UNITED
      STATES


SECURITIES
      AND
      EXCHANGE COMMISSION


Washington,
      D.C.
      20549





**FORM
      10-Q**





þ **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**





For
      the quarterly
      period ended March 31, 2007





**OR**





 ̈ **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**





For
      the transition
      period from _________ to _________








Commission
      file
      number **001-33192**











*www.bmhc.com*


**Building
        Materials Holding Corporation**





**Delaware**
            
            **91-1834269**(State
                of
                incorporation)
            
            (I.R.S.
                Employer Identification No.)





**Four
      Embarcadero Center, Suite 3200, San Francisco, CA 94111**





**(415)
      627-9100**





**N/A**


(Former
      name,
      former address and former fiscal year, if changed since last
      report)





Indicate
      by check
      mark whether the registrant (1) has filed all reports required to be filed
      by
      Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
      12 months (or for such shorter period that the registrant was required to file
      such reports), and (2) has been subject to such filing requirements for the
      past
      90 days.


Yes þ  No  ̈





Indicate
      by check
      mark whether the registrant is a large accelerated filer, an accelerated filer,
      or a non-accelerated filer.


Large
      accelerated
      filer þ  Accelerated
      filer  ̈ Non-accelerated filer  ̈





Indicate
      by check
      mark whether the registrant is a shell company (as defined in Rule 12b-2 of
      the
      Exchange Act).


Yes  ̈  No þ





The
      number of
      shares outstanding of the registrant’s common stock as of May 4, 2007 was
      29,387,326.









BUILDING
      MATERIALS
      HOLDING CORPORATION





**FORM
      10-Q**





For
      the Period
      Ended March 31, 2007





**INDEX**





**Page
                Number****PART
                I - FINANCIAL INFORMATION**
            2**Item
                1**-
                Financial
                Statements (unaudited)
            2Consolidated
                Statements of Operations for the Three Months
                Ended March 31, 2007 and 2006
            2Consolidated
                Balance Sheets as of March 31, 2007 and
                December 31, 2006
            3Consolidated
                Statements of Shareholders’ Equity
                for the Three Months Ended March 31, 2007
              and
                2006
            4Consolidated
                Statements of Cash Flows for the Three
                Months Ended March 31, 2007 and 2006
            5Notes
                to Consolidated Financial
                Statements
            6**Item
                2**-
                Management's Discussion and Analysis of Financial Condition and Results
                of
                Operations
            33**Item
                3**-
                Quantitative and Qualitative Disclosures about Market
                Risk
            46**Item
                4**- Controls
                and Procedures
            47**PART
                II - OTHER INFORMATION**
            48**Item
                1**- Legal
                Proceedings
            48**Item
                1A**- Risk
                Factors
            49**Item
                2**-
                Unregistered Sales of Equity Securities and Use of
                Proceeds
            53**Item
                3**- Defaults
                Upon Senior Securities
            54**Item
                4**- Submission
                of Matters to a Vote of Security Holders
            55**Item
                5**- Other
                Information
            56**Item
                6**-
                Exhibits
            57**SIGNATURES**
            58




1




**Item
      1 - Financial Statements**





**Building
      Materials Holding Corporation**


**Consolidated
      Statements of Operations**


**(thousands,
      except per share data)**


**(unaudited)**




**Three
                Months Ended**
              **March
                31****2007**
            
            **2006****Sales**Construction
                services
            
            **$**
            **319,008**
            
            $
            549,058Building
                products
            
            
            **250,096**
            
            
            335,499**Total
                sales**
            
            
            **569,104**
            
            
            884,557**Costs
                and operating expenses**Cost
                of goods soldConstruction
                services
            
            
            **275,402**
            
            
            454,131Building
                products
            
            
            **181,078**
            
            
            247,226Selling,
                general and administrative
              expenses
            
            
            **113,822**
            
            
            130,601Other
                income, net
            
            
            **(2,158**
            **)**
            
            (1,787
            )Total
                costs and operating expenses
            
            
            **568,144**
            
            
            830,171**Income
                from operations**
            
            
            **960**
            
            
            54,386Interest
                expense
            
            
            **8,218**
            
            
            5,590(Loss)
                income
                before income taxes
              and
                minority interests
            
            
            **(7,258**
            **)**
            
            48,796Income
                tax
                benefit (expense)
            
            
            **2,668**
            
            
            (17,810
            )Minority
                interests income, net of income taxes
            
            
            **(376**
            **)**
            
            (2,917
            )**Net
                (loss) income**
            
            
            **$(4,966**
            **)**
            
            $28,069**Net
                (loss) income per share:**Basic
            
            
            **$(0.17**
            **)**
            
            $0.98Diluted
            
            
            **$(0.17**
            **)**
            
            $0.95





The
      accompanying
      notes are an integral part of these consolidated financial
      statements.





2




**Building
      Materials Holding Corporation**


**Consolidated
      Balance Sheets**


**(thousands,
      except per share data)**


**(unaudited)**




**March****31**
            
            
            **December****31**
            
            
            
            **March****31**
            
            
            **December****31****2007**
            
            
            **2006**
            
            
            
            **2007**
            
            
            **2006****Assets**
            
            
            
            
            
            
            **Liabilities,
                Minority Interests and Shareholders’ Equity**Cash
                and cash
                equivalents
            **$**
            **27,901**
            
            $
            74,272Marketable
                securities
            
            **5,806**
            
            
            4,337
            
            Accounts
                payable
            **$**
            **113,922**
            
            $
            110,961Receivables,
                net of allowances
            
            
            
            
            
            
            Accrued
                compensation
            
            **35,080**
            
            
            48,552of
                $4,948 and $4,487
            
            **288,578**
            
            
            279,829
            
            Insurance
                deductible reserves
            
            **26,731**
            
            
            24,931Inventory
            
            **144,361**
            
            
            144,366
            
            Other
                accrued
                liabilities
            
            **28,140**
            
            
            103,402Unbilled
                receivables
            
            **57,331**
            
            
            43,527
            
            Billings
                  in
                  excess of costs and estimatedDeferred
                income taxes
            
            **7,097**
            
            
            8,914
            
            earnings
            
            **27,221**
            
            
            27,622Prepaid
                expenses and other
            
            **18,541**
            
            
            11,166
            
            Current
                portion of long-term debt
            
            **5,072**
            
            
            8,143**Current
                assets**
            
            **549,615**
            
            
            566,411
            
            **Current
                liabilities**
            
            **236,166**
            
            
            323,611Property
                and
                equipment
            
            
            
            
            
            
            Deferred
                income taxes
            
            **8,591**
            
            
            9,138Land
            
            **67,539**
            
            
            62,367
            
            Insurance
                deductible reserves
            
            **27,139**
            
            
            25,841Buildings
                and improvements
            
            **143,410**
            
            
            139,602
            
            Long-term
                debt
            
            **427,009**
            
            
            349,161Equipment
            
            **189,538**
            
            
            188,285
            
            Other
                long-term liabilities
            
            **36,015**
            
            
            41,390Construction
                in progress
            
            **4,420**
            
            
            8,579Accumulated
                depreciation
            
            **(145,394)**
            
            
            (139,342)
            
            Minority
                interests
            
            **7,004**
            
            
            7,141Marketable
                securities
            
            **51,863**
            
            
            53,513Deferred
                loan
                costs
            
            **5,200**
            
            
            5,481
            
            Commitments
                and contingent liabilities
            
            **—**
            
            
            —Other
                long-term assets
            
            **30,539**
            
            
            27,223Other
                intangibles, net
            
            **105,447**
            
            
            108,792
            
            Shareholders’
                equityGoodwill
            
            **306,479**
            
            
            308,000
            
            Common
                shares, $0.001 par value:**$**
            **1,308,656**
            
            $
            1,328,911
            
            authorized
                50 million; issued andoutstanding
                29.3 and 29.2 millionshares
            
            **29**
            
            
            29Additional
                paid-in capital
            
            **156,794**
            
            
            154,405Retained
                earnings
            
            **411,043**
            
            
            418,927Accumulated
                other comprehensive loss, net
            
            **(1,134)**
            
            
            (732)**Shareholders’
                equity**
            
            **566,732**
            
            
            572,629**$**
            **1,308,656**
            
            $
            1,328,911





The
      accompanying
      notes are an integral part of these consolidated financial
      statements.




3




**Building
      Materials Holding
      Corporation**


**Consolidated
      Statements of Shareholders’
Equity**


**(thousands)**




**Accumulated
                Other**
              **Comprehensive
                Income (Loss)****Net
                Unrealized Gain (Loss) From****Common
                Shares**
            
            
            **Additional**
            
            
            
            
            
            
            
            
            **Interest
                Rate****Shares**
            
            
            **Amount**
            
            
            **Paid-In
                Capital**
            
            
            **Unearned
                Compensation**
            
            
            **Retained
                Earnings**
            
            
            **Swap
                Contracts**
            
            
            **Marketable
                Securities**
            
            
            **Total****Balance
                at December 31, 2005**
            
            
            **28,759**
            
            **$**
            **29**
            ****
            **$**
            **143,780**
            ****
            **$**
            **(2,698**
            **)**
            **$**
            **328,463**
            ****
            **$**
            **736**
            
            **$**
            **(249**
            **)**
            **$**
            **470,061**Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            28,069
            
            
            —
            
            
            —
            
            
            28,069Unrealized
                gain
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,440
            
            
            —
            
            
            1,440Taxes
                for unrealized gain
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (554
            )
            
            —
            
            
            (554
            )Unrealized
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (103
            )
            
            (103
            )Tax
                benefit for unrealized loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            92
            
            
            92**Comprehensive
                income**
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **28,944**Reclassify
                unearned compensation -
              restricted
                shares
            
            
            —
            
            
            —
            
            
            (2,698
            )
            
            2,698
            
            
            —
            
            
            —
            
            
            —
            
            
            —Earned
                compensation - options
            
            
            —
            
            
            —
            
            
            2,198
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,198Earned
                compensation - restricted shares
            
            
            —
            
            
            —
            
            
            723
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            723Issuance
                of restricted shares
            
            
            138
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Share
                options exercised
            
            
            32
            
            
            —
            
            
            291
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            291Tax
                benefit for share options exercised
            
            
            —
            
            
            —
            
            
            328
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            328Shares
                issued from Employee Plan
            
            
            11
            
            
            —
            
            
            400
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            400Cash
                dividends on common shares
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,894
            )
            
            —
            
            
            —
            
            
            (2,894
            )**Balance
                at March 31, 2006**
            
            
            **28,940**
            
            **$**
            **29**
            ****
            **$**
            **145,022**
            ****
            **$**
            **—**
            ****
            **$**
            **353,638**
            ****
            **$**
            **1,622**
            
            **$**
            **(260**
            **)**
            **$**
            **500,051****Balance
                at December 31, 2006**
            
            
            **29,153**
            
            **$**
            **29**
            ****
            **$**
            **154,405**
            ****
            **$**
            **—**
            ****
            **$**
            **418,927**
            ****
            **$**
            **(548**
            **)**
            **$**
            **(184**
            **)**
            **$**
            **572,629**Net
                loss
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **(4,966**
            **)**
            
            **—**
            
            
            **—**
            
            
            **(4,966**
            **)**Unrealized
                loss
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **(851**
            **)**
            
            **—**
            
            
            **(851**
            **)**Tax
                benefit for unrealized loss
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **321**
            
            
            **—**
            
            
            **321**Unrealized
                gain
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **193**
            
            
            **193**Taxes
                for unrealized gain
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **(65**
            **)**
            
            **(65**
            **)****Comprehensive
                loss**
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **(5,368**
            **)**Earned
                compensation - options
            
            
            **—**
            
            
            **—**
            
            
            **1,254**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **1,254**Earned
                compensation - restricted shares
            
            
            **—**
            
            
            **—**
            
            
            **796**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **796**Issuance
                of restricted shares
            
            
            **110**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**Share
                options exercised
            
            
            **5**
            
            
            **—**
            
            
            **35**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **35**Tax
                benefit for share options exercised
            
            
            **—**
            
            
            **—**
            
            
            **28**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **28**Shares
                issued from Employee Plan
            
            
            **13**
            
            
            **—**
            
            
            **276**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **276**Cash
                dividends on common shares
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **(2,918**
            **)**
            
            **—**
            
            
            **—**
            
            
            **(2,918**
            **)****Balance
                at March 31, 2007**
            
            
            **29,281**
            
            **$**
            **29**
            ****
            **$**
            **156,794**
            ****
            **$**
            **—**
            ****
            **$**
            **411,043**
            ****
            **$**
            **(1,078**
            **)**
            **$**
            **(56**
            **)**
            **$**
            **566,732**





The
      accompanying
      notes are an integral part of these consolidated financial
      statements.




4




**Building
      Materials Holding Corporation**


**Consolidated
      Statements of Cash Flows**


**(thousands)**




**Three
                Months Ended**
              **March
                31****Operating
                Activities**
            
            
            **2007**
            
            
            **2006**Net
                (loss) income
            
            **$**
            **(4,966**
            **)**
            $
            28,069Items
                in net (loss) income not using (providing) cash:Minority
                interests, net
            
            
            **376**
            
            
            2,917Depreciation
                and amortization
            
            
            **12,747**
            
            
            10,182Deferred
                loan cost amortization
            
            
            **281**
            
            
            208Share-based
                compensation
            
            
            **2,113**
            
            
            2,980(Gain)
                loss on sale of assets, net
            
            
            **(363**
            **)**
            
            27Realized
                gain on marketable securities
            
            
            **(11**
            **)**
            
            —Deferred
                income taxes
            
            
            **2,443**
            
            
            (208
            )Changes
                in assets and liabilities, net of effects of acquisitions of business
                units:Receivables,
                net
            
            
            **(8,749**
            **)**
            
            (19,399
            )Inventory
            
            
            **5**
            
            
            (15,096
            )Unbilled
                receivables
            
            
            **(13,804**
            **)**
            
            (22,510
            )Prepaid
                expenses and other current assets
            
            
            **(7,386**
            **)**
            
            (2,257
            )Accounts
                payable
            
            
            **15,831**
            
            
            35,094Accrued
                compensation
            
            
            **(13,494**
            **)**
            
            (15,745
            )Insurance
                deductible reserves
            
            
            **1,800**
            
            
            2,944Other
                accrued liabilities
            
            
            **(14,675**
            **)**
            
            16,019Billings
                in excess of costs and estimated earnings
            
            
            **(401**
            **)**
            
            (4,425
            )Other
                long-term assets and liabilities
            
            
            **(10,057**
            **)**
            
            (4,068
            )Other,
                net
            
            
            **256**
            
            
            (370
            )**Cash
                flows (used) provided by operating activities**
            
            
            **(38,054**
            **)**
            
            14,362**Investing
                Activities**Purchases
                of property and equipment
            
            
            **(8,651**
            **)**
            
            (10,409
            )Acquisitions
                and investments in businesses, net of cash acquired
            
            
            **(61,596**
            **)**
            
            (80,005
            )Proceeds
                from dispositions of property and equipment
            
            
            **1,187**
            
            
            425Purchase
                of marketable securities
            
            
            **(8,739**
            **)**
            
            (834
            )Proceeds
                from sales of marketable securities
            
            
            **9,150**
            
            
            581Other,
                net
            
            
            **(463**
            **)**
            
            (1,777
            )**Cash
                flows used by investing activities**
            
            
            **(69,112**
            **)**
            
            (92,019
            )**Financing
                Activities**Net
                borrowings under revolver
            
            
            **79,200**
            
            
            80,700Principal
                payments on term notes
            
            
            **(875**
            **)**
            
            (313
            )Net
                payments on other notes
            
            
            **(3,548**
            **)**
            
            (688
            )(Decrease)
                increase in book overdrafts
            
            
            **(10,359**
            **)**
            
            329Proceeds
                from share options exercised
            
            
            **35**
            
            
            291Tax
                benefit for share options
            
            
            **28**
            
            
            328Dividends
                paid
            
            
            **(2,915**
            **)**
            
            (2,158
            )Distributions
                to minority interests
            
            
            **(1,003**
            **)**
            
            (245
            )Other,
                net
            
            
            **232**
            
            
            (395
            )**Cash
                flows provided by financing activities**
            
            
            **60,795**
            
            
            77,849**(Decrease)
                Increase in Cash and Cash Equivalents**
            
            
            **(46,371**
            **)**
            
            192Cash
                and cash equivalents, beginning of period
            
            
            **74,272**
            
            
            30,078Cash
                and cash equivalents, end of period
            
            **$**
            **27,901**
            
            $
            30,270**Supplemental
                Disclosure of Cash Flow Information**Accrued
                but unpaid dividends
            
            **$**
            **2,918**
            
            $
            2,894Cash
                paid for interest
            
            **$**
            **7,819**
            
            $
            4,923Cash
                paid for income taxes
            
            **$**
            **1,820**
            
            $
            13,146**Supplemental
                Disclosure of Investing Activities**Fair
                value of assets acquired
            
            **$**
            **715**
            
            $
            131,312Liabilities
                assumed
            
            **$**
            **100**
            
            $
            62,637Cash
                paid for acquisitions made this period
            
            **$**
            **615**
            
            $
            68,675Cash
                paid for acquisitions made in prior period
            
            **$**
            **60,981**
            
            $
            11,330





The
      accompanying
      notes are an integral part of these consolidated financial
      statements.




5




***Notes
      to Consolidated Financial Statements***





***1.***  ***Summary
      of Significant Accounting Policies***





*Basis
      of Presentation*


These
      consolidated
      financial statements have been prepared pursuant to the rules and regulations
      of
      the Securities and Exchange Commission. Certain information and disclosures
      normally included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States have been condensed or
      omitted pursuant to those rules and regulations. These consolidated financial
      statements should be read in conjunction with the consolidated financial
      statements and the accompanying notes included in our most recent Annual Report
      on Form 10-K.





These
      consolidated
      financial statements have not been audited by independent registered public
      accountants. However, in the opinion of management, all adjustments necessary,
      including those of a normal and recurring nature, to present fairly the results
      for the periods have been included. The preparation of these consolidated
      financial statements required estimates and assumptions. Actual results may
      differ from those estimates.





*Nature
      of Operations*


Building
      Materials
      Holding Corporation (BMHC) provides construction services and building products
      to professional homebuilders and contractors in western and southern regions
      of
      the United States. We operate through two separately managed and reportable
      business segments: SelectBuild and BMC West. SelectBuild provides framing and
      other construction services to high-volume homebuilders in 16 of the top 25
      single-family construction markets. BMC West distributes building materials,
      manufactures building components (millwork, floor and roof trusses and wall
      panels) and provides construction services to professional builders and
      contractors through a network of 41 distribution facilities and 60 manufacturing
      facilities.





*Principles
      of Consolidation*


The
      consolidated
      financial statements include the accounts of BMHC and its subsidiaries. All
      significant intercompany balances and transactions are eliminated.





*Use
      of Estimates*


The
      preparation of
      financial statements in conformity with U.S. generally accepted accounting
      principles requires management to make estimates and assumptions that affect
      the
      reported amounts of assets and liabilities and contingent assets and liabilities
      at the date of the financial statements as well as the reported amounts of
      sales
      and expenses during the reporting period. Actual amounts may differ materially
      from those estimates. The following critical accounting estimates require our
      subjective and complex judgment often as a result of the need to estimate
      matters that are inherently uncertain:





*·*  *Revenue
      Recognition for Construction Services*


The
      percentage-of-completion method is used to recognize revenue for construction
      services. This method requires the use of various estimates, including among
      others, the extent of progress towards completion, contract revenues and
      contract completion costs. Periodic estimates of our progress towards completion
      are made based on a comparison of labor costs incurred to date with total
      estimated contract costs for labor. Contract revenues and contract costs to
      be
      recognized are dependent on the accuracy of estimates, including quantities
      of
      materials, labor productivity and other cost estimates. We have a history of
      making reasonable estimates of the extent of progress towards completion,
      contract revenues and contract completion costs. However, due to uncertainties
      inherent in the estimation process, it is possible that actual completion costs
      may vary from estimates. Revisions of contract revenues and cost estimates
      as
      well as provisions for estimated losses on uncompleted contracts are recognized
      in the period such revisions are known.




6




*·* *Estimated
      Losses on Uncompleted Contracts and Changes in Contract
      Estimates*


Estimated
      losses on
      uncompleted contracts and changes in contract estimates are established by
      assessing estimated costs to complete, change orders and claims for uncompleted
      contracts. Revisions of estimated losses are recognized in the period such
      revisions are known.





*·*  *Goodwill*


Goodwill
      represents
      the excess of purchase price over the fair values of net tangible and
      identifiable intangible assets of acquired businesses. An annual assessment
      for
      impairment is completed in the fourth quarter and whenever events and
      circumstances indicate the carrying amount may not be recoverable. An impairment
      is recognized if the carrying amount is more than the estimated future operating
      cash flows as measured by fair value techniques.





*·* *Insurance
      Deductible Reserves*


The
      estimated cost
      of workers’ compensation, general liability and automobile claims is determined
      by actuarial methods. Claims in excess of insurance deductibles are insured
      with
      third-party insurance carriers. Reserves for deductible amounts are
      recognized based on the estimated costs of these claims as limited by
      the provisions of the applicable insurance policies. Revisions of estimated
      claims are recognized in the period such revisions are known.





*·*  *Warranties*


The
      estimated cost
      of warranties for certain construction services is based on the nature and
      frequency of claims, anticipated claims and cost per claim. Claims in excess
      of
      insurance deductibles are insured with third-party insurance carriers. Estimated
      costs for warranties are recognized when the revenue associated with the service
      is recognized. Revisions of estimated warranties are recognized in the period
      such revisions are known.





*·*  *Share-based
      Compensation*


Our
      estimates of
      the fair values of our share-based payment transactions are based on the
      modified Black-Scholes-Merton model. To meet the fair value measurement
      objective, we are required to develop estimates regarding expected exercise
      patterns, share price volatility, forfeiture rates, risk-free interest rate
      and
      dividend yield. These assumptions are based principally on historical
      experience. When circumstances indicate the availability of new or different
      information that would be useful in estimating these assumptions, revisions
      will
      be made and recognized in the period such revisions are known. Due to
      uncertainties inherent in these assumptions, it is possible that actual
      share-based compensation may vary from this estimate.




7




*Cash
      and Cash Equivalents*


Cash
      and cash
      equivalents consist of short-term investments that have a maturity of 3 months
      or less at the date of purchase. Cash and cash equivalents were $27.9 million
      at
      March 31, 2007 and $74.3 million at December 31, 2006.





*Receivables*


Receivables
      consist
      primarily of amounts due from customers and are net of an allowance for doubtful
      accounts. The allowance for doubtful accounts reflects our best estimate of
      probable losses inherent in the accounts receivable balance. We determine the
      allowance based on known troubled accounts, historical experience and other
      available evidence.





*Inventory
      Valuation*


Inventory
      consists
      principally of building materials purchased for resale and is valued at the
      lower of average cost or market. We participate in vendor rebate programs under
      which rebates are earned by attaining certain purchase volumes. Volume rebates
      are accrued as earned. These volume rebates are recorded as a reduction in
      inventory and recognized in cost of goods sold when the related product is
      sold.





*Unbilled
      Receivables and Billings in Excess of Costs and Estimated
      Earnings*


The
      percentage-of-completion method results in recognizing costs incurred and
      estimated revenues on uncompleted contracts. Unbilled receivables represent
      revenues recognized for construction services performed, however not yet billed.
      Billings in excess of costs and estimated earnings represent billings made
      in
      excess of estimated revenues recognized. These billings are deferred until
      the
      actual progress towards completion indicates recognition is appropriate. Costs
      include direct labor and materials as well as equipment costs related to
      contract performance.





*Property
      and Equipment*


Property
      and
      equipment are recorded at cost. Cost includes expenditures for major
      improvements and replacements that extend useful life. Certain costs of software
      are capitalized provided those costs are not research and development and
      certain other criteria are met. Capitalized interest was not significant.
      Expenditures for other maintenance and repairs are expensed as incurred. Gains
      and losses from sales and retirements are included in income as they occur.
      Depreciation is calculated using the straight-line method over the economic
      useful lives of the assets. The estimated useful lives of depreciable assets
      are
      generally:


·  10
      to 30 years for
      buildings and improvements


·  7
      to 10 years for
      machinery and fixtures


·  3
      to 10 years for
      handling and delivery equipment


·  3
      to 10 years for
      software development costs





In
      order to improve financial returns, we periodically evaluate our investments
      in
      property and equipment. As a result, property and equipment may be consolidated,
      leased or sold. We recognized a gain of $0.4 million for the period ended March
      31, 2007, a loss of less than $0.1 million for the period ended March 31, 2006
      and a loss of $0.2 million in 2006 from the sales of property and equipment.




In
        April 2007, BMC West sold certain real estate as a result of a relocation
        of our
        building materials operation in Austin, Texas. The sale is expected to result
        in
        a gain after tax of approximately $5.5 million in the second
        quarter.


*Long-lived
      Assets*


Long-lived
      assets
      such as property, equipment and intangibles with useful lives are evaluated
      for
      impairment whenever events or changes in circumstances indicate the carrying
      amount may not be recoverable. An impairment is recognized if the carrying
      amount exceeds its fair value and when the carrying amount is not recoverable
      based on the estimated future operating cash flows on an undiscounted
      basis.




8




*Revenue
      Recognition*


The
      percentage-of-completion method is used to recognize revenue for construction
      services. Revenues for building products are recognized when title to the goods
      and risk of loss pass to the buyer, which is at the time of delivery. Taxes
      assessed by governmental authorities that are directly imposed on our
      revenue-producing transactions are excluded from sales.





*Shipping
      and Handling*


Shipping
      and
      handling costs for manufactured building components and construction services
      are included as a component of cost of goods sold. Shipping and handling costs
      for building products are included as a component of selling, general and
      administrative expenses and were $17.7 million for the period ended March 31,
      2007, $18.2 million for the period ended March 31, 2006 and $78.8 million in
      2006.





*Reclassifications*


SelectBuild
      identified certain costs of sourcing materials and reclassified these costs
      to
      cost of goods sold from selling, general and administrative expenses. Costs
      reclassified to cost of goods sold from selling, general and administrative
      expenses were $6.3 million for the period ended March 31, 2006 and $29.1 million
      for 2006. These reclassifications, none of which affected previously reported
      consolidated results of operations, cash flows or shareholders’ equity, have
      been made to amounts reported in prior periods to conform to the current year
      presentation.





*Recent
      Accounting Principles*


In
      February 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 159, *The
      Fair Value
      Option for Financial Assets and Financial Liabilities - Including an Amendment
      of FASB Statement No. 115* .
      This accounting
      principle expands the use of fair value accounting. Entities may elect to
      measure eligible items at fair value at specified election dates, however the
      fair value election is irrevocable and made on an instrument-by-instrument
      basis. Eligible items include financial assets and liabilities, firm commitments
      for financial instruments, loan commitments, nonfinancial insurance contracts
      and warranties (goods or services settled by a third party) and host financial
      instruments. Upon adoption, unrealized gains and losses for existing items
      measured at fair value are recorded as a cumulative adjustment to beginning
      retained earnings and subsequent changes are recognized in earnings at each
      reporting date. We elected to not adopt the fair value measurement option for
      eligible items. This accounting principle was adopted January 2007 and had
      no
      impact on consolidated financial position, results of operations or cash flows.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157, *Fair
      Value
      Measurements* .
      This accounting
      principle simplifies existing accounting literature by providing a single
      definition of fair value, a framework for measuring fair value and expanded
      disclosures about fair value. This accounting principle emphasized that fair
      value is a market-based measurement of the amount that would be received upon
      the sale of an asset or paid to transfer a liability (an exit price) and not
      the
      price that would be paid to acquire the asset or received to assume the
      liability (entry price). This accounting principle did not expand the use of
      fair value. This accounting principle was adopted January 2007 and had no impact
      on consolidated financial position, results of operations or cash flows.




9




In
      June 2006, the Financial Accounting Standards Board issued Interpretation No.
      48, *Accounting
      for
      Uncertainty in Income Taxes.* This
      accounting
      principle provides specific guidance for measurement, recognition and disclosure
      of uncertain tax positions. This accounting principle was adopted January 2007
      and had no impact on consolidated financial position, results of operations
      or
      cash flows.




10




***2.***  ***Net
      Income Per Share***





Net
      income per
      share was determined using the following information (thousands, except per
      share data):




**Three
                Months Ended**
              **March
                31****2007**
            
            
            **2006**
            
            
            **2006**Net
                (loss)
                income
            
            **$**
            **(4,966**
            **)**
            $
            28,069
            
            $
            102,074Weighted
                average shares used to determine basicnet
                income
                per share
            
            
            **28,768**
            
            
            28,524
            
            
            28,603Net
                effect of
                dilutive stock options and restrictedstock
            
            
            **—**
            
            
            1,049
            
            
            986Weighted
                average sharesused
                to
                determine dilutednet
                income
                per share****
            
            
            **28,768**
            
            
            29,573
            
            
            29,589Net
                (loss)
                income per share:Basic
            
            
            **$(0.17**
            **)**
            
            $0.98
            
            
            $3.57Diluted
            
            
            **$(0.17**
            **)**
            
            $0.95
            
            
            $3.45Cash
                dividendsdeclared
                per
                share
            
            
            **$0.10**
            
            
            $0.10
            
            
            $0.40





Share
      options
      considered not dilutive are those with exercise prices greater than the average
      market value of the common shares in the periods presented. Share options that
      are not dilutive and therefore excluded from the computation of diluted net
      income per share were as follows:


·
            819,098
                shares for the period ended March 31,
                2007,


·
            407,100
                shares for the period ended March 31, 2006,
                and


·
            403,100
                shares in 2006.




11




***3.***  ***Impairment
      of Assets***





Long-lived
      assets
      such as property, equipment and intangibles are evaluated for impairment
      whenever events or changes in circumstances indicate the carrying amount may
      not
      be recoverable. An impairment for these assets is recognized if the carrying
      amount exceeds its fair value and when the carrying amount is not 
recoverable based on the estimated future operating cash flows on an
      undiscounted basis.




Similarly,
      goodwill
      is evaluated for impairment in the fourth quarter and whenever events and
      circumstances indicate the carrying amount may not be recoverable. An impairment
      for goodwill is recognized if the carrying amount is more than the estimated
      future operating cash flows as measured by fair value techniques.





As
      a result of changes in specific markets, SelectBuild recognized the following
      impairments during 2006:


·
            $1.8
                million
                for the carrying amount of goodwill in the second quarter and


·
            $0.4
                million
                for the carrying amount of certain customer relationships in the
                second
                quarter.





12


***4.***  ***Acquisitions
      and Minority Interests***





Acquisitions
      are
      accounted for under the purchase method of accounting. The purchase price is
      allocated to the assets acquired, including intangible assets, and liabilities
      assumed based on their estimated fair values at the date of acquisition.
      Subsequent to the initial allocation of purchase price, adjustments may be
      made
      to reflect the fair value of working capital and tangible assets. Any excess
      of
      the purchase price over the estimated fair value of the identifiable assets
      and
      liabilities acquired is recorded as goodwill. Operating results of acquired
      businesses are included in the consolidated statements of income from the date
      of acquisition.





·
            In
                March
                2007, SelectBuild acquired the assets of a concrete services business
                in
                Fresno, California for approximately $0.7 million in cash of which
                $0.1
                million has been retained for the settlement period. This purchase
                price
                is subject to working capital adjustment. Information required to
                complete
                the purchase price allocation is not yet available. Final allocation
                of
                the purchase price will be completed as soon as this information
                is
                available.





·
            In
                December
                2006, SelectBuild acquired a distribution services business in Southern
                California for approximately $1.6 million in cash of which $0.1 million
                has been retained for the settlement period. This purchase price
                is
                subject to working capital adjustment. Information required to complete
                the purchase price allocation is not yet available. Final allocation
                of
                the purchase price will be completed as soon as this information
                is
                available.





·
            In
                August
                2006, SelectBuild acquired a window installation business in Arizona
                for
                approximately $13.9 million in cash.





·
            In
                July 2006,
                SelectBuild acquired a framing services business in Southern California
                for approximately $78.6 million in cash. Additional cash payments
                may be
                required based on operating performance through June 2009.





·
            In
                June 2006,
                BMC West acquired a building materials distribution and truss
                manufacturing business in Eastern Idaho for approximately $5.1 million
                in
                cash.





·
            In
                April
                2006, SelectBuild acquired a concrete services business in Northern
                Arizona for approximately $1.5 million in
                cash.





·
            In
                April
                2006, SelectBuild acquired a wall panel and truss manufacturing business
                in Palm Springs, California for $6.7 million in
                cash.





·
            In
                February
                2006, BMC West acquired 3 facilities providing building materials
                distribution and millwork services in Houston, Texas for $20.6 million
                in
                cash.





·
            In
                January
                2006, SelectBuild acquired framing businesses in Palm Springs, California
                and Reno, Nevada for $57.1 million in cash. Additional cash payments
                may
                be required based on operating performance through December
                2009.





Minority
      interest
      reflects the other owners’ proportionate share in the assets and liabilities of
      business ventures as of the date of purchase, adjusted by the proportionate
      share of post-acquisition income or loss. As the operating results of entities
      with minority interest are consolidated, minority interests income represents
      the income or loss attributable to the other owners.




13




·
            In
                April
                2007, SelectBuild acquired the remaining 27% interest in Riggs Plumbing
                for $10.5 million in cash. In July 2005, SelectBuild acquired an
                additional 13% interest for $1.4 million in cash and in April 2005,
                acquired an initial 60% interest for $17.8 million in cash. Information
                required to complete the purchase price allocation is not yet available.
                Final allocation of the purchase price will be completed as soon
                as this
                information is available. Riggs Plumbing provides plumbing services
                to
                high-volume production builders in the Phoenix and Tucson markets.





·
            In
                November
                2006, SelectBuild acquired the remaining 49% interest in BBP Companies
                for
                $22.8 million in cash. In July 2005, SelectBuild acquired an initial
                51%
                interest for $9.4 million in cash and $1.0 million of our common
                shares.
                BBP Companies provide concrete services to high-volume production
                homebuilders in Arizona.





·
            In
                January
                2006, SelectBuild acquired the remaining 20% interest in WBC Construction,
                LLC for $36.0 million in cash. In August 2005, SelectBuild acquired
                an
                additional 20% interest for $24.8 million in cash and in January
                2003,
                acquired an initial 60% interest for $22.9 million in cash and $1.0
                million of our common shares. Information required to complete the
                purchase price allocation is not yet available. Final allocation
                of the
                purchase price will be completed as soon as this information is available.
                WBC provides concrete block masonry and concrete services to high-volume
                homebuilders in Florida.





Assets
      and
      liabilities acquired in these acquisitions included (thousands):




**March****31**
            
            **December****31**
            
            
            
            **March****31**
            
            **December****31****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006**Cash
                and cash
                equivalents
            
            **$**
            **—**
            
            $
            —
            
            Accounts
                payable
            
            **$**
            **—**
            
            $
            10,376Receivables
            
            
            **—**
            
            
            44,683
            
            Accrued
                compensation
            
            
            **—**
            
            
            1,447Inventory
            
            
            **—**
            
            
            19,957
            
            Insurance
                deductible reserves
            
            
            **—**
            
            
            —Unbilled
                receivables
            
            
            **—**
            
            
            10,101
            
            Other
                accrued
                liabilities
            
            
            **(60,587)**
            
            
            50,340Deferred
                income taxes
            
            
            **—**
            
            
            —
            
            Billings
                in
                excess ofPrepaid
                expenses and other
            
            
            **15**
            
            
            263
            
            costs and
                estimated earnings
            
            
            **—**
            
            
            23,557Current
                portion of long-term debt
            
            
            **—**
            
            
            —**Current
                assets**
            
            
            **15**
            
            
            75,004
            
            **Current
                liabilities**
            
            
            **(60,587)**
            
            
            85,720Property
                and
                equipment
            
            
            **216**
            
            
            19,845
            
            Deferred
                income taxes
            
            
            **(917)**
            
            
            937Other
                long-term assets
            
            
            **—**
            
            
            42
            
            Long-term
                debt
            
            
            **—**
            
            
            —Other
                intangibles, net
            
            
            **1,382**
            
            
            68,692
            
            Other
                long-term liabilities
            
            
            **—**
            
            
            8,173Goodwill
            
            
            **(1,521)**
            
            
            122,374Minority
                interests
            
            
            **—**
            
            
            (10,627)**$**
            **92**
            
            $
            285,957
            
            
            
            **$**
            **(61,504)**
            
            $
            84,203





The
      following
      summarizes pro forma results of operations assuming the acquisitions for 2007
      and 2006 occurred as of the beginning of 2006. Due to uncertainties in these
      assumptions, the pro forma data does not purport to be indicative of the results
      of operations that would have resulted had the acquisitions been consummated
      at
      the beginning of the period presented, or that may occur in the future
      (thousands, except per share data):




14




**Three
                Months Ended**
              **March
                31****2007**
            
            
            **2006**
            
            
            **2006**Sales
                - as
                reported
            
            **$**
            **569,104**
            
            $
            884,557
            
            $
            3,245,169Pro
                forma
                Sales
            
            **$**
            **569,868**
            
            $
            931,467
            
            $
            3,325,314Net
                (loss)
                income - as reported
            
            **$**
            **(4,966**
            **)**
            $
            28,069
            
            $
            102,074Pro
                forma Net
                (loss) income
            
            **$**
            **(3,976**
            **)**
            $
            30,061
            
            $
            102,017Net
                (loss)
                income per share:Diluted
                - as reported
            
            
            **$(0.17**
            **)**
            
            $0.95
            
            
            $3.45Pro
                forma Diluted
            
            
            **$(0.14**
            **)**
            
            $1.02
            
            
            $3.45





We
      have call rights and put obligations associated with the interests in RCI
      Construction, A-1 Truss and WBC Mid-Atlantic that we do not currently own.
      Under
      the purchase agreements, we have the right to purchase the other owners’
remaining portions during certain periods or if certain conditions are met.
      Likewise, the other owners have the option to require us to purchase their
      remaining portions during certain periods. The purchase price for the remaining
      portions will be based generally on a multiple of historical earnings. The
      following table summarizes the timing of these call and put
      obligations:





**Call
                Options**
            
            **Put
                Options**RCI
                Construction
            January
                2008
                through January 2012
            
            January
                2008
                through January 2012A-1
                Truss
            September
                2004 through August 2014
            
            September
                2009 through August 2014WBC
                Mid-Atlantic
            October
                2003
                through September 2010
            
            December
                2006
                through December 2008




15




***5.***  ***Marketable
      Securities***





Investments
      in
      marketable securities consist of debt securities held by our captive insurance
      subsidiary and are considered available-for-sale and recorded at fair value.
      Fair value is based on market quotes. Unrealized gains and losses, net of
      deferred taxes, are recorded as a component of accumulated other comprehensive
      (loss) income, net, a component of shareholders’ equity. There were no
      significant unrealized losses.





The
      fair value of
      these marketable securities were as follows (thousands):




**March****31**
                    **2007**
            
            
            **December
                  31****2006**U.S.
                government and agencies
            
            **$**
            **22,159**
            
            $
            25,661Asset
                backed
                securities
            
            
            **20,339**
            
            
            18,278Corporate
                securities
            
            
            **15,171**
            
            
            13,911**$**
            **57,669**
            
            $
            57,850





Contractual
      maturities were as follows (thousands):




**March****31**
                **2007**
            
            
            **December
                  31****2006**Less
                than 1
                year
            
            **$**
            **5,806**
            
            $
            4,337Due
                in 1 to 2
                years
            
            
            **15,453**
            
            
            16,648Due
                in 2 to 5
                years
            
            
            **36,410**
            
            
            36,865**$**
            **57,669**
            
            $
            57,850




16




***6.***  ***Intangible
      Assets and Goodwill***





Intangible
      assets
      represent the values assigned to customer relationships, covenants not to
      compete and trade names. Intangible assets are amortized on a straight-line
      basis over their expected useful lives. Customer relationships are amortized
      over 3 to 17 years, covenants not to compete over 2 to 5 years and trade names
      over 3 years. Amortization expense for intangible assets was $4.7 million for
      the period ended March 31, 2007, $3.1 million for the period ended March 31,
      2006 and $14.7 million in 2006. Intangible assets consist of the following
      (thousands):




**March
                31, 2007****Gross**
              **Carrying
                Amount**
            
            
            **Accumulated
                Amortization**
            
            
            **Net
                Carrying Amount**Customer
                relationships
            
            **$**
            **123,845**
            
            **$**
            **(25,771**
            **)**
            **$**
            **98,074**Covenants
                not
                to compete
            
            
            **12,095**
            
            
            **(5,308**
            **)**
            
            **6,787**Trade
                names
            
            
            **204**
            
            
            **(176**
            **)**
            
            **28**Other
            
            
            **657**
            
            
            **(99**
            **)**
            
            **558****$**
            **136,801**
            
            **$**
            **(31,354**
            **)**
            **$**
            **105,447**




**December
                31, 2006****Gross**
              **Carrying
                Amount**
            
            
            **Accumulated
                Amortization**
            
            
            **Net
                Carrying Amount**Customer
                relationships
            
            $
            122,498
            
            $
            (22,125
            )
            $
            100,373Covenants
                not
                to compete
            
            
            13,094
            
            
            (4,802
            )
            
            8,292Trade
                names
            
            
            204
            
            
            (159
            )
            
            45Other
            
            
            146
            
            
            (64
            )
            
            82$
            135,942
            
            $
            (27,150
            )
            $
            108,792





Estimated
      amortization expense for intangible assets is $12.9 million for the remainder
      of
      2007, $15.6 million for 2008, $15.2 million for 2009, $14.3 million for 2010,
      $13.0 million for 2011 and $34.4 million thereafter.





Goodwill
      represents
      the excess of the purchase price over the fair value of net tangible and
      identifiable intangible assets of acquired businesses. Adjustments to amounts
      previously reported as goodwill occur as a result of completing the purchase
      price allocation to the assets acquired, including intangible assets, and
      liabilities assumed based on their estimated fair values at the date of
      acquisition.





An
      annual assessment for impairment is completed in the fourth quarter and whenever
      events and circumstances indicate the carrying amount may not be recoverable.
      An
      impairment is recognized at the reporting unit if the carrying amount is more
      than the estimated future operating cash flows as measured by fair value
      techniques.





Changes
      in the
      carrying amount of goodwill by business segment were as follows
      (thousands):




**SelectBuild**
            
            
            **BMC
                West**
            
            
            **Total****Balance
                at December 31, 2006**
            
            $
            287,123
            
            $
            20,877
            
            $
            308,000Purchase
                Price Adjustment
            
            
            (1,521
            )
            
            —
            
            
            (1,521
            )**Balance
                at March 31, 2007**
            
            **$**
            **285,602**
            
            **$**
            **20,877**
            
            **$**
            **306,479**




17




While
      goodwill is
      tested for impairment annually and not amortized for financial statement
      proposes, goodwill may be deductible for income tax purposes. Certain goodwill
      is non-deductible. Changes to non-deductible goodwill were as follows
      (thousands):




**SelectBuild**
            
            
            **BMC
                West**
            
            
            **Total****Balance
                at December 31, 2006**
            
            $
            33,939
            
            $
            7,423
            
            $
            41,362Purchase
                Price Adjustment
            
            
            1,512
            
            
            —
            
            
            1,512**Balance
                at March 31, 2007**
            
            **$**
            **35,451**
            
            **$**
            **7,423**
            
            **$**
            **42,874**





18




***8.***  ***Debt***





Long-term
      debt
      consists of the following (thousands):




**Notional
                Amount**
            
            
            **Effective
                Interest Rate****As
                of March 31, 2007**
            
            
            **Balance**
            
            
            **Stated
                Interest Rate**
            
            
            **of
                Interest Rate Swaps**
            
            
            **Average
                for Quarter**
            
            
            **As
                of**
              **March
                31**Revolver
            
            **$**
            **79,200**
            
            
            **LIBOR
                plus 1.25% or Prime plus 0.00%**
            
            **$**
            **—**
            
            
            **10.6**
            **%**
            
            **8.3**
            **%**Term
                note
            
            
            **348,250**
            
            
            **LIBOR
                plus 2.50% or Prime plus 1.25%**
            
            
            **200,000**
            
            
            **7.7**
            **%**
            
            **7.7**
            **%**Other
            
            
            **4,631**
            
            
            **Various**
            
            
            **—****432,081**
            
            
            
            
            **$**
            **200,000**Less:  Current
                portion
            
            
            **5,072****$**
            **427,009**






**Notional
                Amount of Interest**
            
            
            **Effective
                Interest Rate****As
                of
                December 31, 2006**
            
            
            **Balance**
            
            
            **Stated
                Interest Rate**
            
            
            **Rate**
              **Swaps**
            
            
            **Average**
              **for
                Year**
            
            
            **As
                of**
              **December
                31**Revolver
            
            $
            —
            
            
            LIBOR
                plus 1.25% or Prime plus 0.00%
            
            $
            ―
            
            
            6.5
            %
            
            n/aTerm
                note
            
            
            349,125
            
            
            LIBOR
                plus 2.50% or Prime plus 1.25%
            
            
            200,000
            
            
            6.7
            %
            
            7.0
            %Other
            
            
            8,179
            
            
            Various
            
            
            —
            
            
            —
            
            
            —357,304
            
            
            
            
            $
            200,000Less:  Current
                portion
            
            
            8,143$
            349,161





*Revolver*


In
      November 2006, we entered into an amended $500 million revolver with a group
      of
      lenders. The revolver matures in November 2011. The revolver consists of both
      LIBOR and Prime based borrowings. These variable interest rates are subject
      to
      quarterly adjustment based on operating performance and range from LIBOR plus
      1.00% to 2.00%, or Prime plus 0.00% to 0.75%. Interest is paid quarterly. As
      of
      March 31, 2007, $79.2 million was outstanding under the revolver.




19




*Term
      Note*


In
      November 2006, we entered into a $350 million term note with a group of lenders.
      The term note matures in November 2013 and is payable in quarterly installments
      for the first 7 years in amounts equal to 1% of the initial principal per year
      and the remaining principal due November 2013. The variable interest rate for
      the term note is LIBOR plus 2.50%, or Prime plus 1.25%. Interest is paid
      quarterly. As of March 31, 2007, $348.3 million was outstanding under this
      term
      note.





*Other*


Other
      long-term
      debt of $4.6 million consists of term notes, equipment notes and capital leases
      for equipment. Interest rates vary and dates of maturity are through March
      2021.





*Expansion
      of Credit Facility, Covenants and Maturities*


The
      credit facility
      consists of the revolver and term note. The credit facility may be increased
      an
      aggregate amount of up to $250 million. The credit facility is collateralized
      by
      tangible and intangible property of our wholly-owned subsidiaries, except the
      assets of our captive insurance subsidiary. The credit facility contains
      covenants and conditions requiring the maintenance of certain financial ratios.
      At March 31, 2007, we were in compliance with these covenants and
      conditions.





Scheduled
      maturities of long-term debt are as follows (thousands):





2007
            
            $
            3,9372008
            
            
            4,8262009
            
            
            4,1402010
            
            
            3,8242011
            
            
            82,909Thereafter
            
            
            332,445$
            432,081





As
      of March 31, 2007 and December 31, 2006 there were $97.2 million of letters
      of
      credit outstanding that guaranteed performance or payment to third parties.
      These letters of credit reduce borrowing availability under the
      revolver.





*Hedging
      Activities*


Derivative
      and
      hedging activities are recorded on the balance sheet at their fair values.
      In
      November 2006, we entered into interest rate swap contracts that effectively
      convert $200 million of the variable rate borrowings of the $348.3 million
      term
      note to a fixed interest rate of 7.59% through November 2012, thus reducing
      the
      impact of increases in interest rates on future interest expense. Approximately
      57% of the outstanding variable rate borrowings of the term note as of March
      31,
      2007 have been hedged through the designation of interest rate swap contracts
      accounted for as cash flow hedges. After giving effect to the interest rate
      swap
      contracts, total borrowings were 47% fixed and 53% variable.





The
      fair value of
      derivative instruments is based on pricing models using current market rates.
      The fair value of the interest rate swap contracts was a long-term liability
      of
      $1.7 million as of March 31, 2007. The effective portion was recorded in
      accumulated other comprehensive loss, net, a separate component of shareholders’
equity, and is subsequently reclassified into earnings in the same financial
      statement line item, interest expense, in the same period during which the
      hedged transaction is recognized in earnings. A corresponding deferred tax
      asset
      of $0.7 million was also recorded in accumulated other comprehensive loss,
      net
      for the income tax related to the estimated fair value of the interest rate
      swap
      contracts. The ineffective portion of the change in the value of the interest
      rate swap contracts is immediately recognized as a component of interest
      expense. Management may choose not to swap variable rates to fixed rates or
      may
      terminate a previously executed swap if the variable rate positions are more
      beneficial.




20




In
      June 2004, we entered into interest rate swap contracts that effectively
      converted $100 million of variable rate borrowings to a fixed interest rate.
      These swaps were settled in November 2006 and the $1.5 million gain recognized
      for this settlement was reclassified to other income, net from accumulated
      other
      comprehensive income, net.




21




***9.***  ***Shareholders’
      Equity***





*Preferred
      Shares*


We
      are authorized to issue 2 million preferred shares, however none of these shares
      are issued. Under the terms of our Restated Certificate of Incorporation, the
      Board of Directors is authorized to determine or alter the rights, preferences,
      privileges and restrictions of the preferred shares.





*Common
      Shares*


Our
      common shares
      have a par value of $0.001. We have 50 million shares authorized of which
      approximately 29.3 million are issued and outstanding as of March 31,
      2007.





Of
      the unissued shares, 322,928 shares were reserved for the
      following:





Employee
                Stock Purchase Plan
            
            
            **50,262**2004
                Incentive and Performance Plan
            
            
            **272,666**





*Shareholders’
      Rights Plan*


In
      September 1997, our Board of Directors adopted a shareholder rights plan. If
      a
      person acquires 15% or more of our common shares or makes a tender offer or
      other offer to do so without the approval of the Board of Directors, our
      shareholders would have the right to purchase our common shares or the shares
      of
      the acquiring company at a significant discount. The Board of Directors has
      the
      right to redeem these rights for a nominal amount, to extend the period before
      the rights may be exercised or to take other actions as defined. The plan is
      intended to encourage any person seeking to acquire us to negotiate with the
      Board of Directors. The plan expires in September 2007.





*Dividends*


Cash
      dividends per
      common share were as follows:




**2007**
            
            
            **2006**First quarter
            
            
            **$0.10**
            
            
            $0.10Second
                quarter
            
            
            —
            
            
            0.10Third quarter
            
            
            —
            
            
            0.10Fourth
                quarter
            
            
            —
            
            
            0.10**$0.10**
            
            
            $0.40





On
      May 1, 2007, our Board of Directors approved a 2007 second quarter cash dividend
      of $0.10 per common share. The dividend was payable to shareholders of record
      as
      of June 22, 2007 and will be paid on or about July 13, 2007.





*Repurchase
      Program*


In
      March 2007, our Board of Directors authorized the repurchase of up to $25
      million of our common shares through March 2008. No common shares were
      repurchased in the period ended March 31, 2007.




22




***10.***
            ***Employee
                Benefit Plans***





*Retirement
      Plans*


*·*  *Savings
      and Retirement Plan*


We
      provide a savings and retirement plan for salaried and certain hourly employees
      whereby eligible employees may contribute a percentage of their earnings to
      a
      trust. Participants may defer 1% to 50% of their eligible compensation (base
      salary, annual incentive and long-term incentives) subject to the limitations
      imposed under the Internal Revenue Code. Vesting in matching contributions
      and
      related earnings/losses occurs at the rate of 20% per year of service or upon
      reaching age 65, death or disability.





Our
      matching
      contributions range from 50% of the first 6% to 25% of the first 4% of the
      participant’s contribution. Matching contributions are established at the
      discretion of the Compensation Committee of our Board of Directors in February.
      Matching contributions of $1.4 million for the period ended March 31, 2007,
      $1.5
      million for the period ended March 31, 2006 and $4.5 million in 2006 were made
      to the trusts based on a percentage of the contributions made by participants.





Participants
      may
      direct their contributions and matching contributions through any of the
      investment options offered, including self-directed brokerage accounts.
      Investment options are reviewed and revised quarterly by an Investment Committee
      comprised of management and advised by consultants.





*·*  *Executive
      Deferred Compensation*


We
      provide a deferred compensation plan for executives and key employees. The
      objective of the plan is to provide executives and key employees with an
      additional opportunity to save for their retirement. Participants may defer
      up
      to 80% of their eligible compensation (base salary, annual incentive and
      long-term incentives). Matching contributions mirror the savings and retirement
      plan matching contribution percentage. Matching contributions are established
      at
      the discretion of the Compensation Committee of our Board of Directors in
      February.





There
      are no
      minimum or guaranteed returns. Participants may elect distribution upon reaching
      a specific age, number of years or separation of service. Distributions may
      be a
      lump sum payment or monthly installment over 5 to 10 years.





Matching
      contributions mirror the savings and retirement plan matching contribution
      percentage. Matching contributions are established at the discretion of the
      Compensation Committee of our Board of Directors in February. Matching
      contributions of $0.2 million for the period ended March 31, 2007, $0.3 million
      for the period ended March 31, 2006 and $0.4 million for 2006 were made to
      the
      trust based on a percentage of the contributions made by participants.





Participants
      may
      direct their contributions and matching contributions through any of the
      investment options offered, including our common shares. Investment options
      are
      reviewed and revised quarterly by an Investment Committee comprised of
      management and advised by consultants.





*·*  *Supplemental
      Retirement*


Additionally,
      there
      is a supplemental retirement plan for executives and key employees. The
      objective of the plan is to provide a meaningful supplemental retirement benefit
      that enables participants to retire at age 65 with 30 years of service at an
      income level of at least 60% of pre-retirement base salary after considering
      deferred compensation, predecessor retirement and social security
      benefits.




23




Active
      participants
      receive a guaranteed return of 7% and inactive participants receive a guaranteed
      return of 0% to 9% based on their years of service and payment elections.
      Contributions and the guaranteed return are established at the discretion of
      the
      Compensation Committee of our Board of Directors in February. Participants
      are
      immediately vested in the contribution.





In
      2006, contributions were 3.6% of net income and were allocated proportionately
      to participants based on their base salaries. Contributions were $0.6 million
      for the period ended March 31, 2007, $1.8 million for the period ended March
      31,
      2006 and $7.5 million in 2006.





Contributions
      for
      the obligation are invested in company-owned life insurance policies. The cash
      surrender value of these policies approximates the obligation, however the
      guaranteed returns, if any, are not fully funded as these returns are dependent
      upon years of service and payment elections. These life insurance policies
      fund
      the obligation to the participants or their beneficiaries over a 5, 10 or
      15-year period.





*Employee
      Stock Purchase Plan*


In
      September 2000, our Board of Directors adopted the Employee Stock Purchase
      Plan,
      which our shareholders approved in May 2001. The plan permits eligible employees
      to purchase common shares through payroll deductions of up to 10% of an
      employee’s compensation limited to $25,000 each year. The purchase price of the
      shares is 85% of the market price on the last day of each month. There were
      400,000 common shares authorized under this plan and there were 50,262 shares
      available for future purchase as of March 31, 2007. Compensation expense
      recognized was $0.1 million for the period ended March 31, 2007, $0.1 million
      for the period ended March 31, 2006 and $0.3 million in 2006.





*2004
      Incentive and Performance Plan*


In
      February 2004, our Board of Directors adopted the 2004 Incentive and Performance
      Plan, which our shareholders approved in May 2004. A total of 2.4 million shares
      are reserved for issuance under the plan. Employees and non-employee directors
      are eligible to receive awards at the discretion of the Compensation Committee.
      Options, appreciation rights, restricted shares, other share-based awards and
      non-discretionary awards may be granted under this plan.





*Options*


·
            Grants
                of
                options under the 2004 Incentive and Performance Plan vest ratably
                over 3
                to 4 years from the date of grant and expire after 7 years if unexercised.
                Options were awarded with exercise prices equal to the fair value
                of the
                shares on the date of grant.





·
            In
                February
                2000, our Board of Directors adopted the 2000 Stock Incentive Plan
                which
                our shareholders approved in May 2000. Grants of options under the
                2000
                Stock Incentive Plan vest ratably through the end of the fourth year
                from
                the date of grant and expire after 10 years if unexercised. Options
                were
                awarded with exercise prices equal to the fair value of the shares
                on the
                date of grant. No further grants are made under this plan.





With
      the adoption
      of Statement of Financial Accounting Standards No. 123 (Revised 2004), *Share-Based
      Payment,* in
      2006,
      compensation expense is recognized over the requisite service period for all
      share-based awards granted after the date of adoption as well as awards unvested
      on the date of adoption. Prior periods are not revised for comparative purposes.
      Share-based compensation expense previously included restricted shares and
      share
      awards and will now include the fair value of share options.




24




Compensation
      expense is recognized over the requisite service period. The fair value of
      compensation expense recognized for options for the requisite service period
      was
      $1.3 million for the period ended March 31, 2007, $2.2 million for the period
      ended March 31, 2006 and $5.1 million, including $0.3 million for options vested
      due to early retirement eligibility, for 2006. Options are not included in
      the
      calculation of basic income per share, however options are included in the
      calculation of diluted income per share.





The
      fair value of
      each option is estimated on the date of grant using the modified
      Black-Scholes-Merton model. Significant awards of options and their key
      assumptions are as follows:




**Grant**
                **Year**
              
              **Grant**
                **Month**
              
              **Grant
                  Date**
                **Fair
                  Value**
                **of
                  Options**
              
              **Exercise**
                **Price**
              
              **Risk
                  Free Interest Rate**
              
              **Expected
                  Volatility**
              
              **Expected
                  Dividend Yield**
              
              **Expected
                  Term (years)**2007
              
              March
              
              
              $8.21
              
              $18.28
              
              
              4.53
              %
              
              54.53
              %
              
              2.03
              %
              
              5.192006
              
              September
              
              
              $12.74
              
              $28.01
              
              
              4.51
              %
              
              55.58
              %
              
              1.59
              %
              
              4.722006
              
              January
              
              
              $17.59
              
              $37.93
              
              
              3.77
              %
              
              48.58
              %
              
              0.70
              %
              
              5.602005
              
              May
              
              
              $15.79
              
              $28.36
              
              
              4.29
              %
              
              54.16
              %
              
              0.68
              %
              
              7.002005
              
              February
              
              
              $12.31
              
              $22.77
              
              
              4.10
              %
              
              54.16
              %
              
              0.84
              %
              
              6.842004
              
              May
              
              
              $4.39
              
              $8.50
              
              
              4.56
              %
              
              54.25
              %
              
              1.45
              %
              
              7.002004
              
              February
              
              
              $4.16
              
              $7.88
              
              
              4.09
              %
              
              54.68
              %
              
              1.45
              %
              
              7.50




These
      assumptions
      are based principally on historical experience. When circumstances indicate
      the
      availability of new or different information that would be useful in estimating
      these assumptions, revisions will be made and reflected in the period such
      revisions are determined. Due to uncertainties inherent in these assumptions,
      it
      is possible that actual share-based compensation may vary from the estimate
      of
      the fair value of these options.





Activity
      for option
      awards was as follows (thousands, except per share data):




**Three
                Months Ended**
              **March
                31**
              **2007**
            
            
            **Three
                Months Ended**
              **March
                31**
              **2006**
            
            
            **2006****Shares**
            
            
            **Weighted
                Average Exercise Price**
            
            
            **Weighted
                Average Remaining Contractual Term (years)**
            
            
            **Intrinsic
                Value**
            
            
            **Shares**
            
            
            **Weighted
                Average Exercise Price**
            
            
            **Shares**
            
            
            **Weighted
                Average Exercise Price**Outstanding
                at beginningof
                the
                period
            
            
            **2,521**
            
            
            **$14.41**
            
            
            **5.1**
            
            
            
            
            
            2,300
            
            
            $9.73
            
            
            2,300
            
            
            $9.73Granted
            
            
            **354**
            
            
            **$18.28**
            
            
            
            
            
            
            
            
            407
            
            
            $37.93
            
            
            409
            
            
            $37.88Exercised
            
            
            **(5**
            **)**
            
            **$6.97**
            
            
            
            
            
            
            
            
            (31
            )
            
            $9.22
            
            
            (176
            )
            
            $7.34Forfeited
            
            
            **(1**
            **)**
            
            **$6.25**
            
            
            
            
            
            
            
            
            (7
            )
            
            $14.33
            
            
            (12
            )
            
            $21.98Outstanding
                at end of theperiod
            
            
            **2,869**
            
            
            **$14.90**
            
            
            **5.1**
            
            
            
            
            
            2,669
            
            
            $14.03
            
            
            2,521
            
            
            $14.41Exercisable
                at end of theperiod
            
            
            **1,924**
            
            
            **$11.27**
            
            
            **4.6**
            
            
            
            
            
            1,535
            
            
            $8.09
            
            
            1,658
            
            
            $8.20In-the-money:Outstanding
            
            
            **1,696**
            
            
            **$6.76**
            
            
            
            
            **$**
            **19,244**
            
            
            2,662
            
            
            $9.72
            
            
            2,108
            
            
            $9.84Exercisable
            
            
            **1,518**
            
            
            **$6.56**
            
            
            
            
            **$**
            **17,530**
            
            
            1,525
            
            
            $7.74
            
            
            1,656
            
            
            $7.85Weighted
                average fairvalue
                of
                optionsgranted
                at
                fair value
            
            
            
            
            
            **$8.21**
            
            
            
            
            
            
            
            
            
            
            
            $17.59
            
            
            
            
            
            $17.56




25




The
      intrinsic value
      or the difference between our share price and the exercise price, for
      in-the-money options represents the value that would have been received by
      option holders had they exercised their options. These values change based
      on
      the fair market value of our shares. The intrinsic value was:


·  $19.2
      million for
      options **outstanding**


·  $17.5
      million for
      options **exercisable** (vested)





The
      intrinsic value
      for options **exercised** was $0.1 million
      for the period ended March 31, 2007, $0.9 million for the period ended March
      31,
      2006 and $3.8 million in 2006.





As
      of March 31, 2007, option awards outstanding and exercisable were as follows
      (thousands, except per share data):




**Options
                Outstanding**
            
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            
            **Options**
              **Outstanding**
            
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                (years)**
            
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            
            **Shares**
              **Exercisable**
            
            
            **Weighted**
              **Average**
              **Exercise
                Price**$4.84
                to
                $5.97
            
            
            **555**
            
            
            **3.2**
            
            
            **$4.94**
            
            
            **555**
            
            
            **$4.94**$6.19
                to
                $6.97
            
            
            **336**
            
            
            **5.9**
            
            
            **$6.96**
            
            
            **336**
            
            
            **$6.96**$7.00
                to
                $7.88
            
            
            **467**
            
            
            **5.7**
            
            
            **$7.38**
            
            
            **415**
            
            
            **$7.31**$8.70
            
            
            **338**
            
            
            **4.1**
            
            
            **$8.70**
            
            
            **212**
            
            
            **$8.70**$18.28
            
            
            **354**
            
            
            **7.0**
            
            
            **$18.28**
            
            
            **15**
            
            
            **$18.28**$22.77
                to
                $28.36
            
            
            **416**
            
            
            **4.9**
            
            
            **$22.90**
            
            
            **272**
            
            
            **$22.83**$37.93
                to
                $38.16
            
            
            **403**
            
            
            **5.8**
            
            
            **$37.93**
            
            
            **146**
            
            
            **$37.93**$4.84
                to $38.16
            
            
            **2,869**
            
            
            **5.1**
            
            
            **$14.90**
            
            
            **1,951**
            
            
            **$11.27**





As
      of March 31, 2007, there was $8.9 million of unrecognized compensation expense
      related to these options. This is recognized as the requisite services are
      rendered and is expected to be recognized ratably through March 2011. The total
      fair value of options vested and unexercised was $4.0 million for
      the period ended March 2007, $1.7 million for the period ended March 2006 and
      $2.7 million in 2006.





*Restricted
      Shares*


Grants
      of
      restricted shares vest 3 years from the date of grant. Under certain
      circumstances some or all of the restricted shares may vest earlier.
      Compensation expense is recognized over the vesting period. Compensation expense
      recognized was $0.8 million for the period ended March 31, 2007, $0.7 million
      for the period ended March 31, 2006 and $3.1 million in 2006.





Activity
      for
      nonvested restricted share awards was as follows (thousands, except per share
      data):




26




**Three
                Months Ended**
              **March
                31**
              **2007**
            
            
            **Three
                Months Ended**
              **March
                31**
              **2006**
            
            
            **2006****Shares**
            
            
            **Weighted
                Average Grant Date Fair Value**
            
            
            **Shares**
            
            
            **Weighted
                Average Grant Date Fair Value**
            
            
            **Shares**
            
            
            **Weighted
                Average Grant Date Fair Value**Nonvested
                at
                beginning of the period
            
            
            **396**
            
            
            **$23.91**
            
            
            258
            
            
            $16.46
            
            
            258
            
            
            $16.46Granted
            
            
            **109**
            
            
            **$18.28**
            
            
            138
            
            
            $37.88
            
            
            139
            
            
            $37.83Vested
            
            
            **—**
            
            
            **—**
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            **—**
            
            
            **—**
            
            
            —
            
            
            —
            
            
            (1
            )
            
            $37.93Nonvested
                at
                end of the period
            
            
            **505**
            
            
            **$22.69**
            
            
            396
            
            
            $23.95
            
            
            396
            
            
            $23.91





As
      of March 31, 2007, there was $0.6 million of unrecognized compensation expense
      related to these restricted shares. This is recognized as the requisite services
      are rendered and is expected to be recognized ratably through March 2010.
      Restricted shares are not included in the calculation of basic income per share,
      however restricted shares are included in the calculation of diluted income
      per
      share.





*Shares*


We
      issue shares to non-employee directors of our Board of Directors for their
      services. These shares vest immediately, however trading is restricted for
      1
      year from the date of grant. We issued 12,000 shares in May 2006 and 14,000
      shares in May 2005 and recognized compensation expense of $0.1 million for
      the
      period ended March 31, 2007, $0.1 million for the period ended March 31, 2006
      and $0.4 million in 2006.





The
      following table
      summarizes equity compensation information as of March 31, 2007 (thousands,
      except per share data):





**Number
                of Securities to be Issued Upon Exercise of Outstanding Options,
                Warrants
                and Rights**
            
            **Weighted
                Average Exercise Price of Outstanding Options, Warrants and
                Rights**
            
            **Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans**Equity
                compensation plansapproved
                by
                security
              holders
            
            
            **3,374**
            
            
            **$12.67**
            
            
            **273**Equity
                compensation plans notapproved
                by
                security
              holders
            
            
            **—**
            
            
            **—**
            
            
            **—**Total
            
            
            **3,374**
            
            
            **$12.67**
            
            
            **273**





Share-based
      compensation expense is included in selling, general and administrative expenses
      since it is incentive compensation issued primarily to our executives and senior
      management. Share-based compensation expense for options, restricted shares
      and
      share awards was $2.1 million for the period ended March 31, 2007, $3.0 million
      for the period ended March 31, 2006 and $8.5 million for 2006.




27


***11.***  ***Income
      Taxes***





The
      asset and
      liability method is used to account for income taxes. Under this method,
      deferred tax assets and liabilities are recognized for tax credits and for
      the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. A valuation allowance
      is
      recorded to reduce the carrying amounts of deferred tax assets unless it is
      more
      likely than not that such assets will be realized.





Our
      income tax
      compliance is periodically examined by various taxing authorities. Our tax
      returns for 2006 through 2002 are either under examination or open for future
      examination. We believe the ultimate results of examinations, if any, will
      not
      have an adverse affect on our financial condition, results of operations or
      cash
      flows. Revisions of estimated tax liabilities are reflected in the period such
      revisions are known.





In
      November 2006, SelectBuild acquired the remaining 49% interest in BBP Companies.
      Prior to the acquisition, income taxes associated with the other owner’s
      proportionate interest were $0.8 million for the period ended March 31, 2006
      and
      $1.7 million in 2006. We were required to recognize income taxes for all of
      the
      earnings due to its C Corporation status. While these income taxes were
      recognized in income tax expense, the portion of income taxes associated with
      the other owner’s proportionate share of earnings was eliminated through
      minority interest.





The
      tax benefit
      associated with options exercised by employees under the various share plans
      reduced taxes payable an insignificant amount for the period ended March 31,
      2007, $0.3 million for the period ended March 31, 2006 and $1.5 million in
      2006.
      These tax benefits are recognized in additional paid-in capital, a component
      of
      shareholders’ equity.





28


***12.***  ***Financial Instruments***





The
      estimated fair
      values of cash and cash equivalents, receivables, unbilled receivables,
      accounts payable and accruals are the same as their carrying amounts due to
      their short-term nature. After giving effect to the interest rate swap
      contracts, the interest for our debt is 47% fixed and 53% variable. The
      estimated market value of our debt, based on current interest rates for similar
      obligations with like maturities, was:


·
            $0.9
                million
                more than the amount of debt reported on the consolidated balance
                sheet at
                March 31, 2007 and


·
            $0.2
                million
                less than the amount of debt reported on the consolidated balance
                sheet at
                December 31, 2006.





Changes
      in interest
      rates expose us to financial market risk. We currently utilize interest rate
      swap contracts to hedge interest exposure on our term note. The interest rate
      swap contracts effectively convert $200 million of the term note to a fixed
      interest rate of 7.59% through November 2012. Changes in the fair value of
      the
      interest rate swap contracts are recorded as accumulated other comprehensive
      loss, net, a separate component of shareholders’ equity, and are subsequently
      reclassified into interest expense as interest expense is recognized on the
      term
      note.





Derivative
      financial instruments are not utilized to hedge other risks or for speculative
      or trading purposes.





29


***13.***  ***Commitments and Contingencies***





*Warranties*


We
      provide limited warranties for certain construction services. Specific terms
      and
      conditions for warranties vary from 1 year to 10 years and are based on
      geographic market and state regulations. Factors for determining estimates
      of
      warranties include the nature and frequency of claims, anticipated claims and
      cost per claim. Estimated costs for warranties are recognized when the revenue
      associated with the service is recognized. Revisions of estimated warranties
      are
      reflected in the period such revisions are determined. Warranty activity is
      as
      follows (thousands):




**Three
                Month Ended**
              **March
                31****2007**
            
            
            **2006**
            
            
            **2006**Balance
                at
                beginning of theperiod
            
            **$**
            **7,155**
            
            $
            5,404
            
            $
            5,404Provision
                for warranties
            
            
            **113**
            
            
            1,438
            
            
            3,009Provision
                for warrantiesfrom
                acquisitions
            
            
            **—**
            
            
            95
            
            
            117Warranty
                charges
            
            
            **(201**
            **)**
            
            (119
            )
            
            (1,375
            )Balance
                at
                end of the period
            
            **$**
            **7,067**
            
            $
            6,818
            
            $
            7,155





*Legal
      Proceedings*


We
      are involved in litigation and other legal matters arising in the normal course
      of business. In the opinion of management, the recovery or liability, if any,
      under any of these matters will not have a material effect on our financial
      position, results of operations or cash flows.




30




***14.***  ***Segment Information***





The
      consolidated
      financial statements include operations from our two reportable segments,
      SelectBuild and BMC West. These segments represent businesses that are managed
      separately. Each of these businesses requires distinct marketing and operating
      strategies. Management reviews financial performance based on these operating
      segments.





*SelectBuild*


SelectBuild
      provides construction services to high-volume homebuilders. These services
      include wood framing or concrete block masonry, concrete services, plumbing
      and
      other services. Construction services include managing labor and construction
      schedules as well as sourcing materials.





*BMC
      West*


BMC
      West markets
      and sells building products, manufactures building components and provides
      construction services. Products include structural lumber and building materials
      purchased from other manufacturers as well as manufactured building components
      including millwork, trusses and wall panels. Construction services include
      framing and installation of miscellaneous building products. Building products
      and construction services are sold principally to professional builders and
      contractors.





*Corporate*


Corporate
      represents expenses to support the operations of our business segments,
      SelectBuild and BMC West. These costs include administrative functions for
      information systems, reporting, accounts payable and human resources,
      professional fees for regulatory compliance, executive and senior management,
      certain incentive compensation as well as actuarial adjustments for insurance
      and medical claims. These costs are not allocated to our business
      segments.





The
      financial
      performance for these reporting segments is based on income from operations
      before interest expense, income taxes and minority interests. These segments
      follow the accounting principles described in the Summary of Significant
      Accounting Policies included in our most recent Annual Report on Form 10-K.
      Sales between segments are recognized at market prices and no single customer
      accounts for more than 10% of sales.





Selected
      financial
      information by segment is as follows (thousands):




**Sales**
            
            
            **Income**
              **(Loss)**
              **Before**
              **Taxes
                and**
            
            
            **Depreciation****Total**
            
            
            **Inter-**
              **Segment**
            
            
            **Trade**
            
            
            **Minority**
              **Interests**
            
            
            **and**
              **Amortization**
            
            
            **Capital****(1)**
              **Expenditures**
            
            
            **Assets****Three
                Months Ended March 31, 2007**SelectBuild
            
            **$**
            **282,531**
            
            **$**
            **(60**
            **)**
            **$**
            **282,471**
            
            **$**
            **2,586**
            
            **$**
            **8,626**
            
            **$**
            **5,893**
            
            **$**
            **730,724**BMC
                West
            
            
            **286,755**
            
            
            **(122**
            **)**
            
            **286,633**
            
            
            **11,431**
            
            
            **3,155**
            
            
            **1,971**
            
            
            **444,465**Corporate
            
            
            **—**
            
            
            **—**
            
            
            **—**
            
            
            **(13,057**
            **)**
            
            **966**
            
            
            **1,003**
            
            
            **133,467****$**
            **569,286**
            
            **$**
            **(182**
            **)**
            **$**
            **569,104**
            
            
            **960**
            
            **$**
            **12,747**
            
            **$**
            **8,867**
            
            **$**
            **1,308,656**Interest
                Expense
            
            
            
            
            
            
            
            
            
            
            
            **8,218****$**
            **(7,258**
            **)****Three
              Months Ended March 31, 2006**SelectBuild
            
            $
            498,330
            
            $
            (32
            )
            $
            498,298
            
            $
            46,075
            
            $
            6,627
            
            $
            14,232
            
            $
            770,685BMC
                West
            
            
            386,876
            
            
            (617
            )
            
            386,259
            
            
            30,546
            
            
            2,895
            
            
            4,123
            
            
            493,042Corporate
            
            
            —
            
            
            —
            
            
            —
            
            
            (22,235
            )
            
            660
            
            
            660
            
            
            86,572$
            885,206
            
            $
            (649
            )
            $
            884,557
            
            
            54,386
            
            $
            10,182
            
            $
            19,015
            
            $
            1,350,299Interest
                Expense
            
            
            
            
            
            
            
            
            
            
            
            5,590$
            48,796**Year
              Ended December 31, 2006**SelectBuild
            
            $
            1,744,092
            
            $
            (12,278
            )
            $
            1,731,814
            
            $
            148,416
            
            $
            30,002
            
            $
            33,409
            
            $
            722,328BMC
                West
            
            
            1,515,121
            
            
            (1,766
            )
            
            1,513,355
            
            
            124,523
            
            
            12,178
            
            
            33,135
            
            
            487,703Corporate
            
            
            —
            
            
            —
            
            
            —
            
            
            (75,484
            )
            
            3,104
            
            
            6,174
            
            
            118,880$
            3,259,213
            
            $
            (14,044
            )
            $
            3,245,169
            
            
            197,455
            
            $
            45,284
            
            $
            72,718
            
            $
            1,328,911Interest
                Expense
            
            
            
            
            
            
            
            
            
            
            
            29,082$
            168,373





(1) Property and
      equipment from acquisitions are included as capital expenditures.




31




***15.***  ***Quarterly
      Results of Operations***





Operating
      results
      by quarter for 2007 and 2006 were as follows (thousands, except per share
      data):


**First**
              
              **Second**
              
              **Third**
              
              **Fourth****2007**Sales
              
              **$**
              **569,104**
              
              
              **—**
              
              
              **—**
              
              
              **—**Income from operations
              
              **$**
              **960**
              
              
              **—**
              
              
              **—**
              
              
              **—**Net loss
              
              **$**
              **(4,966**
              **)**
              
              **—**
              
              
              **—**
              
              
              **—**Net income per diluted common share
              
              
              **$(0.17**
              **)**
              
              **—**
              
              
              **—**
              
              
              **—**Common share prices:High
              
              
              **$24.93**
              
              
              **—**
              
              
              **—**
              
              
              **—**Low
              
              
              **$18.11**
              
              
              **—**
              
              
              **—**
              
              
              **—****2006**Sales
              
              $
              884,557
              
              $
              921,992
              
              $
              830,599
              
              $
              608,021Income from operations
              
              $
              54,386
              
              $
              64,317
              
              $
              64,271
              
              $
              14,481Net income
              
              $
              28,069
              
              $
              34,175
              (1)
              $
              35,348
              
              $
              4,482Net income per diluted common share
              
              
              $0.95
              
              
              $1.16
              
              
              $1.20
              
              
              $0.15Common share prices:High
              
              
              $40.32
              
              
              $38.29
              
              
              $28.01
              
              
              $27.72Low
              
              
              $32.27
              
              
              $25.36
              
              
              $20.84
              
              
              $23.95


(1)
            Includes
                impairments of $1.1 million net of tax for goodwill and $0.3 million
                net
                of tax for certain customer relationships of
                SelectBuild.




32




**Item
      2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION****AND
      RESULTS OF OPERATIONS**





**Business
      Environment and Executive Overview**





We
      are one of the largest providers of residential construction services and
      building products in the United States, with a focus in the western and southern
      states. We provide construction services and building products in 16 of the
      top
      25 single-family residential construction markets through our two subsidiaries, **SelectBuild** and **BMC
      West** .
      SelectBuild
      provides construction services to high-volume homebuilders in key growth
      markets. BMC West markets and sells building products, manufactures building
      components and provides construction services to professional builders and
      contractors through a network of 41 distribution facilities and 60 manufacturing
      facilities.





The
      national
      homebuilding market continues to experience a significant downturn in
      construction activity. Through the first quarter of 2007, the U.S. Census
      Bureau reported a drop in the estimate of single-family building permits of
      28% relative to the prior year and an annual pace of homebuilding of 1.2
      million units compared to 1.6 million units in the prior year. We have
      experienced a similar slowdown in contract starts and building permits in
      our markets and are confronting the challenge of adjusting our cost structures
      to accommodate this slower pace of homebuilding. We do not anticipate a rebound
      in new home construction until excess unsold home inventory has adjusted to
      levels consistent with current demand which we believe will occur on a market
      by
      market basis.





As part
      of our
      growth strategy, we evaluate acquisition opportunities that strengthen
      and broaden our construction services and building products as well as our
      presence in attractive markets. In particular, we believe high-volume
      homebuilders are seeking quality, reliable and cost effective solutions to
      meet
      their construction services needs. Our services include framing, concrete,
      plumbing and other construction services as well as building product
      distribution and manufactured building components including trusses, millwork
      and wall panels. As we focus on managing our business through the current
      industry downturn, future acquisition initiatives will remain measured and
      strategic.





***Acquisition
      History***





**SelectBuild** acquired
      businesses providing construction services to high-volume homebuilders.
      Specifically, these businesses were as follows:





*2007*


·
            remaining
                27%
                interest in our existing plumbing services business in Phoenix and
                Tucson,
                Arizona (April)


·
            concrete
                services in Fresno, California
                (March)





*2006*


·
            distribution
                services in Southern California
                (December)


·
            remaining
                49%
                interest in our existing concrete services business in Arizona
                (November)


·
            window
                installation services in Phoenix, Arizona
                (August)


·
            framing
                services in Southern California
                (July)


·
            concrete
                services in Northern Arizona
                (April)


·
            wall
                panel
                and truss manufacturer in Palm Springs, California
                (April)


·
            remaining
                20%
                interest in our existing concrete block masonry and concrete services
                business in Florida (January)




33


·
            framing
                services in Palm Springs, California and Reno, Nevada
                (January)




At **BMC
      West** ,
      we are expanding
      our building products, manufactured building components, millwork and
      construction services to become a full-service provider to homebuilders. To
      facilitate this expansion in products and services, BMC West
      acquired:





*2006*


·
            building
                materials distribution and truss manufacturing in Eastern Idaho
                (June)


·
            building
                materials distribution and millwork services in Houston, Texas
                (February)





We
      evaluate our results of operations including and excluding acquisitions. We
      believe a presentation of sales and income from operations excluding
      acquisitions not present in comparable periods enhances an understanding of
      the
      acquisitions as well as comparable operations for the respective periods. A
      reconciliation of sales and income from operations excluding acquisitions has
      been provided for the three months ended March 31, 2007 and 2006.





The
      following
      tables and subsequent discussions should be read in conjunction with the
      consolidated financial statements and the related notes in this Form 10-Q and
      our most recent Annual Report on Form 10-K.





**RESULTS
      OF OPERATIONS**





***2007
      COMPARED WITH 2006***





The
      following table
      sets forth the amounts and percentage relationship to sales of certain costs,
      expenses and income items (millions, except per share data):




**Three
                Months Ended**
              **March
                31****2007**
            
            
            
            **2006****Sales**Construction
                services
            
            **$**
            **319**
            
            
            **56.1**
            **%**
            
            $
            549
            
            
            62.0
            %Building
                products
            
            
            **250**
            
            
            **43.9**
            
            
            
            336
            
            
            38.0**Total
                sales**
            
            
            **569**
            
            
            **100.0**
            
            
            
            885
            
            
            100.0**Costs
                and operating expenses**Cost
                of goods
                soldConstruction
                services
            
            
            **275**
            
            
            **86.2**
            
            
            
            454
            
            
            82.7Building
                products
            
            
            **181**
            
            
            **72.4**
            
            
            
            247
            
            
            73.5Selling,
                general and administrative expenses
            
            
            **114**
            
            
            **20.0**
            
            
            
            131
            
            
            14.8Other
                income,
                net
            
            
            **(2**
            **)**
            
            **(0.3**
            **)**
            
            
            (1
            )
            
            (0.1
            )Total
                costs
                and operating expenses
            
            
            **568**
            
            
            **99.8**
            
            
            
            831
            
            
            93.9**Income
                from operations**
            
            
            **1**
            
            
            **0.2**
            
            
            
            54
            
            
            6.1Interest
                expense
            
            
            **8**
            
            
            **1.4**
            
            
            
            6
            
            
            0.7Income
                tax
                benefit (expense)
            
            
            **2**
            
            
            **0.3**
            
            
            
            (17
            )
            
            (1.9
            )Minority
                interests income, net of income taxes
            
            
            **—**
            
            
            **—**
            
            
            
            (3
            )
            
            (0.3
            )**Net
                (loss) income**
            
            **$**
            **(5**
            **)**
            
            **(0.9**
            **)%**
            
            $
            28
            
            
            3.2
            %**Net
                (loss) income per diluted share**
            
            
            **$(0.17**
            **)**
            
            
            
            
            
            $0.95




34




***Consolidated
      Financial Results***


Selected
      financial
      results are as follows (millions):










**2007**
            
            
            **2006**
            
            
            **$
                Change**
            
            
            **%
                Change****Sales**Construction
                services
            
            **$**
            **319**
            
            $
            549
            
            $
            (230
            )
            
            (42
            )%Building
                products
            
            
            **250**
            
            
            336
            
            
            (86
            )
            
            (26
            )%**$**
            **569**
            
            $
            885
            
            $
            (316
            )
            
            (36
            )%**Income
                from operations**
            
            **$**
            **1**
            
            $
            54
            
            $
            (53
            )
            
            (98
            )%





Sales
      of $569
      million decreased $316 million or 36% from the same quarter a year ago. Sales
      of
      construction services were particularly lower and reflected the decline in
      contract starts and building permits across all our markets. According to
      the U.S. Census Bureau, single-family permits in our markets were down 37%
      for
      the three months ended February 2007, while the U.S. overall was down 31%.
      Sales
      were also impacted by lower commodity wood product prices and the seasonal
      slowdown in construction activity.





Income
      from
      operations of $1 million decreased $53 million or 98% from the prior year
      quarter. The decrease in income from operations was due to a decline in gross
      margin from lower volume. Gross margin was 19.8% for the quarter compared to
      20.7% in the same quarter a year ago. Margins were lower for construction
      services due to competitive pricing. Building product margins improved 1.3%
      and
      represented a higher portion of the sales mix, partially offsetting lower
      margins for construction services.





Selling,
      general
      and administrative expenses were down $16.8 million from reductions in payroll
      including incentive compensation. Selling, general and administrative expenses
      as a percent of sales increased to 20.0% from 14.8% due to:


·
            lower
                sales
                volume,


·
            the
                fixed
                portion of certain selling, general and administrative expenses
                and


·
            a
                shift in
                sales mix to a higher portion of building products which carry higher
                expenses than construction
                services.




35




*Interest
      Expense*


Interest
      expense of
      $8 million was up $2 million from the same quarter a year ago. The increase
      was
      due to higher average interest rates of 6.6% compared to 5.0% in 2006 and higher
      average borrowings of $377 million compared to $332 million in the same quarter
      of the prior year. Borrowings were higher to complete payments for acquisitions
      made in 2006.





***Business
      Segments***





Sales
      and operating
      income by business segment are as follows (millions):




**2007**
            
            
            **2006****Sales**
            
            
            **Income
                from**
              **Operations**
            
            
            **Sales**
            
            
            **Income
                from**
              **Operations**SelectBuild
            
            **$**
            **282**
            
            **$**
            **3**
            
            $
            499
            
            $
            46BMC
                West
            
            
            **287**
            
            
            **11**
            
            
            386
            
            
            30Corporate
            
            
            **—**
            
            
            **(13**
            **)**
            
            ―
            
            
            (22
            )**$**
            **569**
            
            **$**
            **1**
            
            $
            885
            
            $
            54








***SelectBuild***


Selected
      financial
      results are as follows (millions):




**2007**
            
            
            **2006**
            
            
            **$
                Change**
            
            
            **%
                Change****Sales**
            
            **$**
            **282**
            
            $
            499
            
            $
            (217
            )
            
            (44
            )%Less:
                Acquisitions
            
            
            **(27**
            **)**
            
            —
            
            
            (27
            )
            
            —**$**
            **255**
            
            $
            499
            
            $
            (244
            )
            
            (49
            )%**Income
                from operations**
            
            **$**
            **3**
            
            $
            46
            
            $
            (43
            )
            
            (93
            )%Less:
                Acquisitions
            
            
            **(3**
            **)**
            
            —
            
            
            (3
            )
            
            —****
            
            **$**
            **—**
            
            $
            46
            
            $
            (46
            )
            
            (100
            )%





Sales
      decreased 44%
      to $282 million from $499 million in the same quarter a year ago. Sales from
      comparable operations were 49% or $244 million lower. Sales from acquisitions
      not present in the same quarter of 2006 were 10% of sales or $27 million. The
      decline in sales volume was pervasive across all our regions and reflected
      a 43%
      decrease in single-family building permits in our markets. High-volume
      homebuilders sharply reduced production of new homes to balance supply with
      demand.





Income
      from
      operations for the quarter decreased 93% to $3 million from $46 million in
      the
      same quarter of 2006. Income from comparable operations was a loss of $0.3
      million.


Income
      from
      operations was adversely impacted by lower gross margins due to a sharp drop
      in
      volume. Gross margins of 13.3% declined 4% from the same quarter in 2006 due
      to
      competitive pricing for fewer job starts in our markets.





Selling,
      general
      and administrative expenses were higher as a percent of sales relative to the
      prior year quarter due to:


·
            a
                decline in
                sales volume,


·
            integration
                expenses including compensation to support a regional operating
                infrastructure and


·
            non-cash
                and
                operating expenses associated with recent
                acquisitions.





36





***BMC
      West***


Selected
      financial
      results are as follows (millions):




**2007**
            
            
            **2006**
            
            
            **$
                Change**
            
            
            **%
                Change****Sales**
            
            **$**
            **287**
            
            $
            386
            
            $
            (99
            )
            
            (26
            )%Less:
                Acquisitions
            
            
            **(9**
            **)**
            
            —
            
            
            (9
            )
            
            —**$**
            **278**
            
            $
            386
            
            $
            (108
            )
            
            (28
            )%**Income
                from operations**
            
            **$**
            **11**
            
            $
            30
            
            $
            (19
            )
            
            (63
            )%Less:
                Acquisitions
            
            
            **—**
            
            
            ―
            
            
            —
            
            
            —**$**
            **11**
            
            $
            30
            
            $
            (19
            )
            
            (63
            )%





Sales
      decreased 26%
      to $287 million from $386 million in the same quarter a year ago. Sales were
      lower due to a 29% decrease in single-family building permits in our
      markets and lower commodity wood product prices. The decline in sales
      occurred in all our markets, particularly Colorado.





Income
      from
      operations for the quarter decreased 63% to $11 million from $30 million in
      the
      same quarter of 2006. Despite a 1.1% improvement in gross margins to 25.9%
      of
      sales, operating income was lower due to the decline in sales.





Selling,
      general
      and administrative expenses increased to 22.2% of sales from 17.0% in the same
      quarter a year ago. As a percent of sales, the increase was due to compensation
      and fixed occupancy expenses relative to lower sales volume.





***Corporate***


Corporate
      represents expenses to support the operations of our business segments,
      SelectBuild and BMC West. These costs include administrative functions for
      information systems, reporting, accounts payable and human resources, executive
      and senior management, professional fees for regulatory compliance and certain
      incentive compensation as well as actuarial adjustments for insurance and
      medical claims. These costs are not allocated to our business
      segments.





Selected
      financial
      results are as follows (millions):





**2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****Operating
                expenses**
            
            **$**
            **13**
            
            $
            22
            
            $
            (9
            )
            
            (41
            )%





Corporate
      expenses
      decreased 41% to $13 million from $22 million in the same period of 2006. The
      decrease was due to lower incentive compensation expenses. Corporate expenses
      were 2.3% of sales compared to 2.5% for the same period a year ago.




37


**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      Flows


Our
      primary need
      for capital resources is to fund working capital and acquisitions as well as
      finance capital expenditures. We expect to fund these requirements through
      a
      combination of cash flow from operations and seasonal borrowings under our
      credit facility.





For
      the first
      quarter of 2007, cash was used by operations and borrowed to complete payments
      for acquisitions made in the prior year as well as complete capital
      expenditures. The sections that follow discuss in more detail our operating,
      investing and financing activities as well as our financing
      arrangements.





*Operations*


Cash
      used by
      operating activities was $38.1 million compared to $14.4 million provided from
      operations for the same period a year ago. Net income adjusted for non-cash
      items decreased $31.6 million due to slower construction activity as
      homebuilders curtailed production in an effort to align home inventory with
      demand. In addition, working capital requirements were $15.5 million more than
      the same quarter a year ago. Cash was used to reduce other accrued liabilities
      and accrued compensation and increases in unbilled receivables, receivables
      and
      prepaid expenses were partially offset by an increase in accounts
      payable.





*Capital
      Investment and Acquisitions*


Cash
      used in
      investing activities was $69.1 million or $22.9 million less than $92.0 million
      in the same quarter a year ago. Cash use included $61.6 million for:


·
            2006
                acquisition of the remaining interests in a concrete block masonry
                and
                concrete services business and a concrete services business and


·
            purchase
                price retained for the settlement period for 4 businesses.





Cash
      used for
      investing activities also included capital expenditures of $8.7 million or
      $1.7
      million less than $10.4 million for the same quarter a year ago. Capital
      expenditures were principally for expansion of construction service facilities
      in California and Florida as well as routine replacement of operating
      equipment.





*Financing*


Cash
      provided by financing activities was $60.8 million or $17.0 million less
      than $77.8 million for the same quarter a year ago. As operating cash flows
      were
      weak and working capital requirements were higher, debt was borrowed to complete
      payments for the remaining interests in two concrete services businesses and
      the
      purchase price retained for the settlement period for 4 businesses as well
      as
      expand our construction service facilities and replace operating equipment.





Financing
      Arrangements


Our
      debt structure
      consists of a revolver, term note and other borrowings.





*Revolver*


In
      November 2006, we entered into an amended $500 million revolver with a group
      of
      lenders. The revolver matures in November 2011. The revolver consists of both
      LIBOR and Prime based borrowings. These variable interest rates are subject
      to
      quarterly adjustment based on operating performance and range from LIBOR plus
      1.00% to 2.00%, or Prime plus 0.00% to 0.75%. Interest is paid quarterly. As
      of
      March 31, 2007, $79.2 million was outstanding under the revolver.




38




*Term
      Note*


In
      November 2006, we entered into a $350 million term note with a group of lenders.
      The term note matures in November 2013 and is payable in quarterly installments
      for the first 7 years in amounts equal to 1% of the initial principal per year
      and the remaining principal due November 2013. The variable interest rate for
      the term note is LIBOR plus 2.50%, or Prime plus 1.25%. Interest is paid
      quarterly. As of March 31, 2007, $348.3 million was outstanding under this
      term
      note.





*Other*


Other
      long-term
      debt of $4.6 million consists of term notes, equipment notes and capital leases
      for equipment. Interest rates vary and dates of maturity are through March
      2021.





*Expansion
      of Credit Facility, Covenants and Maturities*


The
      credit facility
      consists of the revolver and term note. The credit facility may be increased
      an
      aggregate amount of up to $250 million. The credit facility is collateralized
      by
      tangible and intangible property of our wholly-owned subsidiaries, except the
      assets of our captive insurance subsidiary. The credit facility contains
      covenants and conditions requiring the maintenance of certain financial ratios.
      At March 31, 2007, we were in compliance with these covenants and
      conditions.





Scheduled
      maturities of long-term debt are as follows (thousands):





2007
            
            $
            3,9372008
            
            
            4,8262009
            
            
            4,1402010
            
            
            3,8242011
            
            
            82,909Thereafter
            
            
            332,445$
            432,081





As
      of March 31, 2007 and December 31, 2006 there were $97.2 million of letters
      of
      credit outstanding that guaranteed performance or payment to third parties.
      These letters of credit reduce borrowing availability under the
      revolver.





*Hedging
      Activities*


Derivative
      and
      hedging activities are recorded on the balance sheet at their fair values.
      In
      November 2006, we entered into interest rate swap contracts that effectively
      convert $200 million of the variable rate borrowings of the $348.3 million
      term
      note to a fixed interest rate of 7.59% through November 2012, thus reducing
      the
      impact of increases in interest rates on future interest expense. Approximately
      57% of the outstanding variable rate borrowings of the term note as of March
      31,
      2007 have been hedged through the designation of interest rate swap contracts
      accounted for as cash flow hedges. After giving effect to the interest rate
      swap
      contracts, total borrowings were 47% fixed and 53% variable.





The
      fair value of
      derivative instruments is based on pricing models using current market rates.
      The fair value of the interest rate swap contracts was a long-term liability
      of
      $1.7 million as of March 31, 2007. The effective portion was recorded in
      accumulated other comprehensive loss, net, a separate component of shareholders’
equity, and is subsequently reclassified into earnings in the same financial
      statement line item, interest expense, in the same period during which the
      hedged transaction is recognized in earnings. A corresponding deferred tax
      asset
      of $0.7 million was also recorded in accumulated other comprehensive loss,
      net
      for the income tax related to the estimated fair value of the interest rate
      swap
      contracts. The ineffective portion of the change in the value of the interest
      rate swap contracts is immediately recognized as a component of interest
      expense. Management may choose not to swap variable rates to fixed rates or
      may
      terminate a previously executed swap if the variable rate positions are more
      beneficial.




39




In
      June 2004, we entered into interest rate swap contracts that effectively
      converted $100 million of variable rate borrowings to a fixed interest rate.
      These swaps were settled in November 2006 and the $1.5 million gain recognized
      for this settlement was reclassified to other income, net from accumulated
      other
      comprehensive income, net.





*Equity*





*Repurchase
      Program*


In
      March 2007, our Board of Directors authorized the repurchase of up to $25
      million of our common shares through March 2008. No common shares were
      repurchased in the period ended March 31, 2007.





*Common
      Shares*


On
      February 14, 2006, our Board of Directors approved a two for one split of our
      outstanding common shares. Shareholders of record as of February 28, 2006
      received a stock dividend of one additional common share for every common share
      they owned. All share and per share information for all periods presented has
      been adjusted to reflect this share split.





At
      the annual meeting of shareholders on May 3, 2005, our shareholders voted to
      increase the number of authorized common shares to 50 million from 20 million.
      These additional shares may be issued for reasons including but not limited
      to
      stock splits, financing acquisitions, establishing strategic relationships
      with
      corporate partners and providing equity incentives.





In
      the third quarter of 1998, we filed a shelf registration with the Securities
      and
      Exchange Commission to register 4 million common shares. We may issue these
      shares in connection with future business acquisitions, combinations or mergers.
      Shares have been issued from this registration statement for a portion of the
      purchase price for acquisitions. There are approximately 3.7 million shares
      remaining and available under this shelf registration.





Based
      on our
      historical ability to generate cash flows from operations, borrowing capacity
      under the credit facility and access to debt and equity markets, management
      believes it will have sufficient capital to meet anticipated needs.





40


**OFF-BALANCE
      SHEET ARRANGEMENTS**





As
      part of our ongoing business, we do not participate in transactions that
      generate relationships with unconsolidated entities or financial partnerships
      often referred to as structured finance or special purpose entities which might
      be established to facilitate off-balance sheet arrangements or other
      contractually narrow or limited purposes. As of March 31, 2007, we are not
      involved in any transactions with unconsolidated entities.





**DISCLOSURES
      OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS**





Accelerated
      repayment of our revolver and term note may occur if certain financial
      conditions or warranties and representations are not met. The credit facility
      consists of the revolver and term note. The credit facility is collateralized
      by
      all tangible and intangible property, except assets of the captive insurance
      subsidiary. The credit facility contains covenants and conditions requiring
      the
      maintenance of certain financial ratios. At March 31, 2007, we were in
      compliance with these covenants and conditions.





We
      have potential put obligations and call rights associated with the interests
      in
      RCI Construction, A-1 Truss and WBC Mid-Atlantic that we do not currently own.
      Under the purchase agreements, we have the right to purchase the remaining
      portions during certain periods or if certain conditions are met. Likewise,
      the
      other owners have the option to require us to purchase the remaining portions
      during certain periods. The purchase price for the remaining portions will
      be
      based generally on a multiple of historical earnings.





As
      part of our revolver, we have $97.2 million of letters of credit outstanding
      principally for the deductible portion of automobile, general liability and
      workers’ compensation claims. These obligations are not required to be recorded
      on our balance sheet and renew automatically on their various anniversary dates
      or until released by their respective beneficiaries.





41





**CRITICAL
      ACCOUNTING ESTIMATES**





Preparing
      financial
      statements requires management to make estimates and assumptions that affect
      the
      reported amounts of assets, liabilities, revenues and expenses. These estimates
      and assumptions include critical accounting estimates which are defined by
      the
      Securities and Exchange Commission as those that are the most important to
      the
      portrayal of our financial condition, results of operations or cash flows.
      These
      estimates require management’s subjective and complex judgments often as a
      result of the need to estimate matters that are inherently uncertain. We review
      the development, selection and disclosure of these estimates with our Audit
      Committee. Management believes the estimates utilized are reasonable under
      the
      circumstances, however actual results could differ from these estimates and
      may
      require adjustment in future periods. Our critical accounting estimates
      are:





*·*  *Revenue
      Recognition for Construction Services*


The
      percentage-of-completion method is used to recognize revenue for construction
      services.  This method requires the use of various estimates,
      including among others, the extent of progress towards completion, contract
      revenues and contract completion costs. Periodic estimates of our progress
      towards completion are made based on a comparison of labor costs incurred to
      date with total estimated contract costs for labor. Contract revenues and
      contract costs to be recognized are dependent on the accuracy of estimates,
      including quantities of materials, labor productivity and other cost estimates.
      We have a history of making reasonable estimates of the extent of progress
      towards completion, contract revenues and contract completion costs. However,
      due to uncertainties inherent in the estimation process, it is possible that
      actual completion costs may vary from estimates. Revisions of contract revenues
      and cost estimates as well as provisions for estimated losses on uncompleted
      contracts are recognized in the period such revisions are known.





*·* *Estimated
      Losses on Uncompleted Contracts and Changes in Contract
      Estimates*


Estimated
      losses on
      uncompleted contracts and changes in contract estimates are established by
      assessing estimated costs to complete, change orders and claims for uncompleted
      contracts. Revisions of estimated losses are recognized in the period such
      revisions are known.





At
      March 31, 2007, the reserve for these estimated losses was $0.2 million for
      SelectBuild and less than $0.1 million for BMC West. These reserves are
      established by assessing estimated costs to complete, change orders and claims.
      Assumptions for estimated costs to complete include material prices, labor
      costs, labor productivity and contract claims. Such estimates are inherently
      uncertain and therefore it is possible that actual completion costs may vary
      from these estimates. We have a history of making reasonable estimates of the
      extent of progress towards completion, contract revenue and contract completion
      costs. However, due to uncertainties inherent in the estimation process, it
      is
      possible that actual completion costs may vary from estimates.





*·*  *Goodwill*


Goodwill
      represents
      the excess of purchase price over the fair values of net tangible and
      identifiable intangible assets of acquired businesses. An annual assessment
      for
      impairment is completed in the fourth quarter and whenever events and
      circumstances indicate the carrying amount may not be recoverable. An impairment
      is recognized if the carrying amount is more than the estimated future operating
      cash flows as measured by fair value techniques.




42




At
      March 31, 2007, goodwill was $285.6 million for SelectBuild and $20.9 million
      for BMC West. The impairment assessment includes determining the estimated
      fair
      value of reporting units based on discounting the future operating cash flows
      using a discount rate reflecting our estimated average cost of funds. Future
      operating cash flows are derived from our budget information, which includes
      assumptions of future volumes, pricing of commodity products and labor costs.
      Prices for commodity products are inherently volatile.





Due
      to the
      variables associated with prices of commodity products and the effects of
      changes in circumstances, both the precision and reliability of the estimates
      of
      future operating cash flows are subject to uncertainty. As additional
      information becomes known, we may change our estimates.





*·*  *Insurance
      Deductible Reserves*


The
      estimated cost
      of workers’ compensation, general liability and automobile claims is determined
      by actuarial methods. Claims in excess of insurance deductibles are insured
      with
      third-party insurance carriers. Reserves for deductible amounts are
      recognized based on the estimated costs of these claims as limited by the
      provisions of the applicable insurance policies. Revisions of estimated
      claims are recognized in the period such revisions are known.





At
      March 31, 2007, the reserve for automobile, general liability and workers’
compensation claims was $53.9 million. The actuarial assessment includes
      determining the estimated cost of claims. The reserve for these claims is
      susceptible to change based on the estimated cost of the claims. Actual loss
      experience substantially different than the actuarial assumptions may occur.
      Future reserves are subject to the nature and frequency of claims, medical
      cost
      inflation and changes in the insurance deductibles of the applicable insurance
      policies.





*·*  *Warranties*


The
      estimated cost
      of warranties for certain construction services is based on the nature and
      frequency of claims, anticipated claims and cost per claim. Claims in excess
      of
      insurance deductibles are insured with third-party insurance carriers. Estimated
      costs for warranties are recognized when the revenue associated with the service
      is recognized. Revisions of estimated warranties are recognized in the period
      such revisions are known.





At
      March 31, 2007, the reserve for warranties was $7.1 million. Specific terms
      and
      conditions for warranties vary from 1 year to 10 years and are based on
      geographic market and state regulations. The reserve for these claims is
      susceptible to change based on the estimated cost of the claim. We have a
      history of making reasonable estimates of warranties. However, due to
      uncertainties inherent in the estimation process, it is possible that actual
      warranty costs may vary from estimates. Revisions of estimated warranties are
      recognized in the period such revisions are known.





*·*  *Share-based
      Compensation*


Our
      estimates of
      the fair values of our share-based payment transactions are based on the
      modified Black-Scholes-Merton model. To meet the fair value measurement
      objective, we are required to develop estimates regarding expected exercise
      patterns, share price volatility, forfeiture rates, risk-free interest rate
      and
      dividend yield. These assumptions are based principally on historical
      experience. When circumstances indicate the availability of new or different
      information that would be useful in estimating these assumptions, revisions
      will
      be made and recognized in the periods such revisions are known. Due to
      uncertainties inherent in these assumptions, it is possible that actual
      share-based compensation may vary from this estimate.




43




**RECENT
      ACCOUNTING PRINCIPLES**





In
      February 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 159, *The
      Fair Value
      Option for Financial Assets and Financial Liabilities - Including an Amendment
      of FASB Statement No. 115* .
      This accounting
      principle expands the use of fair value accounting. Entities may elect to
      measure eligible items at fair value at specified election dates, however the
      fair value election is irrevocable and made on an instrument-by-instrument
      basis. Eligible items include financial assets and liabilities, firm commitments
      for financial instruments, loan commitments, nonfinancial insurance contracts
      and warranties (goods or services settled by a third party) and host financial
      instruments. Upon adoption, unrealized gains and losses for existing items
      measured at fair value are recorded as a cumulative adjustment to beginning
      retained earnings and subsequent changes are recognized in earnings at each
      reporting date. We elected to not adopt the fair value measurement option for
      eligible items. This accounting principle was adopted January 2007 and had
      no
      impact on consolidated financial position, results of operations or cash flows.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157, *Fair
      Value
      Measurements* .
      This accounting
      principle simplifies existing accounting literature by providing a single
      definition of fair value, a framework for measuring fair value and expanded
      disclosures about fair value. This accounting principle emphasized that fair
      value is a market-based measurement of the amount that would be received upon
      the sale of an asset or paid to transfer a liability (an exit price) and not
      the
      price that would be paid to acquire the asset or received to assume the
      liability (entry price). This accounting principle did not expand the use of
      fair value. This accounting principle was adopted January 2007 and had no impact
      on consolidated financial position, results of operations or cash
      flows.





In
      June 2006, the Financial Accounting Standards Board issued Interpretation No.
      48, *Accounting
      for
      Uncertainty in Income Taxes.* This
      accounting
      principle provides specific guidance for measurement, recognition and disclosure
      of uncertain tax positions. This accounting principle was adopted January 2007
      and had no impact on consolidated financial position, results of operations
      or
      cash flows.








**BUSINESS
      RISKS AND FORWARD-LOOKING STATEMENTS**





There
      are a number
      of business risks and uncertainties that affect our operations and therefore
      could cause future results to differ from past performance or expected results.
      Additional information regarding business risks and uncertainties is contained
      in Part II Item 1A of this Form 10-Q. These risks and uncertainties may include,
      however are not limited to:


·
            demand
                for
                and supply of single-family homes which is influenced by changes
                in the
                overall condition of the U.S. economy, including interest rates,
                job
                formation, consumer confidence and other important
                factors; ·
            our
                business
                model; ·
            the
                integration of acquired businesses may not result in anticipated
                cost
                savings and revenue synergies being fully realized or may take longer
                to
                realize than expected;




44


·
            our
                ability
                to identify suitable acquisition
                candidates; ·
            availability
                of and our ability to attract, train and retain qualified
                individuals; ·
            our
                ability
                to implement and maintain cost structures that align with revenue
                growth; ·
            changes
                in
                the business models of our customers may limit our ability to provide
                construction services and building products required by our
                customers; ·
            fluctuations
                in our costs and availability of sourcing channels for commodity
                wood
                products, concrete, steel and other building
                materials; ·
            intense
                competition; ·
            weather
                conditions including natural catastrophic
                events; ·
            exposure
                to
                construction defect and product liability claims as well as other
                legal
                proceedings; ·
            disruptions
                in our information systems; ·
            actual
                and
                perceived vulnerabilities as a result of terrorist activities and
                armed
                conflict; ·
            costs
                and/or
                restrictions associated with federal, state and other regulations;
                and ·
            numerous
                other matters of a local and regional scale, including those of a
                political, economic, business, competitive or regulatory
                nature.




Risks
      related to
      our shares may include, however are not limited to:


·
            price
                for our
                shares may fluctuate significantly;
                and


·
            anti-takeover
                defenses and certain provisions could prevent an acquisition of our
                company or limit share price.





Certain
      statements
      in this Form 10-Q, including those related to expectations about homebuilding
      activity in our markets, demographic trends supporting homebuilding and
      anticipated sales and operating income, are forward-looking statements within
      the meaning of the Private Securities Litigation Reform Act of 1995. Statements
      that are not historical or current facts, including statements about our
      expectations, anticipated financial results and future business prospects are
      forward-looking statements. While these statements represent our current
      judgment on what the future may hold and we believe these judgments are
      reasonable, these statements involve risks and uncertainties that are important
      factors that could cause our actual results to differ materially from those
      in
      forward-looking statements. These factors include, however are not limited
      to
      the risks and uncertainties cited in the above paragraph. Undue reliance should
      not be placed on such forward-looking statements, as such statements speak
      only
      as of the
      date of the
      filing of this Form 10-Q. We undertake no obligation to update forward-looking
      statements.




45


**Item
      3**-********Quantitative
      and Qualitative Disclosures about Market Risk**





*Commodity
      Risk*


Prices
      of commodity
      wood products, which are subject to significant volatility, may adversely impact
      operating income when prices rapidly rise or fall within a relatively short
      period of time. The frequency at which inventory is sold and the short-term
      duration of our construction contracts reduces the risk of gross margin erosion
      caused by rapid changes in commodity wood product prices. We do not use
      derivative financial instruments to hedge commodity wood product
      prices.





*Interest
      Rate Risk*


Changes
      in interest
      expense occur when market interest rates change. Changes in the amount of debt
      could also increase interest rate risks. Interest rate swap contracts are
      currently utilized to hedge interest rate risks. Approximately 57% of the
      outstanding floating rate borrowings of the $348.3 million term note as of
      March
      31, 2007 have been hedged through the designation of interest rate swap
      contracts accounted for as cash flow hedges. After giving effect to the interest
      rate swap contracts, total borrowings are 47% fixed and 53% floating. Based
      on
      debt outstanding as of March 31, 2007, a 0.25% increase in interest rates would
      result in approximately $0.6 million of additional interest expense
      annually.





46


**Item
      4***-***Controls and Procedures**





*Evaluation
      of Disclosure Controls and Procedures*


As
      of the end of the period covered by this report, management carried out an
      evaluation, under the supervision and with the participation of the Chief
      Executive Officer and Chief Financial Officer, of the design and operation
      of
      our disclosure controls and procedures. This evaluation was conducted to
      determine whether the disclosure controls and procedures were effective and
      timely in bringing material information to the attention of senior management
      and are designed to provide reasonable assurance regarding the reliability
      of
      financial reporting and the preparation of our financial statements in
      accordance with generally accepted accounting principles. Based on that
      evaluation, the Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures are effective in ensuring
      information required to be disclosed in reports filed under the Securities
      and
      Exchange Act of 1934 is recorded, processed, summarized and reported within
      the
      time periods specified in the Securities and Exchange Commission’s rules and
      forms and is accumulated and communicated to our Chief Executive Officer and
      Chief Financial Officer to allow timely decisions regarding required
      disclosure.





*Changes
      in Internal Controls Over Financial Reporting*


Our
      disclosure
      controls and procedures and internal controls over financial reporting are
      routinely evaluated and tested for effectiveness. These evaluations are
      discussed with management and the Audit Committee of the Board of Directors.
      As
      a result of these evaluations, revisions and corrective actions are made to
      ensure the continuing effectiveness of our disclosure controls and procedures
      and internal controls over financial reporting.





During
      the period
      covered by this report, we identified deficiencies in the design or operation
      of
      our internal controls, however revisions and corrective actions are being made
      to ensure the effectiveness of our disclosure controls and procedures and
      internal controls over financial reporting. None of these deficiencies have
      been
      considered a material weakness and there were no changes in the design or
      operation of our internal controls over financial reporting that have materially
      affected, or are reasonably likely to materially affect, our internal controls
      over financial reporting.




47


**PART
      II - OTHER INFORMATION**




**Item
      1**-**Legal Proceedings**





We
      are involved in litigation and other legal matters arising in the normal course
      of business. In the opinion of management the recovery or liability, if any,
      under any of these matters will not have a material effect on our consolidated
      financial position, results of operations or cash flows.





48





**Item
      1A**-**Risk Factors**





*Risks
      Related to Our Business*


There
      are a number
      of business risks and uncertainties that affect our operations and therefore
      could cause future results to differ from past performance or expected results.
      These risks or uncertainties may include, but are not limited to the following
      factors:





*Our
      business is dependent on demand for and supply of single-family homes which
      is
      influenced by changes in the overall condition of the U.S. economy, including
      interest rates, job formation, consumer confidence and other important
      factors.*


The
      residential
      construction services and building products industry is highly dependent on
      demand for single-family homes which is influenced by several factors. These
      factors include economic changes nationally and locally, mortgage and other
      interest rates, job formation, consumer confidence, demographic trends,
      inflation and building permit activity as well as other factors. The
      construction of new homes may experience decline due to home inventory levels,
      the availability and affordability of land in attractive metropolitan areas,
      shortages of qualified trades people, shortages of materials and regulations
      that impose restrictive zoning and density requirements. Also, changes to
      housing patterns may occur, such as an increase in consumer demand for urban
      living rather than single-family suburban neighborhoods. All of these factors
      could limit demand for home construction and may adversely impact our financial
      condition, results of operations or cash flows.





*There
      are risks associated with our business model.*


Our
      business model
      seeks the strategic growth of construction services and distribution of building
      products in an effort to provide a comprehensive solution to high-volume and
      other homebuilders. Providing these services and products includes the risks
      of
      availability and cost of qualified labor and claims for construction defects,
      product liability and workers compensation as well as the timely sourcing and
      availability of building products. Additionally, there is no guarantee that
      our
      efforts to offer these comprehensive solutions will continue to be accepted
      by
      the marketplace.





*The
      integration of acquired businesses may not result in anticipated cost savings
      and revenue synergies being fully realized or may take longer to realize than
      expected.*


Our
      growth over the
      past several years has been largely due to acquisitions and we intend to
      continue this strategy. The integration of acquired businesses may not result
      in
      anticipated cost savings and revenue synergies being fully realized or may
      take
      longer to realize than expected. The management and acquisition of businesses
      involves substantial risks including:


·
            the
                uncertainty that an acquired business will achieve anticipated operating
                results;


·
            significant
                expenses to integrate;


·
            diversion
                of
                management attention;


·
            departure
                of
                key personnel from the acquired
                business;


·
            effectively
                managing entrepreneurial spirit and
                decision-making;


·
            integration
                of different information systems;


·
            managing
                new
                construction service trades;


·
            unanticipated
                costs and exposure to unforeseen liabilities;
                and


·
            impairment
                of
                assets.




49




*Our
      growth is dependent upon our ability to identify suitable acquisition
      candidates.*


Our
      growth over the
      past several years has been largely due to acquisitions and we intend to
      continue this strategy. Failure to identify and acquire suitable acquisition
      candidates could have an adverse effect on our growth. Also, the increasing
      level of consolidation occurring in the construction services and building
      products distribution industry may limit the availability and suitability of
      acquisition candidates.





*Our
      success is dependent upon the availability of and our ability to attract, train
      and retain qualified individuals.*


Competition
      for
      employees is especially intense in both construction services and building
      products distribution. In markets with strong housing demand, we may experience
      shortages in qualified labor and key personnel, which may limit our ability
      to
      complete contracts as well as obtain additional contracts with builders.
      Additional and perceived enforcement of as well as changes to immigration
      policies could also limit the availability of qualified labor. We cannot
      guarantee that we will be successful in recruiting and retaining qualified
      employees in the future.





*An
      inability to implement and maintain cost structures that align with revenue
      growth may have an adverse impact on our operating results.*


When
      we experience
      slower periods of homebuilding activity, acquire new businesses or expand
      existing operations, we may experience inefficiencies in our cost structures.
      Our evaluation and changes to expenses in response to declining sales may not
      occur in a timely manner, leading to higher costs and lower returns on sales.





*Changes
      in the business models of customers may limit our ability to provide
      construction services and building products required by our
      customers.*


As
      the business models of our customers evolve, our existing construction service
      and building product offerings may not meet the needs of certain homebuilders.
      Homebuilders may decide to no longer outsource construction services or may
      purchase construction services and building products from separate suppliers.
      If
      we do not timely assess shifts in customer expectations, preferences and demands
      in a timely manner, our financial condition, results of operations or cash
      flows
      could be adversely affected.





*Our
      operating results are affected by fluctuations in our costs and the availability
      of sourcing channels for commodity wood products, concrete, steel and other
      building materials.*


Prices
      of commodity
      wood products, concrete, steel and other building products are historically
      volatile and are subject to fluctuations arising from changes in domestic and
      international supply and demand, labor costs, competition, market speculation,
      government regulations and periodic delays in delivery. Rapid and significant
      changes in product prices may affect sales as well as margins due to a limited
      ability to pass on short-term price changes. We do not use derivative financial
      instruments to hedge commodity price changes.





We
      may experience shortages of building products as a result of unexpected demand
      or production difficulties as well as transportation limitations. Any disruption
      in our sources of supply for key building products could negatively impact
      our
      financial condition, results of operations or cash flows.





*Our
      business is subject to intense competition.*


We
      experience competition across all markets for our construction services and
      building products. Recently, there has been increased consolidation within
      the
      construction services and building materials distribution industry. As the
      industry consolidates, other building materials distributors, including large
      retail distributors focused on consumers, may aggressively pursue our target
      market of high-volume homebuilders and other professional builders and
      contractors. These competitive factors may lead to pricing pressures and cause
      reductions in sales or margins, increases in operating costs and may limit
      acquisition opportunities. Loss of significant market share due to competition
      could result in the closure of facilities.




50




*Weather
      conditions, including natural catastrophic events, may cause our operating
      results to fluctuate each quarter.*


Our
      first and
      fourth quarters historically have been, and are expected to continue to be,
      adversely affected by weather conditions in some of our markets, causing
      decreases in operating results due to slower homebuilding activity. In addition,
      natural catastrophic events may cause our operating results to
      fluctuate.





*The
      nature of our business exposes us to construction defect and product liability
      claims as well as other legal proceedings.*


We
      are involved in construction defect and product liability claims relating to
      our
      various construction trades and the products we distribute and manufacture.
      We
      also operate a large fleet of trucks and other vehicles and therefore face
      some
      risk of accidents. Although we believe we maintain adequate insurance, we may
      not be able to maintain such insurance on acceptable terms or such insurance
      may
      not provide adequate protection against potential liabilities. Current or future
      claims may adversely affect our financial condition, results of operations
      or
      cash flows.





*We
      may be adversely affected by disruptions in our information
      systems.*


Our
      operations are
      dependent upon information for decision-making and the related information
      systems. A substantial disruption in our information systems for a prolonged
      period could result in delays in our services and products and adversely affect
      our ability to complete contracts and fulfill customer demands. Such delays,
      problems or costs may have an adverse effect on our financial condition, results
      of operations or cash flows.





*Actual
      and perceived vulnerabilities as a result of terrorist activities and armed
      conflict may adversely impact consumer confidence and our
      business.*


Instability
      in the
      economy and financial markets as a result of terrorism or war may impact
      consumer confidence and result in a decrease in homebuilding in our markets.
      Terrorist attacks may also directly impact our ability to maintain operations
      and services and may have an adverse effect on our business.





*Federal,
      state and other regulations could impose substantial costs and/or restrictions
      on our business.*


We
      are subject to various federal, state, local and other regulations, including
      among other things, work safety regulations promulgated by the Department of
      Labor’s Occupational Safety and Health Administration, transportation
      regulations promulgated by the Department of Transportation, employment
      regulations promulgated by the United States Equal Employment Opportunity
      Commission and state and local zoning restrictions and building codes. More
      burdensome regulatory requirements in these or other areas may increase our
      costs and have an adverse effect on our financial condition, results of
      operations or cash flows.





*Numerous
      other matters of a local and regional scale, including those of a political,
      economic, business, competitive or regulatory nature may have an adverse impact
      on our business.*


Many
      factors shape
      the homebuilding industry and our business. In addition to the factors
      previously cited, there are other matters of a local and regional scale,
      including those of a political, economic, business, competitive or regulatory
      nature that may have an adverse effect on our business.




51




*Risks
      Related to Our Shares*


Risks
      related to
      our shares may include, however are not limited to:




*Our
      share price may fluctuate significantly, which may make it difficult for
      shareholders to trade*  *our
      shares when desired or at attractive prices.*


The
      market price of
      our shares is subject to significant changes as a result of our operating
      performance and the other factors discussed above as well as perceptions and
      events that are beyond our control. Price and trading volume fluctuations for
      our shares may be unrelated or disproportionate to our operating performance.
      Additionally, our share price could fluctuate based on the expectations and
      performance of other publicly traded companies in the construction services
      and
      building products distribution industry.





*Anti-takeover
      defenses in our governing documents and certain provisions under Delaware law
      could*  *prevent
      an acquisition of our company or limit the price that investors might be willing
      to pay for our shares.*


Our
      governing documents and certain provisions of Delaware law that apply to us
      could make it difficult for another company to acquire control of our company.
      For example, w e
      have a
      shareholder rights plan, commonly known as a “poison pill,” which would make it
      difficult for someone to acquire our company without the approval of our Board
      of Directors. Also, our certificate of incorporation allows our Board of
      Directors to issue, at any time and without shareholder approval, preferred
      shares with such terms as it may determine. These provisions and others could delay, prevent or allow our Board of Directors
      to resist an acquisition of our company, even if a majority of our shareholders
      favored the proposed transaction.





52





**Item
      2**-**Unregistered Sales of Equity Securities and Use of
      Proceeds**





In
      March 2007, our Board of Directors authorized the repurchase of up to $25
      million of our common shares through March 2008. No common shares were
      repurchased in the period ended March 31, 2007.





53





**Item
      3**-**Defaults Upon Senior Securities**





None.





54





**Item
      4**-**Submission of Matters to a Vote of Security Holders**





Our
      annual meeting
      of shareholders was held on May 1, 2007. A total of 29,170,793 common
      shares were outstanding at the date of record and entitled to vote at the
      meeting. Of the total outstanding, 26,473,771 shares were represented at the
      meeting, while 2,697,022 were not voted.





*Election
      of Board of Directors*


In
      accordance with Delaware corporate law and our bylaws, directors are elected
      by
      a plurality of the votes, with the nominees receiving the highest number of
      affirmative votes being elected as directors. As there were no votes cast for
      other candidates, each of the nominees below were elected as directors with
      terms expiring in 2008.





**For**
            
            **Withheld**Robert
                E.
                Mellor
            
            23,494,156
            
            2,979,615Sara
                L.
                Beckman
            
            23,816,770
            
            2,657,001Eric
                S.
                Belsky
            
            23,863,120
            
            2,610,651James
                K.
                Jennings, Jr.
            
            23,864,141
            
            2,609,630Norman
                J.
                Metcalfe
            
            23,867,893
            
            2,605,878David
                M.
                Moffett
            
            23,820,330
            
            2,653,441R.
                Scott
                Morrison, Jr.
            
            23,819,160
            
            2,654,611Peter
                S.
                O’Neill
            
            23,617,952
            
            2,855,819Richard
                G.
                Reiten
            
            23,865,891
            
            2,607,880Norman
                R.
                Walker
            
            23,854,845
            
            2,618,926





*Amended
      2004 Incentive and Performance Plan*


Our
      shareholders
      approved the following changes to the 2004 Incentive and Performance
      Plan:


·
            increase
                limitation on annual incentive compensation to $5 million from $1.5
                million,


·
            eliminate
                200% base salary limitation for annual incentive compensation
                and


·
            clarify
                $5
                million annual incentive compensation limitation does not include
                options
                or share appreciation rights.





Shareholder
      votes
      were cast as follows:





**For**
            
            **Withheld**
            
            **Abstain**
            
            **Not
                Voted**16,500,930
            
            1,646,601
            
            52,634
            
            8,273,606





*Ratification
      of Independent Registered Public Accountants*


Our
      shareholders
      ratified the selection of KPMG LLP as our independent registered public
      accountants at the annual meeting and votes were cast as follows:





**For**
            
            **Withheld**
            
            **Abstain**
            
            **Not
                Voted**26,280,668
            
            146,674
            
            46,429
            
            0




55




**Item
      5**-**Other Information**





None.





56





**Item
      6**-**Exhibits**





(a)
            
            Exhibits**Number**
            
            **Description**10.25
            
            Building
                Materials Holding Corporation Amended 2004 Incentive and Performance
                Plan10.40
            
            Building
                Materials Holding Corporation 2007 Annual Incentive Program for Certain
                Employees of BMHC and SelectBuild10.41
            
            Building
                  Materials Holding Corporation 2007 Annual Incentive Program for
                  BMC West
                  Officers and Key Staff10.45.1
            
            Building
              Materials Holding Corporation 2005 Deferred Compensation Plan for
              Executives Amendment #111.0
            
            Statement
                regarding computation of earnings per share (see Note
                2)31.1
            
            Section
                302
                Certification31.2
            
            Section
                302
                Certification32.0
            
            Section
                906
                Certifications




57




**SIGNATURES**





Pursuant
      to the
      requirements of the Securities Exchange Act of 1934, the registrant has duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.




BUILDING
              MATERIALS HOLDING CORPORATIONDate:
                May 4,
                2007
            
            */s/
                Robert E. Mellor*Robert E. Mellor
              Chairman of the Board, President
                and
                Chief Executive Officer
              (Principal Executive
                Officer)  Date:
                    May 4,
                    2007
              
              */s/
                    William M. Smartt*William M. Smartt
                Senior Vice President and
                  Chief
                  Financial Officer
                (Principal
                    Financial Officer)
  58