Orleans Homebuilders (OHBIQ) 10-Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

OR

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

FOR THE TRANSITION PERIOD__________ TO __________.

Commission File No. 1-6830

ORLEANS HOMEBUILDERS, INC.

(Exact name of registrant as specified in its charter)

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

One Greenwood Square, Suite 101

3333 Street Road

Bensalem, PA 19020

(Address of principal executive offices)

Telephone:      (215) 245-7500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer            Accelerated filer            Non-accelerated filer

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

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

May 8, 2006:18,401,207

(excluding 296,924 shares held in Treasury).

ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

		PAGE
PART 1 - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets at March 31, 2006
	and June 30, 2005	1
	Consolidated Statements of Operations for the
	Three and Nine Months Ended March 31, 2006 and 2005	2
	Consolidated Statements of Shareholders’ Equity for the
	Nine Months Ended March 31, 2006	3
	Consolidated Statements of Cash Flows for the Nine
	Months Ended March 31, 2006 and 2005	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market
	Risk	33
Item 4.	Controls and Procedures	33
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 6.	Exhibits	34

Orleans Homebuilders, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands)

	March 31, 2006 (Unaudited)			June 30, 2005
Assets
Cash and cash equivalents	$	42,246		$	62,576
Restricted cash - due from title company		9,972			28,785
Restricted cash - customer deposits		19,752			20,100
Real estate held for development and sale:
Residential properties completed or under construction		340,005			190,855
Land held for development or sale and improvements		504,605			398,290
Inventory not owned - Variable Interest Entities		138,657			88,252
Property and equipment, at cost, less accumulated depreciation		3,392			3,420
Deferred taxes		3,106			2,802
Intangible assets		4,111			6
Goodwill		20,514			20,514
Receivables, deferred charges and other assets		21,489			18,532
Land deposits and costs of future development		27,579			27,408
Total Assets	$	1,135,428		$	861,540
Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable	$	32,121		$	47,689
Accrued expenses		71,637			65,253
Customer deposits		30,722			27,738
Obligations related to inventory not owned - Variable Interest Entities		126,117			79,585
Mortgage and other note obligations		498,605			399,030
Subordinated notes		105,000			—
Other notes payable		5,890			9,400
Total Liabilities		870,092			628,695
Commitments and contingencies (See Note J)
Redeemable common stock		240			889
Shareholders’ Equity:
Common stock, $.10 par, 23,000,000 shares authorized,
18,698,131 shares issued at March 31, 2006
and June 30, 2005		1,870			1,870
Capital in excess of par value - common stock		71,764			70,450
Retained earnings		195,300			160,407
Treasury stock, at cost (296,924 and 176,911 shares held at
March 31, 2006 and June 30, 2005, respectively)		(3,838	)		(771	)
Total Shareholders’ Equity		265,096			231,956
Total Liabilities and Shareholders’ Equity	$	1,135,428		$	861,540

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

1

Orleans Homebuilders, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005
Earned revenues
Residential properties	$	207,843		$	198,120		$	586,718		$	514,710
Land sales		—			250			1,353			342
Other income		2,072			1,612			6,136			5,100
		209,915			199,982			594,207			520,152
Costs and expenses
Residential properties		161,411			160,523			453,998			412,068
Land sales		—			250			1,150			338
Other		1,407			972			4,631			3,293
Selling, general and administrative		25,864			20,894			74,439			60,149
Interest:
Incurred		10,779			6,913			26,497			12,951
Less capitalized		(10,779	)		(6,878	)		(26,497	)		(12,887	)
		188,682			182,674			534,218			475,912
Income from operations before income taxes		21,233			17,308			59,989			44,240
Income tax expense		8,424			6,735			23,986			17,235
Net income	$	12,809		$	10,573		$	36,003		$	27,005
Basic earnings per share	$	0.69		$	0.58		$	1.94		$	1.52
Diluted earnings per share	$	0.68		$	0.56		$	1.91		$	1.44
Dividends declared per share	$	0.02		$	—		$	0.06		$	—
Basic weighted average shares outstanding		18,445			18,339			18,514			17,798
Diluted weighted shares outstanding		18,781			18,893			18,854			18,812

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

2

Orleans Homebuilders, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(dollars in thousands)

	Common Stock										Treasury Stock
	Shares Issued and Outstanding		Amount		Capital in Excess of Par Value - Common Stock			Retained Earnings			Share Held			Amount			Total
Balance at June 30, 2005		18,698,131	$	1,870	$	70,450		$	160,407			176,911		$	(771	)	$	231,956
Redeemable common stock sold / expired						649												649
Shares awarded under Stock Award Plan						427						(14,126	)		62			489
Fair market value of stock options issued						104												104
Stock options, net						(115	)					(40,000	)		174			59
Tax benefit of stock option exercises						249												249
Treasury stock purchase												174,139			(3,303	)		(3,303	)
Dividends declared									(1,110	)								(1,110	)
Net income									36,003									36,003
Balance at March 31, 2006		18,698,131	$	1,870	$	71,764		$	195,300			296,924		$	(3,838	)	$	265,096

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

3

Orleans Homebuilders, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Nine Months Ended March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	36,003		$	27,005
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization		928			1,051
Amortization of note discount		50			—
Deferred taxes		(304	)		(89	)
Stock based compensation expense		392			226
Changes in operating assets and liabilities:
Restricted cash - due from title company		18,813			—
Restricted cash - customer deposits		348			(3,051	)
Real estate held for development and sale		(255,465	)		(195,053	)
Receivables, deferred charges and other assets		(2,957	)		(6,852	)
Land deposits and costs of future developments		(4,044	)		(10,473	)
Accounts payable and other liabilities		(13,746	)		(13,008	)
Customer deposits		2,984			4,423
Net cash used in operating activities		(216,998	)		(195,821	)
Cash flows from investing activities:
Purchases of property and equipment		(894	)		(452	)
Acquisitions, net of cash acquired		—			(56,635	)
Net cash used in investing activities		(894	)		(57,087	)
Cash flows from financing activities:
Borrowings from loans secured by real estate assets		190,959			628,811
Repayment of loans secured by real estate assets		(91,384	)		(384,649	)
Borrowings from unsecured line of credit		—			135,948
Repayments of unsecured line of credit		—			(135,948	)
Borrowings from subordinated notes		105,000			—
Borrowings from other note obligations		—			5,179
Repayment of other note obligations		(3,560	)		(2,168	)
Sale/(purchase) of treasury stock		(3,303	)		268
Proceeds from Stock Award Plan		284			—
Tax benefit form exercise of stock options		249			—
Proceeds from stock options exercised		59			137
Common stock dividend paid		(742	)		—
Net cash provided by financing activities		197,562			247,578
Net decrease in cash and cash equivalents		(20,330	)		(5,330	)
Cash and cash equivalents at beginning of year		62,576			32,962
Cash and cash equivalents at end of period	$	42,246		$	27,632
Supplemental disclosure of cash flow activities:
Interest paid, net of amounts capitalized	$	—		$	64
Income taxes paid	$	25,919		$	14,512

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

4

ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(A) Summary of Significant Accounting Policies:

The accompanying unaudited consolidated financial statements are presented in accordance with the requirements for Form 10-Q and do not include all the disclosures required by generally accepted accounting principles for complete financial statements. Reference is made to Form 10-K as of and for the year ended June 30, 2005 for Orleans Homebuilders, Inc. and subsidiaries (the “Company”) for additional disclosures, including a summary of the Company’s accounting policies.

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

Accounting for variable interest entities:

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

Based on the provisions of FIN 46, the Company has concluded that whenever it enters into an option agreement to acquire land or lots from an entity and pays a significant deposit that is not unconditionally refundable, a VIE is created under condition (ii) (b) of the previous paragraph. The Company has been deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur. For each VIE created, the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46. If the Company is deemed to be the primary beneficiary of the VIE it will consolidate the VIE on its balance sheet. The fair value of the VIEs inventory will be reported as “Inventory not owned – Variable Interest Entities.”

At March 31, 2006, the Company consolidated twenty-two VIEs as a result of its options to purchase land or lots from the selling entities. The Company paid cash or issued letters of credit deposits to these twenty-two VIEs totaling $12,890,000 and incurred additional pre-acquisition costs totaling $2,500,000. The Company's deposits and any costs incurred prior to acquisition of the land or lots represent the Company’s maximum exposure to loss. The fair value of the VIEs inventory is reported as “Inventory not owned – Variable Interest Entities.” The Company recorded $138,657,000 in Inventory Not Owned - Variable Interest Entities as of March 31, 2006. The fair value of the property to be acquired less cash deposits and pre-acquisition costs, which totaled $126,117,000 at March 31, 2006, was reported on the balance sheet as “Obligations related to inventory not owned – Variable Interest Entities.” Creditors, if any, of these VIEs have no recourse against the Company.

5

The Company will continue to secure land and lots using options. Including the deposits and other costs capitalized in connection with the VIEs discussed in the prior paragraph, the Company had total costs incurred to acquire land and lots at March 31, 2006 of approximately $40,135,000, including $24,300,000 of cash deposits. The total purchase price under these cancelable contracts or options is approximately $605,613,000. The maximum exposure to loss is limited to the deposits, although some deposits are refundable, and costs incurred prior to the acquisition of the land or lots.

Accounting for share based payments:

In December 2004, the FASB revised FAS No. 123 through the issuance of FAS No. 123-R “Share Based Payment”, revised (“FAS 123-R”).  FAS 123-R was effective for the Company commencing July 1, 2005.  FAS 123-R, among other things, eliminates the alternative to use the intrinsic value method of accounting for stock based compensation and requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions).  The fair value based method in FAS 123-R is similar to the fair-value-based method in FAS No. 123 in most respects, subject to certain key differences.  As the Company previously adopted the fair value recognition provisions of FAS No. 123 prospectively for all stock awards granted, commencing on July 1, 2002, the impact of the modified prospective adoption of FAS 123-R did not have a significant impact on the financial position or results of operations of the Company. The Company amortizes compensation expense on a straight line basis over the vesting period of each option grant. The Company utilizes the Black-Scholes option pricing model to calculate the compensation expense associated with stock options. For the nine months ended March 31, 2006, the Company recorded pretax compensation expense associated with stock awards of $392,000. Total compensation cost related to nonvested awards not yet recognized of $3,804,000 will be recognized according to vesting schedules through March 2015. For the nine months ended March 31, 2006, the Company recognized a $249,000 tax benefit resulting from the disqualified disposition of shares issued to employees in connection with the exercise of incentive stock options.

Accounting for income taxes:

In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" (FSP FAS 109-1). FSP FAS 109-1 clarifies that the deduction will be treated as a "special deduction" as described in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. The impact of the deduction will be reported in the period in which the deduction is claimed.   The Company files a consolidated return on a calendar year.  Accordingly, the Company began reflecting the special deduction with respect to its operations effective January 1, 2005.  The expected impact was and will be to lower the effective tax provision in the periods in which the deduction may be claimed and that this benefit will increase as the deduction is phased in under the statute.

6

(B) Acquisitions:

Peachtree Acquisition:

On December 23, 2004, pursuant to an Asset Purchase Agreement of the same date, the Company acquired, through a wholly-owned subsidiary, the real estate assets described below (the “Assets”) from Peachtree Residential Properties, LLC, a North Carolina limited liability company and Peachtree Townhome Communities, LLC, a North Carolina limited liability company which, at the time the Company acquired the assets, were wholly-owned subsidiaries of Peachtree Residential Properties, Inc., a Georgia corporation (collectively, “Peachtree Residential Properties”).

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

The Company paid $29,300,000 in cash, to acquire the Assets. The Company also assumed certain liabilities of Peachtree Residential Properties, less $200,000 to be retained by the Company and applied towards the administration of certain home warranty claims.

Realen Acquisition:

On July 28, 2004, pursuant to a Purchase Agreement of the same date, the Company completed its acquisition of all of the issued and outstanding partnership interests in Realen Homes L. P., a Pennsylvania limited partnership (“Realen Homes”), from Realen General Partner, LLC, a Pennsylvania limited liability company, and DB Homes Venture L.P., a Pennsylvania limited partnership. The Company acquired the limited partner’s interest in Realen Homes and a subsidiary of the Company, RHGP LLC, acquired the general partner's interest and serves as the general partner of Realen Homes.

In accordance with the Purchase Agreement, the consideration paid by the Company consisted of: (i) $53,348,000 in cash delivered at closing, (ii) a promissory note of the Company in the aggregate principal amount of $5 million, payable over a period of up to two years, with an interest rate of 3% per year and (iii) a warranty holdback of $1.5 million retained by the Company to be applied toward the administration of any warranty claims made against Realen Homes in excess of certain predetermined amounts. The purchase price was determined based on Realen Homes’ book value at June 30, 2004, its management personnel, its profitability, its backlog and its land position.

7

The Company evaluated the $5,000,000 3% note in accordance with APB 21 and determined that it was a below market rate note. In accordance with APB 21, the Company estimated, based on current market conditions that the Company would likely have been able to obtain similar fixed-rate financing from a third party at approximately 150 basis points higher than the note actually obtained. The Company imputed interest on the note at 4.5% and reduced the carrying value of the note from $5,000,000 to $4,863,000. The discount of $137,000 will be recorded as interest expense over the life of the note.

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

The Company accounted for the acquisition as a purchase in accordance with SFAS No. 141, “Business Combinations.” The purchase price was allocated to goodwill for $13,327,000 which is defined as the fair value of assets and liabilities acquired in excess of the purchase price and to intangible assets for $500,000. The intangible assets represent the intangible value of the backlog acquired from Realen Homes. The intangible value of the backlog was amortized into cost of sales as the acquired backlog was delivered. The Company amortized the remaining $6,000 of the intangible value of the backlog acquired from Realen Homes during the three months ended September 30, 2005.

Masterpiece Acquisition:

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

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

8

From July 28, 2003 through March 31, 2006, the Company recorded $308,000 in pretax compensation expense associated with the stock options granted pursuant to the employment agreement with the president of Masterpiece Homes, recognized $3,763,000 in contingent payments representing 25% of the pre-tax profits of Masterpiece Homes, and paid the Contingent Stock Payment of $2,130,000 on January 1, 2005 as required under the terms of the acquisition agreement.

(C) Mortgage and other note obligations and subordinated notes:

The $603,605,000 outstanding balance at March 31, 2006 consists of $495,950,000 outstanding under the Revolving Credit Facility, which is discussed below, $105,000,000 outstanding pursuant to the sale and issuance of trust preferred securities discussed below, and $2,655,000 under mortgage obligations secured by land held for development and sale and improvements. The average month end balance during the nine months ended March 31, 2006 was $500,947,000.

At March 31, 2006, the Company had approximately $495,950,000 outstanding under the Revolving Credit Facility. In addition, approximately $42,468,000 of letters of credit and other assurances of the availability of funds have been provided under the Revolving Credit Facility.

On December 22, 2004, Greenwood Financial, Inc., a wholly-owned subsidiary of the Company and other wholly-owned subsidiaries of the Company, as borrowers, and Orleans Homebuilders, Inc. as guarantor, entered into a Revolving Credit and Loan Agreement for a $500,000,000 Senior Secured Revolving Credit and Letter of Credit Facility (the “Revolving Credit Facility”) with various banks as lenders. The Revolving Credit Facility was amended on January 24, 2006 via the Amended and Restated Revolving Credit and Loan Agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provided for the following amendments to the terms of its December 22, 2004 revolving credit facility:

· The revolving sublimit was increased from $500,000,000 to $650,000,000.

· The accordion feature of the Revolving Credit Facility was increased from $650,000,000 to $750,000,000.

· The interest rate was lowered from the LIBOR Market Index Rate plus a non-default variable spread ranging from 175 basis points to 237.5 basis points to the LIBOR Market Index Rate plus a non-default variable spread ranging from 165 basis points to 225 basis points.

· The maturity date of the Revolving Credit Facility was extended from December 20, 2007 to December 20, 2008.

9

· The loan to value or loan to cost advance rate ranges were increased from 50% to 90% of the lower of the appraised value or cost of the real estate to 50% to 95% of the lower of the appraised value or cost of the real estate.

Under and subject to the terms of the Amended and Restated Credit Agreement, the borrowers may borrow and re-borrow for the purpose of financing the acquisition and development of real estate, the construction of homes and improvements, for investment in joint ventures, for working capital and for such other appropriate purposes as may be approved by the lenders. The Company is required to maintain certain financial ratios and customary covenants as set forth in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement is primarily collateralized by real estate held for development and sale. In addition, in connection with the Amended and Restated Credit Agreement, Orleans Homebuilders entered into an amended and restated Guaranty Agreement.

On November 23, 2005, the Company issued $75,000,000 of trust preferred securities which mature on January 30, 2036 and are callable, in whole or in part, at par plus accrued interest on or after January 30, 2011. For the first ten years, the securities have a fixed interest rate of 8.61% per annum. Thereafter, the securities have a floating interest rate equal to three-month LIBOR plus 360 basis points per annum, resetting quarterly. In the event the Company fails to meet certain financial covenants, the applicable rate of interest will be increased by 300 basis points until such time as the Company is in compliance with the financial covenants, then the interest rate will return to its original amount. The transaction is treated as debt for financial statement purposes. The Company used proceeds from the sale of these securities to repay outstanding obligations under the Revolving Credit Facility discussed above.

On September 20, 2005, the Company issued $30,000,000 of trust preferred securities which mature on September 30, 2035 and are callable, in whole or in part, at par plus accrued interest on or after September 30, 2010. For the first ten years, the securities have a fixed interest rate of 8.52% per annum. Thereafter, the securities have a floating interest rate equal to three-month LIBOR plus 380 basis points per annum, resetting quarterly. The transaction is treated as debt for financial statement purposes. The Company used proceeds from the sale of these securities for land purchases and general corporate purposes. The obligations relating to the trust preferred securities are subordinated to the Revolving Credit Facility.

On December 21, 2004 and in accordance with the terms of the Company’s Convertible Subordinated 7% Note issued to Jeffrey P. Orleans, Chairman and Chief Executive Officer of the Company, the third and final installment due of $1,000,000 was converted, at $1.50 per share, into 666,668 shares of the Company’s common stock.

(D) Redeemable Common Stock:

In connection with the Company’s acquisition of Parker and Lancaster Corporation on October 13, 2000, the Company issued 300,000 shares of common stock of the Company to the former shareholders of Parker and Lancaster Corporation. The former shareholders of Parker and Lancaster Corporation have the right to cause the Company to repurchase the common stock approximately five years after the closing of the acquisition at a price of $3.33 per share. The redemption feature of these shares expired during the quarter ended December 31, 2005.

10

In connection with the Company’s acquisition of Masterpiece Homes on July 28, 2003, the Company sold 30,000 shares of common stock of the Company to the president of Masterpiece Homes at $8 per share. The president of Masterpiece Homes has the right to cause the Company to repurchase the common stock at $8 per share by giving notice to the Company no later than the earlier of December 31, 2006 or 30 days after termination of his employment, as specified in his employment agreement.

(E) Employee Retirement and Deferred Compensation Plans

Employee Retirement Plan

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

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

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

The Company used a 4% annual compensation increase and a 5% discount rate in its calculation of the present value of its projected benefit obligation. The discount rate used represented the Moody’s AA bond rate for long-term bonds as of September 2005. The Company recognized the following costs related to the SERP for the period ended March 31, 2006:

	Three Months Ended		Nine Months Ended
	March 31, 2006		March 31, 2006
Net periodic pension cost:
Service cost	$	134,000	$	314,000
Interest cost		77,000		180,000
Amortization of prior service cost		83,000		194,000
Total net periodic pension cost	$	294,000	$	688,000

Deferred Compensation Plan

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

11

(F) Earnings Per Share:

The weighted average number of shares used to compute basic earnings per common share and diluted earnings per common share and a reconciliation of the numerator and denominator used in the computation for the three and nine months ended March 31, 2006 and 2005 are shown in the following table:

	Three Months Ended						Nine Months Ended
	March 31,
		2006			2005			2006			2005
	(Unaudited)  (in thousands)
Weighted average common shares issued		18,698			18,698			18,698			18,250
Unconditional shares issuable		—			—			—			32
Less: Average treasury shares Outstanding		(253	)		(359	)		(184	)		(484	)
Basic EPS shares		18,445			18,339			18,514			17,798
Effect of assumed shares issued under
treasury stock method for stock options		336			554			340			566
Effect of partial conversion of $3 million
Convertible Subordinated 7% Note		—			—			—			448
Diluted EPS shares		18,781			18,893			18,854			18,812
Net income available for common Shareholders	$	12,809		$	10,573		$	36,003		$	27,005
Effect of partial conversion of $3 million
Convertible Subordinated 7% Note		—			—			—			22
Adjusted net income for diluted EPS	$	12,809		$	10,573		$	36,003		$	27,027

(G) Residential Properties Completed or under Construction:

Residential properties completed or under construction consist of the following:

	March 31, 2006		June 30, 2005
	(in thousands)
Under contract for sale (backlog)	$	224,558	$	128,137
Unsold		115,447		62,718
Total residential properties completed or under construction	$	340,005	$	190,855

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(H) Restricted Stock Award:

On March 4, 2005, the Compensation Committee of the Company resolved to grant Michael T. Vesey, the Company's President, Chief Operating Officer and a member of the Company's Board of Directors, 125,000 restricted shares of the Company's common stock pursuant to the terms of the Company's Stock Award Plan. The award was subject to Mr. Vesey's execution of a Restricted Stock Award Agreement which he has executed. The Compensation Committee also approved the payment of bonus compensation to Mr. Vesey sufficient to allow Mr. Vesey to pay the income tax liability triggered on each vesting date.

The shares of restricted stock granted to Mr. Vesey will vest at a rate of 10,000 per year on the first through fifth anniversaries of the date of grant and 15,000 per year on the sixth through tenth anniversaries of the date of the grant, with all shares being fully vested by or on the tenth anniversary of the date of grant, assuming Mr. Vesey's continued employment with the Company. In addition, in the event of a change of control as defined in the Stock Award Plan, any shares of restricted stock not vested at that time will vest, assuming Mr. Vesey is then employed by the Company. Any shares that are not vested are subject to forfeiture in the event Mr. Vesey's employment with the Company terminates for any reason.

On a monthly basis, the Company records compensation expense for the portion of the award earned along with additional compensation expense sufficient to cover the taxes Mr. Vesey will have to pay on the award.

(I) Litigation

From time to time the Company is named as a defendant in legal actions arising from its normal business activities. Although the amount of liability that could arise with respect to currently pending actions cannot be accurately predicted, in the opinion of the Company any such liability will not have a material adverse effect on the financial position, operating results or cash flows of the Company.

(J) Commitments and Contingencies:

As of March 31, 2006, the Company owned or controlled approximately 18,989 building lots. As part of the aforementioned building lots, the Company had contracted to purchase, or had under option, undeveloped land and improved lots for an aggregate purchase price of approximately $605,613,000 which are expected to yield approximately 10,054 building lots. Generally, the Company structures its land acquisitions so that it has the right to cancel its agreements to purchase undeveloped land and improved lots by forfeiture of its deposit under the agreement. Furthermore, purchase of the properties is usually contingent upon obtaining all governmental approvals and satisfaction of certain requirements by the Company and the sellers.  

13

ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Orleans Homebuilders, Inc. and its subsidiaries (collectively, the “Company”, “OHB” or “Orleans”) market, develop and build high-quality, single-family homes, townhomes and condominiums to serve various homebuyer segments, including first-time, first move-up, second move-up, luxury and active adult. The Company believes this broad range of home designs allows it to capitalize on favorable economic and demographic trends within its markets. The Company is currently engaged in residential real estate development in the following fourteen markets: southeastern Pennsylvania; central New Jersey; southern New Jersey; Orange County New York; Charlotte, Raleigh and Greensboro, North Carolina; Richmond and Tidewater, Virginia; Orlando, Palm Coast, and Palm Bay Florida; Chicago, Illinois; and Phoenix, Arizona. The Company’s Charlotte, North Carolina market also includes operations in adjacent counties in South Carolina. The Company has operated in its Pennsylvania and New Jersey markets for over 85 years and began operations in its North Carolina and Virginia markets in fiscal 2001 through the acquisition of Parker & Lancaster Corporation, a privately-held residential homebuilder. The Company entered the Orlando and Palm Coast, Florida markets on July 28, 2003 through its acquisition of Masterpiece Homes, Inc. (“Masterpiece Homes”), a privately-held residential homebuilder. On July 28, 2004, the Company entered the Chicago, Illinois market through the acquisition of Realen Homes, L.P. (“Realen Homes”), an established privately-held homebuilder with operations in southeastern Pennsylvania and Chicago, Illinois. On December 23, 2004, pursuant to an Asset Purchase Agreement of the same date, the Company acquired, through a wholly-owned subsidiary, certain real estate assets from Peachtree Residential Properties, LLC, a North Carolina limited liability company and Peachtree Townhome Communities, LLC, a North Carolina limited liability company which, at the time the Company acquired the assets, were wholly-owned subsidiaries of Peachtree Residential Properties, Inc., a Georgia corporation (collectively, “Peachtree Residential Properties”). In December 2005, the Company entered the Phoenix, Arizona market as a start-up operation via the purchase of an undeveloped parcel of land. The Company anticipates generating its first revenues in the Phoenix market in the last quarter of fiscal 2007. The Results of Operations include the activity of Realen Homes from July 28, 2004 through March 31, 2006 as well as the revenue and expenses associated with certain real estate assets acquired from Peachtree Residential Properties from December 22, 2004 through March 31, 2006. Unless otherwise indicated, the term the “Company” includes the accounts of Realen Homes.

References to a given fiscal year in this Quarterly Report on Form 10-Q are to the fiscal year ended June 30th of that year. For example, the phrases “fiscal 2006” or “2006 fiscal year” refer to the fiscal year ended June 30, 2006. When used in this report, “northern region” refers to the Company’s markets in Pennsylvania, New Jersey and New York, which includes the southeastern Pennsylvania operations of Realen Homes that were acquired on July 28, 2004; “southern region” refers to the Company’s markets in North Carolina and Virginia; “Florida region” refers to the Company’s market in Florida, and “midwestern region” refers to the Company’s market in Illinois.

At March 31, 2006, backlog was $588,048,000 representing 1,298 homes compared to a backlog of $665,441,000 representing 1,713 homes at March 31, 2005. At March 31, 2006, the Company was selling in 86 active selling communities and owned or controlled approximately 18,989 building lots compared to 85 active selling communities and approximately 16,119 owned or controlled building lots at March 31, 2005. The Company considers a community active if it has five or more lots available for sale in that community.

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After considerable increases in new orders and new home pricing in the prior fiscal years, the Company has experienced a softening of demand beginning in the second quarter of fiscal 2006 and continuing through the third quarter of fiscal 2006, primarily in its northern and Florida regions. The Company believes this softening in certain regions is consistent with the trend in the housing industry, as record level sales for three consecutive years adjust toward more sustainable levels.

Several factors contributing to the overall decline in new orders for the housing industry include rising interest rates, decreasing home price affordability and an increasing supply of homes as investors exit various markets. In addition to these overall housing industry trends, the Company has encountered delays in the opening of new communities due to increasingly restrictive regulations and moratoriums by governments, particularly in the Company’s northern region, and an increase in new order cancellation rates, particularly in the Company’s Florida region, as investors exit the market. The Company believes these overall factors will continue to place downward pressure on new orders and new order pricing in the near-term, thereby negatively impacting future revenue growth and gross margins. Despite these pressures, the Company believes the long-term outlook for the housing industry remains positive, as the population increases and new households are formed, mortgage interest rates remain relatively low compared to historical levels and employment opportunities continue to grow.

Results of Operations

The following table sets forth certain details as to residential sales activity. The information provided is for the three and nine months ended March 31, 2006 and 2005 in the case of residential revenue earned and new orders, and as of March 31, 2006 and 2005 in the case of backlog.

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

	Nine Months Ended March 31,
	2006						2005
	(Dollars in thousands)
Northern Region (1)					Average						Average
Pennsylvania and New Jersey:	Amount		Homes		Price		Amount		Homes		Price
Residential revenue earned	$	239,303		510	$	469	$	214,202		481	$	445
New orders		191,509		349		549		256,977		526		489
Backlog		202,727		374		542		325,594		705		462
Southern Region(2)
North Carolina, South Carolina
and Virginia:
Residential revenue earned	$	210,328		527	$	399	$	161,708		452	$	358
New orders		288,994		639		452		198,484		517		384
Backlog		236,957		485		489		192,919		477		404

15

Florida Region
Residential revenue earned	$	60,086	248	$	242	$	53,052	310	$	171
New orders		62,952	193		326		70,799	320		221
Backlog		89,068	304		293		70,595	329		215
Midwestern Region (3)
Residential revenue earned	$	77,001	183	$	421	$	85,748	233	$	368
New orders		78,074	179		436		64,403	169		381
Backlog		59,296	135		439		76,333	202		378
Combined Regions
Residential revenue earned	$	586,718	1,468	$	400	$	514,710	1,476	$	349
New orders		621,529	1,360		457		590,663	1,532		386
Backlog		588,048	1,298		453		665,441	1,713		388

(1) Information on residential revenue earned and new orders for the nine months ending March 31, 2006 includes the acquired operations of Realen Homes’ Southeastern Pennsylvania region from the date of acquisition, July 28, 2004, through March 31, 2006.

(2) Information on residential revenue earned and new orders for the nine months ending March 31, 2006 includes amounts acquired from Peachtree Residential Properties for the period beginning December 23, 2004, the date the Company acquired the assets, through March 31, 2006.

(3) Information on residential revenue earned and new orders is for the period beginning July 28, 2004, the date the Company entered this market through its acquisition of Realen Homes, through March 31, 2006.

	Three Months Ended March 31,
	2006						2005
	(Dollars in thousands)
Northern Region (1)					Average						Average
Pennsylvania and New Jersey:	Amount		Homes		Price		Amount		Homes		Price
Residential revenue earned	$	90,105		184	$	490	$	78,501		172	$	456
New orders		52,267		92		568		116,431		252		462
Backlog		202,727		374		542		325,594		705		462
Southern Region(2)
North Carolina, South Carolina
and Virginia:
Residential revenue earned	$	71,445		172	$	415	$	62,995		173	$	364
New orders		100,027		209		479		94,880		240		395
Backlog		236,957		485		489		192,919		477		404

16

Florida Region
Residential revenue earned	$	24,359	97	$	251	$	19,221	104	$	185
New orders		13,889	41		339		33,072	141		235
Backlog		89,068	304		293		70,595	329		215
Midwestern Region (3)
Residential revenue earned	$	21,934	51	$	430	$	37,403	100	$	374
New orders		30,581	68		450		18,163	49		371
Backlog		59,296	135		439		76,333	202		378
Combined Regions
Residential revenue earned	$	207,843	504	$	412	$	198,120	549	$	361
New orders		196,764	410		480		262,546	682		385
Backlog		588,048	1,298		453		665,441	1,713		388

(1) Information on residential revenue earned and new orders for the three months ending March 31, 2006 includes the acquired operations of Realen Homes’ Southeastern Pennsylvania region from the date of acquisition, July 28, 2004, through March 31, 2006.

(2) Information on residential revenue earned and new orders for the three months ending March 31, 2006 includes amounts acquired from Peachtree Residential Properties for the period beginning December 23, 2004, the date the Company acquired the assets, through March 31, 2006.

(3) Information on residential revenue earned and new orders is for the period beginning July 28, 2004, the date the Company entered this market through its acquisition of Realen Homes, through March 31, 2006.

Three and Nine Months Ended March 31, 2006

Orders and Backlog and Cancellations

New orders for the nine months ended March 31, 2006 increased $30,866,000, or 5.2%, to $621,529,000 on 1,360 homes, compared to $590,663,000 on 1,532 homes for the nine months ended March 31, 2005. The average price per home of new orders increased by approximately 18.4% to $457,000 for the nine months ended March 31, 2006 compared to $386,000 for the nine months ended March 31, 2005.

New orders for the three months ended March 31, 2006 decreased $65,782,000, or 25.1%, to $196,764,000 on 410 homes, compared to $262,546,000 on 682 homes for the three months ended March 31, 2005. The average price per home of new orders increased by approximately 24.7% to $480,000 for the three months ended March 31, 2006 compared to $385,000 for the three months ended March 31, 2005.

The backlog at March 31, 2006 decreased $77,393,000, or 11.6%, to $588,048,000 on 1,298 homes compared to the backlog at March 31, 2005 of $665,441,000 on 1,713 homes. The decrease in the backlog was attributable to decreases in new orders in the northern and Florida regions which were partially offset by increases in new orders in the southern and midwestern regions. The average price per home included in the Company’s backlog increased 16.8% to $453,000 at March 31, 2006 compared to $388,000 at March 31, 2005.

17

The Company experienced a cancellation rate of approximately 19% and 20% for the nine and three months ended March 31, 2006, respectively, compared to a cancellation rate of approximately 15% in fiscal 2005. The Company believes the increase in the cancellation rates is primarily attributable to investors exiting the Palm Coast market in the Company’s Florida region.

Northern Region:

New orders for the nine months ended March 31, 2006 decreased $65,468,000 to $191,509,000, or 25.5%, on 349 homes, compared to $256,977,000 on 526 homes for the nine months ended March 31, 2005. The decrease in new orders is attributable to softening demand coupled with delays in the start of new communities to replace communities that were sold-out at the conclusion of fiscal 2005. The delays are due to significant government regulations imposed on developers and homebuilders in the northern region. The average price per home of new orders increased by 12.3% to $549,000 for the nine months ended March 31, 2006 compared to $489,000 for the nine months ended March 31, 2005. The increase in the average price per home of new orders was impacted by a shift in the mix of new orders for the nine months ended March 31, 2006 compared to the nine months ended March 31, 2005. Specifically, single family homes, which typically have higher price points than multi-family homes, comprised a larger percentage of new orders than multi-family homes for the nine months ended March 31, 2006 when compared to the nine months ended March 31, 2005.

New orders for the three months ended March 31, 2006 decreased $64,164,000 to $52,267,000, or 55.1%, on 92 homes, compared to $116,431,000 on 252 homes for the three months ended March 31, 2005. The decrease in new orders is attributable to softening demand in the region coupled with delays in the start of new communities to replace communities that were sold-out at the conclusion of fiscal 2005. The delays are due to significant government regulations imposed on developers and homebuilders in the northern region. The average price per home of new orders increased by 22.9% to $568,000 for the three months ended March 31, 2006 compared to $462,000 for the three months ended March 31, 2005. The increase in the average price per home of new orders was impacted by a shift in the mix of new orders for the three months ended March 31, 2006 compared to the three months ended March 31, 2005. Specifically, single family homes, which typically have higher price points than multi-family homes, comprised a larger percentage of new orders than multi-family homes for the three months ended March 31, 2006 when compared to the three months ended March 31, 2005.

The Company had 26 active selling communities in the northern region as of March 31, 2006 and 2005.

Southern Region:

New orders for the nine months ended March 31, 2006 increased $90,510,000 to $288,994,000, or 45.6%, on 639, homes compared to $198,484,000 on 517 homes for the nine months ended March 31, 2005. The increase in new orders was attributable to the opening of new communities during the nine months ended March 31, 2006. The new communities replaced existing communities that were sold-out during fiscal 2005. The average price per home of new orders increased by 17.7% to $452,000 for the nine months ended March 31, 2006 compared to $384,000 for the nine months ended March 31, 2005. This increase in the average price per home of new orders is attributable to two factors. First, the Company increased prices in a majority of those communities in the region open during the nine months ended March 31, 2006 when compared with the same communities and homes offered for sale in the comparable prior year period. Second, the Company opened new communities in the region during the nine months ended March 31, 2006 that have higher price points than the communities they are replacing that were open during the nine months ended March 31, 2005.

18

New orders for the three months ended March 31, 2006 increased $5,147,000 to $100,027,000, or 5.4%, on 209 homes, compared to $94,880,000 on 240 homes for the three months ended March 31, 2005. The decrease in the number of new orders is primarily attributable to softening demand in the Company’s Richmond, Virginia market. The increase in the new order dollars was attributable to positive pricing trends in existing communities and the opening of new communities that have higher price points than the communities they are replacing. These trends have resulted in an increase in the average price per home of new orders of 21.3% to $479,000 for the three months ended March 31, 2006 compared to $395,000 for the three months ended March 31, 2005.

The Company had 46 active selling communities in the southern region as of March 31, 2006 and 2005.

Florida Region:

New orders for the nine months ended March 31, 2006 decreased $7,847,000 to $62,952,000, or 11.1%, on 193 homes, compared to $70,799,000 on 320 homes for the nine months ended March 31, 2005. The decrease in new orders was primarily attributable to two factors. First, the region experienced approval and land development related delays which have postponed the opening of several new communities. Second, the region experienced a higher percentage of cancellations during the nine months ended March 31, 2006 compared to the nine months ended March 31, 2005 as investors exit various markets in the region. The average price per home of new orders increased by 47.5% to $326,000 for the nine months ended March 31, 2006 compared to $221,000 for the nine months ended March 31, 2005. The increase in the average price per home of new order was attributable to a shift towards move-up homes as opposed to entry level homes.

New orders for the three months ended March 31, 2006 decreased $19,183,000 to $13,889,000, or 58.0%, on 41 homes, compared to $33,072,000 on 141 homes for the three months ended March 31, 2005. The decrease in new orders was attributable to two factors. First, the region experienced approval and land development related delays which have postponed the opening of several new communities. Second, the region experienced a higher percentage of cancellations during the three months ended March 31, 2006 compared to the three months ended March 31, 2005 as investors exit various markets in the region. The average price per home of new orders increased by 44.3% to $339,000 for the three months ended March 31, 2006 compared to $235,000 for the three months ended March 31, 2005. The increase in the average price per home of new order was attributable to a shift towards move-up homes as opposed to entry level homes.

The Company had five active selling communities in the Florida region as of March 31, 2006, compared to seven active selling communities as of March 31, 2005. The Company expects an increase in the number of active selling communities for the Florida region in the next fiscal year. The Company owns or controls 2,332 lots at March 31, 2006 compared to 1,764 lots at March 31, 2005.

19

Midwestern Region:

The Company entered the midwestern region through the acquisition of Realen Homes on July 28, 2004. New orders for nine months ended March 31, 2006 increased $13,671,000 to $78,074,000, or 21.2%, on 179 homes compared to $64,403,000 on 169 homes for the nine months ended March 31, 2005. The increase in new orders was primarily attributable to an increase in the average price per home of new orders during the nine months ended March 31, 2006 when compared to the nine months ended March 31, 2005. The average price per home of new orders increased by 14.4% to $436,000 for the nine months ended March 31, 2006 compared to $381,000 for the nine months ended March 31, 2005. The increase in average price per home of new orders was attributable to price increases in a majority of those communities open during the nine months ended March 31, 2006 when compared with the same communities and products offered for sale in the comparable prior year period.

New orders for three months ended March 31, 2006 increased $12,418,000 to $30,581,000, or 68.4%, on 68 homes compared to $18,163,000 on 49 homes for the three months ended March 31, 2005. The increase in new orders was attributable to increases in the number of active selling communities and the average price per home of new orders during the three months ended March 31, 2006 when compared to the three months ended March 31, 2005. The average price per home of new orders increased by 21.3% to $450,000 for the three months ended March 31, 2006 compared to $371,000 for the three months ended March 31, 2005. The increase in average price per home of new orders was attributable to price increases in a majority of those communities open during the three months ended March 31, 2006 when compared with the same communities and products offered for sale in the comparable prior year period.

The Company had nine active selling communities in the midwestern region as of March 31, 2006, compared to six active selling communities as of March 31, 2005.

Total Earned Revenues

Total earned revenues for the nine months ended March 31, 2006 increased $74,055,000, to $594,207,000, or 14.2%, compared to $520,152,000 for the nine months ended March 31, 2005. Residential revenue earned from the sale of residential homes included 1,468 homes totaling $586,718,000 during the nine months ended March 31, 2006, as compared to 1,476 homes totaling $514,710,000 during the nine months ended March 31, 2005. The average selling price per home delivered in the nine months ended March 31, 2006 increased by approximately 14.6% to $400,000 for the nine months ended March 31, 2006 compared to $349,000 for the nine months ended March 31, 2005.

Total earned revenues for the three months ended March 31, 2006 increased $9,933,000, to $209,915,000, or 5.0%, compared to $199,982,000 for the three months ended March 31, 2005. Residential revenue earned from the sale of residential homes included 504 homes totaling $207,843,000 during the three months ended March 31, 2006, as compared to 549 homes totaling $198,120,000 during the three months ended March 31, 2005. The average selling price per home delivered in the three months ended March 31, 2006 increased by approximately 14.1% to $412,000 for the three months ended March 31, 2006 compared to $361,000 for the three months ended March 31, 2005.

Northern Region:

Residential revenue earned for the nine months ended March 31, 2006 increased $25,101,000 to $239,303,000, or 11.7%, on 510 homes delivered as compared to $214,202,000 on 481 homes delivered during the nine months ended March 31, 2005. The increase in residential revenue earned and new home deliveries is a result of increased homebuilding production in the region coupled with a shift in the mix of homes delivered. Specifically, multi-family homes comprised a larger percentage of the total homes delivered in the region during the nine months ended March 31, 2006 than single family product when compared to the nine months ended March 31, 2005. The average selling price per home delivered in the nine months ended March 31, 2006 increased 5.4% to $469,000 for the nine months ended March 31, 2006 compared to $445,000 for the nine months ended March 31, 2005.

20

Residential revenue earned for the three months ended March 31, 2006 increased $11,604,000 to $90,105,000, or 14.8%, on 184 homes delivered as compared to $78,501,000 on 172 homes delivered during the three months ended March 31, 2005. The increase in residential revenue earned and new home deliveries is a result of increased homebuilding production in the region coupled with an increase in the average sales price per home delivered. The average selling price per home delivered in the three months ended March 31, 2006 increased 7.5% to $490,000 for the three months ended March 31, 2006 compared to $456,000 for the three months ended March 31, 2005.

Southern Region:

Residential revenue earned for the nine months ended March 31, 2006 increased $48,620,000 to $210,328,000, or 30.1%, on 527 homes delivered as compared to $161,708,000 on 452 homes delivered during the nine months ended March 31, 2005. The increase in residential revenue earned and homes delivered was attributable to continued new order growth as the Company continues to expand in the region. The average price per home delivered increased 11.5% to $399,000 for the nine months ended March 31, 2006 compared to $358,000 for the nine months ended March 31, 2005. The increase in the average price per home delivered was attributable to increases in the average price per home of new orders in fiscal 2006 and a change in the product mix of homes delivered during the nine months ended March 31, 2006 compared to the nine months ended March 31, 2005. Specifically, the Company delivered a larger percentage of luxury and move-up homes during the nine months ended March 31, 2006 than during the nine months ended March 31, 2005.

Residential revenue earned for the three months ended March 31, 2006 increased $8,450,000 to $71,445,000, or 13.4%, on 172 homes delivered as compared to $62,995,000 on 173 homes delivered during the three months ended March 31, 2005. The increase in residential revenue earned was attributable to an increase in the average price per home delivered as the Company delivered a larger percentage of luxury and move-up homes during the three months ended March 31, 2006 than during the three months ended March 31, 2005. The average price per home delivered increased 14.0% to $415,000 for the three months ended March 31, 2006 compared to $364,000 for the three months ended March 31, 2005.

Florida Region:

Residential revenue earned for the nine months ended March 31, 2006 increased $7,034,000 to $60,086,000, or 13.3%, on 248 homes, compared to $53,052,000 on 310 homes for the nine months ended March 31, 2005. The increase in residential revenue earned is primarily attributable to a 41.5% increase in the average selling price per home delivered to $242,000 for the nine months ended March 31, 2006 compared to $171,000 for the nine months ended March 31, 2005. The increase in the average selling price per home delivered is attributable to the demand for new housing as well a shift in the region toward move-up homes which command greater pricing power than entry level homes. The decrease in the number of homes delivered is primarily attributable to a decrease in the number of new orders resulting from speculative homebuyer cancellations and government-related delays in recording the record plats and obtaining building permits in some of the Company’s new communities in the region.

21

Residential revenue earned for the three months ended March 31, 2006 increased $5,138,000 to $24,359,000, or 26.7%, on 97 homes, compared to $19,221,000 on 104 homes for the three months ended March 31, 2005. The increase in residential revenue earned is primarily attributable to a 35.7% increase in the average selling price per home delivered to $251,000 for the three months ended March 31, 2006 compared to $185,000 for the three months ended March 31, 2005. The increase in the average selling price per home delivered is primarily attributable to the demand for new housing as well a shift in the region toward move-up homes which command greater pricing power than entry level homes.

Midwestern Region:

The Company entered the midwestern region on July 28, 2004 through the acquisition of Realen Homes. Residential revenue earned for the nine months ended March 31, 2006, decreased $8,747,000 to $77,001,000, or 10.2%, on 183 homes, compared to $85,748,000 on 233 homes for the nine months ended March 31, 2005. The decrease in residential revenue earned is primarily due to the significant backlog acquired and delivered in the prior fiscal year when compared to the available backlog deliverable in the current fiscal year. The average selling price per home delivered in the nine months ended March 31, 2006 increased 14.4% to $421,000 for the nine months ended March 31, 2006 compared to $368,000 for the nine months ended March 31, 2005.

Residential revenue earned for the three months ended March 31, 2006, decreased $15,469,000 to $21,934,000, or 41.4%, on 51 homes, compared to $37,403,000 on 100 homes for the three months ended March 31, 2005. The decrease in residential revenue earned is primarily due to the significant backlog acquired and delivered in the prior fiscal year when compared to the available backlog deliverable in the current fiscal year. The average price per home delivered increased 15.0% to $430,000 for the three months ended March 31, 2006 compared to $374,000 for the three months ended March 31, 2005.

Other Income

Other income consists primarily of property management fees and mortgage processing income. Other income for the nine months ended March 31, 2006 increased $1,036,000 to $6,136,000, or 20.3%, compared to $5,100,000 for the nine months ended March 31, 2005. The increase is primarily attributable to increases in mortgage processing revenue and interest income earned during the nine months ended March 31, 2006 compared to the nine months ended March 31, 2005. The increase in the mortgage processing revenue is attributable to the Company’s increased residential property revenue coupled with an improved mortgage capture rate for the nine months ended March 31, 2006 compared to the nine months ended March 31, 2005.

Other income for the three months ended March 31, 2006 increased $460,000 to $2,072,000, or 28.5%, compared to $1,612,000 for the three months ended March 31, 2005. The increase is primarily attributable to increases in mortgage processing revenue as a result of the increase in residential property revenue of the Company and interest income earned during the three months ended March 31, 2006 compared to the three months ended March 31, 2005. The increase in the mortgage processing revenue is attributable to the Company’s increased residential property revenue coupled with an improved mortgage capture rate for the three months ended March 31, 2006 compared to the three months ended March 31, 2005.

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Costs and Expenses

Costs and expenses for the nine months ended March 31, 2006 increased $58,306,000 to $534,218,000, or 12.3%, compared with the nine months ended March 31, 2005. The cost of residential properties for the nine months ended March 31, 2006 increased $41,930,000 to $453,998,000, or 10.2%, when compared with the nine months ended March 31, 2005. The increase in cost of residential properties was primarily attributable to the overall increase in residential revenue as noted above. The consolidated gross profit margin for the nine months ended March 31, 2006 increased 2.7% to 22.6% compared to 19.9% for the nine months ended March 31, 2005.

The increase in gross profit margin is primarily attributable to the change in product mix toward more homes for move-up and luxury buyers and the introduction of new models at the communities the Company acquired from Realen Homes. In addition, the gross profit margin is favorably affected by the consolidated reduced inventory step-up amortization related to acquisition accounting for inventory delivered during the nine months ended March 31, 2006 as compared to the nine months ended March 31, 2005.

Interest included in the costs and expenses of residential properties and land sold for the nine months ended March 31, 2006 and March 31, 2005 was $8,648,000 and $6,423,000, respectively. The interest incurred during the construction periods is capitalized to inventory and then expensed to the cost of residential properties in the period in which the home settles.

Costs and expenses for the three months ended March 31, 2006 increased $6,008,000 to $188,682,000, or 3.3%, compared with the three months ended March 31, 2005. The cost of residential properties for the three months ended March 31, 2006 increased $888,000 to $161,411,000, or 0.6%, when compared with the three months ended March 31, 2005. The consolidated gross profit margin for the three months ended March 31, 2006 increased 3.3% to 22.3% compared to 19.0% for the three months ended March 31, 2005.

The increase in gross profit margin is primarily attributable to the change in product mix toward more homes for move-up and luxury buyers and the introduction of new models at the communities the Company acquired from Realen Homes. In addition, the gross profit margin is favorably affected by the consolidated reduced inventory step-up amortization related to acquisition accounting for inventory delivered during the three months ended March 31, 2006 as compared to the three months ended March 31, 2005.

Interest included in the costs and expenses of residential properties and land sold for the three months ended March 31, 2006 and March 31, 2005 was $3,218,000 and $1,696,000, respectively. The interest incurred during the construction periods is capitalized to inventory and then expensed to the cost of residential properties in the period in which the home settles.

The Company sells a variety of home types in various communities and regions, each yielding a different gross profit margin. As a result, depending on the mix of both communities and of home types delivered, the consolidated gross profit margin may fluctuate up or down on a periodic basis and periodic profit margins may not be representative of the consolidated gross profit margin for the year.

Selling, General & Administrative Expenses

For the nine months ended March 31, 2006, selling, general and administrative expenses increased $14,290,000 to $74,439,000, or 23.8%, when compared with the nine months ended March 31, 2005. The increase was attributable to increases in both variable and fixed selling, general and administrative expenses. Variable expenses increased due to an increase in outside broker commissions and incentive compensation during the nine months ended March 31, 2006 as compared to the nine months ended March 31, 2005. Fixed selling, general and administrative expenses for the nine months ended March 31, 2006 are higher than for the nine months ended March 31, 2005 primarily due to expenses recognized in connection with the Company’s adoption of a supplemental executive retirement plan, forfeited deposits and land pre-acquisition costs related to abandoned land development projects and advertising expenditures.

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The selling, general and administrative expenses as a percentage of residential revenue earned for the nine months ended March 31, 2006 increased 1.0% to 12.7% as compared to the 11.7% for the nine months ended March 31, 2005. The increased percentage is primarily due to the increased variable selling and fixed selling, general and administrative expenses discussed above.

For the three months ended March 31, 2006, selling, general and administrative expenses increased $4,970,000 to $25,864,000, or 23.8%, when compared with the three months ended March 31, 2005. The increase was attributable to increases in both variable selling and fixed selling, general and administrative expenses. Variable expenses increased due to an increase in outside broker commissions and incentive compensation during the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. Fixed selling, general and administrative expenses for the three months ended March 31, 2006 are higher than for the three months ended March 31, 2005 primarily due to expenses recognized in connection with the Company’s adoption of a supplemental executive retirement plan, forfeited deposits and land pre-acquisition costs related to abandoned land development projects and advertising expenditures.

The selling, general and administrative expenses as a percentage of residential revenue earned for the three months ended March 31, 2006 increased 1.9% to 12.4% as compared to the 10.5% for the three months ended March 31, 2005. The increased percentage is primarily due to the increased variable selling and fixed selling, general and administrative expenses discussed above.

Income Tax Expense

Income tax expense for the nine months ended March 31, 2006 increased $6,751,000 to $23,986,000, or 39.2% from $17,235,000 for the nine months ended March 31, 2005. Income tax expense as a percentage of income from operations before income taxes was 40.0% and 39.0% for the nine months ended March 31, 2006 and 2005, respectively. The increase in income tax expense for the nine months ended March 31, 2006 is attributable to an increase in pre-tax income during the nine months ended March 31, 2006 compared to the nine months ended March 31, 2005 coupled with a higher effective tax rate. The increase in the effective tax rate is due to a decrease in favorable permanent differences from previous acquisitions, partially offset by the inclusion of tax credits for the tax deduction of qualified production activities provided by the American Jobs Creation Act of 2004.

Income tax expense for the three months ended March 31, 2006 increased $1,689,000 to $8,424,000, or 25.1% from $6,735,000 for the three months ended March 31, 2005. Income tax expense as a percentage of income from operations before income taxes was 39.7% and 38.9% for the three months ended March 31, 2006 and 2005, respectively. The increase in income tax expense for the three months ended March 31, 2006 is attributable to an increase in pre-tax income during the three months ended March 31, 2006 compared to the three months ended March 31, 2005 coupled with a higher effective tax rate. The increase in the effective tax rate is due to a decrease in favorable permanent differences from previous acquisitions, partially offset by the inclusion of tax credits for the tax deduction of qualified production activities provided by the American Jobs Creation Act of 2004.

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Net Income

Net income for the nine months ended March 31, 2006 increased $8,998,000, or 33.3%, to $36,003,000, compared with $27,005,000 for the nine months ended March 31, 2005. The increase in net income was attributable to increased residential revenue earned during the nine months ended March 31, 2006 coupled with improved gross profit margins.

Net income for the three months ended March 31, 2006 increased $2,236,000, or 21.1%, to $12,809,000, compared with $10,573,000 for the three months ended March 31, 2005. The increase in net income was attributable to increased residential revenue earned during the three months ended March 31, 2006 coupled with improved gross profit margins.

Liquidity and Capital Resources

On an ongoing basis, the Company requires capital to purchase and develop land, to construct units, to fund related carrying costs and overhead and to fund various advertising and marketing programs to facilitate sales. These expenditures include site preparation, roads, water and sewer lines, impact fees and earthwork, as well as the construction costs of the homes and amenities. The Company's sources of capital include funds derived from operations, sales of assets and various borrowings, most of which are secured. The Company believes that funds generated from operations and financial commitments from available lenders will provide sufficient capital for the Company to meet its existing operating needs.

Trust Preferred Securities

On November 23, 2005, the Company issued $75,000,000 of trust preferred securities which mature on January 30, 2036 and are callable, in whole or in part, at par plus accrued interest on or after January 30, 2011. For the first ten years, the securities have a fixed interest rate of 8.61% per annum. Thereafter, the securities have a floating interest rate equal to three-month LIBOR plus 360 basis points per annum, resetting quarterly. In the event the Company fails to meet certain financial covenants, the applicable rate of interest will be increased by 300 basis points until such time as the Company is in compliance with the financial covenants, then the interest rate will return to its original amount. The transaction is treated as debt for financial statement purposes. The Company used proceeds from the sale of these securities to repay outstanding obligations under the Revolving Credit Facility discussed below.

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

Revolving Credit Facility

At March 31, 2006, the Company had $111,581,000 of borrowing capacity under its secured revolving credit facility discussed below, of which $66,376,000 was available to be drawn based upon the Company’s borrowing base. A majority of the Company’s debt is variable rate, primarily based on 30-day LIBOR, and therefore, the Company is exposed to market risk in connection with interest rate changes. At March 31, 2006, the 30-day LIBOR rate of interest was 4.83%

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On December 22, 2004, Greenwood Financial, Inc., a wholly-owned subsidiary of the Company and other wholly-owned subsidiaries of the Company, as borrowers, and Orleans Homebuilders, Inc. as guarantor, entered into a Revolving Credit and Loan Agreement for a $500,000,000 Senior Secured Revolving Credit and Letter of Credit Facility (the “Revolving Credit Facility”) with various banks as lenders. The Revolving Credit Facility was amended on January 24, 2006 via the Amended and Restated Revolving Credit and Loan Agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provided for the following amendments to the terms of its December 22, 2004 revolving credit facility:

· The revolving sublimit was increased from $500,000,000 to $650,000,000.

· The accordion feature of the Revolving Credit Facility was increased from $650,000,000 to $750,000,000.

· The interest rate was lowered from the LIBOR Market Index Rate plus a non-default variable spread ranging from 175 basis points to 237.5 basis points to the LIBOR Market Index Rate plus a non-default variable spread ranging from 165 basis points to 225 basis points.

· The maturity date of the Revolving Credit Facility was extended from December 20, 2007 to December 20, 2008.

· The loan to value or loan to cost advance rate ranges were increased from 50% to 90% of the lower of the appraised value or cost of the real estate to 50% to 95% of the lower of the appraised value or cost of the real estate.

Under and subject to the terms of the Amended and Restated Credit Agreement, the borrowers may borrow and re-borrow for the purpose of financing the acquisition and development of real estate, the construction of homes and improvements, for investment in joint ventures, for working capital and for such other appropriate purposes as may be approved by the lenders. The Company is required to maintain certain financial ratios and customary covenants as set forth in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement is primarily collateralized by real estate held for development and sale. In addition, in connection with the Amended and Restated Credit Agreement, Orleans Homebuilders entered into an amended and restated Guaranty Agreement.

Employee Retirement Plan

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

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

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

The Company used a 4% annual compensation increase and a 5% discount rate in its calculation of the present value of its projected benefit obligation. The discount rate used represented the Moody’s AA bond rate for long-term bonds as of September 2005. The Company recognized the following related to the SERP for the period ended March 31, 2006:

	Three Months Ended		Nine Months Ended
	March 31, 2006		March 31, 2006
Net periodic pension cost:
Service cost	$	134,000	$	314,000
Interest cost		77,000		180,000
Amortization of prior service cost		83,000		194,000
Total net periodic pension cost	$	294,000	$	688,000

Deferred Compensation Plan

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

Share Repurchase Program

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

During the nine months ended March 31, 2006, the Company repurchased 174,139 shares of its common stock for a total purchase price of $3,303,000.

Cash Flow Statement

Net cash used in operating activities for the nine months ended March 31, 2006 was $216,998,000, compared to net cash used in operating activities for the prior year nine monthperiod of $195,821,000. The increase was primarily attributable to an increase in cash used for real estate held for development and sale and a decrease in cash used for land deposits and costs of future development and receivables, deferred charges and other assets. The increase in net cash used in operating activities was partially offset by increases in net income and restricted cash during the nine months ended March 31, 2006 as compared to the nine months ended March 31, 2005. Net cash used in investing activities for the nine months ended March 31, 2006 was $894,000, compared to $57,087,000 for the prior fiscal period. This decrease was primarily related to the acquisition of Realen Homes on July 28, 2004. Net cash provided by financing activities for the nine months ended March 31, 2006 was $197,562,000, compared to $247,578,000 for the prior fiscal period. The decrease in net cash provided by financing activities in the current year is primarily attributable to increased borrowings in the prior year used to acquire Realen Homes during the nine months ended March 31, 2005.

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Lot Positions

As of March 31, 2006, the Company owned or controlled approximately 18,989 building lots. Included in the aforementioned lots, the Company had contracted to purchase, or has under option, undeveloped land and improved building lots for an aggregate purchase price of approximately $605,613,000 that are expected to yield approximately 10,054 building lots.

Undeveloped Land Acquisitions

In recent years, the process of acquiring desirable undeveloped land has become extremely competitive, particularly in the northern region, mostly due to the lack of available parcels suitable for development. In addition, expansion of regulation in the housing industry has increased the time it takes to acquire undeveloped land with all of the necessary governmental approvals required to begin construction. Generally, the Company structures its land acquisitions so that it has the right to cancel its agreements to purchase undeveloped land by forfeiture of its deposit under the agreement. For the nine months ended March 31, 2006, the Company forfeited $240,000 of land deposits and expensed an additional $1,015,000 of pre-acquisition costs related to the cancellation of purchase agreements. Included in the balance sheet captions “Inventory not owned - Variable Interest Entities” and “Land deposits and costs of future development,” at March 31, 2006 the Company had $35,618,000 invested in 76 parcels of undeveloped land, of which $20,121,000 is deposits, a portion of which is non-refundable. At March 31, 2006 overall undeveloped parcels of land under contract had an aggregate purchase price of approximately $508,289,000 and were expected to yield approximately 9,076 building lots.

The Company attempts to further mitigate the risks involved in acquiring undeveloped land by structuring its undeveloped land acquisitions so that the deposits required under the agreements coincide with certain benchmarks in the governmental approval process, thereby limiting the amount at risk. This process allows the Company to periodically review the approval process and make a decision on the viability of developing the acquired parcel based upon expected profitability. In some circumstances the Company may be required to make deposits solely due to the passage of time. This structure still provides the Company an opportunity to periodically review the viability of developing the parcel of land. In addition, the Company primarily structures its agreements to purchase undeveloped land to be contingent upon obtaining all governmental approvals necessary for construction. Under most agreements, the Company secures the responsibility for obtaining the required governmental approvals as the Company believes that it has significant expertise in this area. The Company intends to complete the acquisition of undeveloped land after all governmental approvals are in place. In certain circumstances, however, when all extensions have been exhausted, the Company must make a decision on whether to proceed with the purchase even though all governmental approvals have not yet been received. In these circumstances, the Company performs reasonable due diligence to ascertain the likelihood that the necessary governmental approvals will be granted.

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Improved Lot Acquisitions

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

At March 31, 2006, the Company had contracted to purchase or had under option approximately 978 improved building lots for an aggregate purchase price of approximately $97,324,000. At March 31, 2006, the Company had $4,517,000 invested in these improved building lots, of which $4,179,000 is deposits. There were no deposits forfeited during the nine months ended March 31, 2006 with respect to improved building lots.

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

Critical Accounting Policies

For a discussion of the Company’s critical accounting policies, see “Critical Accounting Policies” under Item 7 of the Company’s Annual Report on Form 10-K for fiscal year ended June 30, 2005 filed with the Securities and Exchange Commission.

Recent Accounting Pronouncements

In December 2004, the FASB revised FAS No. 123 through the issuance of FAS No. 123-R “Share Based Payment”, revised (“FAS 123-R”).  FAS 123-R was effective for the Company commencing July 1, 2005.  FAS 123-R, among other things, eliminates the alternative to use the intrinsic value method of accounting for stock based compensation and requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions).  The fair value based method in FAS 123-R is similar to the fair-value-based method in FAS No. 123 in most respects, subject to certain key differences.  As the Company previously adopted the fair value recognition provisions of FAS No. 123 prospectively for all stock awards granted, commencing on July 1, 2002, the impact of the modified prospective adoption of FAS 123-R did not have a significant impact on the financial position or results of operations of the Company. The Company amortizes compensation expense on a straight line basis over the vesting period of each option grant. The Company utilizes the Black-Scholes option pricing model to calculate the compensation expense associated with stock options. For the nine months ended March 31, 2006, the Company recorded pretax compensation expense associated with stock awards of $392,000. Total compensation cost related to nonvested awards not yet recognized of $3,804,000 will be recognized according to vesting schedules through March 2015. For the nine months ended March 31, 2006, the Company recognized a $249,000 tax benefit resulting from the disqualified disposition of shares issued to employees in connection with the exercise of incentive stock options.

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In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" (FSP FAS 109-1). FSP FAS 109-1 clarifies that the deduction will be treated as a "special deduction" as described in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. The impact of the deduction will be reported in the period in which the deduction is claimed.   The Company files a consolidated return on a calendar year.  Accordingly, the Company began reflecting the special deduction with respect to its operations effective January 1, 2005.  Its expected impact was and will be to lower the effective tax provision in the periods in which the deduction may be claimed and that this benefit will increase as the deduction is phased in under the statute.  

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the Safe Harbor provisions created by statute. Generally words such as “may”, “will”, “should”, “could”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, and “believe” or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. The Company does not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements are based on current expectations and involve risks and uncertainties and the Company’s future results could differ significantly from those expressed or implied by the Company’s forward-looking statements.

Many factors, including those listed below, could cause the Company’s actual consolidated results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company:

· Continued increases in interest rates or a decrease in the availability of mortgage financing could lead to fewer home sales, which could adversely affect the Company’s total earned revenues and earnings.

· The Company is subject to substantial risks with respect to the land and home inventories it maintains and fluctuations in market conditions may affect the Company’s ability to sell its land and home inventories at expected prices, if at all, which could reduce the Company’s total earned revenues and earnings.

· The Company’s business is subject to governmental regulations that may delay, increase the cost of, prohibit or severely restrict the Company’s development and homebuilding projects and reduce its total earned revenues and growth.

· States, cities and counties in which the Company operates have adopted, or may adopt, slow or no growth initiatives which would reduce the Company’s ability to build and sell homes in these areas and could adversely affect the Company’s total earned revenues and earnings.

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· Adverse changes in national, regional or local economic conditions, such as decreases in employment levels or job growth, increases in interest rates or decreases in consumer confidence, could have a negative impact on the Company’s operations and reduce revenues.

· The Company recently experienced an increase in the rate of customer cancellations and it is impossible to predict whether there will be further increases in the future. Additional increases in the rate of customer cancellations could lead to fewer home sales and a decrease in revenues.

· The Company may not be successful in its effort to identify, complete or integrate acquisitions, or to enter new markets through start-up operations, which could disrupt the activities of the Company’s current business, adversely affect the Company’s results of operations and future growth, or cause losses.

· The Company is dependent on the services of certain key employees and the loss of their services could harm the Company’s business.

· The Company may not be able to acquire suitable land at reasonable prices, which could result in cost increases the Company is unable to recover and reduce the Company’s total earned revenues and earnings.

· The competitive conditions in the homebuilding industry could increase the Company’s costs, reduce its total earned revenues and earnings and otherwise adversely affect its results of operations or limit its growth.

· The Company may need additional financing to fund its operations or to expand its business, and if the Company is unable to obtain sufficient financing or such financing is obtained on adverse terms, the Company may not be able to operate or expand its business as planned, which could adversely affect the Company’s results of operations and future growth.

· Shortages of labor or materials and increases in the price of materials can harm the Company’s business by delaying construction, increasing costs, or both.

· The Company depends on the continued availability and satisfactory performance of its subcontractors which, if unavailable, could have a material adverse effect on the Company’s business by limiting its ability to build and deliver homes.

· The Company is subject to construction defect, product liability and warranty claims arising in the ordinary course of business that could adversely affect its results of operations.

· The Company is subject to mold litigation and mold claims arising in the ordinary course of business for which the Company has no insurance that could adversely affect the Company’s results of operations.

· The Company’s business, total earned revenues and earnings may be adversely affected by adverse weather conditions or natural disasters.

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· The Company may be subject to environmental liabilities that could adversely affect its results of operations or the value of its properties.

· Increases in taxes or government fees could increase the Company’s costs and adverse changes in tax laws could reduce customer demand for the Company’s homes, either of which could reduce the Company’s total earned revenues or profitability.

· Jeffrey P. Orleans, Chairman and Chief Executive Officer and the Company’s majority shareholder, can cause the Company to take certain actions or preclude the Company from taking actions without the approval of the other shareholders and may have interests that could conflict with the interests of other shareholders.

· The Company has entered into several transactions with related parties, including entities controlled by Mr. Jeffrey P. Orleans, which may create conflicts of interest.

· Acts of war or terrorism may seriously harm the Company’s business.

· The Company’s substantial indebtedness could adversely affect it financial condition and prevent it form fulfilling its debt service obligations.

· To service the Company’s indebtedness, the Company requires a significant amount of cash. The Company’s ability to generate cash depends on many factors beyond its control.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company, due to adverse changes in financial and commodity market prices and interest rates. The Company’s principal market risk exposure continues to be interest rate risk. A majority of the Company’s debt is variable based on LIBOR or the prime rate, and, therefore, affected by changes in market interest rates. Based on current operations, an increase or decrease in interest rates of 100 basis points will result in a corresponding increase or decrease in cost of sales and interest charges incurred by the Company of approximately $4,960,000 in a fiscal year, a portion of which will be capitalized and included in cost of sales as homes are delivered. The Company believes that reasonably possible near-term interest rate changes will not result in a material negative effect on future earnings, fair values or cash flows of the Company. Generally, the Company has been able to recover any increased costs of borrowing through increased selling prices; however, there is no assurance the Company will be able to continue to increase selling prices to cover the effects of any increase in near-term interest rates.

Changes in the prices of commodities that are a significant component of home construction costs, particularly lumber, may result in unexpected short term increases in construction costs. Since the sales price of the Company’s homes is fixed at the time the buyer enters into a contract to acquire a home and because the Company generally contracts to sell its homes before construction begins, any increase in costs in excess of those anticipated may result in gross margins lower than anticipated for the homes in the Company’s backlog. The Company attempts to mitigate the market risks of price fluctuation of commodities by entering into fixed-price contracts with its subcontractors and material suppliers for a specified period of time, generally commensurate with the building cycle.

There have been no material adverse changes to the Company’s (1) exposure to risk and (2) management of these risks, since June 30, 2005.

Item  4. Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer, President and Chief Operating Officer, and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission's rules and forms and also to ensure information required to be disclosed is accumulated and communicated to management. There has been no change in the Company's internal control over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (dollars in thousands, except per share data)

In September 2005, the Board of Directors authorized the repurchase of up to one million shares of the Company’s common stock. The repurchases, which represent up to 5% of the Company’s 18.7 million shares of common stock currently outstanding, will be made from time to time through open market purchases or privately negotiated transactions at our discretion and in accordance with the rules of the Securities and Exchange Commission. The amount and timing of the repurchases will depend on market conditions and other factors. The Company repurchased the following shares of common stock during the third quarter of 2006:

							Total Number of Maximum Number of Shares That May Yet Be Purchased Under the Plan
	Total Number of Shares Purchased		Average Price Paid Per Share		Shares Purchased as Part of Publicly Announced Plans
Period
January 1 – 31, 2006		26,539	$	18.78		26,539		882,561
February 1 – 28, 2006		4,000	$	19.25		4,000		878,561
March 1 – 31, 2006		52,700	$	18.66		52,700		825,861

Item 6. Exhibits.

3.1* Certificate of Incorporation

4.1 In accordance with Regulation S-K, Item 601(b)(4)(iii)(A) certain instruments respecting long-term debt of the Company have been omitted; the Company agrees to furnish a copy of any such instrument to the SEC upon request.

10.1** Amendment to Orleans Homebuilders, Inc. Supplemental Executive Retirement Plan, dated March 13, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 15, 2006).

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

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

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

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

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

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

* Exhibits filed herewith electronically.

** Management contract or compensatory plan or arrangement.

35

SIGNATURES

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

	ORLEANS HOMEBUILDERS, INC. (Registrant)
May 8, 2006	Michael T. Vesey
	Michael T. Vesey President and Chief Operating Officer

May 8, 2006	Joseph A. Santangelo
	Joseph A. Santangelo Treasurer, Secretary and Chief Financial Officer

36

EXHIBIT INDEX

3.1* Certificate of Incorporation

4.1 In accordance with Regulation S-K, Item 601(b)(4)(iii)(A) certain instruments respecting long-term debt of the Company have been omitted; the Company agrees to furnish a copy of any such instrument to the SEC upon request.

10.1** Amendment to Orleans Homebuilders, Inc. Supplemental Executive Retirement Plan, dated March 13, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 15, 2006).

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

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

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

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

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

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

* Exhibits filed herewith electronically.

** Management contract or compensatory plan or arrangement.

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