Table of Contents  Exhibit 13.1 PORTIONS OF 2006 ANNUAL REPORT TO SHAREHOLDERS SELECTED FINANCIAL DATA You should read the following selected financial data together with our consolidated financial statements and the related notes appearing elsewhere in this report and the Managements Discussion and Analysis of Financial Condition and Results of Operations section and other financial data included in this report.  Blue Ridge Real Estate Company and Subsidiaries and Big Boulder Corporation and Subsidiaries COMBINED SUMMARY OF SELECTED FINANCIAL DATA  10/31/0610/31/0510/31/0410/31/0310/31/02Revenues from continuing operations$13,329,620$11,682,890$7,177,910$7,947,534$7,082,823Net income (loss)$2,831,280$1,932,000$6,246,107$ (879,137)$  686,758Net income (loss) per combined share$1.17$0.90$3.26($0.45)$0.36Cash dividends per combined share00000Weighted average number of combined shares outstanding2,443,0242,385,0241,916,1301,916,1301,916,431Total assets$71,814,454$56,993,743$45,461,969$27,960,410$24,645,828Debt$22,030,700$13,149,742$15,881,808$10,990,756$ 8,049,805Shareholders' equity$37,845,397$33,663,614$15,769,866$ 9,523,759$10,202,521   1   Table of Contents  FINANCIAL SECTION Page  Quarterly Financial Information (Unaudited) 3 Stock and Dividend Information 4 Managements Discussion and Analysis of Financial Condition and Results of Operations 5 Combined Balance Sheets 16 Combined Statements of Operations 18 Combined Statements of Changes in Shareholders Equity 19 Combined Statements of Cash Flows 20 Notes to Consolidated Financial Statements 21 Report of Independent Registered Public Accounting Firm 38   2   Table of Contents  QUARTERLY FINANCIAL INFORMATION (Unaudited) The results of operations for each of the quarters in the last two years are presented below. 1st2nd3rd4thTotalYear ended 10/31/06Operating revenues$1,496,504$2,194,983$4,670,530$4,967,603$13,329,620Operating (loss) profit(747,382)(576,589)674,085677,52327,637Net (loss) income from discontinued
   operations(51,633)49,5243,269,043(15,126)3,251,808Net (loss) income(598,763)(388,802)3,594,249224,5962,831,280Net (loss) income before discontinued
   operations per weighted
   average combined share($0.22)($0.20)($0.73)$0.98($0.17)Net (loss) income per weighted average
   combined share($0.25)($0.16)$1.49$0.09$1.17  1st2nd3rd4thTotalYear ended 10/31/05Operating revenues$4,801,535$2,275,541$2,131,194$2,474,620$11,682,890Operating profit (loss)$2,399,136($81,761)($179,601)($344,667)$1,793,107Net income (loss) from discontinued
   operations$420,998$1,341,240($615,151)($240,453)$906,634Net income (loss)$1,751,846$1,198,280($784,316)($233,810)$1,932,000Net income (loss) before discontinued
   operations and cumulative effect per
   weighted average combined share$0.69($0.07)($0.07)($0.07)$0.48Net income (loss) per weighted average
   combined share$0.91$0.61($0.48)($0.14)$0.90 The quarterly results of operations for Fiscal 2006 and 2005 reflect the cyclical nature of the Companies' business since land dispositions occur sporadically and do not follow any pattern during the fiscal year.  Reclassifications in operating revenues and income (loss) from continuing operations in the quarters for years ended October 31, 2006 and 2005 reflect ski operations being classified as discontinued operations, as well as the sale of Oxbridge Square shopping center in Fiscal 2006.   3   Table of Contents  STOCK AND DIVIDEND INFORMATION  Market Price of Common Stock  Our common stock is quoted on the OTC Bulletin Board under the symbol BLRGZ.  There has been a limited and sporadic trading market for our common stock.  However, our management does not believe such limited activity constitutes an established public trading market.  As of January 26, 2007, we had 514 holders of record of our common stock.  The following sets forth the high asked and low bid price quotations as reported on the monthly statistical reports of the National Association of Securities Dealers, Inc. for Fiscal 2006 and 2005. No dividends were paid on common stock in either period.  Fiscal Year 2006 HIGH LOW ASKED BID First Quarter 38.88 37.50 Second Quarter 47.00 37.80 Third Quarter 43.00 37.55 Fourth Quarter 41.75 38.00   Fiscal Year 2005 HIGH LOW ASKED BID First Quarter 36.10 27.50 Second Quarter 41.00 34.00 Third Quarter 45.00 37.75 Fourth Quarter 45.00 37.75  The reported quotations represent prices between dealers, do not reflect retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions.  Dividend Policy  We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and expand our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, operating results, capital requirements, and other factors the board of directors deems relevant.   4   Table of Contents  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Overview Our principal business is the management and development of our real estate and rental properties.  Also significant to our operations is the development of drive-to and destination resort communities in and around our two ski areas, Jack Frost Mountain and Big Boulder. Since the completion of our last large-scale real estate development project in the 1980s, which established our four resort communities, management was primarily focused on the promotion and maintenance of our two ski areas, our summer operations and the resort communities.  Beginning in the fiscal year ended October 31, 2001, we began to refocus our attention on the further development of our real estate holdings.  We are continuing to evaluate the feasibility of our current real estate projects based on market demand and economic conditions. We own 17,007 acres of land in Northeastern Pennsylvania.  Of these land holdings, we have designated 5,004 acres as held for development and are moving forward with governmental approvals.  Management believes that our primary focus should be on the construction of single and multi-family dwellings in proximity to our ski areas.  It is expected that all of our planned developments will result in approximately 3,700 lots or units, some of which will be subdivided and sold as parcels of land, while others will be developed into single and multi-family housing.  For the fiscal year ended October 31, 2007, or Fiscal 2007, management intends to continue selective sales and purchases of land, some of which may be treated as section 1031 tax deferred exchanges.  We are also taking various steps to attract new land sale customers; for example, we are offering financing opportunities for the purchase of selected tracts of land.  We are constructing Phase I and II of the Laurelwoods Community of single family and multi-family homes.  Additionally, we are moving forward with plans to develop residential communities near Jack Frost and Big Boulder ski resorts.  This is part of a comprehensive plan for our core land development in and around our two ski areas. We also generate revenue by the selective timbering of our land.  The selection of parcels is based upon our current real estate development activities. We are in various stages of approval for the community surrounding a new 18-hole golf course at Jack Frost Mountain that is scheduled to open during the spring of 2007.  This community is expected to include approximately 1,100 homes and will be comprised of approximately 40% single family homes and 60% multi-family units, as well as golf club amenities and the necessary infrastructure. We also expect that certain subdivisions may be sold outright in phases to nationally-recognized land developers in order to facilitate the market for housing and to reduce the inherent risk associated with any land development. We currently operate two real estate sales offices.  Jack Frost-Big Boulder Real Estate is located in Lake Harmony, Pennsylvania and markets new and previously owned homes in and around our resort communities primarily to buyers seeking a second home.  The Stoney Run Realty office located in Stroudsburg, Pennsylvania offers custom-built, single family homes in the Pocono region.  These homes primarily attract customers from nearby metropolitan areas in Pennsylvania, New York and New Jersey.  All of these custom-built homes are built by our construction division, Moseywood Construction Company. As a result of the Companies continued focus on real estate activities, at October 31, 2006 we changed the presentation of our balance sheet to an unclassified presentation using the alternate format in order to reflect our assets and liabilities in order of their importance.  5   Table of Contents  Recent Developments  On August 18, 2006, we acquired a retail store located on New Jersey State Highway Route No. 9, in Toms River, New Jersey.  The purchase price of the acquired asset was $5,950,000.  The property consists of a free-standing Walgreens store including approximately 14,820 square feet of leasable space and approximately 1.8 acres of land located in Toms River, New Jersey.  The property and improvements are currently leased to Walgreen Eastern Co., Inc. (the Tenant) pursuant to a lease agreement dated May 18, 2005.  The Tenant began operations effective August 1, 2006. On September 28, 2006, Blue Ridge acquired another retail store property known as the Jack in the Box restaurant, located in the city of Anahuac, Texas, for total consideration of $1,940,000.  Blue Ridge and Jack in the Box entered into a Lease Agreement for the Property whereby Blue Ridge leased the property back to Jack in the Box following the closing. On September 21, 2006, Blue Ridge registered a new subsidiary company named Flower Fields Motel, LLC.  This company was created to facilitate the acquisition of the Flower Fields Motel in Tannersville, Pennsylvania. On October 13, 2006, Blue Ridge, under their newly formed subsidiary Flower Fields Motel, LLC, acquired commercial property known as the Flower Fields Motel.  The property consists of approximately three acres, with a motel and two cottages located thereon in Tannersville, Pennsylvania for total consideration of $900,000.  On October 13, 2006, Flower Fields Motel LLC entered into a Lease Agreement for the Property leasing it to the current operators. On October 31, 2006, Blue Ridge acquired another retail store property located along Wildwood Road, in White Bear Lake, Minnesota.  The purchase price of the acquired asset was $6,190,000.  The property consists of a free-standing Walgreens store including approximately 14,820 square feet of leasable space and approximately 1.8 acres of land located in White Bear Lake, Minnesota.  The property and improvements are currently leased to Walgreen Company, Inc. (the Tenant) pursuant to a lease agreement dated August 11, 2005.  The Tenant began operations effective November 25, 2006. The purchase price for the Walgreens stores in New Jersey and Minnesota, the Jack in the Box restaurant and the Flower Fields Motel were funded by cash held in escrow from the sale of Oxbridge Square shopping center via a third party intermediary. These acquisitions are replacement properties for the tax deferred like-kind exchange of Oxbridge Square Shopping Center in accordance with Internal Revenue Code Section 1031. On September 28, 2006, Blue Ridge Real Estate Company and Northeast Land Company sold 126 acres to Split Rock County Club, Inc. for $645,000.  As part of the Agreement of Sale for the property, Blue Ridge Real Estate Company agreed to terminate two easements through the property for an additional $105,000. Effective October 1, 2006, the Northeast Land Company entered into an agreement with Mountain Resort Villas, an unrelated party and an affiliate of Appletree Management Group, Inc. Pursuant to the contract, Mountain Resort Villas agreed to purchase certain property management and rental management contracts from Northeast Land Company and to lease certain buildings for use in the operation and maintenance of Northeast Land Companys existing rental accommodations program. The opening of the Jack Frost National Golf Course in Blakeslee, Pennsylvania is planned for spring 2007.  The opening was delayed due to several weather related events, including a torrential rainstorm in June which delayed the grow-in phase of the golf course. Construction of two duplex buildings in Laurelwoods II commenced in September 2006 and is expected to be completed in the summer of 2007. Infrastructure improvements for Boulder Lake Village condominium development are expected to be completed by the fall of 2007.  Plans are underway to begin construction the first condominium building in spring 2007.  6   Table of Contents  Critical Accounting Policies and Significant Judgments and Estimates We have identified the most critical accounting policies upon which our financial status depends.  The critical policies and estimates were determined by considering accounting policies that involve the most complex or subjective decisions or assessments.  The most critical accounting policies identified relate to net deferred tax assets and liabilities, net investment in direct financing leases, the valuation of land development costs and long-lived assets, and revenue recognition. Revenues are derived from a wide variety of sources, including sales of real estate, management of investment properties, home construction, property management services, timbering and leasing activities.  Revenues are recognized as services are performed. Timbering revenues from stumpage contracts are recognized at the time a stumpage contract is signed in accordance with Staff Accounting Bulleting No. 104  Revenue Recognition, (SAB 104). At the time a stumpage contract is signed, the risk of ownership is passed to the buyer at a fixed, determinable cost.  Reasonable assurance of collectibility is determined by the date of signing, and at that time, the obligations of the Companies are satisfied.  Therefore, full accrual recognition at the time of contract execution is appropriate under SAB 104 guidance. Managements estimate of deferred tax assets and liabilities is primarily based on the difference between the tax basis and financial reporting basis of depreciable assets and the net investment in direct financing leases, like-kind exchanges of assets, stock options and accruals.  Valuation allowances are established, when necessary to reduce tax assets to the amount expected to be realized. We have capitalized as the net investment in direct financing leases, that portion of the leased premises pertaining to Jack Frost Mountain and Big Boulder ski areas, which met the criteria for accounting for a portion of the lease transactions as direct financing leases.  The accounting was based on estimates and assumptions about the fair values and estimated useful lives of the leased properties, as well as, the collectibility of lease payments and recoverability of the unguaranteed residual value of the leased properties.  We will periodically review the net investment in direct financing leases for events or changes in circumstances that may impact collectibility, and recoverability of the unguaranteed residual value of leased properties. We capitalize as land and land development costs, the original acquisition cost, direct construction and development costs, property taxes, interest incurred on costs related to land under development and other related costs (engineering, surveying, landscaping, etc.) until the property reaches its intended use.  The cost of sales for individual parcels of real estate or condominium units within a project is determined using the relative sales value method.  Revenue is recognized upon signing of the sales agreement.  Selling expenses are charged against income in the period incurred. Long-lived assets, namely properties, is based on historical cost. Depreciation and amortization is provided principally using the straight-line half-year method over the estimated useful life of the class of property. Upon sale or retirement of depreciable property, the cost and related accumulated depreciation are removed from the related accounts, and resulting gains or losses are reflected in income. Interest, real estate taxes, and insurance costs, including those costs associated with holding unimproved land, are normally charged to expense as incurred. Interest cost incurred during construction of facilities is capitalized as part of the cost of such facilities. Maintenance and repairs are charged to expense, and major renewals and betterments are added to property accounts. Impairment losses are recognized in operating income, as they are determined. We review our long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In that event, we calculate the expected future net cash flows to be generated by the asset. If those net future cash flows are less than the carrying value of the asset, an impairment loss is recognized in operating income. The impairment loss is the difference between the carrying value and the fair value of the asset.  7   Table of Contents  Deferred income consists of dues, rents and deposits on land or home sales. Rents that are not yet earned are related to our commercial properties that have been paid in advance, and dues are related to memberships in our hunting and fishing clubs paid in advance. We recognize revenue related to the hunting and fishing clubs over the one-year period that the dues cover.  We recognize revenue related to the fishing club over a 5 month period, May through September.  Deposits are required on land and home sales. We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Results of Operations FISCAL 2006 VERSUS FISCAL 2005 Net Income For Fiscal 2006, we reported net income of $2,831,280 or $1.17 per combined share as compared with a net income of $1,932,000, or $.0.90 per combined share for Fiscal 2005. Revenues Combined revenue of $13,329,620 represents an increase of $1,646,730, or 14% compared to Fiscal 2005.  Real Estate Management Operations/Rental Operations revenue increased $5,069,403, or 115%, when compared to Fiscal 2005.  Summer Recreation Management Operations decreased $569,662, or 74%.  Land Resource Management revenue decreased $2,853,011, or 44%. Real Estate Management/Rental Operations The Real Estate Management Operations/Rental Operations had revenue of $9,479,276 in Fiscal 2006 as compared to $4,409,873 in Fiscal 2005, which resulted in an increase of $5,069,403, or 115% that was primarily attributed to an increase in Moseywood Construction Companys custom home construction sales. Summer Recreation Operations In Fiscal 2006, Summer Recreation Operations had revenue of $204,626 as compared to $774,288 for Fiscal 2005, which represents a decrease of $569,662, or 74%.  This decrease is mainly attributable to the discontinuation of the Splatter Paintball and the Traxx Motocross operations following the Fiscal 2005 season. Land Resource Management In Fiscal 2006, Land Resource Management had revenue of $3,645,718 as compared to $6,498,729 for Fiscal 2005, which represents a decrease of $2,853,011, or 44%.  In Fiscal 2006, 260 acres of land and one company-owned investment property were sold generating $1,926,377 in revenue, as compared to Fiscal 2005 in which 2,470 acres of land and seven company-owned resort investment properties were sold generating revenue of $4,802,976. This represents a decrease of $2,876,529, or 60% for Fiscal 2006 as compared to Fiscal 2005. Real Estate Development revenue in Fiscal 2006 was $1,513,670 as compared to $1,014,271 revenue recognized in Fiscal 2005 for an increase of $499,399, or 49%. This increase was the result of the sale of four single family homes in the Laurelwoods residential community.  To date approximately 5% of our 17,020 acres have been marked for timbering.  A forester has been hired to generate a long-term plan of managed timbering that will pay significant attention to protecting the environment and retaining the value of the land.  In Fiscal 2006, timber sales were $205,671, as compared to Fiscal 2005, which generated $681,482 of revenue, a decrease of $475,811, or 70%.  8   Table of Contents  Operating Costs Real Estate Management/Rental Operations Operating costs associated with Real Estate Management Operations/Rental Operations for Fiscal 2006 were $9,127,308, as compared to $4,136,925 for Fiscal 2005, which represents an increase of $4,990,383, or 121%.  The increase was mainly attributable to the expenses associated with new home construction costs. For the Fiscal 2006 construction costs were $4,351,980 on 28 housing starts as compared to construction costs of $324,262 on six housing starts for the Fiscal 2005. The increase in Fiscal 2006 was also attributable to marketing costs and sales expenses related to new home construction and the reclassification of personnel costs from the Companies other business segments to more accurately reflect duties performed. Summer Recreation Operations Operating costs associated with Summer Recreation Operations for Fiscal 2006 were $225,666 as compared with $683,458 for Fiscal 2005, which represents a decrease of $457,792, or 67%. This decrease was due to the closing of the Splatter Paintball and the Traxx Motocross operations following the Fiscal 2005 season. Land Resource Management Operating costs associated with Land Resource Management for Fiscal 2006 were $2,299,621 as compared with $3,366,788 for Fiscal 2005, which represents a decrease of $1,067,167, or 32%. This decrease is primarily attributable to costs for land and buildings sold.  For Fiscal 2006, 260 acres of land and one resort investment property were sold as compared to 2,470 acres and seven resort investment properties sold in Fiscal 2005. Asset Impairment Loss There was no asset impairment loss in Fiscal 2006. The asset impairment loss in Fiscal 2005 of $149,798 is the result of the closing of Splatter Paintball. The Splatter Paintball facility was closed due to the playing fields encroaching on the site of the new 18-hole championship golf course. General and Administration General and Administration costs for Fiscal 2006 were $1,649,388, as compared with $1,552,814 for Fiscal 2005, which represents an increase of $96,574, or 6%.  This is primarily a result of recognition of stock based compensation consistent with FAS 123R. Other Income (Expense) Interest and Other Income was ($49,788) in Fiscal 2006, as compared to $139,738 in Fiscal 2005, a decrease of $189,526, or 136%. This decrease is primarily attributable to the sale of laundry equipment to a third party operator of the accommodations rental program. Interest expense for Fiscal 2006 was $632,387, as compared to $600,479 for Fiscal 2005, which represents an increase of $31,908, or 5%.  9   Table of Contents  Discontinued Operations Due to managements decision to enter into a lease agreement subsequent to Fiscal 2005 year end, in which the Companies leased the two ski areas to a third party operator, the results of operations of the ski operations segment for Fiscal 2006, 2005 and 2004 are reported as discontinued operations.  Future cash flows and operating results of the Ski Operations segment will no longer be reported.   Cash flows resulting from the lease commitment are now reported in the Real Estate Management/Rental Operations segment. The net loss from discontinued operations for ski operations in Fiscal 2006 was ($279,938) as compared to a net income of $436,121 in Fiscal 2005.  This loss in Fiscal 2006 is due to one month depreciation expense prior to the lease commencement, as well as expense recognized under FAS 123R related to the vesting of stock options for terminated employees. The net income from discontinued operations for the Oxbridge Square shopping center for Fiscal 2006 was $5,610,546 as compared to $754,513 for Fiscal 2005. $5,236,478 of this income was a result of the gain on the sale of the shopping center. Also included in discontinued operations in Fiscal 2004 are the results of real estate rental operations stemming from the sale of the Dreshertown Plaza Shopping Center which reported income from operations of $418,216 and a gain on the sale net of tax amounting to $7,848,867.  No activity was incurred for Dreshertown Plaza Shopping Center in Fiscal 2006 or Fiscal 2005. Tax Rate The effective Tax Rate for Fiscal 2006 was 39% and Fiscal 2005 was 24%.  The 39% effective tax rate in Fiscal 2006 is in line with what would be expected based on statutory rates.  The 24% tax rate in Fiscal 2005 was due to managements decision to sell outright six investment properties that were previously purchased in tax deferred 1031 exchanges and recorded for tax purposes at a lower basis.  Therefore, upon their sale, a significant taxable gain was recognized as currently taxable.  This resulted in a significant unexpected utilization of state net operating loss carryforwards.  Valuation allowances were provided for these state carryforwards at October 31, 2004.  The reduction of this valuation allowance reduced the income tax expense and effective tax rate. Results of Operations FISCAL 2005 VERSUS FISCAL 2004 Net Income For Fiscal 2005, (Fiscal 2005), we reported net income of $1,932,000, or $.0.90 per combined share, as compared with a net income of $6,246,107, or $3.26 per combined share, for Fiscal 2004. Revenues Combined revenue of $11,682,890 represents an increase of $4,504,908, or 62% compared to Fiscal 2004.  Real Estate Management Operations/Rental Operations revenue increased $497,429, or 13% when compared to Fiscal 2004. Summer Recreation Management Operations decreased $1,169,735, or 60%.  Land Resource Management revenue increased $5,177,286.  10   Table of Contents  Real Estate Management/Rental Operations The Real Estate Management Operations/Rental Operations had revenue of $4,409,873 in Fiscal 2005 as compared to $3,912,444 in Fiscal 2004, which resulted in an increase of $497,429 that was primarily attributed to an increase in the rental of investment properties. This increase in revenue was mainly attributed to income from a newly acquired shopping center in Fiscal 2004, the Coursey Commons shopping center. The Coursey Commons shopping center's revenue was $970,791 for Fiscal 2005 as compared to $329,986 for Fiscal 2004 for an increase of $640,805.  The increase in revenue for the shopping centers is due the shorter five-month period of revenue recognition in Fiscal 2004, as the shopping centers were purchased in June 2004.  This increase was offset by a reduction in communication tower rental income as several towers were sold. Summer Recreation Operations In Fiscal 2005, Summer Recreation Operations had revenue of $744,288 as compared to $1,944,023 for Fiscal 2004, which represents a decrease of $1,169,735, or 60%.  This decrease is mainly attributed to the closing of the Traxx Motocross Park and the Fernridge Campground in October 2004 and the closing of the Splatter Paintball in March 2005. Land Resource Management In Fiscal 2005, Land Resource Management had revenue of $6,498,729 as compared to $1,321,443 for Fiscal 2004, which resulted in an increase of $5,177,286.  In Fiscal 2005, 2,470 acres of land were sold generating $4,802,976 in revenue with a basis of $135,466 as compared to Fiscal 2004 in which 104 acres of land were sold generating revenue of $994,542 with a basis of $6,514. This results in an increase of $3,808,434 for Fiscal 2005 as compared to Fiscal 2004. Real Estate Development revenue in Fiscal 2005 was $1,014,271 as compared to no revenue recognized for Fiscal 2004. This represents the sale of three single family homes in the Laurelwoods residential community.  To date approximately 5% of our 17,269 acres have been marked for timbering.  A forester has been hired to generate a long-term plan of managed timbering which will pay specific attention to protecting the environment and retaining the value of the land.  In Fiscal 2005 timber sales were $681,482 as compared to Fiscal 2004 which generated $326,900 of revenue, an increase of $354,582 or 108%. Operating Costs Real Estate Management/Rental Operations Operating costs associated with Real Estate Management Operations/Rental Operations for Fiscal 2005 were $4,136,925 as compared to $3,530,493 for Fiscal 2004, which represents an increase of $600,432, or 17%.The increase was mainly attributable to the expenses associated with a new shopping center acquired in June 2004, the Coursey Commons shopping center. The Coursey Commons shopping center had expenses of $850,315 for Fiscal 2005 as compared to $300,775 for Fiscal 2004 for an increase of $549,540. The increase in operating costs for the shopping center is due to a shorter five month period in Fiscal 2004, as the shopping centers were purchased in June 2004. This was offset by a reduction in costs associated with the sale of several communication towers. Summer Recreation Operations Operating costs associated with Summer Recreation Operations for Fiscal 2005 were $683,458 as compared with $1,660,939 for Fiscal 2004, which represents a decrease of $977,481, or 59%. This decrease was due to the closing of the Traxx Motocross Park and the Fernridge Campground in October 2004 and the closing of Splatter Paintball in March 2005.  11   Table of Contents  Land Resource Management Operating costs associated with Land Resource Management for Fiscal 2005 were $3,366,788 as compared with $1,125,127 for Fiscal 2004, which represents an increase of $2,241,661. This increase is primarily attributable to an increase in construction and related costs of $1,683,137 in Fiscal 2005 as compared to no costs recognized in Fiscal 2004. The majority of these costs were for cost of goods sold of $762,706, salaries and wages of $374,599, and consulting fees of $203,039, all related to the sale of 3 single family homes in the Laurelwoods development. The cost of land and buildings sold increased $835,231 relating to the sale of six investment properties in the land sales division. Asset Impairment Loss The asset impairment loss in Fiscal 2005 of $149,798 is the result of the closing of Splatter Paintball. The Splatter Paintball facility was closed due to the playing fields encroaching on the site of the new 18 hole championship golf course.  In Fiscal 2004, $452,325 was recognized as an impairment loss as the result of the closing of the Fern Ridge Campground and an impairment loss of $568,709 was recorded as a result of the closing of the Traxx Motocross Park. General and Administration General and Administration costs for Fiscal 2005 were $1,552,814, as compared with $898,315 for Fiscal 2004, which represents an increase of $654,499, or 73%. This increase is attributable to $83,313 in Pennsylvania and Louisiana Capital Stock Tax expensed in Fiscal 2005, increased consulting fees of $193,000, increased  legal and audit fees of  $81,600 resulting from the implementation of the Sarbanes Oxley internal control compliance act and $168,000 in donations to various local municipalities. Other Income (Expense) Interest and Other Income was $139,738 in Fiscal 2005 as compared to $1,076,964 in Fiscal 2004, a decrease of $937,226, or 87%. This decrease is primarily attributable to the sale of our four communication towers in Fiscal 2004. Interest expense for Fiscal 2005 was $600,479, as compared to $334,021 for Fiscal 2004, which represents an increase of $266,458, or 80%. This increase is attributable to the additional interest incurred on the mortgages resulting from the purchase of the Coursey Commons shopping center in June of Fiscal 2004.  The Coursey Commons shopping centers interest expense in Fiscal 2005 was $433,476, as compared to $159,199 in Fiscal 2004, for an increase of $274,277 or 172%. Discontinued Operations Due to managements decision to enter into a lease agreement subsequent to the Fiscal 2005 year end, in which the Companies have leased the Jack Frost Mountain and Big Boulder ski areas to a third party operator, the results of operations of the ski operations segment for Fiscal 2005 and 2004 are reported as discontinued operations.  Future cash flows and operating results of the Ski Operations segment will no longer be reported.  Cash flows resulting from the lease commitment are reported in the Real Estate Management / Rental Operations segment. The net income from discontinued operations for the Oxbridge Square shopping center for Fiscal 2005 was $614,512 as compared to $125,448 for Fiscal 2004. Also included in discontinued operations in Fiscal 2004 are the results of real estate rental operations stemming from the sale of the Dreshertown Plaza Shopping Center which reported income from operations of $418,216 and a gain on the sale amounting to $7,848,867 net of tax.  No activity was incurred for Dreshertown Plaza Shopping Center in Fiscal 2005.  12   Table of Contents  Tax Rate The effective Tax Rate for Fiscal 2005 was 24% and for Fiscal 2004 was 34%.  The decrease in the effective tax rate was due to managements decision to sell outright six investment properties that were previously purchased in tax deferred 1031 exchanges and recorded for tax purposes at a lower basis.  Therefore, upon their sale, a significant taxable gain was recognized as currently taxable.  This resulted in a significant unexpected utilization of state net operating loss carryforwards.  Valuation allowances were provided for these state carryforwards at October 31, 2004.  The reduction of this valuation allowance reduced the income tax expense and effective tax rate. Liquidity and Capital Resources: The Combined Statement of Cash Flows reflects net cash used in operating activities of $10,351,042 for Fiscal 2006, net cash used by operating activities of $7,051,431 for Fiscal 2005, versus net cash used by operating activities of $826,949 for the Fiscal 2004.  The increase in net cash used in operating activities for Fiscal 2006 was primarily the result of $10.9 million of costs incurred in land development projects. Material non-recurring cash items during the past three years include in Fiscal 2006, the exchange of the Oxbridge Square shopping center for the two Walgreen retail stores, the Jack in the Box restaurant, the Flower Fields Motel and a investment property located in the resort community at Jack Frost Mountain; the issuance of common stock net of proceeds of approximately $15,100,000 in Fiscal 2005; the sale of the communication towers for $1,469,000 in Fiscal 2004; and the exchange of the Dreshertown Plaza shopping center for the Oxbridge Square and the Coursey Commons shopping centers in Fiscal 2004. Proceeds of approximately $11,000,000 from the sale of Oxbridge Square shopping center are included in the investing activities on the combined statement of cash flows.  The proceeds were used to finance approximately $15,500,000 of additions to properties.  A gain of approximately $5,200,000 is included as a reconciling item for net cash used in operating activities and $374,000 of net income reported in operating activities will be replaced by the new income producing properties. On April 12, 2006, Manufacturers and Traders Trust issued a letter of credit in the amount of $336,499 in favor of Kidder Township to guarantee performance of the golf course maintenance building project as defined and described in the Land Improvement Development Agreement between Kidder Township and Blue Ridge Real Estate Company dated January 19, 2006. On April 20, 2006, Manufacturers and Traders Trust extended a line of credit to the Companies in the aggregate amount of $10 million to fund real estate development.  Interest is due and payable on a monthly basis at a rate equal to the prime rate (as announced by the Wall Street Journal as of the first day of the calendar month), minus 0.25%.  The remaining principal and any accrued but unpaid interest is due and payable on April 19, 2008.  The Companies are using $3.5 million of this line of credit to fund construction of residential development projects and $6.5 million of this line of credit to fund infrastructure improvements for residential developments.  The total principal amount outstanding under the line of credit will not exceed the lesser of (a) $10 million, or (b) 80% of the cost or appraised value of the units. On May 31, 2006 Manufacturers and Traders Trust issued a letter of credit in the amount of $444,373 in favor of Kidder Township to guarantee performance of the Jack Frost National Golf Course temporary clubhouse facility as defined and described in the Land Development Improvement Agreement between Kidder Township and Blue Ridge Real Estate Company dated May 26, 2006. On July 17, 2006 Manufacturers and Traders Trust issued a letter of credit in the amount of $46,197 in favor of Kidder Township to guarantee performance of the Kresge Lane Subdivision site improvements as defined and described in the Land Improvement Development Agreement between Kidder Township and Blue Ridge Real Estate Company dated July 13, 2006.  13   Table of Contents  For Fiscal 2006, our major capital expenditures were for infrastructure costs associated with the 23 single unit Laurelwoods Longview Drive residential community at the Big Boulder ski area, the construction of the Jack Frost National Golf Course and the subdivision and permitting cost relating to the Boulder Lake Village 144 unit condominium community and the final phase of the Laurelwoods Community. We have two other lines of credit with Manufacturers and Traders Trust Company totaling $4.1 million; a $3.1 million line for general operations and a $1 million line for real estate transactions. During Fiscal 2006, we borrowed against our $3.1 million line of credit in varying amounts with a maximum amount of $2,845,807.  During Fiscal 2005, we borrowed against our $3.1 million line of credit in varying amounts with a maximum amount of $1,984,000.  The rates of interest are one percentage point less than the prime rate on the $3.1 million line (7.25% at October 31, 2006) and one half of one percentage point (0.50%) less than the prime rate on the $1.0 million line (7.75% at October 31, 2006). There were no borrowings against the real estate line of credit in Fiscal 2006. Contractual Obligations:TotalLess than 1 year1-3 years4-5 yearsMore than 5 yearsLines of Credit2,222,7212,222,721000Long-Term Debt19,807,979632,30911,366,274705,9157,103,481Purchase Obligations507,810507,810000Pension Contribution Obligations455,794455,794Other Long-Term Obligations00000Total Contractual Cash Obligations$22,994,304$3,818,634$11,366,274$705,915$7,103,481 Purchase obligations consist of material contracts totaling $10,328,901, with six separate contractors relating to real estate development.  Payments made through October 31, 2006 total $9,821,091. We currently anticipate that the funds needed for future operations and to implement our land development strategy will be satisfied through operating cash, borrowed funds, public offerings or private placements of debt or equity and reinvested profits from completed and sold units or lots. We expect that with respect to land development, future construction will be conducted in phases, with the profits from each phase used to fund additional future construction. Construction is being implemented in phases as to reduce market risk associated with changing economic conditions. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk is limited primarily to the fluctuating interest rates associated with variable rate indebtedness.  At October 31, 2006, we had $9,238,124 of variable rate indebtedness, representing 42% of our total debt outstanding, at an average rate of 7.29% (calculated as of October 31, 2006).  Our average interest rate is based on our various credit facilities and our market risk exposure fluctuates based on changes in underlying interest rates. Exposure to market risk may also exist in our mortgages receivable issued in connection with land sales.  Mortgages receivable are considered fully collectible by management and accordingly, no allowance for loan losses is considered necessary. New Accounting Pronouncements: In June 2006, Financial Accounting Standards Board (FASB) issued FIN 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN No. 48).  FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The Companies are required to apply FIN No. 48 for the fiscal year beginning October 1, 2008.  The Companies are still evaluating the impact of adopting FIN No. 48.  14   Table of Contents  In September 2006, FASB issued Statement No. 157 Fair Value Measurements, (SFAS No. 157).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  Accordingly, FASB No. 157 does not require any new fair value measurements.  The Companies are required to apply SFAS No. 157 in the first interim or annual reporting that begins after November 15, 2007.  The Companies do not expect the adoption of SFAS No. 157 to have a significant impact on its financial position or results of operations. In September 2006, the FASB issued Statement No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R), (SFAS No. 158).  SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  SFAS No. 158 requires companies to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.  The Companies are required to apply SFAS No. 158 as of the end of the fiscal year ending after June 15, 2007.  The Company is still evaluating the impact of adopting SFAS No. 158.   15   Table of Contents  BLUE RIDGE REAL ESTATE COMPANY and SUBSIDIARIES AND BIG BOULDER CORPORATION and SUBSIDIARIES   COMBINED BALANCE SHEETS October 31, 2006 and 2005  ASSETS10/31/0610/31/05Land and land development costs (5,004 and 5,124,
   respectively, acres per land ledger)$27,950,669$17,050,335Land improvements, buildings & equipment, net25,432,91620,982,839Land held for investment, principally unimproved (12,017 and
   12,145, respectively, acres per land ledger)8,077,0826,511,879Net investment in direct financing leases8,361,5750Assets held to be used09,206,923Cash and cash equivalents153,7421,833,704Prepaid expenses and other assets981,877722,878Accounts receivable and mortgages receivable856,593685,185$71,814,454$56,993,743  LIABILITIES AND SHAREHOLDERS EQUITY10/31/0610/31/05LIABILITIES:Debt$22,030,700$13,149,742Accounts payable1,811,3351,876,006Accrued liabilities918,412975,099Deferred income888,851754,837Amounts due to related parties66,460120,836Deferred income taxes7,694,8005,895,000Accrued pension expense and minimum pension liability558,499558,609Total liabilities33,969,05723,330,129Commitments and contingenciesCOMBINED SHAREHOLDERS EQUITY:Capital stock, without par value, stated value $0.30 per
     combined share, Blue Ridge and Big Boulder each
     authorized 3,000,000 shares, each issued 2,725,042 and
     2,667,042 shares, respectively817,511800,111Capital in excess of stated value18,920,29717,337,329Earnings retained in the business20,296,46117,465,181Compensation recognized under employee stock plans0200,900Accumulated other comprehensive loss(103,465)(54,500)39,930,80435,749,021Less cost of 282,018 shares of capital stock in treasury2,085,4072,085,407Total shareholders equity37,845,39733,663,614$71,814,454$56,993,743  The accompanying notes are an integral part of the combined financial statements.  16   Table of Contents  BLUE RIDGE REAL ESTATE COMPANY and SUBSIDIARIES AND BIG BOULDER CORPORATION and SUBSIDIARIES  COMBINED STATEMENTS OF OPERATIONS for the years ended October 31, 2006, 2005 and 2004  10/31/0610/31/0510/31/04Revenues:Real estate management$7,853,081$3,099,585$3,236,598Summer recreation operations204,626774,2881,944,023Land resource management3,645,7186,498,7291,321,443Rental income1,626,1951,310,288675,84613,329,62011,682,8907,177,910Costs and expenses:Real estate management7,617,0423,330,1732,986,785Summer recreation operations225,666683,4581,660,939Land resource management2,299,6213,366,7881,125,127Rental income1,510,266806,752543,708General and administration1,649,3881,552,814898,315Asset impairment loss0149,7981,021,03413,301,9839,889,7838,235,908Operating profit (loss)27,6371,793,107(1,057,998)Other income (expense):Interest and other income, net(49,778)139,7381,076,964Interest expense (net of capitalized interest of 
            $205,053 in 2006 and $102,929 in 2005)(632,387)(600,479)(334,021)(682,165)(460,741)742,943(Loss) income from continuing operations before income taxes(654,528)1,332,366(315,055)(Credit) provision for income taxes:Current(146,000)8,000(71,000)Deferred(88,000)299,000125,000(234,000)307,00054,000Net (loss) income before discontinued operations and cumulative effect(420,528)1,025,366(369,055)Discontinued operations (including $5,236,478 gain on disposal in 2006 and  $12,026,867 gain on disposal in 2004)5,330,6081,190,63412,234,940Provision for income taxes on discontinued operations:Current146,000089,000Deferred1,932,800284,0004,025,0002,078,800284,0004,114,000Net income from discontinued operations3,251,808906,6348,120,940Net income before cumulative effect of change in accounting principle2,831,2801,932,0007,751,885Cumulative effect of change in accounting principle (net of tax effect of $1,004,000)00(1,505,778)Net income$2,831,280$1,932,000$6,246,107   17   Table of Contents  BLUE RIDGE REAL ESTATE COMPANY and SUBSIDIARIES AND BIG BOULDER CORPORATION and SUBSIDIARIES   COMBINED STATEMENTS OF OPERATIONS for the years ended October 31, 2006, 2005 and 2004  10/31/0610/31/0510/31/04Basic earnings per weighted average combined share:Net (loss) income before discontinued operations andcumulative effect($0.17)$0.48($0.19)Income from discontinued operations, net of tax1.340.424.24Cumulative effect of change in accounting principle, net of tax0.000.00(0.79)Net income$1.17$0.90$3.26Diluted earnings per weighted average combined share:Net (loss) income before discontinued operations and 
        cumulative effect($0.17)$0.46($0.18)Income from discontinued operations, net of tax1.330.414.14Cumulative effect of change in accounting principle, net of tax0.000.00(0.77)Net income$1.16$0.87$3.19Pro forma amounts assuming the change in accounting principle applied retroactively:Pro forma net income$0$0$7,751,885Pro forma basic earnings per weighted average
      combined share$0.00$0.00$4.05Pro forma diluted earnings per weighted average
      combined share$0.00$0.00$3.96  The accompanying notes are an integral part of the combined financial statements.   18   Table of Contents  BLUE RIDGE REAL ESTATE COMPANY and SUBSIDIARIES AND BIG BOULDER CORPORATION and SUBSIDIARIES   COMBINED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY for the years ended October 31, 2006, 2005 and 2004  Capital Stock (a)SharesAmountCapital in Excess of Stated ParCompensation
Under Employee 
Stock PlansEarnings 
Retained in
the BusinessAccumulated Other
Comprehensive
LossCapital
Stock 
in 
Treasury(c)TotalBalances, October 31, 20032,198,148$659,444$1,461,748$200,900$9,287,074($2,085,407)$9,523,759Net income6,246,1076,246,107Balances, October 31, 20042,198,148659,4441,461,748200,90015,533,181(2,085,407)15,769,866Comprehensive income:Net income1,932,0001,932,000Other comprehensive loss ,Additional minimum 
     pension liability 
     adjustment,
     net of deferred tax
     benefit of $37,000(54,500)(54,500)1,877,500Issuance of common stock407,894122,36715,014,180(b)15,136,547Exercise of stock options61,00018,300861,401879,701Balances, October 31, 20052,667,042800,11117,337,329200,90017,465,181($54,500)(2,085,407)33,663,614Comprehensive income:Net income2,831,2802,831,280Other comprehensive loss,Additional minimum 
     pension liability 
     adjustment,
     net of deferred tax
     benefit of $45,000(48,965)(48,965)2,782,315Reclassification of 
   compensation recognized 
   under employee stock plan200,900(200,900)0Compensation recognized
   under employee stock plan381,218381,218Exercise of stock options58,00017,4001,000,8501,018,250Balances, October 31, 20062,725,042$817,511$18,920,297$0$20,296,461($103,465)($2,085,407)$37,845,397  (a) Capital stock, at stated value of $.30 per combined share (b) net of issuance costs of $363,424 (c) 282,018 shares held in treasury, at cost at October 31, 2006, 2005, and 2004  The accompanying notes are an integral part of the combined financial statements.  19   Table of Contents  BLUE RIDGE REAL ESTATE COMPANY and SUBSIDIARIES AND BIG BOULDER CORPORATION and SUBSIDIARIES   COMBINED STATEMENTS OF CASH FLOWS for the years ended October 31, 2006, 2005 and 2004  10/31/0610/31/0510/31/04Cash Flows Used In Operating Activities:Net income$2,831,280$1,932,000$6,246,107Adjustments to reconcile net income to net
          cash used in operating activities:Depreciation1,081,2352,524,3763,293,793Asset impairment loss0149,7981,021,034Deferred income taxes1,844,800583,0003,146,000Gain on sale of assets(5,121,306)(7,767)(13,097,691)Compensation cost under employee stock plans381,21800Changes in operating assets and liabilities:Accounts receivable and mortgages receivable(171,408)121,794251,667Prepaid expenses and other current assets(160,732)357,17438,313Deferred operating costs001,554,505Land and land development costs(10,900,334)(12,522,398)(3,609,077)Accounts payable and accrued liabilities(269,809)319,024318,295Deferred revenue134,014(508,432)10,105Net cash used in operating activities(10,351,042)(7,051,431)(826,949)Cash Flows Used In Investing Activities:Proceeds from disposition of assets10,834,2721,275,14315,894,314Additions to properties(16,138,780)(1,905,836)(18,689,878)Payments received under direct financing lease arrangements232,00000Cash held in escrow0134,907174,401Net cash used in investing activities(5,072,508)(495,786)(2,621,163)Cash Flows Provided By Financing Activities:Proceeds from debt22,574,46811,614,29127,957,256Payment of debt(9,849,130)(18,339,357)(24,597,720)Proceeds from issuance of common stock015,136,5470Proceeds from exercise of stock options1,018,250879,7010Net cash provided by financing activities13,743,5889,291,1823,359,536Net (decrease) increase in cash and cash equivalents(1,679,962)1,743,965(88,576)Cash and cash equivalents, beginning of year1,833,70489,739178,315Cash and cash equivalents, end of year$153,742$1,833,704$89,739Supplemental disclosures of cash flow information:Cash paid during the year for:Interest$1,047,936$1,068,945$670,747Income taxes$355,845$89,250$19,435Supplemental disclosure of non cash investing and financing activities:Additions to property acquired through capital lease obligations$0$0$283,398Seller financed property additions$3,844,380$0$4,053,118  The accompanying notes are an integral part of the combined financial statements  20   Table of Contents   NOTES TO COMBINED FINANCIAL STATEMENTS  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Combination: The combined financial statements include the accounts of Blue Ridge Real Estate Company (Blue Ridge) and its wholly-owned subsidiaries, Northeast Land Company, Jack Frost Mountain Company, Boulder Creek Resort Company, Moseywood Construction Company, Jack Frost National Golf Course, Inc., Blue Ridge Acquisition Company, BRRE Holdings, Inc., Oxbridge Square Shopping Center, LLC, Coursey Commons Shopping Center, LLC, Coursey Creek, LLC, Cobble Creek, LLC and Flower Fields Motel, LLC and Big Boulder Corporation (Big Boulder) and its wholly-owned subsidiaries, Lake Mountain Company and BBC Holdings, Inc., collectively (the Companies).  Under a Security Combination Agreement between Blue Ridge and Big Boulder and under the by-laws of both Companies, shares of the Companies are combined in unit certificates, each certificate representing concurrent ownership of the same number of shares of each company; shares of each company may be transferred only together with an equal number of shares of the other company. All significant intercompany accounts and transactions are eliminated. Revenue Recognition: Revenues are derived from a wide variety of sources, including sales of real estate, management of investment properties, home construction, property management services, timbering and leasing activities. Generally, revenues are recognized as services are performed. Timbering Revenues: Timbering revenues from stumpage contracts are recognized in accordance with Staff Accounting Bulletin No. 104 - Revenue Recognition, ("SAB 104").  At the time a stumpage contract is signed, the risk of ownership has been passed to the buyer at a fixed, determinable cost.  Reasonable assurance of collectibility has been determined by the date of signing, and the few obligations of the Companies have already been met.  Therefore, full accrual recognition at the time of contract execution is appropriate under SAB 104 guidance. Disposition of Land and Resort Homes: The Companies recognize income on the disposition of real estate in accordance with the provisions of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" (SFAS 66). Down payments of less than 20% are accounted for as deposits as required by SFAS No. 66. The costs of developing land for resale as resort homes and the costs of constructing certain related amenities are allocated to the specific parcels to which the costs relate. Such costs, as well as the costs of construction of the resort homes, are charged to operations as sales occur. Land held for resale and resort homes under construction are stated at lower of cost or market. Custom Home Construction: The Companies recognize revenue on custom home construction in accordance with Financial Accounting Standards Board (FASB) No. 66, Accounting for Sales of Real Estate (SFAS No. 66).  Under the provisions of SFAS No. 66, revenues and costs are recognized using the percentage of completion method of accounting when construction is beyond the preliminary stage, the buyer is committed to the extent of being unable to require a refund except for non-delivery, the sales proceeds are collectible and the aggregate sales proceeds and the total cost of the project can be reasonably estimated.  Total estimated revenues and construction costs are reviewed periodically, and any change is applied prospectively.  21   Table of Contents  Land and Land Development Costs: The Companies capitalize as land and land development costs, the original acquisition cost, direct construction and development costs, property taxes, interest incurred on costs related to land under development and other related costs (engineering, surveying, landscaping, etc.) until the property reaches its intended use.  The cost of sales for individual parcels of real estate or condominium units within a project is determined using the relative sales value method.  Revenue is recognized upon signing closing documents.  Selling expenses are charged against income in the period incurred. Accounts and Mortgages Receivable: Accounts receivable are reported at net realizable value.  Accounts are written off when they are determined to be uncollectible based upon managements assessment of individual accounts.  An allowance for doubtful accounts, if deemed necessary, is estimated based on the Companies historical losses and the financial stability of its customers. The Companies account for mortgages receivable on a cost basis.  Interest income is recorded on a monthly basis.  Late payment fees are charged on overdue payments of principal and interest.  Mortgages receivable are evaluated at origination and monitored on an ongoing basis for credit worthiness.  Mortgages receivable are considered fully collectible by management and accordingly no allowance for loan losses is considered necessary.  Any mortgage 90 days past due is reviewed by management for write off.  Mortgages receivables were $261,388 and $126,450 at October 31, 2006 and 2005, respectively. Land Improvements, Buildings, Equipment and Depreciation: Land improvements, buildings and equipment are stated at cost. Depreciation, including amortization of equipment under capital lease is provided principally using the straight-line method over the following years: Land improvements 10-30 Buildings 3-40 Equipment and furnishings 3-20 Upon sale or retirement of depreciable property, the cost and related accumulated depreciation are removed from the related accounts, and resulting gains or losses are reflected in income. Interest, real estate taxes, and insurance costs, including those costs associated with holding unimproved land, are normally charged to expense as incurred. Interest cost incurred during construction of facilities is capitalized as part of the cost of such facilities. Maintenance and repairs are charged to expense, and major renewals and betterments are added to property accounts. Impairment losses are recognized in operating profit as they are determined.  The Companies review their long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  In that event, the Companies calculate the expected future net cash flows to be generated by the asset.  If those net future cash flows are less than the carrying value of the asset, an impairment loss is recognized in operating income.  The impairment loss is the difference between the carrying value and the fair value of the asset.  One impairment loss was recorded in Fiscal 2005 and two in Fiscal 2004. Deferred Income: Deferred income consists of dues, rents and deposits on land or home sales. Rents that are not yet earned relate to our commercial properties that have been paid in advance, and dues are related to memberships in the Companies hunting and fishing clubs paid in advance. The Companies recognize revenue related to the hunting and fishing clubs over the one-year period that the dues cover.  Deposits are required on land and home sales.  22   Table of Contents  Also included in deferred income are amounts received under a contract with the Pennsylvania Department of Transportation for reimbursement of the cost of a constructed asset are deferred.  The amounts will be recognized as income over the period in which depreciation on those assets is charged.  This asset has not yet been placed in service. Income Taxes: The Companies account for income taxes utilizing the asset and liability method of recognizing the tax consequence of transactions that have been recognized for financial reporting or income tax purposes.  Among other things, this method requires current recognition of the effect of changes in statutory tax rates on previously provided deferred taxes.  Valuation allowances are established, when necessary, to reduce tax assets to the amount expected to be realized.  For federal income tax purposes, Blue Ridge, and its subsidiaries, and Big Boulder, and its subsidiaries, each file as consolidated entities. State income taxes are reported on a separate company basis. Managements estimate of deferred tax assets and liabilities is primarily based on the difference between the tax basis and financial reporting basis of depreciable assets and the net investment in direct financing leases, like-kind exchanges of assets, stock options and accruals.  Valuation allowances are established, when necessary to reduce tax assets to the amount expected to be realized. Investment in Direct Financing Leases: The Companies have capitalized as the net investment in direct financing leases, that portion of the leased premises pertaining to Jack Frost Mountain and Big Boulder ski areas, which met the criteria for accounting for a portion of the lease transactions as direct financing leases.  The accounting was based on estimates and assumptions about the fair values and estimated useful lives of the leased properties, as well as the collectibility of lease payments and recoverability of the unguaranteed residual value of the leased properties.  Management periodically reviews the net investment in direct financing leases for events or changes in circumstances that may impact collectibility, and recoverability of the unguaranteed residual value of leased properties. Advertising Costs: Advertising costs in the fiscal year ended October 31, 2006, or Fiscal 2006, are primarily related to new home construction and real estate development.  Prior to Fiscal 2006, advertising costs were primarily related to ski operations.  Advertising costs are expensed when incurred and the advertising expense for Fiscal 2006, 2005 and the fiscal year ended October 31, 2004, or Fiscal 2004, was $379,927, $1,133,715, and $1,509,994, respectively. Use of Estimates and Assumptions: The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  For example, unexpected changes in market conditions or a downturn in the economy could adversely affect actual results.  Estimates are used in accounting for, among other things, land development costs, accounts and mortgages receivables, legal liability, insurance liability, depreciation, employee benefits, taxes, and contingencies.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the combined financial statements in the period they are determined to be necessary. Management believes that its accounting policies regarding revenue recognition, land development costs, long lived assets, net investment in direct financing leases, deferred revenues and income taxes among others, affect its more significant judgments and estimates used in the preparation of its Combined Financial Statements.  For a description of these critical accounting policies and estimates, see Managements Discussion and Analysis of Financial Condition and Results of Operations.  23   Table of Contents  Statement of Cash Flows: For purposes of reporting cash flows, the Companies consider cash equivalents to be all highly liquid investments with maturities of three months or less when acquired. Concentration of Credit Risk: Financial instruments which potentially subject the Companies to concentration of credit risk consist principally of temporary cash investments. The Companies temporary cash investments are held by financial institutions. The Companies have not experienced any losses related to these investments. Earnings Per Share: Basic earnings per share is calculated based on the weighted-average number of shares outstanding.  Diluted earnings per share includes the dilutive effect of stock options. Business Segments: The Companies currently operate in three business segments, which consist of Real Estate Management/Rental Operations, Summer Recreational Operations and Land Resource Management segments.  The Companies previously operated in four business segments, the fourth being Ski Operation.  However, on December 1, 2005, the Companies entered into a 28 year lease for the Jack Frost Mountain Ski Area and Big Boulder Ski Area with JFBB Ski Areas Inc., an affiliate of Peak Resorts, both unaffiliated parties.  Pursuant to the lease, JFBB Ski Areas will operate the ski areas and will make monthly lease payments during the ski season.  This resulted in the termination of the Ski Operations business segment, reducing the number of business segments from four to three. As a result of entering into the lease agreement, the Companies have discontinued future operations and cash flows from the ski operations segment and have reported the activity recognized for the years ending October 31, 2006, 2005 and 2004 as discontinued operations. Revenue and expenses from the leased ski areas is now included in the Real Estate Management / Rental Operations business segment.The Companies business segments were determined from the Companies internal organization and management reporting, which are based primarily on differences in services.  Financial information about our segments can be found in Note 14. Stock Compensation: Effective for the quarter ended January 31, 2006 and thereafter, the Companies adopted SFAS No. 123R, Share-Based Payment, in accounting for its employee stock options.  SFAS No. 123R requires the Companies to recognize as compensation expense an amount equal to the grant date fair value of the stock options issued over the required service period.  Compensation cost was measured using the modified prospective approach provided under SFAS No. 123R and, consequently, the Companies have not retroactively adjusted results from prior periods. The fair value of each option award is estimated at the date of grant using a Black-Scholes option pricing model.  Expected volatilities are based upon historical volatilities of the Companies stock.  The Companies use historical data to estimate option exercises and employee terminations with the valuation model.  The expected term of options granted is derived from the output of the valuation model and represents the period of time that options granted are expected to be outstanding.  The risk-free rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Prior to the quarter ended January 31, 2006, the Companies applied APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options as permitted by SFAS No. 123, "Accounting for Stock Based Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." Under APB No. 25, because the exercise price of the employee stock options equals the fair market value of the Companies' underlying stock on the date of the grant, no compensation expense is recognized.  24   Table of Contents  Had compensation cost for the Companies employee stock option plan been determined consistent with SFAS No. 123 and SFAS No. 148, the Companies net income and earnings per share would have been reduced to the pro forma amounts indicated below: 10/31/0610/31/0510/31/04Net income, as reported$  2,831,280$  1,932,000$  6,246,107Add: Stock-based employeecompensation expense included inreported net  income, net of tax benefit232,543----Deduct: Total stock-based employeecompensation expense determinedunder fair value based method forall awards, net of tax expense(230,656)(113,256)(372,557)Pro forma net income$  2,833,167$  1,818,744$   5,873,550Basic earnings per share:As reported$1.17$0.90$    3.26Pro forma$1.17$0.84$    3.09Diluted earnings per share:As reported$1.16$0.87$  3.19Pro forma$1.16$0.82$  3.00 Reclassification: Certain amounts in the 2005 and 2004 combined financial statements have been reclassified to conform to the 2006 presentation. New Accounting Pronouncements: In June 2006, Financial Accounting Standards Board (FASB) issued FIN 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN No. 48).  FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The Companies are required to apply FIN No. 48 for the fiscal year beginning November 1, 2008.  The Companies are still evaluating the impact of adopting FIN No. 48. In September 2006, FASB issued Statement No. 157 Fair Value Measurements, (SFAS No. 157).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  Accordingly, FASB No. 157 does not require any new fair value measurements.  The Companies are required to apply SFAS No. 157 in the first interim or annual reporting that begins after November 15, 2007.  The Companies do not expect the adoption of SFAS No. 157 to have a significant impact on its financial position or results of operations. In September 2006, the FASB issued Statement No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R), (SFAS No. 158).  SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  SFAS No. 158 requires companies to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.  The Companies are required to  25   Table of Contents  apply SFAS No. 158 as of the end of the fiscal year ending after June 15, 2007.  The Companies are still evaluating the impact of adopting SFAS No. 158. 2.  CHANGE IN ACCOUNTING PRINCIPLE: Prior to Fiscal 2004, managements estimate of deferred operating costs was primarily based on deferring costs directly related to ski operations in order to match those costs to the period in which ski operating revenues were recognized. Ski operating revenues were recognized principally over the months of December through March.  Effective April 1, 2004, the Companies elected to change their method of deferring certain ski operating costs incurred during the non-ski season.  Upon investigation of competitors practices, management had determined that a change in accounting principle should be made in order to report ski operations in accordance with the predominant industry practice used by similar operating companies.  Additionally, the Companies believed the new method better enabled users of the financial statements, including management, to benchmark the Companies now discontinued ski operations segment results against their competitors by removing the timing difference associated with matching certain ski operating costs incurred in a prior fiscal year against current fiscal year ski operating revenues.  The effect of this change in accounting principle in Fiscal 2004 is a $2,509,778 decrease in net income, net of a deferred tax benefit of $1,004,000 and is reflected in the Combined Statements of Operations. 3.  DISCONTINUED OPERATIONS:  On June 16, 2006, the Oxbridge Square shopping center was sold as a Section 1031 tax deferred exchange and as a result the operating activity for the years ending October 31, 2006, 2005 and 2004 is being reported as a discontinued operation.  The operating results of the Oxbridge Square shopping center were previously reported in the Rental Income segment of the combined statement of operations.  At October 31, 2006, there were no remaining assets or liabilities related to Oxbridge Square shopping center. On December 1, 2005, the Companies entered into a long term lease agreement with JFBB Ski Areas, Inc., an affiliate of Peak Resorts (the Lessee), an unrelated third party, whereby the Lessee will operate and maintain the two ski resorts.  As a result the Companies have reported the activity recognized for the years ending October 31, 2006, 2005 and 2004 as discontinued operations.  The major assets related to ski operations have been classified on the combined balance sheets as of October 31, 2005 as assets held to be used. On March 10, 2004, the Dreshertown Shopping Center was sold as a Section 1031 tax deferred exchange and as a result the operating activity for the year ending October 31, 2004 is being reported as discontinued operations.  The operating results of the Dreshertown shopping center were previously reported in the Real Estate Management/Rental Income segment of the combined statement of operations.  26   Table of Contents  Operating results, including interest expense incurred, of the discontinued operations in Fiscal years 2006, 2005 and 2004 are as follows: 200620052004Revenues:Oxbridge Square$844,426$1,379,031$455,313Ski010,163,2219,742,230Dreshertown00720,018Total Revenue844,42611,542,25210,917,561Expenses (excluding interest):Oxbridge Square290,965471,089205,397Ski279,9389,572,7679,944,341Dreshertown00232,530Total Expenses570,90310,043,85610,382,268Interest (calculated on debt related to the property):Oxbridge Square179,393293,428124,468Ski014,334133,480Dreshertown0069,272Total Interest179,393307,762327,220Gain on Disposal:Oxbridge Square5,236,47800Dreshertown0012,026,867Income from discontinued 
   operations before income taxes$5,330,608$1,190,634$12,234,940 4. CONDENSED FINANCIAL INFORMATION: Condensed financial information of the Companies, Blue Ridge and its subsidiaries and Big Boulder and its subsidiaries, at October 31, 2006, 2005 and 2004 and for each of the years then ended is as follows: Blue Ridge and Subsidiaries10/31/0610/31/0510/31/04FINANCIAL POSITION:Total assets$55,431,276$42,729,408$38,318,248Total liabilities31,266,58022,357,72327,382,522Shareholders' equity24,164,69620,371,68510,783,896OPERATIONS:Revenues10,924,5219,886,3736,371,814(Loss) income from continuing 
   operations and before taxes(613,563)1,527,264(680,300)(Credit) provision for income
   taxes(219,366)351,90847,936Net income$2,951,633$1,629,212$6,982,885   27   Table of Contents   Big Boulder and Subsidiaries10/31/0610/31/0510/31/04FINANCIAL POSITION:Total assets$16,383,178$14,264,335$7,143,721Total liabilities2,702,477972,4062,309,581Shareholders' equity13,680,70113,291,9294,985,970OPERATIONS:Revenues2,405,0991,796,517806,096(Loss) income from continuing 
   operations and before taxes(40,965)(194,898)365,245(Credit) provision for income 
   taxes(14,634)(44,908)6,064Net (loss) income($120,353)$302,788($736,778)  5.  DEBT: Debt as of October 31, 2006 and 2005 consists of the following: 10/31/0610/31/05Mortgage note payable to insurance company, interest fixed at 10.5% payable in monthly installments of $15,351 including interest through Fiscal 2014$925,014$1,007,337Mortgage notes payable to bank, interest at the banks prime rate (8.25% at October 31, 2006) payable in monthly installments of $5,708 through Fiscal 2014.553,689620,926Construction loan payable to bank, interest fixed at 7.67% payable in full March 31, 2007. (Refinanced subsequent to year end, interest at LIBOR plus 0.90% payable in Fiscal 2009.)4,365,0000Mortgage note payable to bank, interest fixed at 5.59% payable in monthly installments of $44,156 including interest through Fiscal 2035.7,502,5627,604,070Construction & site development line of credit mortgage note payable to bank, interest at the bank's prime rate less 25 points (8.00% at October 31, 2006) payable in installments due at the closing of each unit within the developmentthrough April 2008.6,461,7140Revolving line of credit payable to bank, interest at the banks prime rate less 100 points (7.25% at October 31, 2006) payable on demand.2,222,7210Mortgage note repaid in 200603,917,409$22,030,700$13,149,742 The Companies have three lines of credit with Manufacturers and Traders Trust Company (the Bank) totaling $14.1 million.  The $3.1 million general line was increased from $2.1 million.  At October 31, 2006, Blue Ridge had utilized $2,222,721 of the general line of credit, aggregating $3,100,000 which is an on demand line with no expiration date. The line of credit bears interest at 1% less than the prime rate (7.25% at October 31, 2006). The $1 million line was secured for real estate transactions.    At October 31, 2006, the Companies had not utilized any of the real estate line of credit, aggregating $1,000,000.  The real estate line of credit bears interest at .50% less than the prime rate (7.75% at October 31, 2006). The Companies obtained a third revolving line of credit in April 2006 with the Bank totaling $10 million.  This facility is comprised of a site development infrastructure sublimit of $6.5 million and a home construction sublimit of $3.5 million.  The line of credit bears interest at .25% less than the prime rate (8.00% at October 31, 2006). The weighted average interest rate for the year ended October 31, 2006 was 7.29%.  The agreement requires, among other things, that the Companies comply with consolidated debt to worth, debt service coverage and tangible net worth ratios.  The Companies have met each of these covenants at October 31, 2006.  The real estate development infrastructure sublimit agreement enables the Companies to issue letters of credit in amounts up to $6,500,000.  28   Table of Contents  During Fiscal 2005 the Companies entered into two letters of credit with the Bank. The Bank agreed to issue on the Companies' behalf, irrevocable standby Letters of Credit to Kidder Township aggregating an amount not to exceed $6,403,478 for the purpose of guaranteeing completion of the infrastructure improvements to the Laurelwoods II and Boulder Lake Village premises as required by Kidder Township.  On July 20, 2005 the first letter of credit was issued aggregating up to $2,571,884 for the purpose of infrastructure improvements to the Laurelwoods II premises.  On September 12, 2005 the second letter of credit was issued aggregating $3,831,594 for the purpose of the development of infrastructure relating to the Boulder Lake Village premises.  The amount of the Letters of Credit is to be reduced as the site improvements and infrastructure work is completed and shall be for a maximum period of two years.  The Letters of Credit are part of, and reduce availability under the site development infrastructure sublimit of the $10 million revolving line of credit.  As of October 31, 2006, the Letters of Credit were $492,322 and $1,202,937, respectively, and Blue Ridge had utilized $4,708,219 of the site development infrastructure sublimit. During Fiscal 2006 the Companies entered into three letters of credit with the Bank.  The Bank agreed to issue, on the Companies behalf, irrevocable standby Letters of Credit to Kidder Township aggregating an amount not to exceed $827,068 for the purpose of guaranteeing completion of the Jack Frost National maintenance facility, the Jack Frost National site development for the temporary clubhouse and infrastructure improvements to the Kresge Lane real estate subdivision located along Route 940.  The Letters of Credit are part of, and reduce availability under the $3.1 million general operating line of credit.  The Letters of Credit as of October 31, 2006 were $33,195, $163,568 and $46,197, respectively. Properties at cost, which have been pledged as collateral for debt, include the following at October 31, 2006: Investment properties leased to others$2,190,470Assets subject to direct financing lease arrangements (ski facilities)$18,093,037 The aggregate amount of long-term debt maturing in each of the five years and thereafter ending subsequent to October 31, 2006, is as follows:  2007 - $2,855,030;   2008 - $6,744,161;  2009 - $4,301,353;    2010 - $320,760;   2011-$341,942;  thereafter $7,467,454. 6.   INCOME TAXES:  The (credit) provision for income taxes from continuing operations is as follows:  10/31/0610/31/0510/31/04Currently payable:Federal($146,000)$0($71,000)State08,0000(146,000)8,000(71,000)Deferred:Federal(59,000)433,000(545,000)State(29,000)(134,000)670,000(88,000)299,000125,000Total($234,000)$307,000$54,000 A reconciliation between the amount computed using the statutory federal income tax rate and the actual provision (credit) for income taxes is as follows: 10/31/0610/31/0510/31/04Computed at statutory rate($222,447)$453,004($64,567)State net operating losses subject to valuation allowance0(124,686)(233,000)State income taxes, net of federal income tax(19,026)(83,160)364,980Nondeductible expenses3,12963,5083,852Other4,344(1,666)32,735(Credit) provision for income taxes from continuing operations($234,000)$307,000$54,000  29   Table of Contents  The components of the deferred tax assets and liabilities as of October 31, 2006 and 2005 are as follows: 10/31/0610/31/05Deferred tax assets:Accrued expenses$28,000$90,000Deferred revenues31,00033,000Deferred income, sewer line and tower205,000210,000Additional minimum pension liability82,00037,000Net operating losses and AMT credit carryforward1,991,4001,660,000Valuation allowance(1,245,700)(1,175,000)Contribution carryforward69,00068,000Stock options152,0000Deferred tax asset1,312,700923,000Deferred tax liability,Depreciation9,007,5006,818,000Deferred income tax liability, net$7,694,800$5,895,000 At October 31, 2006, the Companies have $317,000 of Alternative Minimum Tax (AMT) credit carryforward available to reduce future income taxes.  The AMT credit has no expiration date. At October 31, 2006, the Companies have available approximately $2,900,000 of federal net operating losses which will expire from 2020 to 2023. The Companies also have state net operating loss carryforwards of approximately $12,400,000 that will expire from 2019 to 2025.  The Companies have recorded a valuation allowance against state net operating losses, which are not expected to be utilized. 7.   PENSION BENEFITS: Weighted Average Assumptions10/31/0610/31/0510/31/04Discount Rates used to determine net periodic
 benefit cost as of October 31, 2006, 2005 and 20046.00%5.75%6.50%Expected long-term rates of return on assets8.50%8.50%8.50%Rates  of increase in compensation levels4.00%4.00%4.00%  Change in Benefit Obligation10/31/0610/31/05Benefit obligation at beginning of year$5,741,736$4,719,943Service cost (net of expenses)202,212228,789Interest cost290,574305,039Curtailment gain(634,387)0Actuarial (gain) loss(347,569)657,358Benefit payments(221,293)(169,393)Benefit obligation at end of year$5,031,273$5,741,736  Change in Plan Assets10/31/0610/31/05Fair value of plan assets at beginning of year$3,528,530$3,082,990Actual return on plan assets371,870185,786Employer contributions368,276486,334Benefits paid(221,293)(169,393)Administrative Expenses(103,330)(57,187)Fair value of plan assets at end of year$3,944,053$3,528,530   30   Table of Contents   Reconciliation of Funded Status of the Plan10/31/0610/31/05Funded status at end of year($1,087,220)($2,213,206)Unrecognized transition obligation18,88064,305Unrecognized net prior service cost1,9816,470Unrecognized net actuarial loss693,3251,675,322Net amount recognized at end of year($373,034)($467,109)  Amounts Recognized in the Combined Balance Sheet10/31/0610/31/05Prepaid benefit cost$0$0Accrued benefit cost(579,360)(629,384)Intangible asset20,86170,775Accumulated other comprehensive income185,46591,500Net amount recognized($373,034)($467,109)  10/31/0610/31/05Other Comprehensive Loss Attributable to Change in Additional Minimum Liability$93,965$91,500  Additional Year-End Information for Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets10/31/0610/31/05Projected benefit obligation$5,031,273$5,741,736Accumulated benefit obligation$4,523,413$4,157,914Fair value of plan assets$3,944,053$3,528,530  Pension Expense Reconciliation10/31/0610/31/05Prepaid (accrued) benefit cost at beginning of year($467,109)($606,406)Net periodic pension cost(274,201)(347,037)Contributions368,276486,334Prepaid (accrued) benefit cost at end of year($373,034)($467,109)  Components of Net Periodic Benefit Cost10/31/0610/31/0510/31/04Service cost$202,212$274,289$263,286Interest cost290,574305,039279,984Expected return on plan assets(305,358)(274,934)(245,414)Amortization of transition obligation3,8038,4808,480Amortization of prior service cost274611611Amortization of accumulated gain36,86033,55224,261Total net periodic benefit cost$228,365$347,037$331,208Curtailment expense45,83600Total expense$274,201$347,037$331,208  Estimated Future Benefits PaymentsFiscal YearBenefits2007$180,8422008$238,5012009$226,2592010$214,5502011$263,8462012-2016$1,704,053 The Companies expect to contribute $454,000 to the pension plan in fiscal 2007. Measurement Date   October 31, 2006  31   Table of Contents   Weighted Average AssumptionsFor Determination of:Benefit Obligations 
as of 
October 31, 2006Net Periodic Pension Cost for Year Ending October 31, 2006Discount rate5.75%6.50%Rate of compensation increase4.00%4.00%Expected long-term return8.50%8.50%  Weighted-average asset allocations10/31/0610/31/05Asset CategoryEquity60.00%59.37%Fixed Income39.00%40.24%Cash Equivalents1.00%0.39%Total100.00%100.00% The Companies goal is to conservatively invest the plan assets in higher-grade securities and other assets with a minimum risk of market fluctuation.  Based on the allocation of our assets between equity, fixed income and money market we estimate our long term rate of return to be approximately 8.5%. 8.  PROPERTIES: Properties consist of the following at October 31, 2006 and 2005. 10/31/200610/31/2005Land improvements$6,156,934$4,805,023Corporate buildings496,092496,092Buildings leased to others26,162,25221,823,689Equipment and furnishings2,509,9522,622,92435,325,23029,747,728Less accumulated depreciation and amortization9,892,3148,764,889$25,432,916$20,982,839 In Fiscal 2005 an impairment loss of $149,798 resulted from the closing of the Splatter Paintball facility. In Fiscal 2004, $452,325 was recorded as an impairment loss as a result of the closing of the Fern Ridge Campground and an impairment loss of $568,709 was recorded as a result of the closing of the Traxx Motocross Park. 9.  ACCRUED LIABILITIES: Accrued liabilities consist of the following at October 31, 2006 and 2005. 10/31/200610/31/2005Payroll$127,647$311,057Security & Other Deposits36,354144,409Professional Fees41,88333,674Insurance Claims86,95243,170Real Estate Taxes123,696107,907Billings in excess of construction costs196,15075,563Miscellaneous305,730259,319$918,412$975,099   32   Table of Contents  10.  LEASES: The Companies are lessors under various operating lease agreements for the rental of land, land improvements and investment properties leased to others. Rents are reported as income over the terms of the leases as they are earned.  Shopping centers are leased to various tenants for renewable terms averaging 3.11 years with options for renewal.  Information concerning rental properties and minimum future rentals under current leases as of October 31, 2006 is as follows: Properties Subject to LeaseCostAccumulated DepreciationInvestment properties leased to others$26,162,251($3,393,862)Land and land improvements$11,738,949($2,827,089)Minimum future rentals:Fiscal years ending October 31:2007$2,132,10720082,001,96420091,806,02720101,686,67320111,584,417Thereafter68,860,834$78,072,022 Thereafter, includes $1,263,500 under a land lease expiring in 2072; $5,520,372 and $1,558,990 under net leases for two stores expiring in 2024; and $25,667,125 and $27,576,250 under net leases for two stores expiring in 2082; and $5,503,547 under a net lease for a store expiring in January 2039. There were no contingent rentals included in income for the fiscal years ended October 31, 2006, 2005 and 2004.  Includes all option years and rental escalations, recognized using straight-line basis. 11.  INVESTMENT IN DIRECT FINANCING LEASES: The Companies lease the Jack Frost and Big Boulder ski areas under direct financing leases through 2034.  The leases provide for minimum payments plus scheduled increases based upon the consumer price index, not to exceed 4% in any given year.  Minimum future lease payments due under those leases is as follows: Year ending October 31:2007$237,8002008243,7452009249,8392010256,0852011262,487Thereafter16,188,204TOTAL$17,438,160 The Companies net investment in direct financing leases consists of the following as of October 31, 2006: Minimum future lease payments$9,007,281Unguaranteed residual value of lease properties8,430,879Gross investment in lease17,438,160Unearned income(9,076,585)Net investment in direct financing leases$8,361,575 Unearned interest income is amortized to income using the interest method.  The scheduled lease increase over the terms of the leases have been accounted for on a straight line basis in accordance with generally accepted accounting principles and is evaluated for collectibility on an ongoing basis.  33   Table of Contents  12.  FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair values of the Companies' financial instruments are as follows at October 31, 2006 and 2005: Carrying AmountFair ValueCarrying AmountFair ValueASSETS:10/31/0610/31/05Cash and cash equivalents$  153,742$  153,742$1,833,704$1,833,704Accounts and mortgages receivable856,593856,593685,185685,185  Carrying
AmountFair
ValueCarrying
AmountFair
ValueLIABILITIES:10/31/0610/31/05Accounts payable$1,811,335$1,811,335$1,876,006$1,876,006Amounts due to related parties66,4600120,8360Debt22,030,70021,490,70013,149,74214,179,038 Fair Values were determined as follows: Cash and cash equivalents, accounts and mortgages receivable, and accounts payable:  The carrying amounts approximate fair value because of the short-term maturity of these instruments. Amounts due to related parties: Estimating the fair value of these instruments is not practicable because the terms of these transactions could not be duplicated in the market. Debt:  The fair value of debt is estimated using discounted cash flows based on current borrowing rates available to the Companies for similar types of borrowing arrangements. 13.  QUARTERLY FINANCIAL INFORMATION (Unaudited): The results of operations for each of the quarters in the last two years are presented below. 1st2nd3rd4thTotalYear ended 10/31/06Operating revenues$1,496,504$2,194,983$4,670,530$4,967,603$13,329,620Operating (loss) profit(747,382)(576,589)674,085677,52327,637Net (loss) income from discontinued
   operations(51,633)49,5243,269,043(15,126)3,251,808Net (loss) income(598,763)(388,802)3,594,249224,5962,831,280Net (loss) income before discontinued
   operations per weighted
   average combined share($0.22)($0.20)($0.73)$0.98($0.17)Net (loss) income per weighted average
   combined share($0.25)($0.16)$1.49$0.09$1.17  1st2nd3rd4thTotalYear ended 10/31/05Operating revenues$4,801,535$2,275,541$2,131,194$2,474,620$11,682,890Operating profit (loss)$2,399,136($81,761)($179,601)($344,667)$1,793,107Net income (loss) from discontinued
   operations$420,998$1,341,240($615,151)($240,453)$906,634Net income (loss)$1,751,846$1,198,280($784,316)($233,810)$1,932,000Net income (loss) before discontinued
   operations and cumulative effect per
   weighted average combined share$0.69($0.07)($0.07)($0.07)$0.48Net income (loss) per weighted average
   combined share$0.91$0.61($0.48)($0.14)$0.90  34   Table of Contents  The quarterly results of operations for Fiscal 2006 and 2005 reflect the cyclical nature of the Companies' business since land dispositions occur sporadically and do not follow any pattern during the fiscal year.  Reclassifications in operating revenues and income (loss) from continuing operations in the quarters for years ended October 31, 2006 and 2005 reflect ski operations being classified as discontinued operations, as well as the sale of Oxbridge Square Shopping Center in Fiscal 2006. 14.  BUSINESS SEGMENT INFORMATION: The following information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information."  In accordance with SFAS No. 131, the Companies' business segments were determined from the Companies' internal organization and management reporting, which are based primarily on differences in services. The Companies and the subsidiaries, under SFAS No. 131, previously operated in four business segments, currently operate three business segments (Ski Operations was combined into Real Estate Management/Rental Operations) consisting of the following: Real Estate Management/Rental Operations Real Estate Management/Rental Operations consists of: investment properties leased to others located in Eastern Pennsylvania, South Carolina, New Jersey, Minnesota, Louisiana and Texas; a custom home construction division; recreational club activities and services to the trusts that operate resort communities; sales of investment properties; and rental of land and land improvements, which includes the leasing of our two ski areas and located in the Pocono Mountains of Northeastern Pennsylvania. Summer Recreation Operations Summer Recreation Operations consist of a seasonal recreational operating center located in the Pocono Mountains of Northeastern Pennsylvania, which is the Lake Mountain Sports Club.  In fiscal 2007, this segment will include the operation of Jack Frost National Golf Course. Land Resource Management Land Resource Management consists of land sales, land purchases, timbering operations and a real estate development division.  Timbering operations consist of selective timbering on our land holdings.  Contracts are entered into for parcels that have had the timber selectively marked.  The real estate development division is responsible for the residential land development activities which include overseeing the construction of single and multi-family homes and development of infrastructure. Funds expended to date for real estate development in Laurelwoods have been primarily for infrastructure improvements.  We are in the construction phase for 23 single family homes and the initial construction stage for 66 duplex homes.  Other expenditures for all development projects in the planning phases include fees for architects, engineers, consultants, studies and permits. 10/31/0610/31/0510/31/04Revenues from continuing operations:Real estate management/rental operations$9,479,276$4,409,873$3,912,444Summer recreation operations204,626774,2881,944,023Land resource management3,645,7186,498,7291,321,443$13,329,620$11,682,890$7,177,910Operating profit (loss), excluding general and administrative expenses:Real estate management/rental operations$351,968$272,948$381,951Summer recreation operations(21,040)90,830283,084Land resource management1,346,0973,131,941196,316$1,677,025$3,495,719$861,351General and administrative expenses:Real estate management/rental operations$1,172,952$586,132$489,642Summer recreation operations25,320102,913243,294Land resource management451,116863,769165,379$1,649,388$1,552,814$898,315  35   Table of Contents   10/31/0610/31/0510/31/04Interest and other income (expense), net:Real estate management/rental operations($27,657)$ 98,662$1,049,822Summer recreation operations000Land resource management(22,131)41,07627,142($49,778)$139,738$1,076,964Interest expense:Real estate management/rental operations$574,373$585,460$325,053Summer recreation operations000Land resource management58,01415,0198,968$632,387$600,479$334,021(Loss) income from continuing operations before income taxes($654,528)$1,332,366($315,055) For the fiscal years ended October 31, 2006, 2005, and 2004, no one customer represented more than 10 % of total revenues. Identifiable assets, net of accumulated depreciation at October 31, 2006, 2005, and 2004 and depreciation expense and capital expenditures for the years then ended by business segment are as follows: IdentifiableDepreciationCapitalOctober 31, 2006AssetsExpenseExpendituresReal estate management/rental operations$70,592,405$903,006$15,864,370Summer recreation operations234,77830,16439,547Land resource management216,27945,710150,871Other corporate770,992102,35583,992Total$71,814,454$1,081,235$16,138,780  October 31, 2005Identifiable 
AssetsDepreciation 
ExpenseCapital 
ExpendituresReal estate management/rental operations$56,085,585$2,313,035$1,612,010Summer recreation operations203,60358,19924,834Land resource management134,45647,200140,208Other corporate570,099105,942128,784Total$56,993,743$2,524,376$1,905,836  IdentifiableDepreciationCapitalOctober 31, 2004AssetsExpenseExpendituresReal estate management/rental operations$38,173,543$1,977,797$22,656,301Summer recreation operations431,4051,187,12085,310Land resource management158,80245,74297,897Other corporate6,698,21983,134186,886Total$45,461,969$3,293,793$23,026,394 15. CONTINGENT LIABILITIES and COMMITMENTS: The Companies are party to various legal proceedings incidental to their business. Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are possible of assertion against the Companies.  In the opinion of management, all such matters are without merit or are of such kind, or involve such amounts, which are not expected to have a material effect on the combined financial position or results of operations of the Companies.  36   Table of Contents  16.  RELATED PARTY TRANSACTIONS: Kimco Realty Services, Inc., or Kimco, is our controlling shareholder and Kimco Realty Corporation, the parent company of Kimco, is presently providing consulting services to us.  The services are focused on land development, acquisitions and disposals.  For the fiscal years ended October 31, 2006, 2005 and 2004 Kimco was paid $300,000, $200,000, and $285,000 in consulting fees, respectively. Kimco Realty Corporation serves as the management company for the Coursey Commons Shopping Center, Baton Rouge, Louisiana, effective June 2004.  A wholly owned subsidiary of Kimco Realty Corporation receives a fixed monthly fee of 4.5% of rental income on store leases.  During the fiscal years ended October 31, 2006 and 2005 that subsidiary received $36,810 and $30,735, respectively for management fees earned on the shopping center.  Kimco Realty Corporation also served as the management company for the Oxbridge Square Shopping Center located in Richmond, Virginia from June 2004 to June 2006 (at which point the shopping center was sold).  During its management term of Oxbridge Square, Kimco Realty Corporation was paid $109,928 in management fees. Michael J. Flynn, the Chairman of our board of directors, is also the President, Chief Operating Officer and Vice Chairman of the board of directors of Kimco Realty Corporation. Michael receives an annual fee of $35,000.  In addition, Patrick M. Flynn, who serves as one of our directors and is our President and Chief Executive Officer, is the Director of Real Estate at Kimco Realty Corporation.  Patrick has received  an annual bonus of $50,000, $50,000, and $40,000 in the years ended October 31, 2006, 2005 and 2004.  Finally, Milton Cooper, who serves as one of our directors, also serves as Chief Executive Officer and Chairman of the board of directors of Kimco Realty Corporation. Amounts due to the above related parties total $66,460 at October 31, 2006 and $120,836 at October 31, 2005. 17. STOCK OPTIONS and CAPITAL STOCK: During Fiscal 2002, four corporate officers were granted stock options in varying amounts for a total of 11,000 shares, all expiring December 10, 2006.  Additionally, during Fiscal 2003, six key employees were granted stock options totaling 18,000 shares, due to expire on December 2, 2007.  During Fiscal 2004, seven key employees were granted stock options in varying amount for a total of 32,000 shares, all expiring February 2009.  During Fiscal 2005, seven key employees were granted stock options totaling 52,000 shares, which vest over three years, all expiring February 2010.  During Fiscal 2006, five corporate officers were granted stock options to purchase a total of 21,500 shares, which options vest over three years and which expire in February 2011.  37   Table of Contents   Option activity during the years ended October 31, 2006, 2005 and 2004 is as follows:  10/31/0610/31/0510/31/04SharesWeighted Average Exercise PriceSharesWeighted Average Exercise PriceSharesWeighted Average Exercise PriceOutstanding at 
   beginning of year:87,000$23.0496,000$11.6264,000$8.56Granted21,500$37.8052,000$34.0032,000$17.75Exercised(58,000)$17.56(61,000)$14.42--Canceled---Outstanding at end
   of year50,500$35.6287,000$23.0496,000$11.62Options exercisable
   at year-end16,458$35.2446,440$13.4696,000$11.62Option price range$34.00-$37.80$6.75-$34.00$6.75-$17.75Weighted average
   fair value of 
   options granted 
   during year$13.75$15.00$17.64Weighted average
   grant date fair value
   of options granted
   during year$14.30$15.70$17.66Weighted average 
   remaining contractual 
   life (in years)3.74.73.8 Activity related to non-vested options for the year ended October 31, 2006 is as follows: SharesWeighted Average Grant Date Fair Value PriceNon vested at beginning of year:40,444$10.28Granted21,500$  9.94Vested(27,902)$10.39Non-vested at year-end34,042$  9.97 The total intrinsic value of options exercised during the fiscal year ended October 31, 2006 and 2005 is $1,018,250 and $879,700, respectively.  The Companies expect to recognize compensation expense related to non-vested awards totaling approximately $148,480 over the next two years based on graded average vesting. The Companies policy regarding the exercise of options is that optionees utilize an independent broker to manage the transaction, whereby the broker sells the exercised shares on the open market.  38   Table of Contents  The following table summarizes the pro forma effect on income from operations, income before taxes, net income, cash flows from operating activities, cash flows from financing activities and earnings per share of adopting FAS 123R for the year ended October 31, 2006. 10/31/2006Loss from continuing operations before income taxes, as reported($654,528)Stock-based employee compensation recognized as a result of adoption of FAS 123R381,218Pro forma loss from continuing operations before income taxes($273,310)Loss from continuing operations, as reported($420,528)Stock-based employee compensation recognized as a result of adoption of FAS 123R, net of tax232,543Pro forma loss from continuing operations($187,985)Net income, as reported$2,831,280Stock-based employee compensation recognized as a result of adoption of FAS 123R, net of tax232,543Pro forma net income$3,063,823Cash flows used in operating activities, as reported($10,351,042)Stock-based employee compensation recognized as a result of adoption of FAS 123R, net of tax232,543Pro forma cash flows used in operating activities($10,118,499)Cash flows provided by financing activities, as reported$13,743,588Stock-based employee compensation recognized as a result of adoption of FAS 123R0Pro forma cash flows provided by financing activities$13,743,588Basic earnings per weighted average combined share, as reported$1.17Stock-based employee compensation recognized as a result of adoption of FAS 123R0.10Basic earnings per weighted average combined share, as pro forma$1.27Diluted earnings per weighted average combined share, as reported$1.16Stock-based employee compensation recognized as a result of adoption of FAS 123R0.10Diluted earnings per weighted average combined share, as pro forma$1.26  39   Table of Contents  18.  PER SHARE DATA: Earnings per share for the years ended October 31, 2006, 2005 and 2004 are computed as follows: 10/31/0610/31/0510/31/04Net earnings$2,831,280$1,932,000$6,246,107Weighted average combined shares of common
   stock outstanding used to compute basic 
   earnings per combined share2,412,9412,161,2441,916,130Additional combined common shares to be 
   issued assuming exercise of stock options,
   net of combined shares assumed reacquired25,14445,99243,793Combined shares used to compute dilutive 
   effect  of stock option2,438,0852,207,2351,959,923Basic earnings per combined common share$1.17$0.90$3.26Diluted earnings per combined common share$1.16$0.87$3.19 19.  SUBSEQUENT EVENTS: On December 11, 2006 Blue Ridge Real Estate Company entered into a mortgage and security agreement and a $3 million promissory note with State Farm Bank, F.S.B. (State Farm).  The Note is secured by the mortgage, which encumbers certain real property purchased in fiscal 2006, known as the Walgreens Store located in Dover Township, Ocean County, New Jersey. On December 15, 2006 Blue Ridge Real Estate Company entered into a mortgage and security agreement and a $4 million promissory note with State Farm Bank.  The Note is secured by the mortgage, which encumbers certain real property purchased in fiscal 2006, known as the Walgreens Store located in White Bear Lake, Washington County, Minnesota. On December 29, 2006, the Companies sold certain real property known as the former Burger King property and comprised of 7.5 acres located along Route 940 at the intersection of the PA Turnpike Route 476 in Kidder Township, Pennsylvania.  The sale price of the property and improvements thereon, was $820,000.  Proceeds from the sale will be used for section 1031 investment purposes.  40   Table of Contents       Report of Independent Registered Public Accounting Firm To Shareholders of
Blue Ridge Real Estate Company
and Big Boulder Corporation: We have audited the accompanying combined balance sheets of Blue Ridge Real Estate Company and subsidiaries and Big Boulder Corporation and subsidiaries (the Companies) as of October 31, 2006 and 2005, and the related combined statements of operations, changes in shareholders equity, and cash flows for each of the three years in the period ended October 31, 2006. These financial statements are the responsibility of the Companies management.  Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Blue Ridge Real Estate Company and subsidiaries and Big Boulder Corporation and subsidiaries as of October 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2006 in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note 1 to the combined financial statements, the Companies changed their method for recognizing and measuring compensation expense related to their non-qualified employee stock option plan. As disclosed in Note 2 to the combined financial statements, the Companies changed their method of accounting for deferred operating costs in 2004. Parente Randolph, LLC Wilkes-Barre, Pennsylvania January 22, 2007  41