore income taxes for the nine months ended March 31, 2007 compared to thenine months ended March 31, 2006.

Income tax expense for the three months ended March 31, 2007 decreased$40,642,000 to an income tax benefit of $32,218,000 for the three months endedMarch 31, 2007.  The decrease in incometax expense was primarily attributable to a decrease in income from operationsbefore income taxes for the three months ended March 31, 2007 compared to thethree months ended March 31, 2006.

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The Company’s consolidated tax rate fluctuates slightly depending uponthe shift in the mix of income from operations before income taxes earned ineach of the Company’s regions.  TheCompany’s effective tax rate was 38.3% and 38.4% during the three and ninemonths ended March 31, 2007, respectively, compared with 39.7% and 40.0% duringthe same periods in fiscal 2006.   TheCompany’s overall effective tax rate decreased for the three and nine monthsended March 31, 2007 compared to the three and nine months ended March 31, 2006as a result of a decrease in unfavorable permanent differences resulting fromstock option activity as well as increased tax benefits resulting from the taxdeduction on qualified production activities provided by the American JobsCreation Act of 2004.

# **NetIncome / Loss****:**

The Company reported a net loss of $55,523,000 for the nine monthsended March 31, 2007 compared with net income of $36,003,000 for the ninemonths ended March 31, 2006.  The netloss is primarily attributable to reduced gross profit margins due to increasedsales incentives in an effort to increase new home orders, inventoryimpairments of approximately $35,529,000, net of tax, an increase in abandonedproject write-offs of approximately $12,311,000, net of tax, and an increase inimpairment of goodwill of approximately $9,968,000, net of tax, for the ninemonths ended March 31, 2007.

The Company reported a net loss of $51,898,000 for the three monthsended March 31, 2007 compared with net income of $12,809,000 for the threemonths ended March 31, 2006.  The netloss is primarily attributable to reduced gross profit margins due to increasedsales incentives in an effort to increase new home orders; inventory impairmentsof approximately $29,484,000, net of tax, an increase in abandoned projectwrite-offs of approximately $6,465,000, net of tax, and an increase inimpairment of goodwill of approximately $9,968,000, net of tax, for the ninemonths ended March 31, 2007.

***Northern Region:***

The northern region net loss was $22,967,000 for the first nine monthsof fiscal 2007 compared with net income of $24,816,000 for the same period infiscal 2006.  The northern region netloss was $19,598,000 for the third quarter of fiscal 2007 compared with netincome of $9,341,000   for the sameperiod in fiscal 2006.  The decrease innet income of $28,939,000 and $47,783,000 for the three months and nine monthsended March 31, 2007 when compared with the prior year is primarily due tounfavorable market conditions in the housing industry, as described above,resulting in inventory impairments, goodwill and abandoned project charges anda decrease in 

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residential revenue earned and gross profit margin.  During the three and nine months ended March31, 2007, the Company recorded goodwill impairments, net of tax, of $4,799,000in the northern region.  In addition, dueto unfavorable market conditions and as a result of a slower than anticipatedpace of new orders and increases in sales incentives, during the three and ninemonths ended March 31, 2007, the Company recorded inventory impairments, net oftax, of $6,097,000 and $8,460,000, respectively, in the northern region.  Further, during the three and nine monthsended March 31, 2007, the Company recorded abandoned project write-offs, net oftax, of $6,301,000 and $10,257,000, respectively, which represents duediligence costs and deposits on land projects under option which the Companyelected not to pursue.  Theaforementioned items negatively impacted net income in the northern region forthe three and nine months ended March 31, 2007 when compared with the sameperiods in the prior fiscal year.

***Southern Region:***

The southern region net income was $2,349,000 for the first nine monthsof fiscal 2007 compared with $9,672,000 for the same period in fiscal2006.  The southern region net loss was$3,110,000 for the third quarter of fiscal 2007 compared with net income of$3,353,000 for the same period in the prior fiscal year.  The decrease in net income of $6,463,000 and$7,323,000 for the three months and nine months ended March 31, 2007 whencompared with the prior year is primarily due to unfavorable market conditionsin the housing industry, as described above, resulting in inventory impairmentsand abandoned project charges and a decrease in residential revenue earned andgross profit.  In addition, during thethree and nine months ended March 31, 2007, the Company recorded inventoryimpairments, net of tax, of $2,767,000 and $3,320,000, respectively, in thesouthern region.  Further, during thenine months ended March 31, 2007, the Company recorded abandoned projectwrite-offs, net of tax, of $838,000, which represents due diligence costs anddeposits on land projects under option which the Company elected not topursue.  The aforementioned itemsnegatively impacted net income in the southern region for the three and ninemonths ended March 31, 2007 when compared with the same periods in the prior fiscalyear.

***Florida Region:***

The Florida region net loss was $9,673,000 for the first nine months offiscal 2007 compared with net income of $2,542,000 for the same period infiscal 2006.  The Florida region net losswas $7,004,000 for the third quarter of fiscal 2007 compared with net income of$1,045,000 for the same period in fiscal 2006. The decrease in net income of$8,049,000 and $12,215,000 for the three months and nine months ended March 31,2007 when compared with the prior year is 

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primarily due to unfavorable market conditions in the housing industry,as described above, resulting in inventory impairments, goodwill and abandonedproject charges and a decrease in gross profit margin.   Specifically, in the Florida region, theCompany experienced high new order cancellation rates as investors continued toexit various markets in the Florida region. This resulted in an increase in new home inventory levels, causing theCompany to increase sales incentives in an effort to decrease its new homeinventory levels.  The increased salesincentives led to a decrease in gross profit margins thereby negativelyimpacting net income in the Florida region. The slower than anticipated pace of new orders and increased salesincentives resulted in an inventory impairment charge, net of tax, of$4,489,000 and $7,466,000, further reducing net income in the Florida regionfor the three and nine months ended March 31, 2007, respectively.  During the three and nine months ended March31, 2007, the Company recorded goodwill impairments, net of tax, of $1,865,000in the Florida region. The aforementioned items negatively impacted net incomein the Florida region for the three and nine months ended March 31, 2007 whencompared with the same periods in the prior fiscal year.

***Midwestern Region:***

The midwestern region net loss was $11,618,000 for the first ninemonths of fiscal 2007 compared with net income of $3,979,000 for the sameperiod in fiscal 2006.  The midwesternregion net loss was $11,834,000 for the third quarter of fiscal 2007 comparedwith net income of $950,000 for the same period in the prior fiscal year.  The decrease in net income of $12,784,000 and$15,597,000 for the three months and nine months ended March 31, 2007 whencompared with the prior year is primarily due to unfavorable market conditionsin the housing industry, as described above, resulting in inventoryimpairments, goodwill and abandoned project charges and a decrease inresidential revenue earned and gross profit margin.  During the three and nine months ended March31, 2007, the Company recorded goodwill impairments, net of tax, of $3,304,000in the midwestern region.  In addition,due to unfavorable market conditions, during the three and nine months endedMarch 31, 2007, the Company recorded inventory impairments, net of tax, of$7,206,000 and $7,359,000, respectively, in the midwestern region as a resultof a slower than anticipated pace of new orders and increases in salesincentives.  Further, during the ninemonths ended March 31, 2007, the Company recorded abandoned project write-offs,net of tax, of $1,051,000, which represents due diligence costs and deposits onland projects under option which the Company elected not to pursue.  The aforementioned items negatively impactednet income in the midwestern region for the three and nine months ended March31, 2007 when compared with the same periods in the prior fiscal year.

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***Western Region:***

Thewestern region net loss was $9,493,000 for the first nine months of fiscal 2007compared with $106,000 for the same period in fiscal 2006.  The western region net loss was $9,203,000for the third quarter of fiscal 2007 compared with $100,000 for the same periodin the prior fiscal year.  The decreasein net income of $9,103,000 and $9,387,000 for the three months and nine monthsended March 31, 2007, when compared with the prior year, is primarily due toinventory impairments recorded during the periods.  During the three and nine months ended March31, 2007, the Company recorded inventory impairments, net of tax, of $8,924,000in the western region.

**Liquidity and Capital Resources**

Onan ongoing basis, the Company requires capital to purchase and develop land, toconstruct homes, to fund related carrying costs and overhead and to fundvarious advertising and marketing programs to facilitate sales.  These expenditures include site preparation,roads, water and sewer lines, impact fees and earthwork, as well as theconstruction costs of the homes and amenities. The Company’s sources of capital include funds derived from operations,sales of assets and various borrowings, most of which are secured.  During the second quarter of fiscal year 2007,the Company repaid the $5,000,000 note outstanding in connection with theRealen Homes acquisition.  In February2007, the Company completed the sale of a parcel of land in its southern regionfor approximately $13,600,000.  With theproceeds from this transaction, the Company was able to repay outstandingobligations under its Revolving Credit Facility described below.  Additionally, the Company is currentlycontemplating several alternatives for selling a portion of its model homeportfolio; however, the Company can offer no assurances as to whether or whensuch a transaction will occur.  SeeInventory Impairments above for additional discussion regarding modelhomes.  The Company believes that cash onhand, funds generated from operations and financial commitments from availablelenders will provide sufficient capital for the Company to meet its existingoperating needs through June 30, 2007.

***RevolvingCredit Facility***

Subsequent to March 31, 2007and prior to filing the Company’s Quarterly Report on Form 10-Q for the thirdfiscal quarter of 2007, the Company entered into an amendment to the Amendedand Restated Credit Agreement described below (“Third Amendment”).  As a result, on May 8, and as of March 31,2007, the Company was in compliance with the covenants contained in the Amendedand Restated Credit Agreement, as amended. However, but for the Third Amendment, 

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the Company would have beenin violation of certain financial covenants in the Amended and Restated CreditAgreement.

During the course ofpreparing its quarterly report of Form 10-Q for the third quarter of fiscalyear 2007, the Company became aware, and on May 7 2007, determined that, absentthe Third Amendment and as a result of the Company’s inventory and goodwillimpairment charges and abandoned project charges, the Company would have beenin violation of its debt service ratio covenant, tangible net worth covenantand certain owned land to consolidated adjusted tangible net worth ratiocovenant under the Amended and Restated Credit Agreement.  A violation of any of these covenants, unlesswaived by the lenders or otherwise cured, is an event of default under theAmended and Restated Credit Agreement which would give the lenders the rightdemand immediate repayment in full of all amounts outstanding, among otherrights as described below.

As defined by the Amendedand Restated Credit Agreement described below: a) the Company’s debt serviceratio is the ratio of the Company’s adjusted EBITDA to debt service; and b) theCompany’s certain owned land to consolidated adjusted tangible net worth ratiois the ratio of the book value of all land owned by the Company not subject toa qualifying agreement of sale and on which no single-family residentialhousing facility or individual condominium dwelling has been constructed or isbeing constructed to its consolidated adjusted tangible net worth.  Each component of the debt service ratio,adjusted EBITDA and debt service, is comprised of the trailing twelve month’sactivity.  The Company’s consolidatedtangible net worth is the Company’s net worth, less intangibles, plus theamount of any unfunded liability attributable to the Company’s supplementalexecutive retirement plan (but only to the extent of any intangible assetsattributable to the plan) and the Company’s consolidated adjusted tangible networth is the Company’s consolidated tangible net worth, plus the lesser of onehalf of the principal amount of certain subordinated debt and 30% of theCompany’s consolidated tangible net worth. At March 31, 2007, the Company’s debt service ratio was 1.48-to-1.00,its tangible net worth was $229,636,000 and its ratio of certain owned land toconsolidated adjusted tangible net worth was 1.99-to-1.00.  Absent the Third Amendment, these financialmeasures would have been required to be a minimum of 1:50-to-1.00, a minimum ofapproximately $241,763,000 and a maximum of 1.90-to-1.00, respectively, as ofMarch 31, 2007.

Dueto the current unfavorable conditions in the homebuilding industry and basedupon the Company’s current projections, the Company anticipates that it isunlikely that it will meet its debt service ratio and certain owned land toconsolidated adjusted tangible net worth ratio covenant set forth in theAmended and Restated Credit Agreement, as amended, at September 30, 

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2007.  A violation of either of the describedcovenants (or any other covenant under the Amended and Restated CreditAgreement), unless waived by the lenders or otherwise cured, would constitutean event of default under the Amended and Restated Credit Facility, giving thelenders the right to terminate their obligations to make additional loansunders the Revolving Credit Facility, demand immediate repayment in full of allamounts outstanding, foreclose on collateral and exercise other rights andremedies granted under the Amended and Restated Credit Agreement and relatedloan documents and as may be available pursuant to applicable law.  The Company is currently in preliminarydiscussions with its lenders with respect to the potential violation of itsdebt service ratio and certain owned land to consolidated adjusted tangible networth ratio covenants with a view toward obtaining an amendment or waiver ofthe covenants so as to be able to be in compliance at September 30, 2007.  While the Company believes it can negotiatean acceptable resolution, there can be no assurance that the Company will beable to negotiate an amendment or waiver or that such amendment of waiver willbe on terms acceptable to the Company. If the Company is unable to obtain an amendment or waiver from itslenders, it could have a material adverse effect on the Company’s financialposition, including the Company’s ability to fund on-going operations.  A default under the Amended and Restated CreditAgreement may also prevent the Company from making payments under its trustpreferred securities.

As a result of the Third Amendment, as of March 31, 2007, the Companyhad $491,950,000 outstanding and $123,575,000 of borrowing capacity under itssecured revolving credit facility discussed below, of which $48,852,000 wasavailable to be drawn based upon the Company’s borrowing base.  In addition, approximately $34,475,000 ofletters of credit and other assurances of the availability of funds have beenprovided under the Revolving Credit Facility, as defined below.  A majority of the Company’s debt is variablerate, primarily based on 30-day LIBOR, and therefore, the Company is exposed tomarket risk in connection with interest rate changes.  At March 31, 2007, the 30-day LIBOR rate ofinterest was 5.32%.

***Terms of the Revolving CreditFacility:***

On January 24, 2006, 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 anAmended and Restated Revolving Credit and Loan Agreement (as amended, the “Amendedand Restated Credit Agreement”) for a $650,000,000 Senior Secured RevolvingCredit and Letter of Credit Facility (the “Revolving Credit Facility”) withvarious 

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banks as lenders.  The Amendedand Restated Credit Agreement was amended on November 1, 2006, February 7, 2007and May 8, 2007.

Under and subject to theterms of the Amended and Restated Credit Agreement, the borrowers may borrowand re-borrow for the purpose of financing the acquisition and development ofreal estate, the construction of homes and improvements, for investment injoint ventures, for working capital and for such other appropriate purposes asmay be approved by the lenders.  TheRevolving Credit Facility is primarily collateralized by real estate held fordevelopment and sale.  In addition, inconnection with the Amended and Restated Credit Agreement, the Company enteredinto an amended and restated guaranty agreement.

The Revolving CreditFacility has a maturity date of December 20, 2008 and may be increased to$750,000,000 under certain circumstances. Borrowings and advances under the Revolving Credit Facility bearinterest on a per annum basis equal to the LIBOR Market Index Rate plus anon-default variable spread ranging from 165 basis points to 262.5 basispoints, depending upon the Company’s leverage ratio and debt serviceratio.  During the term of the RevolvingCredit Facility, interest is payable monthly in arrears.  At March 31, 2007, the interest rate was7.695%, which included a 237.5 basis point spread.

The Company is subject tocertain financial ratios and customary covenants as set forth in the Amendedand Restated Credit Agreement.  Thesefinancial ratios and covenants include, but are not limited to, debt service;consolidated adjusted tangible net worth; leverage; investments in jointventures, land held for development and sale and speculative inventory; andlimitations on subordinated and purchase money mortgage debt.  The Amended and Restated Credit Agreement wasamended on November 1, 2006 (“First Amendment”), February 7, 2007 (“SecondAmendment”) and May 8, 2007 (“Third Amendment”).  As discussed above, the Third Amendment waseffective as of March 31, 2007 and included amendments to certain financialcovenants.

***First Amendment to the Amended and Restated Credit Agreement:***

On November 1, 2006, the Company’s Amended and Restated CreditAgreement described above was amended as follows:

·                  The required debt service ratio was reducedfrom 2.25-to-1.00 for the entire term of the revolving credit facility to2.25-to-1.00 at September 30, 2006; 2.00-to-1.00 at December 31, 2006;1.65-to-1.00 at March 31, 2007, 1.50-to-1.00 at June 30, 2007 through December31, 2007; 1.65-to-1.00 at March 31, 2008; and 1.80-to-1.00 at June 30, 2008through December 31, 

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                        2008. In addition, the Company’s debt service ratio must be greater than orequal to 1.75-to-1.00 as of the last day of at least two fiscal quarters ineach rolling period of five consecutive quarters, beginning with the period offive consecutive fiscal quarters ending September 30, 2006.  This ratio was further amended by the SecondAmendment and the Third Amendment.

·                  The definition of debt service included inthe calculation of the debt service ratio was modified to exclude the repaymentof the $5,000,000 note issued to the former owners of Realen Homes.

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

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

·                  The permitted minimum consolidated tangiblenet worth was reset to 90% of the Company’s consolidated tangible net worth atSeptember 30, 2006 plus an amount equal to 50% of the net income earned duringeach fiscal quarter that ends after September 30, 2006 and all of the netproceeds of equity securities issued by the Company after September 30,2006.  In addition, the definition ofconsolidated tangible net worth was modified to exclude any intangible assetsrecognized in connection with the Company’s supplemental executive retirementplan.  Prior to the First Amendment tothe Amended and Restated Credit Agreement, the permitted minimum consolidatedtangible net worth was defined as $180,000,000 plus an amount equal to 50% ofthe net income earned during each fiscal quarter that ended after December 31,2005 and all of the net proceeds of equity securities issued by the Companyafter December 31, 2005.  This covenantwas further amended by the Second Amendment and the Third Amendment.

·                  Therequired financial metrics that allow for the unsecured election provided underthe Revolving Credit Facility were revised to a leverage ratio that is lessthan or equal to 2.00-to-1.00; a debt service ratio that is greater than orequal to 2.25-to-1.00; and a ratio of all land 

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                        owned which is not subject to a qualifying agreement of sale and onwhich no unit has been or is being constructed to the Company’s consolidatedadjusted tangible net worth is less than or equal to 1.25-to-1.00.  If these financial metrics are in place fortwo consecutive quarters, then the Company may request a release of allcollateral under the Revolving Credit Facility.

***Second Amendment to******Amended and RestatedCredit Agreement:***

On February 7, 2007, the Company’s Amended and Restated CreditAgreement was amended as follows:

·                  Adjusted EBITDA as defined in the Amended andRestated Credit Agreement was revised for the debt service ratio covenant.  For purposes of the debt service ratiocovenant, the revised Adjusted EBITDA includes add-backs for inventoryimpairments and abandoned project write-offs, plus certain other non-cashcharges and extraordinary losses, minus certain other non-cash credits and extraordinarygains.

·                  The required debt service ratio was reducedfrom 1.65-to-1.00 to 1.50-to-1.00 at March 31, 2007.  This ratio was further amended by the ThirdAmendment.

·                  The permitted ratio of all land owned whichis not subject to a qualifying agreement of sale and on which no unit has beenor is being constructed to the  Company’sconsolidated adjusted tangible net worth was reset to 1.90-to-1.00 at December31, 2006 and 1.90-to-1.00 at March 31, 2007. This ratio was further amended by the Third Amendment.

***Third Amendment to Amended andRestated Credit Agreement:***

OnMay 8, 2007, the Company’s Amended and Restated Credit Agreement was amended asfollows:

·                  Thepermitted minimum consolidated tangible net worth covenant was reset to$205,000,000 at March 31, 2007 plus an amount equal to 50% of positive netincome earned by the Company during each fiscal quarter that ends after March31, 2007 and all of the net proceeds of equity securities issued by the Companyafter March 31, 2007.

·                  Thepermitted ratio of the book value of all land owned that is not subject to aqualifying agreement of sale and on which no unit has been or is beingconstructed to the Company’s consolidated adjusted tangible net worth was resetto 2.10-to-1.00 at March 31, 2007 through June 30, 2007.

·                  Therequired debt service ratio was reduced to 1.30-to-1.00 at March 31, 2007 andto 0.50-to-1.00 at June 30, 2007.

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·                  Forany borrowing base certificate that is dated as of a date that is on or afterMarch 31, 2007 and on or before August 31, 2007, the maximum borrowing baseavailability attributable to units not subject to a qualifying agreement ofsale was increased from 30% of the aggregate borrowing base availabilityattributable to the total units to the lesser of (a) 45% of the aggregateborrowing base availability attributable to total units, and (b) $105,000,000.

***Trust Preferred Securities:***

On November 23, 2005, the Company issued $75,000,000 of trust preferredsecurities which mature on January 30, 2036 and are callable, in whole or inpart, at par 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. Thereafter, the securities have a floating interest rate equal tothree-month LIBOR plus 360 basis points per annum, resetting quarterly.  The securities are treated as debtobligations for financial statement purposes. The Company used proceeds from the sale of these securities to repayoutstanding obligations under the Revolving Credit Facility discussed above.

In the event the Company fails to meet certain financial ratios forthree of four consecutive quarters, the applicable rate of interest will beincreased by 300 basis points until such time as the Company is in compliancewith the financial ratios, at which time the interest rate will return to itsoriginal amount.  It is an event ofdefault if the increased interest rate is in effect for four consecutiveinterest payment periods.  The occurrenceof an event of default may trigger demand for immediate payment in full of alloutstanding amounts, whereupon all outstanding amounts will be immediately dueand payable.  An uncured event of defaultunder the trust preferred securities also constitutes an event of default underthe Amended and Restated Credit Agreement. At March 31, 2007, the Company failed to meet the interest coverageratio of 1.75-to-1.00.  Under theindenture, the interest coverage ratio is defined as the Company’s adjustedEBITDA to debt service for the trailing twelve month period.  The Company also failed to meet thisfinancial ratio as of the quarter ended December 31, 2006. The Companyanticipates that it will not meet the interest coverage ratio for the quarterended June 30, 2007. As a result, the Company anticipates that it willbegin to pay the increased rate of interest under the $75,000,000 of trustpreferred securities starting with the quarterly interest payment due onOctober 30, 2007.  The Company can offerno assurance that the increased rate of interest will not be in effect for fourconsecutive interest payment periods thereby triggering an event of defaultunder the $75,000,000 of trust preferred securities.

On September 20, 2005, the Company issued $30,000,000 of trustpreferred securities which mature on September 30, 2035 and are callable, inwhole or in part, at par plus accrued interest on 

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or after September 30, 2010.  Forthe first ten years, the securities have a fixed interest rate of 8.52% perannum.  Thereafter, the securities have afloating interest rate equal to three-month LIBOR plus 380 basis points perannum, resetting quarterly.  Thesecurities are treated as debt obligations for financial statementpurposes.  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.

***Employee Retirement Plan:***

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

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

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

The Company used a 4% annual compensation increase and a 6.16% discount rate in its calculation of the present value of its projected benefit obligation at June 30, 2006.  The discount rate used represented the Moody’s AA bond rate for long-term bonds as of June 30, 2006.  The Company recognized the following costs related to the SERP for the period ended March 31, 2007:

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| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)**          | ** ** |
| Net periodic  pension cost:         |       |                             |       |                            |       |   |   |   |   |
| Service cost                        |       | $                                | 201,000    |                            | $          | 134,000 |   | $ | 572,000 |   | $ | 314,000 |   |
| Interest cost                       |       | 127,000                          |       | 77,000                          |       | 348,000 |   | 180,000 |   |
| Amortization of  prior service cost |       | 91,000                           |       | 83,000                          |       | 272,000 |   | 194,000 |   |
| Total net periodic  pension cost    |       | $                                | 419,000    |                            | $          | 294,000 |   | $ | 1,192,000 |   | $ | 688,000 |   |

 

Asthe SERP was not adopted until December 1, 2005, the Company did not recognizeany net periodic pension costs during the three months ended September 30,2005.

***Deferred Compensation Plan:***

On December 1, 2005, the Company adopted an Executive Compensation Deferral Plan (the “Deferral Plan”) effective as of June 1, 2005.  Under the Plan, participants will have the ability to defer a portion of their compensation which will be credited to an account maintained by the Company for the participant. Amounts contributed by participants are always vested. Participant deferral accounts will be maintained by the Company for recordkeeping purposes only. Participants will have no interest in any assets which may be set aside by the Company to meet its obligations under the Deferral Plan.  At March 31, 2007, the Company had obligations totaling $1,735,000 in connection with the Deferral Plan.  The deferred compensation is included in accrued expenses on the Company’s Consolidated Balance Sheet at March 31, 2007.

***Share Repurchase Program:***

InSeptember 2005, the Board of Directors authorized the repurchase of up to onemillion shares of the Company’s common stock. The repurchases, which represent up to 5% of the Company’s 18.7 millionshares of common stock currently outstanding, will be made from time to timethrough open market purchases or privately negotiated transactions at theCompany’s discretion and in accordance with the rules of the Securities andExchange Commission.  The amount andtiming of the repurchases will depend on market conditions and other factors.

TheCompany did not repurchase any shares under the share repurchase program duringthe nine months ended March 31, 2007.

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***Cash Flow Statement:***

Netcash used in operating activities for the nine months ended March 31, 2007 was$66,495,000, compared to net cash used in operating activities for the prioryear nine month period of $216,998,000. The decrease was primarily attributable to a decrease in cash used forreal estate held for development and sale relating to site improvement costs forland previously acquired and land acquisitions. Net cash used in investing activities for the nine months ended March31, 2007 was $275,000, compared to $894,000 for the prior fiscal period.  This decrease was attributable to a decreasein fixed asset additions.  Net cashprovided by financing activities for the nine months ended March 31, 2007 was$63,480,000, compared to $197,562,000 for the prior fiscal period.  The majority of this decrease relates to adecrease in net borrowings for the nine months ended March 31, 2007 whencompared with the same period in the prior fiscal year.

Cashdividends are approved on a quarterly basis by the Company’s Board ofDirectors, subject to its discretion. Net cash provided by operating activities is used to pay cash dividends.

**Lot Positions**

Asof March 31, 2007, the Company owned or controlled approximately 11,850building lots.  Included in theaforementioned lots, the Company had contracted to purchase, or has underoption, undeveloped land and improved building lots for an aggregate purchaseprice of approximately $185,887,000 that are expected to yield approximately3,520 building lots.

***Undeveloped Land Acquisitions:***

Inrecent years, the process of acquiring desirable undeveloped land has becomeextremely competitive, particularly in the northern region, mostly due to thelack of available parcels suitable for development.  In addition, expansion of regulation in thehousing industry has increased the time it takes to acquire undeveloped landwith all of the necessary governmental approvals required to beginconstruction.  Generally, the Companystructures its land acquisitions so that it has the right to cancel itsagreements to purchase undeveloped land by forfeiture of its deposit under theagreement.  At March 31, 2007, all of theCompany’s agreements to purchase undeveloped land were structured in thismanner.  For the nine months ended March31, 2007, the Company forfeited $6,900,000 of land deposits and expensed anadditional $13,372,000 of pre-acquisition costs related to the cancellation ofpurchase agreements.  The Company willcontinue to assess its investment in land deposits and costs of futuredevelopment considering changing market conditions.  Continued deterioration in demand and marketconditions could result in a decision to forfeit deposits on additional landand lot options and a reevaluation of the 

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Company’sinvestment in land deposits and costs of future development which may result inadditional write-offs. Included in the balance sheet captions “Inventory notowned — Variable Interest Entities” and “Land deposits and costs of futuredevelopment,” at March 31, 2007, the Company had $19,020,000 invested in 25parcels of undeveloped land, of which $9,993,000 was deposits, a portion ofwhich is non-refundable.  At March 31,2007, overall undeveloped parcels of land under contract had an aggregatepurchase price of approximately $138,303,000 and were expected to yieldapproximately 3,050 building lots.

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

***Improved Lot Acquisitions:***

Theprocess of acquiring improved building lots from developers is extremelycompetitive.  The Company competes withmany national homebuilders to acquire improved building lots, some of whichhave greater financial resources than the Company.  The acquisition of improved lots is usuallyless risky than the acquisition of undeveloped land as the contingencies andrisks involved in the land development process are borne by the developer.  In addition, governmental approvals aregenerally in place when the improved building lots are acquired.

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At March 31, 2007, theCompany had contracted to purchase or had under option approximately 468improved building lots for an aggregate purchase price of approximately$47,584,000.  At March 31, 2007, theCompany had $2,506,000 invested in these improved building lots, of which$2,443,000 is deposits.  There were nodeposits forfeited during the nine months ended March 31, 2007 with respect toimproved building lots.

The Company expects toutilize primarily the Revolving Credit Facility as described above as well asother existing capital resources, to finance the acquisitions of undevelopedland and improved lots described above. The Company anticipates completing a majority of these acquisitionsduring the next several years.

**Critical Accounting Policies**

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

# **Recent AccountingPronouncements**

***Accounting for financial statement misstatements:***

In September 2006, the SEC staff issued StaffAccounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 was issued in order to eliminate the diversityof practice surrounding how public companies quantify financial statementmisstatements.

Traditionally, there have been two widely-recognizedmethods for quantifying the effects of financial statement misstatements: the “roll-over”method and the “iron curtain” method. The roll-over method focuses primarily onthe impact of a misstatement on the income statement—including the reversingeffect of prior year misstatements—but its use can lead to the accumulation ofmisstatements in the balance sheet. The iron-curtain method, on the other hand,focuses primarily on the effect of correcting the period-end balance sheet withless emphasis on the reversing effects of prior year errors on the incomestatement. The Company currently uses the roll-over method for quantifyingidentified financial statement misstatements.

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In SAB 108, the SEC staff established an approach thatrequires quantification of financial statement misstatements based on theeffects of the misstatements on each of the company’s financial statements andthe related financial statement disclosures. This model is commonly referred toas a “dual approach” because it requires quantification of errors under boththe iron curtain and the roll-over methods.

SAB 108 permits existing public companies to initiallyapply its provisions either by (i) restating prior financial statements as ifthe “dual approach” had always been used or (ii) recording the cumulativeeffect of initially applying the “dual approach” as adjustments to the carryingvalues of assets and liabilities as of January 1, 2006 with an offsettingadjustment recorded to the opening balance of retained earnings. Use of the “cumulativeeffect” transition method requires detailed disclosure of the nature and amountof each individual error being corrected through the cumulative adjustment andhow and when it arose.

The Company will initially apply the provisions of SAB108 using the cumulative effect transition method in connection with thepreparation of its annual financial statements for the fiscal year ending June30, 2007.  The application of SAB 108will not have a material impact on the Company’s financial statements.

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

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS158”).   SFAS 158 requires companies torecognize the overfunded or underfunded status of a single-employer definedbenefit postretirement plan as an asset or liability in its statement offinancial position and to recognize the changes in that funded status incomprehensive income in the year in which the changes occur.  In addition, SFAS 158 requires companies tomeasure the funded status of a plan as of the date of its year-end statement offinancial position, with limited exceptions. The effective date for the adoption of SFAS 158 for publicly tradedcompanies is as of the end of the fiscal years ending after December 15,2006.  The Company will adopt SFAS 158 asof June 30, 2007 and its impact is to eliminate the Company’s intangible assetthat was recognized in connection with the application of SFAS No. 87, “Employers’Accounting for  Pensions” (“SFAS 87”),reduce the Company’s other comprehensive income, and increase the Company’saccrued expenses.

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

InDecember 2004, the FASB revised SFAS No. 123 through the issuance of SFAS No.123-R “Share Based Payment”, revised (“SFAS 123-R”).  SFAS 123-R waseffective for the Company commencing July 1, 2005.  SFAS 123-R, amongother things, eliminates the alternative to use the intrinsic value method ofaccounting for stock based compensation and requires entities to recognize thecost of employee services received in exchange for awards of equity instrumentsbased on the grant-date fair value of those awards.  The fair value basedmethod in SFAS 123-R is similar to the fair-value-based method in SFAS No. 123in most respects, subject to certain key differences.  As the Companypreviously adopted the fair value recognition provisions of SFAS No. 123prospectively for all stock awards granted, commencing on July 1, 2002, theimpact of the modified prospective adoption of SFAS 123-R did not have a significantimpact on the financial position or results of operations of the Company.  The Company amortizes compensation expense ona straight line basis over the vesting period of each option grant.  The Company utilizes the Black-Scholes optionpricing model to calculate the compensation expense associated with stockoptions.  For the nine months ended March31, 2007, the Company recorded pretax compensation expense associated withstock awards of $1,360,000.  Totalcompensation cost related to nonvested awards not yet recognized of $7,349,000will be recognized according to vesting schedules through March 2015.  For the nine months ended March 31, 2007, theCompany recognized a $1,068,000 tax benefit resulting from the exercise of250,000 non-qualified stock options by Michael T. Vesey, President and ChiefOperating Officer, Joseph A. Santangelo, former Chief Financial Officer andKyle Upper, Executive Vice President.

***Accounting for incometaxes:***

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

InDecember 2004, the FASB issued FASB Staff Position No. FAS 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deductionon Qualified Production Activities Provided by the American Jobs Creation Actof 2004” (“FSP FAS 109-1”). FSP FAS 109-1 clarifies that the deduction will be treatedas a “special deduction” as described in Statement of Financial AccountingStandards No. 109, “Accounting for Income Taxes.” As such, the specialdeduction has no effect on deferred tax assets and liabilities existing at thedate of 

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enactment.The impact of the deduction will be reported in the period in which thededuction is claimed.   The Company files a consolidated return on acalendar year.  Accordingly, the Company began reflecting the specialdeduction with respect to its operations effective January 1, 2005.  Itsimpact was to lower the effective tax provision in the periods in which thededuction was claimed and that this benefit will increase as the deduction isphased in under the statute.

***New AccountingPronouncements:***

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115” (“SFAS 159”).  SFAS159 provides an entity with the option to measure many financial instrumentsand certain other items at fair value. Under the fair value option, an entity will report unrealized gains andlosses on those items at each subsequent reporting date.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007, which for the Company is the fiscal yearending June 30, 2009.  We are currentlyevaluating this standard and have not yet determined what impact, if any, thefair value option would have on our consolidated financial statements.

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

Inaddition to historical information, this report contains statements relating tofuture events or our future results. These statements are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), and are subject to theSafe Harbor provisions created by statute. Generally words such as “may”, “will”, “should”, “could”, “anticipate”, “expect”,“intend”, “estimate”, “plan”, “continue”, and “believe” or the negative of orother variation on these and other similar expressions identify forward-lookingstatements.  These forward-lookingstatements including, without limitation, statements with respect to potentialliabilities relating to litigation currently pending against us, anticipatedreductions in inventory, contemplated sales of model homes, market conditions,anticipated future dividends, anticipated delivery of homes in backlog,expected warranty costs, future land acquisitions, the direction of the housingmarket and the availability of sufficient capital for us to meet our operatingneeds, are made only 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 additionalinformation on some potential risks, see the Company’s Annual Report on Form10-K for the fiscal year ended June 30, 2006.

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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.

Manyfactors could cause our actual consolidated results to differ materially fromthose expressed in any 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, resultsof operations or cash flows of the Company, due to adverse changes in financialand commodity market prices and interest rates. The Company’s principal market risk exposure continues to be interestrate risk.  A majority of the Company’sdebt is variable based on LIBOR or the prime rate, and, therefore, affected bychanges in market interest rates.  Basedon current operations, an increase or decrease in interest rates of 100 basispoints will result in a corresponding increase or decrease in cost of sales andinterest charges incurred by the Company of approximately $4,920,000 in afiscal year, a portion of which will be capitalized and included in cost ofsales 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 orcash flows of the Company.  Generally,the Company has been able to recover any increased costs of borrowing throughincreased selling prices; however, there is no assurance the Company will beable to continue to increase selling prices to cover the effects of anyincrease in near-term interest rates.

Changesin the prices of commodities that are a significant component of homeconstruction costs, particularly lumber, may result in unexpected short termincreases in construction costs.  Sincethe sales price of the Company’s homes is fixed at the time the buyer entersinto a contract to acquire a home and because the Company generally contractsto sell its homes before construction begins, any increase in costs in excessof those anticipated may result in gross margins lower than anticipated for thehomes 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.  These contracts areentered into for the purpose of acquiring building materials and not fortrading purposes.

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

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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, Chief Financial Officer andChief Accounting Officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport.  Based upon that evaluation, theChief Executive Officer, President and Chief Operating Officer, Chief FinancialOfficer and Chief Accounting Officer concluded that the Company’s disclosurecontrols and procedures are functioning effectively to provide reasonableassurance that information required to be disclosed by the Company in reportsfiled under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Security andExchange Commission’s rules and forms and also to ensure information requiredto be disclosed is accumulated and communicated to management.  There has been no change in the Company’sinternal control over financial reporting during the Company’s most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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**PART II.  OTHER INFORMATION**

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

Set forth below is a discussion ofthe material changes in our risk factors as previously disclosed inItem 1A of Part I of our Annual Report on Form 10-K for the fiscalyear ended June 30, 2006 (“2006 Form 10-K”).

The information presented belowupdates, and should be read in conjunction with, the risk factors and other informationdisclosed in our 2006 Form 10-K.

***Deteriorationof market conditions in the homebuilding industry and customer demand couldadversely affect our results of operations.***

During the three and nine monthsended March 31, 2007, we decided not to pursue development of certain parcelsof land on which we had option agreements and the acquisition of certain lotson which we had options resulting in write-offs of land deposits andpre-acquisition costs.  In addition, werecorded significant impairments to residential properties completed or underconstruction and land held for development or sale and improvements.  The impairments were primarily due to aslower than anticipated pace of new orders and increases in sales incentivesrequired to generate new home orders. These write-offs and impairments adversely affected our results ofoperations during the three and nine months ended March 31, 2007.  If market conditions in the homebuildingindustry or customer demand continue to deteriorate or do not improve in futureperiods, we may decide not to pursue development of additional parcels of landor the acquisition of additional lots on which we have option agreements, andthe value of existing land holdings and residential properties may continue todecline.  This would lead to furtherwrite-offs of deposits and pre-acquisition costs and impairments to residentialproperties and land held for development or sale and improvements.

***We believe it is unlikelythat we will be able to satisfy certain financial covenants in our Amended andRestated Credit Agreement as of September 30, 2007.  If we***

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*** are not able to satisfy these covenants,obtain waivers of or amendments to the covenants, or obtain the requiredamendment, or negotiate a new facility without these terms, our lenders coulddeclare a default and demand repayment.***

The Third Amendment to the Amendedand Restated Credit Agreement amended the debt service ratio covenant andcertain owned land to consolidated adjusted tangible net worth ratio covenantas of March 31, 2007 and June 30, 2007, but did not adjust these financialcovenants as of September 30, 2007 or later.

Based upon our current projections,we have determined it is unlikely that we will meet the financial covenantsdescribed above at September 30, 2007.  Aviolation of any of the financial covenants described, unless waived by thelenders or otherwise cured, would constitute an event of default under theAmended and Restated Credit Agreement, giving the lenders the right toterminate their obligations to make additional loans under the Amended andRestated Credit Agreement, demand immediate payment in full of all amountsoutstanding, foreclose on collateral and exercise other rights and remediesgranted under the Amended and Restated Credit Agreement and related loandocuments and as may be available pursuant to applicable law.  If our lenders declare a default, there is noassurance that we would be able to obtain financing to pay amounts owed underthe Amended and Restated Credit Agreement or to continue to fund on-goingoperations.  A default under our Amendedand Restated Credit Agreement may also prevent us from making payments underour trust preferred securities.

**Item 6.**                          Exhibits.

10.1                           Second Amendment to the Amended and RestatedRevolving Credit Loan Agreement, dated February 7, 2007 (incorporated byreference to Exhibit 10.4 to the Company’s Form 10-Q filed with the Securitiesand Exchange Commission on February 9, 2007).

10.2*                    Third Amendment to the Amended and RestatedRevolving Credit Loan Agreement, dated May 8, 2007.

10.3**             Employment Agreement with Garry P. Herdler,dated February 27, 2007 (incorporated by reference to Exhibit 10.1 to theCompany’s Form 8-K filed with the Securities and Exchange Commission on March 5,2007).

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

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

31.3*                    Certification of Garry P. Herdler pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

31.4*                    Certification of James W. Thompson pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

32.3*                    Certification of Garry P. Herdler pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

32.4*                    Certification of James W. Thompson pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

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* Exhibits filed herewithelectronically.

** Management contract orcompensatory plan or arrangement.

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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 10, 2007 | Michael T. Vesey                                      |
|         | Michael T. Vesey                                      |
|         | President and  Chief Operating Officer                |
|         |                                                  |
|         |                                                  |
| May 10, 2007 | Garry P. Herdler                                      |
|         | Garry P. Herdler                                      |
|         | Executive Vice  President and Chief Financial Officer |
|         |                                                  |
|         |                                                  |
| May 10, 2007 | James W. Thompson                                     |
|         | James W.  Thompson                                    |
|         | Chief Accounting  Officer                             |

 

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**EXHIBIT INDEX**

10.2*                    ThirdAmendment to the Amended and Restated Revolving Credit Loan Agreement, datedMay 8, 2007.

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

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

31.3*                    Certification of Garry P. Herdler pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

31.4*                    Certification of James W. Thompson pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

32.3*                    Certification of Garry P. Herdler pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

32.4*                    Certification of James W. Thompson pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

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* Exhibits filed herewith electronically.

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