Orleans Homebuilders (OHBIQ) 10-Q 2009 Q4 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the transition period                     to

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 Identification. No.)
incorporation or organization)

3333 Street Road, Suite 101

Bensalem, PA 19020

(Address of principal executive offices)

Telephone:(215) 245-7500

(Registrant’s telephone number, 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 x No o

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

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

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

Number of shares of common stock, par value $0.10 per share, outstanding as of
February 13, 2009:             19,089,141

(excluding 98,990 shares held in Treasury).

ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES

		PAGE
	PART 1 — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets at December 31, 2008 and June 30, 2008	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2008 and 2007	2
	Condensed Consolidated Statements of Shareholders’ Equity and Total Comprehensive Loss for the Six Months Ended December 31, 2008	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2008 and 2007	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
	PART II — OTHER INFORMATION
Item 1A.	Risk Factors	47
Item 4.	Submission of Matters to a Vote of Security Holders	48
Item 6.	Exhibits	49

Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(dollars in thousands, except per share amounts)

	December 31, 2008			June 30, 2008
Assets
Cash and cash equivalents	$	10,795		$	72,341
Restricted cash - due from title company	1,911			19,269
Restricted cash - customer deposits	6,288			8,264
Marketable securities	17,318			—
Real estate held for development and sale:
Residential properties completed or under construction	192,729			193,257
Land held for development or sale and improvements	340,055			359,555
Inventory not owned - variable interest entities	10,668			13,050
Inventory not owned - other financial interests	12,158			12,171
Property and equipment, at cost, less accumulated depreciation	897			1,491
Goodwill	—			4,180
Receivables, deferred charges and other assets	21,704			22,154
Land deposits and costs of future development	10,486			10,380
Total Assets	$	625,009		$	716,112
Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable	$	37,133		$	44,916
Accrued expenses	40,464			51,768
Deferred revenue	214			274
Customer deposits	8,737			11,856
Obligations related to inventory not owned - variable interest entities	10,235			10,875
Obligations related to inventory not owned - other financial interests	12,058			12,071
Mortgage and other note obligations	365,409			396,133
Subordinated notes	105,000			105,000
Other notes payable	—			718
Total Liabilities	579,250			633,611
Commitments and contingencies (See note 14)
Shareholders’ Equity:
Common stock, $0.10 par, 23,000,000 shares authorized, 19,188,131 and 18,938,131 shares issued at December 31, 2008 and June 30, 2008, respectively	1,919			1,894
Capital in excess of par value - common stock	76,072			75,204
Accumulated other comprehensive loss	(894		)	(816		)
(Accumulated deficit) retained earnings	(30,084		)	7,473
Treasury stock, at cost (98,990 shares held at December 31, 2008 and June 30, 2008)	(1,254		)	(1,254		)
Total Shareholders’ Equity	45,759			82,501
Total Liabilities and Shareholders’ Equity	$	625,009		$	716,112

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

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Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

	Three months ended December 31,						Six months ended December 31,
	2008			2007			2008			2007
Earned revenue
Residential properties	$	87,753		$	144,490		$	176,355		$	263,847
Land sales	—			8,224			58			9,410
Other income	2,475			2,229			4,136			4,562
	90,228			154,943			180,549			277,819
Costs and expenses
Residential properties	87,248			147,425			174,955			250,378
Land sales	2			44,784			26			46,042
Other	1,856			1,441			3,640			3,435
Selling, general and administrative	16,121			24,588			32,699			42,863
Impairment of goodwill	—			—			4,180			—
Interest:
Incurred	11,018			13,035			22,006			25,704
Less capitalized	(9,999		)	(13,035		)	(19,123		)	(25,704		)
	106,246			218,238			218,383			342,718
Loss from continuing operations before income taxes	(16,018		)	(63,295		)	(37,834		)	(64,899		)
Income tax benefit	(397		)	(24,688		)	(277		)	(24,529		)
Loss from continuing operations	(15,621		)	(38,607		)	(37,557		)	(40,370		)
Discontinued operations:
Loss from discontinued operations, net of taxes	—			(12,778		)	—			(13,070		)
Net loss	$	(15,621	)	$	(51,385	)	$	(37,557	)	$	(53,440	)
Basic loss per share
Continuing operations	$	(0.84	)	$	(2.09	)	$	(2.03	)	$	(2.18	)
Discontinued operations	$	—		$	(0.69	)	$	—		$	(0.71	)
Loss per share	$	(0.84	)	$	(2.78	)	$	(2.03	)	$	(2.89	)
Diluted loss per share
Continuing operations	$	(0.84	)	$	(2.09	)	$	(2.03	)	$	(2.18	)
Discontinued operations	$	—		$	(0.69	)	$	—		$	(0.71	)
Loss per share	$	(0.84	)	$	(2.78	)	$	(2.03	)	$	(2.89	)
Dividends declared per share	$	—		$	0.02		$	—		$	0.04
Basic weighted average shares outstanding	18,518			18,502			18,511			18,502
Diluted weighted average shares outstanding	18,518			18,502			18,511			18,502

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

2

Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity

And Total Comprehensive (Loss) Income

(Unaudited)

(dollars in thousands)

	Six months ended December 31, 2008
	Shares	Amount
Common Stock
Beginning balance	18,938,131	$	1,894
Restricted stock award	250,000	25
Ending balance	19,188,131	$	1,919
Additional Paid in Capital
Beginning balance		$	75,204
Fair market value of stock options issued		665
Shares awarded under Stock award plan		228
Restricted stock award		(25		)
Ending balance		$	76,072
(Accumulated Deficit) Retained Earnings
Beginning balance		$	7,473
Net loss		(37,557		)
Ending balance		$	(30,084	)
Accumulated Other Comprehensive Loss
Beginning balance		$	(816	)
Net unrealized loss on investments		(78		)
Ending balance		$	(894	)
Treasury Stock
Beginning and ending balance	98,990	$	(1,254	)
Total Comprehensive Loss
Net loss		$	(37,557	)
Unrealized loss on investments		(78		)
Total Comprehensive loss		$	(37,635	)

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

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Orleans Homebuilders, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

	Six months ended December 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(37,557	)	$	(53,440	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	3,394			1,552
Gain on sale of fixed assets	(906		)	—
Gain on sale of marketable securities	(27		)	—
Write-off of real estate held for development and sale	18,088			80,901
Write-off of land deposits and costs of future development	1,798			862
Write-off of goodwill	4,180			—
Deferred taxes	—			(10,641		)
Stock based compensation expense	961			1,095
Changes in operating assets and liabilities:
Restricted cash - due from title company	17,358			16,358
Restricted cash - customer deposits	1,976			1,950
Real estate held for development and sale	1,940			18,060
Receivables, deferred charges and other assets	(175		)	(33,805		)
Land deposits and costs of future developments	379			(12,483		)
Accounts payable and other liabilities	(19,212		)	32,056
Customer deposits	(3,119		)	(127		)
Net cash (used in) provided by operating activities	(10,922		)	42,338
Cash flows from investing activities:
Purchases of marketable securities	(34,021		)	(40		)
Sales and maturities of marketable securities	16,652			—
Proceeds from sale of fixed assets	996			—
Proceeds from disposition of business	—			11,300
Net cash (used in) provided by investing activities	(16,373		)	11,260
Cash flows from financing activities:
Borrowings from loans collateralized by real estate assets	78,059			25,000
Repayment of loans collateralized by real estate assets	(108,786		)	(74,994		)
Repayment of other note obligations	(718		)	(32		)
Financing costs of long-term debt	(2,265		)	(4,482		)
Liability associated with other financial interests	—			13,425
Payments on liabilities associated with other financial interests	(541		)	—
Common stock cash dividend paid	—			(740		)
Net cash used in financing activities	(34,251		)	(41,823		)
Net (decrease) increase in cash and cash equivalents	(61,546		)	11,775
Cash and cash equivalents at beginning of period	72,341			19,991
Cash and cash equivalents at end of period	$	10,795		$	31,766

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

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ORLEANS HOMEBUILDERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share amounts)

1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Orleans Homebuilders, Inc. and its subsidiaries (collectively, the “Company”) market, develop and build high-quality, single-family homes, townhomes and condominiums to serve various types of homebuyers, including move-up, luxury, empty nester, active adult and first-time homebuyers.  The Company also generates revenue from the sale of land.

Interim Financial Information

These condensed financial statements have been prepared in accordance with the rules of the Securities and Exchange Commission for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended June 30, 2008.  The June 30, 2008, amounts were derived from the Company’s audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.  The condensed financial information as of December 31, 2008, and for the three and six months ended December 31, 2008 and 2007, is unaudited, but in the opinion of management includes all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of the Company’s consolidated results of operations, financial position and cash flows.  Results for the three and six months ended December 31, 2008, are not necessarily indicative of results to be expected for the full fiscal year 2009 or any other future periods.

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

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in Generally Accepted Accounting Principles (“GAAP”), and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial assets and financial liabilities in fiscal years beginning after November 15, 2007 and for certain nonfinancial assets and certain nonfinancial liabilities in fiscal years beginning after November 15, 2008.  Effective July 1, 2008, the Company has adopted the provisions of SFAS No. 157 that relate to its financial assets and financial liabilities.  See note 15, Fair Value Disclosures.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (SFAS No. 159).  This Statement permits entities to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses on these instruments in earnings.  SFAS No. 159 was effective July 1, 2008.  The Company did not adopt the fair value option.

Certain prior year amounts have been reclassified to conform to the fiscal year 2009 presentation, with no effect on previously reported net loss or shareholders’ equity.

2.RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements.  It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation.  SFAS No. 160 is effective for fiscal year ending June 30, 2010.  The Company is evaluating the impact the adoption of SFAS 160 will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses.  It broadens the fair value measurement and recognition of assets acquired,

5

liabilities assumed, and interests transferred as a result of business combinations.  SFAS No. 141(R) expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations.  SFAS No. 141(R) is effective for fiscal year ending June 30, 2010.  The Company is evaluating the impact the adoption of SFAS No. 141(R) will have on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting.  The Statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008 and is not expected to have an impact on the Company’s financial statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.  The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings.  The Company’s outstanding restricted stock awards will be considered participating securities under this FSP. The FSP is effective for the Company’s fiscal year beginning July 1, 2009 and requires retrospective application.  The Company does not expect the adoption of the FSP to have a material impact on its reported earnings per share.

In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The staff position amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46(R) to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. This position is effective for financial statements issued for interim periods and fiscal years ending after December 15, 2008.  The adoption of this pronouncement, which is related to disclosure only, did not have a material impact on the Company’s financial statements.

3.CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of the following at December 31, 2008 and June 30, 2008:

	December 31,		June 30,
	2008		2008
Cash and money market funds	$	9,168	$	72,341
Treasury securities - with maturities of less than three months at time of purchase	1,627		—
	$	10,795	$	72,341

4.MARKETABLE SECURITIES

In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities are classified into three categories: held-to-maturity, available-for-sale and trading.  The Company’s marketable securities consist of United States Treasury securities classified as available-for-sale securities.  Accordingly, they are carried at fair value in accordance with SFAS No. 115.  Further, according to SFAS No. 115 the unrealized holding gains and losses for available-for-sales securities are excluded from earnings and reported, net of deferred income taxes, in accumulated other comprehensive loss, unless the loss is classified as other than a temporary decline in market value.  At December 31, 2008, the amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class of security were as follows:

	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Treasury securities - with maturities of less than one year at time of purchase	$	17,396	$	6	$	(84	)	$	17,318

The treasury bills and treasury notes described above have maturities that range from three months to six months.

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5.RESIDENTIAL PROPERTIES COMPLETED OR UNDER CONSTRUCTION

Residential properties completed or under construction consist of the following:

	December 31,		June 30,
	2008		2008
Under contract for sale	$	92,954	$	109,980
Unsold	99,775		83,277
Total residential property completed or under construction	$	192,729	$	193,257

6.MORTGAGE AND OTHER NOTE OBLIGATIONS AND SUBORDINATED NOTES

The $365,409 outstanding balance in mortgage and other note obligations at December 31, 2008, consists of $365,223 outstanding under the Revolving Credit Facility, which is discussed below, and $186 under mortgage obligations collateralized by land held for development and sale and improvements.  The average daily balance of the Revolving Credit Facility during the six months ended December 31, 2008, was $377,535.

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

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 Loan Agreement for a Senior Secured Revolving Credit and Letter of Credit Facility with various banks as lenders (as amended and restated and further amended, the “Revolving Credit Facility”). The Revolving Credit Loan Agreement was amended on January 24, 2006, via the Amended and Restated Revolving Credit Loan Agreement (the “Amended Credit Agreement”).  In connection with the Amended Credit Agreement, Orleans Homebuilders, Inc. executed a Guaranty, which was amended on September 6, 2007 and amended and restated on September 30, 2008. The Amended and Restated Credit Agreement was amended on November 1, 2006, February 7, 2007, May 8, 2007, September 6, 2007, December 21, 2007, May 9, 2008 by a limited waiver to the Amended Credit Agreement, which was extended on September 15, 2008, and amended and restated in the Second Amended and Restated Revolving Credit Loan Agreement, dated September 30, 2008 (the “Second Amended Credit Agreement”).  The Second Amended Credit Agreement was subsequently amended by a limited waiver letter dated January 30, 2009 (the “waiver letter”) and the First Amendment to Second Amended and Restated Revolving Credit Loan Agreement and First Amendment to Security Agreement dated February 11, 2009 (the “First Amendment”).

Waiver Letter

Absent the waiver letter described below, the Company would have continued to be in default of its obligation to, on or before January 23, 2009, make a principal repayment in an amount necessary to reduce the outstanding principal balance of the loans to the borrowing base availability (the “Repayment Covenant”).  The failure to make the repayment in full within the proscribed period constituted an event of default under the Second Amended Credit Agreement, of which the Company provided notice to the Lenders.  In addition, Wachovia Bank, N.A. (“Wachovia”) asserted that the borrowers breached the liquidity covenant in the Second Amended Credit Agreement (the “Liquidity Covenant”) for the quarter ended December 31, 2008.  The borrowers disagree with Wachovia’s assertion that the borrowers breached the Liquidity Covenant and have notified Wachovia of their disagreement.

The second waiver letter temporarily waived compliance with the Repayment Covenant and the Liquidity Covenant generally from December 31, 2008 through and including February 6, 2009, unless another event of default occurred.  With the termination of waiver period without the First Amendment described below having been entered into, the failure of the Company to have complied with the Repayment Covenant on or before that date, the Company was again in breach of the Repayment Covenant and, to the extent there had been a breach of the Liquidity Covenant as asserted by Wachovia (an assertion with which the Company disagrees), the Company was also in breach of that covenant.  Any such breaches were, however, cured by the First Amendment described below.

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First Amendment to the Second Amended Credit Agreement and Security Agreement:

On February 11, 2009, the Company entered into the First Amendment to the Second Amended Credit Agreement which provides, among other things, that:

·The category reductions applicable to the determination of borrowing base availability were adjusted so that the maximum borrowing base availability attributable to asset class (ii) (units not subject to a qualifying agreement of sale) determined on the basis of any borrowing base certificate that is delivered before July 31, 2009, was increased to a maximum of 58% of the aggregate borrowing base availability attributable to asset classes (i) (units subject to a qualifying agreement of sale) and (ii) (units not subject to a qualifying agreement of sale) as shown on the borrowing base certificate.  For borrowing base certificates delivered on or after July 31, 2009, the maximum percentage remains unchanged at 45%.

·The category reductions applicable to the determination of the borrowing base availability were adjusted so that the maximum borrowing base availability attributable to asset classes (iii) (lots part of improved land not subject to a qualifying agreement of sale), (iv) (lots part of land under development) and (v) (lots part of land approved for development), based on borrowing base certificates delivered before July 31, 2009, was increased to a maximum of 65% of the total borrowing base availability as shown on the borrowing base certificate.  For borrowing base certificates delivered on or after July 31, 2009, the maximum percentage is 55%.    The maximum dollar value of borrowing base availability attributable to asset classes (iii), (iv) and (v) were also adjusted to the following (with such limitations to be reduced dollar for dollar at the time and in the amounts of any impairments with respect to assets in asset classes (iii), (iv) and (v) and included in the borrowing base taken by borrowers):

(i)Beginning with the Borrowing Base Certificate delivered on or after the effective date of the First Amendment: $235,000;

(ii)Beginning with the Borrowing Base Certificate delivered on or after July 31, 2009: $200,000; and

(iii)Beginning with the Borrowing Base Certificate delivered after September 30, 2009: $190,000.

·Under the First Amendment, the aggregate effect of (i) the modification of the borrowing base category reductions applicable to units not subject to a qualifying agreement of sale (described above); (ii) the modification of the borrowing base category reductions for land under development (described above); and (iii)  the inventory impairments during the second fiscal quarter of approximately $8,670, was an increase in net borrowing base availability of $16,065 as of December 31, 2008, from a negative $14,567 to a positive $1,498.

·The amount of the Revolving Credit Facility was reduced from $440,000 to $405,000, except that the amount of the Revolving Credit Facility will be reduced to $375,000 beginning on July 16, 2009 and through maturity, unless otherwise permanently reduced as a result of certain prepayments required by the Revolving Credit Facility.  The letter of credit sublimit was reduced to $30,000 from $60,000, and the financial letter of credit sublimit was reduced to $15,000 from $25,000. The amount actually available under the Revolving Credit Facility is also subject to the borrowing base availability requirements in the Revolving Credit Facility.

·In the event there is one or more defaulting lenders, so long as there is no event of default has occurred and is continuing, pro-rata principal payments shall not be made to such defaulting lender, but instead shall be paid over to the master borrower.

·The minimum consolidated tangible net worth level was adjusted to a minimum of at least $25,000 (1) reduced by the sum of (a) any impairments or other charges under GAAP on assets in the borrowing base taken by the Company and recorded in respect of the financial quarters ended December 31, 2008 and March 31, 2009, plus (b)  any deferred tax assets valuation allowance reserves recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) any impairments or write-offs relating to tangible assets or pre-acquisition costs not contained in the borrowing base recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009 (provided, however, that the aggregate covenant level reduction pursuant to this clause (1) shall not exceed $15,000), and (2) increased by the sum of (x) any favorable adjustment to the deferred tax asset valuation allowance recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (y) 50% of positive quarterly net income after March 31, 2008.

·The definition of liquidity was revised to provide that negative borrowing base availability is deducted from cash and cash equivalents when determining liquidity and the minimum required liquidity covenant was reduced from $15,000 to $10,000.  A five business day cure period in the event of a breach of the minimum liquidity covenant was also added.

·The maximum amount of cash or cash equivalents (excluding cash in transit at title companies) that the Company is allowed to maintain was set at a maximum of $15,000 for any consecutive five-day period.

·The cash flow from operations covenant ratio was adjusted downward for the quarter ending June  30, 2009 to 0.50:1.00 and for the quarter ending September 30, 2009 and thereafter to 0.65:1.00.

·The Company’s ability to purchase up to $8,000 of unimproved real estate is no longer available; however, the Company’s ability to acquire lots though option take-downs remains unchanged.  The provision specifically allowing the Company to make new joint venture investments up to certain specified amounts was also eliminated.

·The interest rate was increased by 25 basis points, to the LIBOR interest rate plus 5.25%.

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·Generally, the ability to obtain letters of credit for general working capital or corporate purposes and the ability to obtain letters of credit in connection with projects outside the borrowing base were eliminated (provided, however, that existing letters of credit can be renewed, subject to the other terms of the Loan Agreement).

·Provisions were added providing that no letter of credit will be issued or renewed and that no tri-party agreement will be executed or maintained while any lender is a defaulting lender, except if the Borrowers have delivered to Agent cash collateral equal to the defaulting lenders’ pro rata share of the letter of credit or tri-party agreement.  The cash collateral is to be used to reimburse lenders in the event of draws under letters of credit or tri-party agreements.

·Letter of credit advances (that is, payments pursuant to a letter of credit that result in the making of a loan to Borrowers in excess of the then available borrowing base) must be repaid within five business days, or earlier under certain circumstances.

·Provisions were added to the Second Amended Credit Agreement and related Security Agreement providing that, in the event of receipt of any tax refund by any obligor that constitutes collateral, the amount received must be used to prepay the loans under the facility.  Any such collateral received by the agent will likewise be applied to the outstanding indebtedness.  However, such reduction of the outstanding indebtedness would have the effect of then increasing the net borrowing base availability immediately thereafter.

·Additional provisions were added with respect to the allocation among the lenders of burdens and risks associated with defaulting lenders.

·In consideration of entering into the First Amendment to the Second Amended Credit Agreement, the Company paid a fee equal to 0.25% of such approving lenders’ reduced commitments effective on the closing of the amendment.

Terms of the Revolving Credit Facility:

The borrowing limit under the Revolving Credit Facility is $405,000, except that the amount of the Revolving Credit Facility will be reduced to $375,000 beginning July 16, 2009, unless otherwise permanently reduced as a result of certain required prepayments. The total amount of loans and advances outstanding at any time under the Revolving Credit Facility may not exceed the lesser of the then-current borrowing base availability or the revolving sublimit as defined in the Revolving Credit Facility. The borrowing base availability is based on the lesser of the appraised value or cost of real estate owned by the Company that has been admitted to the borrowing base and is subject to various limitations and qualifications set forth in the Revolving Credit Agreement.

From October 1, 2008 to February 10, 2009, borrowings and advances under the Revolving Credit Facility bear interest on a per annum basis equal to the LIBOR Market Index Rate plus 500 basis points.  Beginning on February 11, 2009, the interest rate increased to the LIBOR Market Index Rate plus 525 basis points.  Prior to October 1, 2008, the applicable spread had been 400 basis points. During the term of the Revolving Credit Facility, interest is payable monthly in arrears.  At December 31, 2008, the interest rate was 5.44%, which included a 500 basis point spread.

A fee will be earned and payable on September 15, 2009 equal to 8.0% per annum, calculated on a daily basis, of the difference between $250,000 and the aggregate level of the lenders’ lending commitments under the Revolving Credit Facility as they exist from time to time between September 30, 2008 and the earlier of September 15, 2009 and the date the commitments are permanently reduced to $250,000; however this fee will be reduced by 80% if the aggregate level of commitments on or before September 15, 2009 have been permanently reduced to $250,000. Under this provision, the Company currently estimates that the minimum it will be required to pay is $0 and the maximum is $9,150. The Company expects that it will pay no amounts under this provision as it intends to refinance the debt before the payment is due and payable. There can be no assurance that such refinancing will occur. In addition, if all indebtedness under the Revolving Credit Facility is not fully repaid by December 20, 2009, a separate fee will be earned and payable on December 20, 2009 equal to 8.0% per annum of the amount by which the aggregate commitments under the Revolving Credit Facility that exist from time to time after September 15, 2009 exceed $250,000, calculated on a daily basis.  Under this provision, the Company currently estimates that the minimum it will be required to pay is $0 and the maximum is $2,630. The Company expects that it will pay no amounts under this provision as it intends to refinance the debt before the payment is due and payable. There can be no assurance that such refinancing will occur.

In addition to any interest that may be payable with respect to amounts advanced by the lenders pursuant to a letter of credit, the Company will be required to pay to the lender(s) issuing letters of credit an issuance fee of 0.125% of the amount of the letters of credit.

Under and subject to the terms of the Revolving Credit Facility, 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 working capital and for such other appropriate corporate purposes as may be approved by the lenders. Under the Revolving Credit Facility, each lender is generally obligated to fund only its pro rata portion of each requested loan or advance.  As a result, if any lender refuses, or is unable, to fund its

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pro rata portion of a requested loan or advance, the Company may be unable to borrow the entire amount of the requested loan or advance despite the fact that if there are defaulting lenders, the Company is permitted to submit additional borrowing requests in an effort to make-up any borrowing shortfall caused by a defaulting lender failing to fund.  In addition, so long as no event of default has occurred and is continuing, pro-rate principal payments shall not be made to any defaulting lender, but instead shall be paid over to the master borrower.  The Revolving Credit Facility also provides for certain burden sharing measures to allocate among the lenders the burdens and risks associated with defaulting lenders in the event there are defaulting lenders.

Approximately 35% of the Company’s collateral assets have been reappraised pursuant to the terms of the waiver letter and the Company and approximately one third of the assets in the borrowing base with a book value in excess of $4,000 that have not yet been re-appraised are currently being re-appraised. The re-appraisals that have been done to date have not had a material impact on the Company’s borrowing base availability, but there can be no assurance that future reappraisals will not reduce borrowing base availability.

Various conditions must be satisfied in order for real estate to be admitted to the borrowing base, including that a mortgage in favor of lenders has been delivered to the agent for lenders and that all governmental approvals necessary to begin development of for-sale residential housing, other than building permits and certain other permits borrower in good faith believes will be issued within 120 days, have been obtained. Depending on the stage of development of the real estate, the loan to value or loan to cost advance rate in the borrowing base ranges from 50% to 95% of the appraised value or cost of the real estate. Based on these ranges, the Company is restricted as to the type of land it can have in various stages of development as well as the dollar value of land under development.

As security for all obligations of borrowers to lenders under the Revolving Credit Facility, lenders continue to have a first priority mortgage lien on all real estate owned by the Company or any borrower and included in the borrowing base under the Revolving Credit Facility. As further security, pursuant to the Second Amended Credit Facility, the Company has also agreed to grant to the lenders a security interest in and assignment of all future tax refunds and proceeds thereof received or payable to the borrowers or the Company after the closing of the Second Amended Credit Agreement, mortgages in favor of lenders with respect to all real property owned by the borrowers or the Company that is not already subject to a lien in favor of the lenders under the Revolving Credit Facility and a security interest in inter-company debt.  Pursuant to the First Amendment, all such tax refunds must be paid over to the lenders within one business day and will be used to prepay any indebtedness under the Revolving Credit facility.  Orleans Homebuilders, Inc. has guaranteed the obligations of the borrowers to lenders pursuant to a Guaranty executed by Orleans Homebuilders, Inc. on January 26, 2006, amended on September 6, 2007 and amended and restated on September 30, 2008.  Under the Guaranty, Orleans Homebuilders, Inc. granted lenders a security interest in any balance or assets in any deposit or other account that Orleans Homebuilders, Inc. has with any lender. However, the Company and its subsidiaries maintain a majority of the cash, cash equivalents and marketable securities available to them in accounts and as treasury securities outside of the lenders under the Revolving Credit Facility.

The Revolving Credit Facility contains customary covenants that, subject to certain exceptions, limit or eliminate the ability of the Company to (among other things):

·Incur or assume other indebtedness, except certain permitted indebtedness and possible second lien indebtedness if appropriately approved;

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

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

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

·Enter into any transaction with an affiliate that is not a borrower or a guarantor under the Revolving Credit Facility, or a subsidiary of either;

·Pay any dividends;

·Redeem any stock or subordinated debt; and

·Invest in joint ventures or other entities that are not obligors under the Revolving Credit Facility.

In addition, under the Revolving Credit Facility, all real property sales must be accomplished through a title company, with the net proceeds of such a sale going directly to the agent bank for application to the outstanding balance under the Revolving Credit Facility. Any purchases of real estate must be done through a title company through advances under the Revolving Credit Facility and all such acquisitions must be subject to mortgages in favor of the lenders; and, at the time of any such advance, the Company will be required to provide an estimate of the portion of the borrowing that will be used for construction needs. However, the Company may make additional draws from time-to-time pursuant to the terms of the Revolving Credit Facility.

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

·The Company must maintain a minimum consolidated tangible net worth of at least $25,000  (1) reduced by the sum of (a) any impairments or other charges under GAAP on assets in the borrowing base taken by the Company and recorded in respect of the financial quarters ended December 31, 2008 and March 31, 2009, plus (b)  any deferred tax assets valuation allowance reserves recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) any impairments or write-offs relating to tangible assets or pre-acquisition costs not contained in the borrowing base recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009 (provided, however, that the aggregate covenant level reduction pursuant to this clause (1) shall not exceed $15,000), and (2) increased by the sum of (x) any favorable adjustment to the deferred tax asset valuation allowance recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (y) 50% of positive quarterly net income after March 31, 2008.

·The Company must maintain a required liquidity level based on cash plus borrowing base availability of at least $10,000 of cash and cash equivalents (including cash held at a title company) on a consolidated basis at all times, minus the amount by which the then-outstanding principal balance of the Company’s loans plus any swing line loans exceeds the then-current borrowing base availability.

·The Company’s minimum cash flow from operations ratio based on cash flow from operations to interest incurred covenant, must exceed 1.25-to-1.00 for the quarter ending December 31, 2008; 0.40-to-1.00 for the quarter ending March 31, 2009; 0.50-to-1.00 for the quarter ending June 30, 2009; and 0.65-to-1.00 for the quarter ending September 30, 2009 and thereafter. Cash flow from operations is calculated based on the last twelve months cash flow from operations, adjusted for interest paid (excluding any amortized deferred financing costs related to all amendments to the Amended Credit Agreement, the Second Amended Credit Agreement and the trust preferred securities and any future amendments to any of the foregoing), amounts from the disposition of model homes that are subject to a sale-leaseback transaction to the extent such amounts are not otherwise included in net cash provided by operating activities, and interest income.

·The maximum amount of cash or cash equivalents (excluding cash at title companies) the Company is allowed to maintain for any consecutive five-day period is $15,000.

·The Company may purchase improved land (i.e., finished lot takedowns and/or controlled rolling lot options) purchased by the borrowers in the normal course of business, consistent with the projections provided to the Lenders, but otherwise limits the Company’s ability to purchase improved and unimproved land.

At the fiscal quarters ended September 30, 2006, December 31, 2006, March 31, 2007, June 30, 2007, March 31, 2008, June 30, 2008 and December 31, 2008, the Company would have been in violation of certain financial covenants in the Amended and Restated Credit Agreement if not for the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, waiver letter, the Second Amended Credit Agreement, the second waiver letter and the First Amendment to the Second Amended Credit Agreement, respectively.

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

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

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

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

·Dissolution or reorganization of any borrower or the Company;

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

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

·Specified cross defaults.

Upon the occurrence and continuation of an event of default, after completion of any applicable grace or cure period, lenders may demand immediate payment in full of all indebtedness outstanding under the Revolving Credit Facility, terminate their obligations to make any loans or advances or issue any letter of credit, set off and apply any and all deposits held by any lender for the credit or account of any borrower. In addition, upon the occurrence of certain events of bankruptcy or other insolvency events with respect to any borrower or the Company, all indebtedness outstanding under the Revolving Credit Facility shall be immediately due and payable without any act or action by lenders. A default under the Company’s Revolving Credit Facility could also prevent the Company from making required payments under the Company’s trust preferred securities, which would cause a default under those securities.

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If the Company does not meet its forecast in its budgets, the Company could violate its debt covenants and, absent a waiver or amendment from its lenders, the Company could be in default under its Revolving Credit Facility and, as a result, its debt could become due which would have a material adverse effect on the Company’s financial position and results of operations.

As of December 31, 2008, after giving effect to the First Amendment, the Company was in compliance with all of its financial covenants under the Second Amended Credit Agreement, as amended.

Trust Preferred Securities:

On November 23, 2005, the Company issued $75,000 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, provided that certain covenant levels are maintained. Thereafter, the securities have a floating interest rate equal to three-month LIBOR plus 360 basis points per annum, resetting quarterly. The securities are treated as debt obligations 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.

The trust’s preferred and common securities require quarterly distributions of interest by the trust to the holders of the trust securities at a fixed interest rate equal to 8.61% per annum through January 30, 2016 and, after January 30, 2016, at a variable interest rate (reset quarterly) equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 360 basis points.  Since the Company failed to meet both the debt service ratio and minimum tangible net worth requirement set forth in the August 13, 2007 supplemental indenture as of the end of a fiscal quarter for at least three of the last four consecutive fiscal quarters ended on June 30, 2008, the applicable rate of interest was increased by 300 basis points. The Company began accruing for this increased interest rate on July 31, 2008, which was paid to holders for the first time with the coupon payable on October 31, 2008. The interest rate will return to the regularly applicable rate once the Company is in compliance with the debt service ratio and minimum tangible net worth requirements as of the end of any fiscal quarter.  The terms of the trust securities are governed by an Amended and Restated Trust Agreement, dated November 23, 2005, among OHI Financing, Inc., (“OHI Financing”) as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as the Delaware trustee, and the administrative trustees named therein.

The trust used the proceeds from the sale of the trust’s securities to purchase $77,320 in aggregate principal amount of unsecured junior subordinated notes due January 30, 2036 issued by OHI Financing, which includes $2,300 of inter-company issuances. The junior subordinated notes were issued pursuant to a Junior Subordinated Indenture, dated November 23, 2005, as amended by a Supplemental Indenture dated August 13, 2007, collectively referred to herein as the “Indenture,” among OHI Financing, as issuer, and JPMorgan Chase Bank, National Association, as trustee. The terms of the junior subordinated notes are substantially the same as the terms of the trust’s preferred securities. The interest payments on the junior subordinated notes paid by OHI Financing, Inc. will be used by the trust to pay the quarterly distributions to the holders of the trust’s preferred and common securities. Pursuant to the parent guarantee agreement dated November 23, 2005 by and between the Company and JPMorgan Chase Bank, National Association, as trustee, the Company has unconditionally guaranteed OHI Financing, Inc.’s payment and other obligations under the indenture and the junior subordinated notes. The Company used the proceeds from the issuance and sale of the trust preferred securities and the subsequent purchase of the junior subordinated notes to partially repay indebtedness.

The Indenture permits OHI Financing to redeem the junior subordinated notes at par, plus accrued interest on or after January 30, 2011. If OHI Financing redeems any amount of the junior subordinated notes, the Trust Agreement requires the trust to redeem a like amount of the trust securities. Under certain circumstances relating to the tax treatment of the trust or the interest payments made on the junior subordinated notes or the classification of the trust as an “investment company” under the Investment Company Act of 1940, as amended, OHI Financing may also redeem the junior subordinated notes prior to January 30, 2011 at a 7.5% premium.

With certain exceptions relating to debt to a trust, partnership or other entity affiliated with the Company that is a financing vehicle for the Company, the junior subordinated notes and the Company’s obligations under the parent guarantee are expressly subordinate to all of the Company’s existing and future debt unless it is provided in the instrument creating or evidencing such debt, or pursuant to which such debt is outstanding, that such debt is not superior in right to payment of the junior subordinated notes or the obligations under the parent company’s guarantee, as the case may be.

Under the Indenture, OHI Financing will generally have to make eight consecutive Adjusted Interest Rate coupon payments (other than the eight consecutive Adjusted Interest Rate coupon payments that could be made on each of the coupon payment dates from October 30, 2008 to and including July 30, 2010) to cause an event of default under the Indenture (or in some cases six consecutive coupon payments). More specifically, the Indenture provides that the earliest an event of default could occur as a result of the payment of the Adjusted Interest Rate is (i) upon the payment of the Adjusted Interest Rate coupon for October 30, 2010, if applicable, provided there have been eight prior consecutive Adjusted Interest Rate coupons paid by OHI Financing; (ii) on either the fiscal quarter ended March 31, 2010 or the fiscal year ended June 30, 2010, if at either date both the trailing twelve months’ interest coverage ratio is less than 1.25 to 1, and OHI Financing has made the six prior consecutive Adjusted Interest Rate coupon payments; or (iii) on

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the fiscal quarter ended September 30, 2010, if at such time both the trailing twelve months’ interest coverage ratio is less than 1.75 to 1, and OHI Financing has made the eight prior consecutive Adjusted Interest Rate coupon payments. The Adjusted Interest Rate must be paid for eight (or in some instances six) consecutive coupons in order to trigger an event of default. If the interest coverage ratio test and the minimum consolidated tangible net worth test, are both met, OHI Financing would make the payment of the Regular Interest Rate for the next coupon, and the Adjusted Interest Rate test “resets” requiring OHI Financing to make eight (or in some instances six) new consecutive coupon payments at the Adjusted Interest Rate before triggering an event of default. The interest coverage ratio and minimum consolidated tangible net worth measure are not traditional financial maintenance covenants; they are only utilized in determining if the Adjusted Interest Rate or the Regular Interest Rate is applicable.

The junior subordinated notes and the trust securities could become immediately payable upon an event of default. Under the terms of the Trust Agreement and the Indenture, subject to any applicable cure period, an event of default generally occurs upon:

·non-payment of any interest on the junior subordinated notes when it becomes due and payable, and continuance of the default for a period of 30 days;

·non-payment of the principal of, or any premium on, the junior subordinated notes at their maturity;

·default in the performance, or breach, of any covenant or warranty made by OHI Financing, Inc., in the indenture and the continuance of the default or breach for a period of 30 days after written notice to OHI Financing, Inc.;

·non-payment of any distribution on the trust’s securities when it becomes due and payable, and continuance of the default for a period of 30 days;

·non-payment of the redemption price of any trust’s security when it becomes due and payable;

·default in the performance, or breach, in any material respect of any covenant or warranty of any of the trustees in the Trust Agreement, which default or breach continues for a period of 30 days after written notice to the trustees and OHI Financing, Inc.;

·default in the performance, or breach (which default or breach must be material in certain cases), of any covenant or warranty made by OHI Financing, Inc. In the purchase agreement pursuant to which the trust securities and the junior subordinated notes were sold and purchased and the continuation of such default or breach for a period of 30 days after written notice to OHI Financing, Inc.;

·bankruptcy, insolvency or liquidation of the property trustee, if a successor property trustee has not been appointed within 90 days thereafter;

·the bankruptcy or insolvency of OHI Financing, Inc.; or

·certain dissolutions or liquidations, or terminations of the business or existence, of the trust.

Pursuant to the August 13, 2007 Supplemental Indenture, OHI Financing established a $5,000 reserve fund in September 2007 for the benefit of the holders of the trust preferred securities by posting a letter of credit with the trustee. If the adjusted interest rate is in effect for the four consecutive coupon payments ending July 30, 2009, this reserve fund must be increased by $2,500. Under certain events of default, this reserve fund may be drawn by the trustee and used in respect of the trust preferred obligations. The reserve fund may be released upon the earlier of compliance with the applicable interest coverage ratio resulting in OHI Financing paying interest at the regular interest rate rather than the adjusted interest rate, or redemption or defeasance of the notes in accordance with the terms of the Indenture.

On September 20, 2005, the Company issued $30,000 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 securities are treated as debt obligations 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.

7.ASSET IMPAIRMENTS — REAL ESTATE HELD FOR DEVELOPMENT AND SALE

The Company accounts for its real estate held for development and sale in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).  SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  Recoverability of real estate held for development and sale is measured by comparing the carrying value to the future undiscounted net cash flows expected to be generated by the asset.  The impairment loss is the difference between the book value of the assets and the discounted future cash flows generated from expected revenue of the assets, less the associated cost to complete and direct costs to sell.  Estimated cash flows are discounted at a rate commensurate with the inherent risk of the assets and cash flows, which approximates fair value.  The estimates used in the determination of the estimated cash flows and fair value of the asset are based on

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factors known to us at the time such estimates are made and our expectations of future operations.  These estimates of cash flows are significantly impacted by estimates of the amounts and timing of revenues and costs and other factors, which, in turn, are impacted by local market economic conditions and the actions of competitors.  Should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments related to these assets or other assets.

As of December 31, 2008, there were a number of parcels which were tested for impairment as a trigger was identified.  Some of these parcels included those that had previously been impaired. In some cases, the undiscounted cash flow analysis prepared by management did not indicate an impairment.  However, these cash flows are subject to significant estimates and assumptions made by management. In some cases, the results of whether an impairment is indicated from the undiscounted cash flow analysis is highly sensitive to changes in assumptions. These parcels could suffer impairment in the future, and such impairment amounts could be material to the Company’s results of operations and financial position.  In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been delivered, margins under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, and the fair value of the land itself.  Inventory impairments are recorded in residential properties cost and expenses.

When impairment is indicated, the Company estimates the fair value of inventory under SFAS No. 144 based on current market conditions and current assumptions made by management, which may differ materially from actual results if market conditions change. For example, further market deterioration may lead the Company to incur additional impairment charges on previously impaired inventory, as well as on inventory not currently impaired but for which indicators of impairment may arise if further market deterioration occurs.

In conducting the review for indicators of impairment on a community level, the Company evaluates, among other things, the margins on homes that have been delivered, margins under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, and the estimated fair value of the land itself.

In determining the recoverability of the carrying value of the assets in a community that the Company has evaluated as requiring a test for impairment, significant quantitative and qualitative assumptions are made relative to the future home sales prices, sales incentives, direct and indirect costs (including interest expected to be capitalized) of home construction and land development and the pace of new home orders. In addition, these assumptions are dependent on the specific market conditions and competitive factors for the community being tested. The Company’s estimates are made using information available at the date of the recoverability test. However, as facts and circumstances may change in future reporting periods, the estimates of recoverability are subject to change. When impairment is indicated, the Company estimates the fair value of its communities using a discounted cash flow model.  The determination of fair value also requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams.

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The following table represents inventory impairments by region for continuing operations for the three and six months ended December 31, 2008 and 2007:

	Three months ended December 31,
	2008			2007
	Communities	Impairment		Communities	Impairment
Northern	11	$	6,005	5	$	5,654
Southern	8	2,598		5	5,200
Midwestern	—	—		5	9,668
Florida	1	67		3	2,395
Total	20	$	8,670	18	$	22,917

	Six months ended December 31,
	2008			2007
	Communities	Impairment		Communities	Impairment
Northern	13	$	10,904	5	$	6,366
Southern	8	2,695		5	5,200
Midwestern	3	3,907		5	9,668
Florida	2	582		3	2,395
Total	26	$	18,088	18	$	23,629

During the three and six months ended December 31, 2007, the Company specifically identified parcels of land to sell and negotiated contracts with potential buyers.  Prior to the closing of the land sale transactions, the Company recorded asset impairments on the land to be sold of $36,556 for the three and six months ended December 31, 2007.  The Company’s midwestern region recorded impairments of $23,163 related to the sale of two parcels.  The Company’s Florida region recorded impairments of $8,385 related to the sale of four parcels.  The Company’s southern region recorded impairments of $5,008 related to the sale of two parcels.

Additionally, the Company recorded an impairment charge of $20,706 related to the sale of its land position in the western region in the three and six months ended December 31, 2007. This impairment charge is included in loss from discontinued operations.

These impairment charges represent the amounts by which the carrying value of the assets sold exceeded their fair values less costs to sell.  The fair value of the assets was determined based on the contracted sales price.  These impairment charges were included in the cost of land sales on the Consolidated Statements of Operations.

8.     STOCK BASED COMPENSATION

The Company follows the provision of SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123(R)”), which establishes the financial accounting and reporting standards for stock-based compensation plans.  SFAS No. 123(R) requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including stock options and restricted stock.  Under the provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period of the entire award (generally the vesting period of the award).  The fair value based method in SFAS No. 123(R) is similar to the fair-value-based method in SFAS No. 123 in most respects, subject to certain differences.  The Company previously adopted the fair value recognition provisions of SFAS No. 123 prospectively for all stock awards granted and, as such, the impact of the modified prospective adoption of SFAS 123(R) did not have a significant impact on the financial position or results of operations of the Company.

Stock Option Plans

On August 26, 2004, the Company’s Board of Directors adopted the Orleans Homebuilders, Inc. 2004 Omnibus Stock Incentive Plan (as subsequently amended, the “2004 Stock Incentive Plan”), which is intended to function as an amendment, restatement and combination of all stock option and award plans of the Company other than the Orleans Homebuilders, Inc. Stock Award Plan.  On December 6, 2007, the stockholders of the Company approved the second amendment and restatement of the 2004 Stock Incentive Plan to increase the number of shares of the Company’s common stock authorized for issuance under the plan from 400,000 to 2,000,000 shares.

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During the three months ended December 31, 2008 and 2007, the Company recognized $337 and $492, respectively, of stock based compensation expense related to stock options.

During the six months ended December 31, 2008 and 2007, the Company recognized $659 and $966, respectively, of stock based compensation expense related to stock options.

The following summarizes stock option activity for the Company’s stock option plans during the six months ended December 31, 2008:

	Number of Options	Weighted Average Exercise Price
Outstanding, beginning of period	752,500	$	9.01
Granted	250,000	2.20
Exercised	—	—
Outstanding, end of period	1,002,500	$	7.32
Exercisable, end of period	266,500	$	12.14

There were no options exercisable at December 31, 2008 that had a strike price below the market value of the underlying shares of stock.

During the three and six months ended December 31, 2008, the Company granted options to acquire 250,000 shares.  During the three and six months ended December 31, 2007, the Company granted options to acquire 180,000 shares.  In addition, during the three and six months ended December 31, 2007, options to acquire 240,000 shares at $15.60 were repriced to $4.65.

No options were exercised during the three and six months ended December 31, 2008 or the three and six months ended December 31, 2007.

The following table summarizes information about the Company’s stock options at December 31, 2008:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Outstanding at December 31, 2008	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Exercisable at December 31, 2008	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$2.20 - $2.20	250,000	9.9	$	2.20	—	N/A	N/A
4.03 - 4.85	445,000	9.0	4.41		84,000	9.0	4.38
10.64 - 10.64	30,000	4.6	10.64		30,000	4.6	10.64
15.63 - 15.63	250,000	7.5	15.63		125,000	7.5	15.63
21.60 - 21.60	27,500	5.7	21.60		27,500	5.7	21.60
	1,002,500	8.6	$	7.32	266,500	7.4	$	12.14

The aggregate intrinsic value as of December 31, 2008 for outstanding stock options and for stock options that are exercisable was $0 and $0, respectively.

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

As of December 31, 2008, there was a total of $1,762 of unrecognized compensation expense related to time based non-vested stock options.  That cost is expected to be recognized over a weighted average period of 3.3 years.

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Stock Award Plans

In October 2003, the Board of Directors adopted the Orleans Homebuilders, Inc. Stock Award Plan (the “Stock Award Plan”), which provided grant of stock awards of up to an aggregate of 400,000 shares of the Company’s common stock.  On October 17, 2008, the Board of Directors approved an increase in the number of shares authorized for issuance under the Stock Award Plan from 400,000 shares to 1,000,000 shares, which was approved at the Company’s Annual Meeting on December 4, 2008.  The Stock Award Plan allows for the payment of all or a portion of the incentive compensation awarded under the Company’s bonus compensation plans to be paid by means of a transfer of shares of common stock.  The plan has a ten year life and is open to all employees of the Company and its subsidiaries.  The value of time based restricted stock awards are determined by their intrinsic value (as if the underlying shares were vested and issued) on the grant date.  During the three and six month ended December 31, 2008 and 2007, the company awarded 250,000 and 240,000 shares of restricted stock to an executive officer.  The restricted stock awarded during the three and six months ended December 31, 2008 was issued under of the 2004 Stock Incentive Plan.  At December 31, 2008, the Company had awarded 395,904 shares of common stock under the Stock Award Plan and had 604,096 shares of the common stock available to issue under the Stock Award Plan.

During the three months ended December 31, 2008 and 2007, the Company recognized $135 and $108, respectively, of stock based compensation expense related to stock awards.

During the six months ended December 31, 2008 and 2007, the Company recognized $296 and $193, respectively, of stock based compensation expense related to stock awards.

As of December 31, 2008, there was a total of $4,700 of unrecognized compensation expense related to time based non-vested restricted stock awards.  That cost is expected to be recognized over a weighted average period of 5.3 years.

Cash Bonus Plan

On December 4, 2008, The Company’s Compensation Committee adopted a cash bonus plan for an executive officer (the “Plan”).  The Plan provides for a cash bonus of $375 to be paid to the executive officer in the event the Company achieves certain performance targets as determined by the Compensation Committee, which may generally include targets relating to: (i) capital structure initiatives; (ii) refinancing the Company’s outstanding debt (such as by the issuance of new debt, equity or equity-linked securities by the Company or a joint venture in which the Company is a participant); or (iii) the Company entering into a new or modified credit facility (such as a modified credit facility extending the maturity date of the Company’s revolving credit facility).  The maximum amount payable pursuant to the Plan is $750, provided the Company achieves at least two of such performance targets.  In the event the executive officer is awarded a cash bonus pursuant to the Plan, he will be given the option of using up to 50% of that cash bonus at the time of the award to purchase restricted shares of the Company’s stock at a purchase price of $2.75 per share (or up to 136,363 shares of fully vested common stock will be issued to Participant if all awards are earned under the Plan and the executive officer elects to have all such awards payable in Company common stock).  The Company is accounting for the Plan as a combination award in accordance with SFAS No. 123(R).  Based on Company estimates, the Company will be accruing $375 during the period of December 2008 through March 2009; accruing $375 during the period of December 2008 through September 2009; and expensing $60 relating to the option to purchase restricted shares during the period of December 2009 through September 2009.  During the three and six months ended December 31, 2008, the Company recognized $137 of compensation expense related to the Plan.

9.     EMPLOYEE RETIREMENT PLAN

On December 1, 2005, the Company adopted an unfunded, non-qualified target defined benefit retirement plan, effective as of September 1, 2005, which covers a group of management employees of the Company. The Company owns life insurance policies on all participants in the Supplemental Executive Retirement Plan (“SERP”). This SERP, which was amended on March 13, 2006 and September 27, 2007, is intended to provide the participants with 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 ten 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 five years of participation in the SERP. 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, provided that certain terminations occurring after a change in control will not result in a forfeiture.  The Company can amend or terminate the SERP at any time. However, no amendment or 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.

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The Company used a 4% annual compensation increase and a 6.1% 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 June 2008.

The Company recognized the following costs related to the SERP for the three and six months ended December 31, 2008 and 2007:

	Three months ended December 31,						Six months ended December 31,
	2008			2007			2008			2007
Net periodic pension cost:
Service cost	$	129		$	153		$	259		$	306
Interest cost	85			85			170			170
Amortization of prior service cost	104			104			209			207
Amortization of actuarial gain	(69		)	(46		)	(136		)	(92		)
Total net periodic pension cost	$	249		$	296		$	502		$	591
Assumptions used for determining net periodic pension costs:
Discount rate	6.10		%	6.10		%	6.10		%	6.10		%
Salary scale	4.00		%	4.00		%	4.00		%	4.00		%

10.  LOSS PER SHARE

The weighted average number of shares used to compute basic loss per common share and diluted loss per common share and a reconciliation of the numerator and denominator used in the computation for the three and six months ended December 31, 2008 and 2007 are shown in the following table:

	Three months ended December 31,						Six months ended December 31,
	2008			2007			2008			2007
Numerator:
Loss from continuing operations for basic and diluted EPS	$	(15,621	)	$	(38,607	)	$	(37,557	)	$	(40,370	)
Denominator
Weighted average common shares outstanding (in thousands)	18,518			18,502			18,511			18,502
Basic and diluted loss per common share from continuing operations	$	(0.84	)	$	(2.09	)	$	(2.03	)	$	(2.18	)

Assumed shares (in thousands) under the treasury stock method for stock options of 0 and 92 for the three months ended December 31, 2008 and 2007, respectively, and 0 and 91 for the six months ended December 31, 2008 and 2007, respectively, were not included in the computation of diluted earnings per share because the impact was anti-dilutive for those periods.

11.  INCOME TAXES

The Company’s income tax benefit from continuing operations for the six months ended December 31, 2008 was $277 compared to $24,529 in the corresponding prior year period.  These amounts represent effective tax rates for the six months ended December 31, 2008 and 2007 of 0.8% and 37.8%, respectively.  The significant changes in the Company’s effective tax rate resulted primarily from the recording of a $13,826 net valuation reserve in the first six months of fiscal year 2009 as compared with no valuation reserve in the comparable period of the previous fiscal year.  SFAS No. 109 — “Accounting for Income Taxes” (“SFAS No. 109”) requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence that can be objectively verified.  SFAS No. 109 provides that a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable and also restricts the amount of reliance on projections of future taxable income to support the recovery of deferred tax assets.  The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income

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during the periods in which those temporary differences become deductible.  Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.  The income tax benefit for the six months ended December 31, 2008 reflects the impact of a reduction in a prior year tax contingency of approximately $324, as a result of the favorable settlement of the related contingency, partially offset by separate company state income tax expense.  The income tax expense for the six months ended December 31, 2007 include the impact of a revision to a prior year tax contingency reserve of approximately $520 as well as a prior year income tax return-to-accrual adjustment of approximately $228.

At December 31, 2008 and June 30, 2008, the Company had net deferred income tax assets of $68,084 and $53,642, respectively, offset by full valuation allowances of $68,084 and $53,642, respectively.

The Company is currently under examination by various taxing jurisdictions and anticipates finalizing the examinations with certain jurisdictions within the next twelve months.  The final outcome of these examinations is not yet determinable.  The statute of limitations for the Company’s major tax jurisdictions remains open for examination for tax years 2005-2007.

12.  DISCONTINUED OPERATIONS

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

As the western region represented a component of the Company’s business, the consolidated financial statements have been reclassified for all periods presented to present this business as discontinued operations.  Summarized financial information for the western region is set forth below:

	Three months ended  December 31,			Six months ended December 31,
	2007			2007
Operating loss	$	(21,092	)	$	(21,574	)
Tax benefit	(8,314		)	(8,504		)
Net loss from discontinued operations	$	(12,778	)	$	(13,070	)

Discontinued operations have not been segregated in the condensed consolidated statement of cash flows. Therefore amounts for certain captions will not agree with respective data in the condensed consolidated statement of operations.

13.  SEGMENT REPORTING

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”) establishes standards for the manner in which public enterprises report segment information about operating segments.  The Company has determined that its operations primarily involve four reportable homebuilding segments operating in 11 markets.  Revenues are primarily derived from the sale of homes which the Company constructs.  The segments reported have been determined to have similar economic characteristics including similar historical and expected future operating performance, employment trends, land acquisitions and land constraints, municipality behavior and met the other aggregation criteria in SFAS No. 131.  The reportable homebuilding segments include operations conducting business in the following markets:

Northern region:

·Southeastern Pennsylvania;

·Central New Jersey;

·Southern New Jersey; and

·Orange County, New York

Southern region:

·Charlotte, North Carolina (including adjacent counties in South Carolina);

·Richmond, Virginia;

·Raleigh, North Carolina;

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·Greensboro, North Carolina; and

·Tidewater, Virginia

Midwestern region:

·Chicago, Illinois

Florida region:

·Orlando, Florida

During the fiscal year ended June 30, 2008, the Company exited from the Phoenix, Arizona market.  See note 12, Discontinued Operations.

The Company’s evaluation of segment performance is based on (loss) income from continuing operations before taxes.  During fiscal year 2008, the allocation of corporate and unallocated (loss) income from continuing operations before taxes to the segments was a fixed amount, which left a portion of the loss unallocated.  During fiscal year 2009, corporate (loss) income from continuing operations is fully allocated to the segments based on budgeted revenue.  The fiscal year 2009 allocation includes the Company’s mortgage brokerage and property management subsidiaries.  Below is a summary of revenue and (loss) income from continuing operations before taxes for each reportable segment for the three and six months ended December 31, 2008 and 2007:

	Three Months Ended December 31,						Six Months Ended December 31,
	2008			2007			2008			2007
Total Revenue
Northern	$	33,222		$	55,137		$	80,102		$	106,277
Southern	44,289			62,600			71,594			111,105
Midwestern	9,198			16,581			20,688			30,119
Florida	1,239			16,686			4,429			24,955
Corporate and unallocated(1)	2,280			3,939			3,736			5,363
Consolidated Total	$	90,228		$	154,943		$	180,549		$	277,819
(Loss) Income from Continuing Operations
Before Taxes
Northern	$	(8,043	)	$	(10,414	)	$	(13,888	)	$	(11,092	)
Southern	(5,746		)	(10,090		)	(15,182		)	(10,511		)
Midwestern	(1,656		)	(35,867		)	(7,168		)	(37,391		)
Florida	(573		)	(12,867		)	(1,596		)	(13,988		)
Corporate and unallocated	—			5,943			—			8,083
Consolidated Total	$	(16,018	)	$	(63,295	)	$	(37,834	)	$	(64,899	)

(1) Corporate and unallocated includes the revenue of the Company’s mortgage brokerage and property management.

14.  COMMITMENTS AND CONTINGENCIES

At December 31, 2008, the Company had outstanding bank letters of credit, surety bonds and financial security agreements amounting to $101,928 as collateral for completion of improvements at various developments of the Company.

As of December 31, 2008, the Company owned or controlled approximately 6,387 building lots.  As part of the aforementioned building lots, the Company has contracted to purchase, or had under option, undeveloped land and improved lots for an aggregate purchase price of $99,781, which are expected to yield approximately 1,353 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.

From time to time, the Company is named as a defendant in legal actions arising from its normal business activities.  Although the amount of any 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 or operating results of the Company.

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The Company accrues the cost for warranty and customer satisfaction into the cost of its homes as a liability at closing for each unit based on the Company’s individual budget per unit. These liabilities are reviewed on a quarterly basis and generally closed to earnings within nine to 12 months for unused amounts with any excess amounts expensed as identified as a change in estimate.  Any significant material defects are generally under warranty with the Company’s supplier.  The Company has not historically incurred any significant litigation requiring additional specific reserves for its product offerings (e.g., mold litigation).

Generally, the Company provides all of its homebuyers with a limited one year warranty as to workmanship. Under certain circumstances, this warranty may be extended to two years. In practice, the Company may extend this warranty period with the ultimate goal of satisfying the customer. In addition, the Company enrolls all of its homes in a limited warranty program with a third party provider (with the premium paid for this program included in the individual unit budgets described above). This limited warranty program generally covers certain defects for periods of one to two years and major structural defects for up to ten years and actual costs incurred are paid for by the third party provider.

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

	Six months ended December 31,
	2008			2007
Balance at beginning of period	$	3,353		$	2,908
Warranty costs accrued	834			1,399
Actual warranty costs incurred	(1,402		)	(1,477		)
Balance at end of period	$	2,785		$	2,830

15.  FAIR VALUE DISCLOSURES

Effective July 1, 2008, the Company adopted SFAS No. 157, “ Fair Value Measurements” (“SFAS No. 157”) as amended by FASB Staff Position SFAS No. 157-1, “ Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS No. 157-1”) and FASB Staff Position SFAS No. 157-2, “ Effective Date of FASB Statement No. 157” (“FSP FAS No. 157-2”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and provides for expanded disclosure about fair value measurements.  SFAS No. 157 is applied prospectively, including to all other accounting pronouncements that require or permit fair value measurements.  FSP FAS No. 157-1 amends SFAS No. 157 to exclude from the scope of SFAS No. 157 certain leasing transactions accounted for under SFAS No. 13, “Accounting for Leases” for purposes of measurements and classifications.  FSP FAS No. 157-2 amends SFAS No. 157 to defer the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15, 2008.

SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.  Financial assets and liabilities are categorized based on the inputs to the valuation techniques as follows:

Level 1   Fair value determined based on quoted prices in active markets for identical assets.

Level 2   Fair value determined using significant other observable inputs.

Level 3   Fair values determined using significant unobservable inputs.

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The Company’s financial instruments measured at fair value on a recurring basis are summarized below:

		Fair Value at
Financial Instruments	Fair Value Hierarchy	December 31, 2008
Marketable securities	Level 1	$	17,318

The partial adoption of SFAS No. 157 under FSP FAS No. 157-2 did not have a material impact on the Company’s financial assets and liabilities.  Management is evaluating the impact that SFAS No. 157 will have on its non-financial assets and non-financial liabilities since the application of SFAS No. 157 for such items was deferred to July 1, 2009.  The Company believes that the impact of these items will not be material to its consolidated financial statements.

16.  GOODWILL

During the six months ended December 31, 2008, the Company recorded an impairment charge related to the goodwill that arose from the Parker & Lancaster Corporation acquisition.  This assessment was performed in accordance with SFAS No. 142.  Management evaluated the recoverability of the goodwill by comparing the carrying value of the Company’s southern reporting unit to its fair value.  Fair value was determined based on the discounted future cash flows.  These cash flows are significantly impacted by estimates related to current and future economic conditions, including absorption rates and margins reflective of slowing demand, as well as anticipated future demand and timing thereof.  The amounts included in the discounted cash flow analysis are based on management’s best estimate of future results.  This estimate considered increased risk and uncertainty associated with current market and economic conditions as reflected within the discount rate used to present value future cash flows and lower expected pricing over the projection period due to decreased consumer demand in the near term over the projection period.  The deteriorating market conditions in the Southern Region in which Parker & Lancaster operates are the result of continued economic turmoil, uncertainty in the credit and financial markets, decreased consumer demand and increased mortgage underwriting standards. Discount rates were based on the Company’s weighted average cost of capital adjusted for the aforementioned business risks.  The amount of the goodwill impairment was $4,180 and was recorded in the Company’s southern reporting segment.  As a result of this impairment charge, the Company has no goodwill on its Balance Sheet at December 31, 2008.  No impairment charge related to goodwill was taken during the three and six months ended December 31, 2007.

17.  VARIABLE INTEREST ENTITIES

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 protected from absorbing 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-R, 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-R, 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 performs an analysis of the expected losses and residual returns based on the probability of future cash flows based on the expected variability as outlined in FIN 46-R.  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, generally believed to be the purchase price of the land under option, will be reported as “Inventory not owned—Variable Interest Entities.”

At December 31, 2008, the Company consolidated three VIEs as a result of its options to purchase land or lots from the selling entities.  The Company paid cash of $412 and issued letters of credit of $100 to these VIEs and incurred additional pre-acquisition costs totaling $21.  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, determined as of the date of consolidation, is reported as “Inventory not owned—Variable Interest Entities.”  The Company recorded $10,668 in Inventory Not Owned—Variable Interest Entities as of December 31, 2008.  The fair value of the property to be acquired less cash deposits and pre-acquisition costs, which totaled $10,235 at December 31, 2008, 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.

The Company will continue to secure land and lots using options.  Excluding 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 December 31, 2008 of approximately $10,486, including $3,771 of cash deposits.

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18. SUBSEQUENT EVENT

Waiver Letter

Absent the waiver letter described below, the Company would have continued to be in default of its obligation to, on or before January 23, 2009, make a principal repayment in an amount necessary to reduce the outstanding principal balance of the loans to the borrowing base availability (the “Repayment Covenant”).  The failure to make the repayment in full within the proscribed period constituted an event of default under the Second Amended Credit Agreement, of which the Company provided notice to the Lenders.  In addition, Wachovia Bank, N.A. (“Wachovia”) asserted that the borrowers breached the liquidity covenant in the Second Amended Credit Agreement (the “Liquidity Covenant”) for the quarter ended December 31, 2008.  The borrowers disagree with Wachovia’s assertion that the borrowers breached the Liquidity Covenant and have notified Wachovia of their disagreement.

The second waiver letter temporarily waived compliance with the Repayment Covenant and the Liquidity Covenant generally from December 31, 2008 through and including February 6, 2009, unless another event of default occurred.  With the termination of waiver period without the First Amendment described below having been entered into, the failure of the Company to have complied with the Repayment Covenant on or before that date, the Company was again in breach of the Repayment Covenant and, to the extent there had been a breach of the Liquidity Covenant as asserted by Wachovia (an assertion with which the Company disagrees), the Company was also in breach of that covenant.  Any such breaches were, however, cured by the First Amendment described below.

First Amendment to the Second Amended Credit Agreement and Security Agreement:

On February 11, 2009, the Company entered into the First Amendment to the Second Amended Credit Agreement which provides, among other things, that:

·The category reductions applicable to the determination of borrowing base availability were adjusted so that the maximum borrowing base availability attributable to asset class (ii) (units not subject to a qualifying agreement of sale) determined on the basis of any borrowing base certificate that is delivered before July 31, 2009, was increased to a maximum of 58% of the aggregate borrowing base availability attributable to asset classes (i) (units subject to a qualifying agreement of sale) and (ii) (units not subject to a qualifying agreement of sale) as shown on the borrowing base certificate.  For borrowing base certificates delivered on or after July 31, 2009, the maximum percentage remains unchanged at 45%.

·The category reductions applicable to the determination of the borrowing base availability were adjusted so that the maximum borrowing base availability attributable to asset classes (iii) (lots part of improved land not subject to a qualifying agreement of sale), (iv) (lots part of land under development) and (v) (lots part of land approved for development), based on borrowing base certificates delivered before July 31, 2009, was increased to a maximum of 65% of the total borrowing base availability as shown on the borrowing base certificate.  For borrowing base certificates delivered on or after July 31, 2009, the maximum percentage is 55%.    The maximum dollar value of borrowing base availability attributable to asset classes (iii), (iv) and (v) were also adjusted to the following (with such limitations to be reduced dollar for dollar at the time and in the amounts of any impairments with respect to assets in asset classes (iii), (iv) and (v) and included in the borrowing base taken by borrowers):

(i)Beginning with the Borrowing Base Certificate delivered on or after the effective date of the First Amendment: $235,000;

(ii)Beginning with the Borrowing Base Certificate delivered on or after July 31, 2009: $200,000; and

(iii)Beginning with the Borrowing Base Certificate delivered after September 30, 2009: $190,000.

·Under the First Amendment, the aggregate effect of (i) the modification of the borrowing base category reductions applicable to units not subject to a qualifying agreement of sale (described above); (ii) the modification of the borrowing base category reductions for land under development (described above); and (iii)  the inventory impairments during the second fiscal quarter of approximately $8,670, was an increase in net borrowing base availability of $16,065 as of December 31, 2008, from a negative $14,567 to a positive $1,498.

·The amount of the Revolving Credit Facility was reduced from $440,000 to $405,000, except that the amount of the Revolving Credit Facility will be reduced to $375,000 beginning on July 16, 2009 and through maturity, unless otherwise permanently reduced as a result of certain prepayments required by the Revolving Credit Facility.  The letter of credit sublimit was reduced to $30,000 from $60,000, and the financial letter of credit sublimit was reduced to $15,000 from $25,000. The amount actually available under the Revolving Credit Facility is also subject to the borrowing base availability requirements in the Revolving Credit Facility.

·In the event there is one or more defaulting lenders, so long as there is no event of default has occurred and is continuing, pro-rata principal payments shall not be made to such defaulting lender, but instead shall be paid over to the master borrower.

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·The minimum consolidated tangible net worth level was adjusted to a minimum of at least $25,000 (1) reduced by the sum of (a) any impairments or other charges under GAAP on assets in the borrowing base taken by the Company and recorded in respect of the financial quarters ended December 31, 2008 and March 31, 2009, plus (b)  any deferred tax assets valuation allowance reserves recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) any impairments or write-offs relating to tangible assets or pre-acquisition costs not contained in the borrowing base recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009 (provided, however, that the aggregate covenant level reduction pursuant to this clause (1) shall not exceed $15,000), and (2) increased by the sum of (x) any favorable adjustment to the deferred tax asset valuation allowance recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (y) 50% of positive quarterly net income after March 31, 2008.

·The definition of liquidity was revised to provide that negative borrowing base availability is deducted from cash and cash equivalents when determining liquidity and the minimum required liquidity covenant was reduced from $15,000 to $10,000.  A five business day cure period in the event of a breach of the minimum liquidity covenant was also added.

·The maximum amount of cash or cash equivalents (excluding cash in transit at title companies) that the Company is allowed to maintain was set at a maximum of $15,000 for any consecutive five-day period.

·The cash flow from operations covenant ratio was adjusted downward for the quarter ending June  30, 2009 to 0.50:1.00 and for the quarter ending September 30, 2009 and thereafter to 0.65:1.00.

·The Company’s ability to purchase up to $8,000 of unimproved real estate is no longer available; however, the Company’s ability to acquire lots though option take-downs remains unchanged.  The provision specifically allowing the Company to make new joint venture investments up to certain specified amounts was also eliminated.

·The interest rate was increased by 25 basis points, to the LIBOR interest rate plus 5.25%.

·Generally, the ability to obtain letters of credit for general working capital or corporate purposes and the ability to obtain letters of credit in connection with projects outside the borrowing base were eliminated (provided, however, that existing letters of credit can be renewed, subject to the other terms of the Loan Agreement).

·Provisions were added providing that no letter of credit will be issued or renewed and that no tri-party agreement will be executed or maintained while any lender is a defaulting lender, except if the Borrowers have delivered to Agent cash collateral equal to the defaulting lenders’ pro rata share of the letter of credit or tri-party agreement.  The cash collateral is to be used to reimburse lenders in the event of draws under letters of credit or tri-party agreements.

·Letter of credit advances (that is, payments pursuant to a letter of credit that result in the making of a loan to Borrowers in excess of the then available borrowing base) must be repaid within five business days, or earlier under certain circumstances.

·Provisions were added to the Second Amended Credit Agreement and related Security Agreement providing that, in the event of receipt of any tax refund by any obligor that constitutes collateral, the amount received must be used to prepay the loans under the facility.  Any such collateral received by the agent will likewise be applied to the outstanding indebtedness.  However, such reduction of the outstanding indebtedness would have the effect of then increasing the net borrowing base availability immediately thereafter.

·Additional provisions were added with respect to the allocation among the lenders of burdens and risks associated with defaulting lenders.

·In consideration of entering into the First Amendment to the Second Amended Credit Agreement, the Company paid a fee equal to 0.25% of such approving lenders’ reduced commitments effective on the closing of the amendment.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS(Dollars in thousands, except per share data)

Orleans Homebuilders, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”, “OHB”, “Orleans”, “we”, “us” or “our”) market, develop and build high-quality, single-family homes, townhomes and condominiums to serve various types of homebuyers, including move-up, luxury, empty nester, active adult, first-time move-up and first-time homebuyers. The Company believes this broad range of home designs gives it flexibility to address economic and demographic trends within its markets.  The Company has been in operation since 1918 and is currently engaged in residential real estate development in eight states in the following 11 markets: Southeastern Pennsylvania; Central New Jersey; Southern New Jersey; Orange County, New York; Charlotte, Raleigh and Greensboro, North Carolina; Richmond and Tidewater, Virginia; Chicago, Illinois; and Orlando, Florida.  The Company’s Charlotte, North Carolina market also includes operations in adjacent counties in South Carolina.  On December 31, 2007, the Company committed to exiting the Phoenix, Arizona market and, in connection with that decision, on that date disposed of its entire land position and its related work-in-process homes in Phoenix, which constituted substantially all of its assets in the western region.  The Consolidated Financial Statements have been reclassified for all prior periods presented to reflect this business as a discontinued operation.  See Note 12, Discontinued Operations.

References to a given fiscal year in this Quarterly Report on Form 10-Q is to the fiscal year ended June 30th of that year.  For example, the phrases “fiscal 2009”, “2009 fiscal year” or “year ended June 30, 2009” refer to the fiscal year ending June 30, 2009.  When used in this report, the “northern region” segment refers to our markets in Pennsylvania, New Jersey and New York; the “southern region” segment refers to our markets in North Carolina and Virginia, as well as the adjacent counties in South Carolina; the “midwestern region” segment refers to our market in Illinois; the “Florida region” segment refers to our market in Florida; and the “western region” segment refers to our former market in Arizona.

Results of Operations

New Orders, Residential Revenues and Backlog:

Since the latter part of fiscal year 2006, we and the entire housing industry have faced several significant challenges in the housing and mortgage markets as a whole.  These challenges have increased significantly during the three and six months ended December 31, 2008 as these difficulties which previously were confined to certain segments of the economy (including homebuilding) have expanded to a greater portion of the United States and global economy.  Economic reports show that the United States economy is suffering from falling wages, rising inflation, weak consumer spending, job losses, tight credit, a lingering malaise in the real estate industry and the worst financial crisis since the 1930s.  During the quarter, it was announced that the United States economy had been in a recession since December 2007. As a result, we believe that overall economic conditions and conditions in the housing and mortgage markets will remain difficult and these conditions may continue to have a negative impact on new orders, new order pricing and consumer confidence related to housing in the near term, thereby further reducing revenues, gross margins and net income.  We are continuing to respond to these unfavorable market conditions by attempting to maintain absorption levels through the use of sales incentives, reevaluating our individual land holdings, reducing our land expenditures and emphasizing cost reductions to adjust for lower levels of production.  Further decreases in demand for our homes may require us to further increase the use of sales incentives and to take other steps to reduce expenditures and expenses, which could result in future inventory impairments.

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For the tables below setting forth certain details as to residential sales activities, the information is provided for the three and six months ended December 31, 2008 and 2007 in the case of residential revenue earned and new orders, and as of December 31, 2008 and 2007 in the case of backlog.  We consider a sales contract or a potential sale to be classified as a new order and, therefore, become a part of backlog, at the time a homebuyer executes a contract to purchase a home from the Company.  Sales contracts are usually accompanied by a sales deposit.  In some instances, purchasers are permitted to cancel sales contracts if they are unable to close on the sale of their existing home or fail to qualify for financing and under certain other circumstances.

	Three months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	41,234	$	114,687	$	(73,453	)	(64.0	)%
Units	113		284		(171		)	(60.2	)%
Average sales price	$	365	$	404	$	(39	)	(9.7	)%
Residential revenue earned
Dollars	$	87,753	$	144,490	$	(56,737	)	(39.3	)%
Units	199		323		(124		)	(38.4	)%
Average sales price	$	441	$	447	$	(6	)	(1.3	)%

	Six months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	94,864	$	247,263	$	(152,399	)	(61.6	)%
Units	248		587		(339		)	(57.8	)%
Average sales price	$	383	$	421	$	(38	)	(9.0	)%
Residential revenue earned
Dollars	$	176,355	$	263,847	$	(87,492	)	(33.2	)%
Units	399		586		(187		)	(31.9	)%
Average sales price	$	442	$	450	$	(8	)	(1.8	)%

	As of December 31,
	2008		2007		Change			% Change
Backlog
Dollars	$	156,818	$	301,329	$	(144,511	)	(48.0	)%
Units	335		610		(275		)	(45.1	)%
Average sales price	$	468	$	494	$	(26	)	(5.3	)%

New orders for the three months ended December 31, 2008 decreased $73,453 or 64.0%, to $41,234 on 113 homes, compared to $114,687 on 284 homes for the three months ended December 31, 2007.  The average price per home decreased by approximately 9.7% to $365 for the three months ended December 31, 2008 compared to $404 for the three months ended December 31, 2007.

New orders for the six months ended December 31, 2008 decreased $152,399 or 61.6%, to $94,864 on 248 homes, compared to $247,263 on 587 homes for the six months ended December 31, 2007.  The average price per home decreased by approximately 9.0% to $383 for the six months ended December 31, 2008 compared to $421 for the six months ended December 31, 2007.

The decrease in new orders for the three and six months ended December 31, 2008 is attributable to the continued deterioration in the overall housing and mortgage markets during the period, significant turmoil in the capital markets, weaker employment statistics and decreased consumer confidence.  The decrease in the average sales price on new orders generally represents a response to the deterioration in market conditions by us in an effort to increase absorption through the use of marketing incentives and price reductions.

Residential revenues earned for the three months ended December 31, 2008 decreased $56,737, or 39.3%, to $87,753 on 199 homes,

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compared to $144,490 on 323 homes for the three months ended December 31, 2007.  The average price per home decreased by approximately 1.3% to $441 for the three months ended December 31, 2008 compared to $447 for the three months ended December 31, 2007.

Residential revenues earned for the six months ended December 31, 2008 decreased $87,492, or 33.2%, to $176,355 on 399 homes, compared to $263,847 on 586 homes for the six months ended December 31, 2007.  The average price per home decreased by approximately 1.8% to $442 for the six months ended December 31, 2008 compared to $450 for the six months ended December 31, 2007.

The decrease in residential revenues earned for the three and six months ended December 31, 2008 is also attributable to the continued deterioration in the overall housing and mortgage markets during the period, significant turmoil in the capital markets, weaker employment statistics and decreased consumer confidence.

Changes in backlog are the net result of changes in net new orders and residential revenues earned.

Cancellation rates for the three and six months ended December 31, 2008 were 30.7% and 33.7% of new orders compared to 26.0% and 23.7% for the three and six months ended December 31, 2007.  This increase is the result of the deteriorating economy, which is reflected in the lower gross orders in all regions.  Cancellations declined from 182 in the six months ended December 31, 2007 to 126 in the six months ended December 31, 2008.

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Northern Region:

	Three months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	16,505	$	45,890	$	(29,385	)	(64.0	)%
Units	41		109		(68		)	(62.4	)%
Average sales price	$	403	$	421	$	(18	)	(4.3	)%
Residential revenue earned
Dollars	$	33,102	$	57,024	$	(23,922	)	(42.0	)%
Units	73		118		(45		)	(38.1	)%
Average sales price	$	453	$	483	$	(30	)	(6.2	)%
	Six months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	41,959	$	99,472	$	(57,513	)	(57.8	)%
Units	96		222		(126		)	(56.8	)%
Average sales price	$	437	$	448	$	(11	)	(2.5	)%
Residential revenue earned
Dollars	$	79,827	$	108,050	$	(28,223	)	(26.1	)%
Units	170		223		(53		)	(23.8	)%
Average sales price	$	470	$	485	$	(15	)	(3.1	)%
	As of December 31,
	2008		2007		Change			% Change
Backlog
Dollars	$	71,950	$	136,057	$	(64,107	)	(47.1	)%
Units	136		254		(118		)	(46.5	)%
Average sales price	$	529	$	536	$	(7	)	(1.3	)%

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

The decrease in new orders for the northern region noted above for the three and six months ended December 31, 2008, is the result of a large decrease in the number of units sold, coupled with a slight decline in the average sales price.  The decrease in the number of units is primarily the result of deteriorating market conditions.  The decrease in residential revenue earned for the three and six months ended December 31, 2008, was also the result of both decreases in the units sold and the average sale price.

We have introduced new smaller-value oriented product in the region and we have also seen a shift in mix to our multi-family townhome products as well as lower priced single family communities.

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Southern Region:

	Three months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	17,472	$	50,183	$	(32,711	)	(65.2	)%
Units	52		119		(67		)	(56.3	)%
Average sales price	$	336	$	422	$	(86	)	(20.4	)%
Residential revenue earned
Dollars	$	44,227	$	61,827	$	(17,600	)	(28.5	)%
Units	100		127		(27		)	(21.3	)%
Average sales price	$	442	$	487	$	(45	)	(9.2	)%
	Six months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	35,697	$	108,765	$	(73,068	)	(67.2	)%
Units	103		240		(137		)	(57.1	)%
Average sales price	$	347	$	453	$	(106	)	(23.4	)%
Residential revenue earned
Dollars	$	71,505	$	110,200	$	(38,695	)	(35.1	)%
Units	164		227		(63		)	(27.8	)%
Average sales price	$	436	$	485	$	(49	)	(10.1	)%
	As of December 31,
	2008		2007		Change			% Change
Backlog
Dollars	$	67,951	$	129,093	$	(61,142	)	(47.4	)%
Units	155		256		(101		)	(39.5	)%
Average sales price	$	438	$	504	$	(66	)	(13.1	)%

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

The decrease in new orders for the three and six months ended December 31, 2008, compared to the three and six months ended December 31, 2007, is the result of significant decreases in both the number of units sold and the average price per unit.  The decrease in residential revenues earned for the three and six months ended December 31, 2008, compared to the three and six months ended December 31, 2007, is also due to significant decreases in the number of units sold and the average sale price per unit.  These decreases are the result of decreases in our luxury product — particularly in the Richmond area.

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Midwestern Region:

	Three months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	6,767	$	13,532	$	(6,765	)	(50.0	)%
Units	17		33		(16		)	(48.5	)%
Average sales price	$	398	$	410	$	(12	)	(2.9	)%
Residential revenue earned
Dollars	$	9,198	$	15,725	$	(6,527	)	(41.5	)%
Units	20		34		(14		)	(41.2	)%
Average sales price	$	460	$	463	$	(3	)	(0.6	)%
	Six months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	14,927	$	26,968	$	(12,041	)	(44.6	)%
Units	38		73		(35		)	(47.9	)%
Average sales price	$	393	$	369	$	24		6.5	%
Residential revenue earned
Dollars	$	20,676	$	28,561	$	(7,885	)	(27.6	)%
Units	48		62		(14		)	(22.6	)%
Average sales price	$	431	$	461	$	(30	)	(6.5	)%
	As of December 31,
	2008		2007		Change			% Change
Backlog
Dollars	$	15,335	$	26,339	$	(11,004	)	(41.8	)%
Units	38		66		(28		)	(42.4	)%
Average sales price	$	404	$	399	$	5		1.3	%

In our midwestern region, we have operations in the Chicago area.  The Company in its midwestern region currently builds homes primarily targeted toward the move-up homebuyer.

During the three and six months ended December 31, 2008, both new order dollars and the number of units sold decreased as compared to the same periods in the prior year.  This decrease is primarily the result of the deteriorating economic and market conditions noted above.  Average sales price was down slightly during the three months ended December 31, 2008, but increased during the six months ended December 31, 2008.  During our first quarter of fiscal year 2008, market prices of new homes in the Chicago market declined significantly.  This increase was due to the significant price declines that occurred during the early part of fiscal year 2008.  The decrease in residential revenues earned during the three and six months ended December 31, 2008, was due to declines in units sold and average sale price.

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Florida Region:

	Three months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	490	$	5,082	$	(4,592	)	(90.4	)%
Units	3		23		(20		)	(87.0	)%
Average sales price	$	163	$	221	$	(58	)	(26.2	)%
Residential revenue earned
Dollars	$	1,226	$	9,914	$	(8,688	)	(87.6	)%
Units	6		44		(38		)	(86.4	)%
Average sales price	$	204	$	225	$	(21	)	(9.3	)%
	Six months ended December 31,
	2008		2007		Change			% Change
New orders
Dollars	$	2,281	$	12,058	$	(9,777	)	(81.1	)%
Units	11		52		(41		)	(78.8	)%
Average sales price	$	207	$	232	$	(25	)	(10.8	)%
Residential revenue earned
Dollars	$	4,347	$	17,036	$	(12,689	)	(74.5	)%
Units	17		74		(57		)	(77.0	)%
Average sales price	$	256	$	230	$	26		11.3	%
	As of December 31,
	2008		2007		Change			% Change
Backlog
Dollars	$	1,582	$	9,840	$	(8,258	)	(83.9	)%
Units	6		34		(28		)	(82.4	)%
Average sales price	$	264	$	289	$	(25	)	(8.7	)%

The above table reflects results from our Florida region for the three and six months ended December 31, 2008 and 2007.  In the Florida region, we have operations in the Orlando market.  The six months ended December 31, 2007, also reflects results from the Palm Bay market from which we substantially exited during the first quarter of fiscal 2008.  The three and six months ended December 31, 2007, also reflects results from the Palm Coast market from which we substantially exited during the second quarter of fiscal 2008.  The Company in the Florida region currently builds homes primarily targeted toward first-time, move-up and entry level homebuyers.

The decrease in new orders for the three and six months ended December 31, 2008, as compared to the three and six months ended December 31, 2007, is primarily the result of the continued deterioration of market conditions in this region.  New orders were also negatively impacted by our exit from the Palm Bay and Palm Coast markets, as noted above.  The decline in residential revenue earned is also the result of the overall decline in market conditions, as well as our exit from the Palm Bay and Palm Coast markets, as noted above.

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Costs and Expenses:

Residential Properties:

	Three months ended December 31,
	2008			2007			Change			% Change
Residential Properties
Earned revenue	$	87,753		$	144,490		$	(56,737	)	(39.3	)%
Cost of residential properties	87,248			147,425			(60,177		)	(40.8	)%
Gross profit margin	$	505		$	(2,935	)	$	3,440		(117.2	)%
Gross profit margin %	0.6		%	(2.0		)%
	Six months ended December 31,
	2008			2007			Change			% Change
Residential Properties
Earned revenue	$	176,355		$	263,847		$	(87,492	)	(33.2	)%
Cost of residential properties	174,955			250,378			(75,423		)	(30.1	)%
Gross profit margin	$	1,400		$	13,469		$	(12,069	)	(89.6	)%
Gross profit margin %	0.8		%	5.1		%

The costs of residential properties for the three and six months ended December 31, 2008, compared to the three and six months ended December 31, 2007 decreased primarily as a result of decreased residential revenue earned.  Impairments of residential property in the amount of $8,670 and $22,917 were recorded in the three months ended December 31, 2008 and 2007, respectively.  Impairments of residential property in the amount of $18,088 and $23,629 were recorded in the six months ended December 31, 2008 and 2007, respectively.  Gross profit percentage for the three and six months ended December 31, 2008 was 0.6% and 0.8%, as compared to (2.0)% and 5.1% for the three and six months ended December 31, 2007.  Without recording the impairments, the gross profit percentage would have been 10.5% and 11.1% for the three and six months ended December 31, 2008, as compared to 13.8% and 14.1% for the three and six months ended December 31, 2007.

We sell 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 home types delivered, the consolidated gross profit margin may fluctuate up and down on a periodic basis and periodic profit margins may not be representative of the consolidated gross profit margin for the entire year or future years.

We capitalize interest costs to inventory during development and construction.  Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer.  Historically, our inventory eligible for interest capitalization exceeded our debt levels.  As a result of our reduction of inventories in recent quarters the Company’s active inventory has been lower than its debt level; therefore, a portion of the interest incurred during those periods was expensed directly to interest expense.  As all interest incurred is ultimately expensed, this occurrence only accelerated the expense recognition of the interest incurred during the period.  Interest included in the costs and expenses of residential properties and land sold for the three months ended December 31, 2008 and December 31, 2007 was $4,535 and $5,114, respectively. Interest included in the costs and expenses of residential properties and land sold for the six months ended December 31, 2008 and December 31, 2007 was $8,679 and $8,923, respectively.  Interest charged directly to interest expense during the three and six months ended December 31, 2008 was $1,019 and $2,883, respectively.  Included in interest expense during the six months ended December 31, 2008, was the write-off of debt acquisition costs in the amount of $784.  This charge was recognized due to the decrease in borrowing capacity as a result of the September 30, 2008 amendment to the Revolving Credit Facility.  There was no interest charged directly to interest expense during the three and six months ended December 31, 2007.

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Selling, General and Administrative:

	Three months ended December 31,
	2008		2007		Change			% Change
Selling, General and Administrative
Selling and advertising	$	4,665	$	8,219	$	(3,554	)	(43.2	)%
Commissions	3,537		5,644		(2,107		)	(37.3	)%
General and administrative	7,919		10,725		(2,806		)	(26.2	)%
Total	$	16,121	$	24,588	$	(8,467	)	(34.4	)%

	Six months ended December 31,
	2008		2007		Change			% Change
Selling, General and Administrative
Selling and advertising	$	9,798	$	14,674	$	(4,876	)	(33.2	)%
Commissions	7,094		9,921		(2,827		)	(28.5	)%
General and administrative	15,807		18,268		(2,461		)	(13.5	)%
Total	$	32,699	$	42,863	$	(10,164	)	(23.7	)%

Selling and advertising costs include amortization of deferred marketing costs and other selling costs.  These costs decreased primarily as a result of reduced sales office headcount, as part of headcount reductions that took place during the latter half of fiscal year 2008 and the first half of fiscal year 2009.  During the first seven months of fiscal year 2009, the Company has had three headcount reductions, which have reduced the total number of employees at the Company from 544 at June 30, 2008 to 376 at January 31, 2009, a reduction of 31%.  From June 30, 2006 to January 31, 2009, headcount has been reduced from 988 to 376, a reduction of 62%.

The decrease in commission expense is primarily attributable to the decrease in residential revenues as noted above.  Commission expense as a percentage of residential revenue increased to 4.0% and 4.0% for the three and six months ended December 31, 2008 from 3.9% and 3.8% for the three and six months ended December 31, 2007.  The increased rate is due to increased incentives to the Company’s sales force.

The decrease in general and administrative costs was due to the aforementioned headcount reductions.  Write-offs of abandoned projects and other pre-acquisition costs were $1,641 and $1,798 for the three and six months ended December 31, 2008 as compared to $462 and $862 for the three and six months ended December 31, 2007.

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Land Sales and Other Income:

	Three months ended December 31,
	2008			2007			Change
Land sales
Earned revenue	$	—		$	8,224		$	(8,224	)
Costs and expenses	2			44,784			(44,782		)
Gross profit (loss)	$	(2	)	$	(36,560	)	$	36,558
Other income (expense)
Other income	$	2,475		$	2,229		$	246
Other expense	$	1,856		$	1,441		$	415

	Six months ended December 31,
	2008		2007			Change
Land sales
Earned revenue	$	58	$	9,410		$	(9,352	)
Costs and expenses	26		46,042			(46,016		)
Gross profit (loss)	$	32	$	(36,632	)	$	36,664
Other income (expense)
Other income	$	4,136	$	4,562		$	(426	)
Other expense	$	3,640	$	3,435		$	205

The Company had land sales revenue of $0 and $58 during the three and six months ended December 31, 2008 as compared to $8,224 and $9,410 during the three and six month ended December 31, 2007.

During the three months ended December 31, 2007, we closed nine separate land sale transactions, disposing of approximately 1,400 lots.  Included in those 1,400 lots, were 267 lots that comprised our entire work-in-process inventory and land positions in the Phoenix, Arizona market.  We have historically reported this business as our western region operating segment.  The disposed work-in-process inventory and land positions constituted substantially all of our assets and operations in the western region.  Accordingly, all charges associated with the western region are included as discontinued operations.

Including the lots sold in the western region, approximately 94% of the lots sold were in our midwestern, Florida and western regions.  Approximately 6% of the lots sold were in our southern region.  No lots were sold in the northern region during the three months ended December 31, 2007.

We received proceeds on the nine dispositions in the amount of $32,949, inclusive of proceeds related to the western region, of which $8,224 was recognized as land sales revenue from continuing operations during the three months ended December 31, 2007.  An additional $13,425 of proceeds relates to two parcels of land that were sold, but for accounting purposes were treated as a financing obligation because they were subject to option agreements.  These separate option agreements generally provided us with the option, but not the obligation, to purchase lots on an individual basis through periodic lot option acquisition schedules.  The remaining $11,300 million relates to the western region and is included in loss from discontinued operations discussed below.

Prior to the completion of the land sales discussed above, we recorded asset impairments on the land to be sold.  The total impairment charge related to these land sales were $36,556 for the three months ended December 31, 2007.  These asset impairment losses are included in the costs of land sales.

Other income consists primarily of property management fees and mortgage processing income, while other expense consists primarily of the costs of property management and mortgage processing, along with depreciation expense for the Company.

Our mortgage processing business assists homebuyers in obtaining financing directly from unaffiliated lenders.  We do not fund or service the mortgage loans, nor do we assume any credit or interest rate risk in connection with originating the mortgages.

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Income Taxes and Loss from Continuing Operations:

	Three months ended December 31,
	2008			2007			Change
Pre-tax loss from continuing operations	$	(16,018	)	$	(63,295	)	$	47,277
Income tax benefit	(397		)	(24,688		)	24,291
Loss from continuing operations, net of tax	$	(15,621	)	$	(38,607	)	$	22,986

	Six months ended December 31,
	2008			2007			Change
Pre-tax loss from continuing operations	$	(37,834	)	$	(64,899	)	$	27,065
Income tax benefit	(277		)	(24,529		)	24,252
Loss from continuing operations, net of tax	$	(37,557	)	$	(40,370	)	$	2,813

The effective income tax rate was 0.7% for the six months ended December 31, 2008 as compared to 37.8% for the six months ended December 31, 2007.  The significant change in the Company’s tax rate was a result of the additional valuation allowance against the deferred tax assets due to the lack of objectively verifiable evidence regarding the realization of these assets in the foreseeable future.  There was no valuation allowance booked during the six months ended December 31, 2007.  As of December 31, 2008, the valuation allowance amounted to $68,084.  Of this amount $14,442 was booked during the six months ended December 31, 2008.

Loss from Discontinued Operations:

On December 31, 2007, the Company specifically committed to exiting its Arizona market and, in connection with this decision, on that date, it disposed of its entire land position and its related work-in-process homes in Arizona.  We have historically reported this business as the western region operating segment.  The disposed work-in-process inventory and land assets constituted substantially all of our assets in the western region.  As such, all charges associated with the western region are included as a discontinued operation.

Loss from discontinued operations was $12,778 and 13,070, or a loss of $0.69 per share and $0.71 per share for the three and six months ended December 31, 2007.  See Note 12 to our consolidated financial statements in Item 1 of this Part 1.

Liquidity and Capital Resources

On an ongoing basis, we require capital for expenditures to purchase and develop land, to construct homes, 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.

As of December 31, 2008, we had $50,198 of borrowing capacity under our secured revolving credit facility discussed below, subject to borrowing base availability.  At December 31, 2008, after taking into account the first amendment described below, we had credit facility availability of $1,498.  At December 31, 2008, the 30-day LIBOR rate of interest was 0.44%.

During the six months ended December 31, 2008, our liquidity decreased by $39,677 as shown in the table below:

	December 31,		June 30,
	2008		2008
Cash and cash equivalents	$	10,795	$	72,341
Restricted cash - due from title companies	1,911		19,269
Marketable securities	17,318		—
Net borrowing base availability	1,498		(20,411		)
Liquidity	$	31,522	$	71,199

The decrease in liquidity is primarily due to cash used for operations, lower backlog, which has the impact of reducing our gross borrowing base and inventory impairments during the six months ended December 31, 2008, which decreased our borrowing base availability.  These items decreasing our liquidity were partially offset by adjustments made in the calculation of the borrowing base pursuant to the First Amendment to the Second Amended Credit Agreement, a planned increase in our accounts payable aging, and decreases in acquisitions of land.  

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Our sources of capital include, but are not limited to, funds derived from operations, sales of various assets, reductions in speculative inventory levels through completed home deliveries and reductions in speculative starts, borrowings under our Revolving Credit Facility, the issuance of debt or equity securities, and other external sources of capital.  Our short-term and long-term liquidity depend primarily upon the net cash recovery of our land investment upon completed home deliveries, working capital management (cash, accounts receivable, inventory of units under construction, accounts payable and other liabilities), bank borrowings, land related expenditures, net new orders and deliveries.  In an effort to increase liquidity, we may pursue sales of parcels of land, model homes and other assets, amendments to our Revolving Credit Facility, or we may pursue sales of debt or equity securities, or seek other external sources of funds.  However, we can offer no assurances as to whether or when such transactions will occur or whether the transactions will be on terms advantageous to us.

As the downturn in the housing industry has continued, we have rationalized the size of our business through lot count reductions for both owned and controlled lots, the abandonment or renegotiation of land option contracts, the reduction in the total number of existing speculative units, limited construction of new speculative units in order to maintain reasonable speculative unit levels relative to lower new orders, and actively shifted our speculative unit mix wherever possible to price and products that are in better relative demand today.  We have also significantly reduced our land expenditures and land expenditure budgets, including, given the most recent market conditions, significantly reducing these expenditures for the balance of the fiscal year in order to minimize the impacts of lower net new orders on cash flow generated.  Pursuant to the First Amendment to the Second Amended Credit Agreement, the Company’s ability to purchase unimproved real estate is no longer available; however, the Company continues to be able to acquire lots though option take-downs.  Further, we have significantly reduced our workforce, with headcount reduction through January 31, 2009 of over 30% in the current fiscal year and over 60% since June 30, 2006.

From January 1, 2007 to December 31, 2008, we have reduced our net debt levels by $143,504, or 25% (where net debt is defined for each period as total mortgage and other note obligations plus subordinated notes less the aggregate of cash and cash equivalents, marketable securities, restricted cash — due from title company, but excluding restricted cash — customer deposits).  During this same period, the aggregate amount of our work-in-process and owned land inventories have decreased by $324,458 (from $857,242 to $532,784), which impacts our gross borrowing base availability.  A significant portion of the inventory decrease is due to impairments of $200,939 (including discontinued operations) recorded during this period, although a portion of previously impaired inventory has since been sold, either through land sales or normal operations.  During this same period, our total liquidity (as defined above) decreased by $6,093, from $37,615 to $31,522.  The net debt reduction from January 1, 2007 to December 31, 2008 described above has been generated through various means, including operations, the reduction in the total number of speculative units, offering incentives to buyers in order to help keep orders and deliveries at higher relative levels notwithstanding challenging industry conditions, selective lands sales, decreases in land acquisitions and other land expenditures, the abandonment or renegotiation of land option contracts, income tax refunds and a planned increase in our accounts payable aging.

We continue to focus on cash generation and preservation to allow sufficient liquidity to be available to fund our operations. We currently believe that the cash and cash equivalents and marketable securities on hand, funds generated from operations and anticipated availability under our Revolving Credit Facility will provide sufficient capital for us to meet our existing operating needs.  However, any material variance from our internally projected operating results (including net new orders, cancellations, backlog and deliveries), material declines in the value of our real estate held for development and sale (which may lead to additional inventory impairments), or significant declines in the bank appraised value relative to existing appraisals for certain of our assets to be appraised on behalf of the banks in the coming quarters, could result in a reduction in available borrowing capacity under our Revolving Credit Facility.  Such a reduction in available borrowing capacity could constrain liquidity and require us to seek additional amendments and/or waivers under our Revolving Credit Facility.  We can make no assurances that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs.  In addition, our Revolving Credit Facility matures on December 20, 2009, and while we currently anticipate that we will be able to refinance our Revolving Credit Facility before that time, can offer no assurance that we will be able to do so, or be able to do so on commercially reasonable terms.  In the event that we are not successful in executing our plans discussed above, we may need to consider alternative sources of capital to finance our operations.

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 Loan Agreement for a Senior Secured Revolving Credit and Letter of Credit Facility with various banks as lenders (as amended and restated and further amended, the “Revolving Credit Facility”). The Revolving Credit Loan Agreement was amended on January 24, 2006,

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via the Amended and Restated Revolving Credit Loan Agreement (the “Amended Credit Agreement”).  In connection with the Amended Credit Agreement, Orleans Homebuilders, Inc. executed a Guaranty, which was amended on September 6, 2007 and amended and restated on September 30, 2008. The Amended and Restated Credit Agreement was amended on November 1, 2006, February 7, 2007, May 8, 2007, September 6, 2007, December 21, 2007, May 9, 2008 by a limited waiver to the Amended Credit Agreement, which was extended on September 15, 2008, and amended and restated in the Second Amended and Restated Revolving Credit Loan Agreement, dated September 30, 2008 (the “Second Amended Credit Agreement”).  The Second Amended Credit Agreement was subsequently amended by a limited waiver letter dated January 30, 2009 (the “waiver letter”) and the First Amendment to Second Amended and Restated Revolving Credit Loan Agreement and First Amendment to Security Agreement dated February 11, 2009 (the “First Amendment”).

Waiver Letter

Absent the waiver letter described below, the Company would have continued to be in default of its obligation to, on or before January 23, 2009, make a principal repayment in an amount necessary to reduce the outstanding principal balance of the loans to the borrowing base availability (the “Repayment Covenant”).  The failure to make the repayment in full within the proscribed period constituted an event of default under the Second Amended Credit Agreement, of which the Company provided notice to the Lenders.  In addition, Wachovia Bank, N.A. (“Wachovia”) asserted that the borrowers breached the liquidity covenant in the Second Amended Credit Agreement (the “Liquidity Covenant”) for the quarter ended December 31, 2008.  The borrowers disagree with Wachovia’s assertion that the borrowers breached the Liquidity Covenant and have notified Wachovia of their disagreement.

The second waiver letter temporarily waived compliance with the Repayment Covenant and the Liquidity Covenant generally from December 31, 2008 through and including February 6, 2009, unless another event of default occurred.  With the termination of waiver period without the First Amendment described below having been entered into, the failure of the Company to have complied with the Repayment Covenant on or before that date, the Company was again in breach of the Repayment Covenant and, to the extent there had been a breach of the Liquidity Covenant as asserted by Wachovia (an assertion with which the Company disagrees), the Company was also in breach of that covenant.  Any such breaches were, however, cured by the First Amendment described below.

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First Amendment to the Second Amended Credit Agreement and Security Agreement:

On February 11, 2009, the Company entered into the First Amendment to the Second Amended Credit Agreement which provides, among other things, that:

·The category reductions applicable to the determination of borrowing base availability were adjusted so that the maximum borrowing base availability attributable to asset class (ii) (units not subject to a qualifying agreement of sale) determined on the basis of any borrowing base certificate that is delivered before July 31, 2009, was increased to a maximum of 58% of the aggregate borrowing base availability attributable to asset classes (i) (units subject to a qualifying agreement of sale) and (ii) (units not subject to a qualifying agreement of sale) as shown on the borrowing base certificate.  For borrowing base certificates delivered on or after July 31, 2009, the maximum percentage remains unchanged at 45%.

·The category reductions applicable to the determination of the borrowing base availability were adjusted so that the maximum borrowing base availability attributable to asset classes (iii) (lots part of improved land not subject to a qualifying agreement of sale), (iv) (lots part of land under development) and (v) (lots part of land approved for development), based on borrowing base certificates delivered before July 31, 2009, was increased to a maximum of 65% of the total borrowing base availability as shown on the borrowing base certificate.  For borrowing base certificates delivered on or after July 31, 2009, the maximum percentage is 55%.    The maximum dollar value of borrowing base availability attributable to asset classes (iii), (iv) and (v) were also adjusted to the following (with such limitations to be reduced dollar for dollar at the time and in the amounts of any impairments with respect to assets in asset classes (iii), (iv) and (v) and included in the borrowing base taken by borrowers):

(i)Beginning with the Borrowing Base Certificate delivered on or after the effective date of the First Amendment: $235,000;

(ii)Beginning with the Borrowing Base Certificate delivered on or after July 31, 2009: $200,000; and

(iii)Beginning with the Borrowing Base Certificate delivered after September 30, 2009: $190,000.

·Under the First Amendment, the aggregate effect of (i) the modification of the borrowing base category reductions applicable to units not subject to a qualifying agreement of sale (described above); (ii) the modification of the borrowing base category reductions for land under development (described above); and (iii)  the inventory impairments during the second fiscal quarter of approximately $8,670, was an increase in net borrowing base availability of $16,065 as of December 31, 2008, from a negative $14,567 to a positive $1,498.

·The amount of the Revolving Credit Facility was reduced from $440,000 to $405,000, except that the amount of the Revolving Credit Facility will be reduced to $375,000 beginning on July 16, 2009 and through maturity, unless otherwise permanently reduced as a result of certain prepayments required by the Revolving Credit Facility.  The letter of credit sublimit was reduced to $30,000 from $60,000, and the financial letter of credit sublimit was reduced to $15,000 from $25,000. The amount actually available under the Revolving Credit Facility is also subject to the borrowing base availability requirements in the Revolving Credit Facility.

·In the event there is one or more defaulting lenders, so long as there is no event of default has occurred and is continuing, pro-rata principal payments shall not be made to such defaulting lender, but instead shall be paid over to the master borrower.

·The minimum consolidated tangible net worth level was adjusted to a minimum of at least $25,000 (1) reduced by the sum of (a) any impairments or other charges under GAAP on assets in the borrowing base taken by the Company and recorded in respect of the financial quarters ended December 31, 2008 and March 31, 2009, plus (b)  any deferred tax assets valuation allowance reserves recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) any impairments or write-offs relating to tangible assets or pre-acquisition costs not contained in the borrowing base recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009 (provided, however, that the aggregate covenant level reduction pursuant to this clause (1) shall not exceed $15,000), and (2) increased by the sum of (x) any favorable adjustment to the deferred tax asset valuation allowance recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (y) 50% of positive quarterly net income after March 31, 2008.

·The definition of liquidity was revised to provide that negative borrowing base availability is deducted from cash and cash equivalents when determining liquidity and the minimum required liquidity covenant was reduced from $15,000 to $10,000.  A five business day cure period in the event of a breach of the minimum liquidity covenant was also added.

·The maximum amount of cash or cash equivalents (excluding cash in transit at title companies) that the Company is allowed to maintain was set at a maximum of $15,000 for any consecutive five-day period.

·The cash flow from operations covenant ratio was adjusted downward for the quarter ending June  30, 2009 to 0.50:1.00 and for the quarter ending September 30, 2009 and thereafter to 0.65:1.00.

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·The Company’s ability to purchase up to $8,000 of unimproved real estate is no longer available; however, the Company’s ability to acquire lots though option take-downs remains unchanged.  The provision specifically allowing the Company to make new joint venture investments up to certain specified amounts was also eliminated.

·The interest rate was increased by 25 basis points, to the LIBOR interest rate plus 5.25%.

·Generally, the ability to obtain letters of credit for general working capital or corporate purposes and the ability to obtain letters of credit in connection with projects outside the borrowing base were eliminated (provided, however, that existing letters of credit can be renewed, subject to the other terms of the Loan Agreement).

·Provisions were added providing that no letter of credit will be issued or renewed and that no tri-party agreement will be executed or maintained while any lender is a defaulting lender, except if the Borrowers have delivered to Agent cash collateral equal to the defaulting lenders’ pro rata share of the letter of credit or tri-party agreement.  The cash collateral is to be used to reimburse lenders in the event of draws under letters of credit or tri-party agreements.

·Letter of credit advances (that is, payments pursuant to a letter of credit that result in the making of a loan to Borrowers in excess of the then available borrowing base) must be repaid within five business days, or earlier under certain circumstances.

·Provisions were added to the Second Amended Credit Agreement and related Security Agreement providing that, in the event of receipt of any tax refund by any obligor that constitutes collateral, the amount received must be used to prepay the loans under the facility.  Any such collateral received by the agent will likewise be applied to the outstanding indebtedness.  However, such reduction of the outstanding indebtedness would have the effect of then increasing the net borrowing base availability immediately thereafter.

·Additional provisions were added with respect to the allocation among the lenders of burdens and risks associated with defaulting lenders.

·In consideration of entering into the First Amendment to the Second Amended Credit Agreement, the Company paid a fee equal to 0.25% of such approving lenders’ reduced commitments effective on the closing of the amendment.

Terms of the Revolving Credit Facility:

The borrowing limit under the Revolving Credit Facility is $405,000, except that the amount of the Revolving Credit Facility will be reduced to $375,000 beginning July 16, 2009, unless otherwise permanently reduced as a result of certain required prepayments. The total amount of loans and advances outstanding at any time under the Revolving Credit Facility may not exceed the lesser of the then-current borrowing base availability or the revolving sublimit as defined in the Revolving Credit Facility. The borrowing base availability is based on the lesser of the appraised value or cost of real estate owned by the Company that has been admitted to the borrowing base and is subject to various limitations and qualifications set forth in the Revolving Credit Agreement.

From October 1, 2008 to February 10, 2009, borrowings and advances under the Revolving Credit Facility bear interest on a per annum basis equal to the LIBOR Market Index Rate plus 500 basis points.  Beginning on February 11, 2009, the interest rate increased to the LIBOR Market Index Rate plus 525 basis points.  Prior to October 1, 2008, the applicable spread had been 400 basis points. During the term of the Revolving Credit Facility, interest is payable monthly in arrears.  At December 31, 2008, the interest rate was 5.44%, which included a 500 basis point spread.

A fee will be earned and payable on September 15, 2009 equal to 8.0% per annum, calculated on a daily basis, of the difference between $250,000 and the aggregate level of the lenders’ lending commitments under the Revolving Credit Facility as they exist from time to time between September 30, 2008 and the earlier of September 15, 2009 and the date the commitments are permanently reduced to $250,000; however this fee will be reduced by 80% if the aggregate level of commitments on or before September 15, 2009 have been permanently reduced to $250,000. Under this provision, the Company currently estimates that the minimum it will be required to pay is $0 and the maximum is $9,150. The Company expects that it will pay no amounts under this provision as it intends to refinance the debt before the payment is due and payable. There can be no assurance that such refinancing will occur. In addition, if all indebtedness under the Revolving Credit Facility is not fully repaid by December 20, 2009, a separate fee will be earned and payable on December 20, 2009 equal to 8.0% per annum of the amount by which the aggregate commitments under the Revolving Credit Facility that exist from time to time after September 15, 2009 exceed $250,000, calculated on a daily basis.  Under this provision, the Company currently estimates that the minimum it will be required to pay is $0 and the maximum is $2,630. The Company expects that it will pay no amounts under this provision as it intends to refinance the debt before the payment is due and payable. There can be no assurance that such refinancing will occur.

In addition to any interest that may be payable with respect to amounts advanced by the lenders pursuant to a letter of credit, the Company will be required to pay to the lender(s) issuing letters of credit an issuance fee of 0.125% of the amount of the letters of credit.

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Under and subject to the terms of the Revolving Credit Facility, 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 working capital and for such other appropriate corporate purposes as may be approved by the lenders. Under the Revolving Credit Facility, each lender is generally obligated to fund only its pro rata portion of each requested loan or advance.  As a result, if any lender refuses, or is unable, to fund its pro rata portion of a requested loan or advance, the Company may be unable to borrow the entire amount of the requested loan or advance despite the fact that if there are defaulting lenders, the Company is permitted to submit additional borrowing requests in an effort to make-up any borrowing shortfall caused by a defaulting lender failing to fund.  In addition, so long as no event of default has occurred and is continuing, pro-rate principal payments shall not be made to any defaulting lender, but instead shall be paid over to the master borrower.  The Revolving Credit Facility also provides for certain burden sharing measures to allocate among the lenders the burdens and risks associated with defaulting lenders in the event there are defaulting lenders.

Approximately 35% of the Company’s collateral assets have been reappraised pursuant to the terms of the waiver letter and the Company and approximately one third of the assets in the borrowing base with a book value in excess of $4,000 that have not yet been re-appraised are currently being re-appraised. The re-appraisals that have been done to date have not had a material impact on the Company’s borrowing base availability, but there can be no assurance that future reappraisals will not reduce borrowing base availability.

Various conditions must be satisfied in order for real estate to be admitted to the borrowing base, including that a mortgage in favor of lenders has been delivered to the agent for lenders and that all governmental approvals necessary to begin development of for-sale residential housing, other than building permits and certain other permits borrower in good faith believes will be issued within 120 days, have been obtained. Depending on the stage of development of the real estate, the loan to value or loan to cost advance rate in the borrowing base ranges from 50% to 95% of the appraised value or cost of the real estate. Based on these ranges, the Company is restricted as to the type of land it can have in various stages of development as well as the dollar value of land under development.

As security for all obligations of borrowers to lenders under the Revolving Credit Facility, lenders continue to have a first priority mortgage lien on all real estate owned by the Company or any borrower and included in the borrowing base under the Revolving Credit Facility. As further security, pursuant to the Second Amended Credit Facility, the Company has also agreed to grant to the lenders a security interest in and assignment of all future tax refunds and proceeds thereof received or payable to the borrowers or the Company after the closing of the Second Amended Credit Agreement, mortgages in favor of lenders with respect to all real property owned by the borrowers or the Company that is not already subject to a lien in favor of the lenders under the Revolving Credit Facility and a security interest in inter-company debt.  Pursuant to the First Amendment, all such tax refunds must be paid over to the lenders within one business day and will be used to prepay any indebtedness under the Revolving Credit facility.  Orleans Homebuilders, Inc. has guaranteed the obligations of the borrowers to lenders pursuant to a Guaranty executed by Orleans Homebuilders, Inc. on January 26, 2006, amended on September 6, 2007 and amended and restated on September 30, 2008.  Under the Guaranty, Orleans Homebuilders, Inc. granted lenders a security interest in any balance or assets in any deposit or other account that Orleans Homebuilders, Inc. has with any lender. However, the Company and its subsidiaries maintain a majority of the cash, cash equivalents and marketable securities available to them in accounts and as treasury securities outside of the lenders under the Revolving Credit Facility.

The Revolving Credit Facility contains customary covenants that, subject to certain exceptions, limit or eliminate the ability of the Company to (among other things):

·Incur or assume other indebtedness, except certain permitted indebtedness and possible second lien indebtedness if appropriately approved;

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

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

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

·Enter into any transaction with an affiliate that is not a borrower or a guarantor under the Revolving Credit Facility, or a subsidiary of either;

·Pay any dividends;

·Redeem any stock or subordinated debt; and

·Invest in joint ventures or other entities that are not obligors under the Revolving Credit Facility.

In addition, under the Revolving Credit Facility, all real property sales must be accomplished through a title company, with the net proceeds of such a sale going directly to the agent bank for application to the outstanding balance under the Revolving Credit Facility. Any purchases of real estate must be done through a title company through advances under the Revolving Credit Facility and all such acquisitions must be subject to mortgages in favor of the lenders; and, at the time of any such advance, the Company will be required to provide an estimate of the portion of the borrowing that will be used for construction needs. However, the Company may make additional draws from time-to-time pursuant to the terms of the Revolving Credit Facility.

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

·The Company must maintain a minimum consolidated tangible net worth of at least $25,000  (1) reduced by the sum of (a) any impairments or other charges under GAAP on assets in the borrowing base taken by the Company and recorded in respect of the financial quarters ended December 31, 2008 and March 31, 2009, plus (b)  any deferred tax assets valuation allowance reserves recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (c) any impairments or write-offs relating to tangible assets or pre-acquisition costs not contained in the borrowing base recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009 (provided, however, that the aggregate covenant level reduction pursuant to this clause (1) shall not exceed $15,000), and (2) increased by the sum of (x) any favorable adjustment to the deferred tax asset valuation allowance recorded in respect of the fiscal quarters ended December 31, 2008 and March 31, 2009, plus (y) 50% of positive quarterly net income after March 31, 2008.

·The Company must maintain a required liquidity level based on cash plus borrowing base availability of at least $10,000 of cash and cash equivalents (including cash held at a title company) on a consolidated basis at all times, minus the amount by which the then-outstanding principal balance of the Company’s loans plus any swing line loans exceeds the then-current borrowing base availability.

·The Company’s minimum cash flow from operations ratio based on cash flow from operations to interest incurred covenant, must exceed 1.25-to-1.00 for the quarter ending December 31, 2008; 0.40-to-1.00 for the quarter ending March 31, 2009; 0.50-to-1.00 for the quarter ending June 30, 2009; and 0.65-to-1.00 for the quarter ending September 30, 2009 and thereafter. Cash flow from operations is calculated based on the last twelve months cash flow from operations, adjusted for interest paid (excluding any amortized deferred financing costs related to all amendments to the Amended Credit Agreement, the Second Amended Credit Agreement and the trust preferred securities and any future amendments to any of the foregoing), amounts from the disposition of model homes that are subject to a sale-leaseback transaction to the extent such amounts are not otherwise included in net cash provided by operating activities, and interest income.

·The maximum amount of cash or cash equivalents (excluding cash at title companies) the Company is allowed to maintain for any consecutive five-day period is $15,000.

·The Company may purchase improved land (i.e., finished lot takedowns and/or controlled rolling lot options) purchased by the borrowers in the normal course of business, consistent with the projections provided to the Lenders, but otherwise limits the Company’s ability to purchase improved and unimproved land.

At the fiscal quarters ended September 30, 2006, December 31, 2006, March 31, 2007, June 30, 2007, March 31, 2008, June 30, 2008 and December 31, 2008, the Company would have been in violation of certain financial covenants in the Amended and Restated Credit Agreement if not for the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, waiver letter, the Second Amended Credit Agreement, the second waiver letter and the First Amendment to the Second Amended Credit Agreement, respectively.

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

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

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

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

·Dissolution or reorganization of any borrower or the Company;

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

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

·Specified cross defaults.

Upon the occurrence and continuation of an event of default, after completion of any applicable grace or cure period, lenders may demand immediate payment in full of all indebtedness outstanding under the Revolving Credit Facility, terminate their obligations to make any loans or advances or issue any letter of credit, set off and apply any and all deposits held by any lender for the credit or account of any borrower. In addition, upon the occurrence of certain events of bankruptcy or other insolvency events with respect to

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any borrower or the Company, all indebtedness outstanding under the Revolving Credit Facility shall be immediately due and payable without any act or action by lenders. A default under the Company’s Revolving Credit Facility could also prevent the Company from making required payments under the Company’s trust preferred securities, which would cause a default under those securities.

If the Company does not meet its forecast in its budgets, the Company could violate its debt covenants and, absent a waiver or amendment from its lenders, the Company could be in default under its Revolving Credit Facility and, as a result, its debt could become due which would have a material adverse effect on the Company’s financial position and results of operations.

As of December 31, 2008, after giving effect to the First Amendment, the Company was in compliance with all of its financial covenants under the Second Amended Credit Agreement, as amended.

Trust Preferred Securities:

On November 23, 2005, the Company issued $75,000 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, provided that certain covenant levels are maintained. Thereafter, the securities have a floating interest rate equal to three-month LIBOR plus 360 basis points per annum, resetting quarterly. The securities are treated as debt obligations 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.

The trust’s preferred and common securities require quarterly distributions of interest by the trust to the holders of the trust securities at a fixed interest rate equal to 8.61% per annum through January 30, 2016 and, after January 30, 2016, at a variable interest rate (reset quarterly) equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 360 basis points.  Since the Company failed to meet both the debt service ratio and minimum tangible net worth requirement set forth in the August 13, 2007 supplemental indenture as of the end of a fiscal quarter for at least three of the last four consecutive fiscal quarters ending on June 30, 2008, the applicable rate of interest was increased by 300 basis points. We began accruing for this increased interest rate on July 31, 2008, which was paid to holders for the first time with the coupon payable on October 31, 2008. The interest rate will return to the regularly applicable rate once the Company is in compliance with the debt service ratio and minimum tangible net worth requirements as of the end of any fiscal quarter. The terms of the trust securities are governed by an Amended and Restated Trust Agreement, dated November 23, 2005, among OHI Financing, Inc., (“OHI Financing”) as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as the Delaware trustee, and the administrative trustees named therein.

The trust used the proceeds from the sale of the trust’s securities to purchase $77,320 in aggregate principal amount of unsecured junior subordinated notes due January 30, 2036 issued by OHI Financing, which includes $2,300 of inter-company issuances. The junior subordinated notes were issued pursuant to a Junior Subordinated Indenture, dated November 23, 2005, as amended by a Supplemental Indenture dated August 13, 2007, collectively referred to herein as the “Indenture,” among OHI Financing, as issuer, and JPMorgan Chase Bank, National Association, as trustee. The terms of the junior subordinated notes are substantially the same as the terms of the trust’s preferred securities. The interest payments on the junior subordinated notes paid by OHI Financing, Inc. will be used by the trust to pay the quarterly distributions to the holders of the trust’s preferred and common securities. Pursuant to the parent guarantee agreement dated November 23, 2005 by and between the Company and JPMorgan Chase Bank, National Association, as trustee, the Company has unconditionally guaranteed OHI Financing, Inc.’s payment and other obligations under the indenture and the junior subordinated notes. The Company used the proceeds from the issuance and sale of the trust preferred securities and the subsequent purchase of the junior subordinated notes to partially repay indebtedness.

The Indenture permits OHI Financing to redeem the junior subordinated notes at par, plus accrued interest on or after January 30, 2011. If OHI Financing redeems any amount of the junior subordinated notes, the Trust Agreement requires the trust to redeem a like amount of the trust securities. Under certain circumstances relating to the tax treatment of the trust or the interest payments made on the junior subordinated notes or the classification of the trust as an “investment company” under the Investment Company Act of 1940, as amended, OHI Financing may also redeem the junior subordinated notes prior to January 30, 2011 at a 7.5% premium.

With certain exceptions relating to debt to a trust, partnership or other entity affiliated with the Company that is a financing vehicle for the Company, the junior subordinated notes and the Company’s obligations under the parent guarantee are expressly subordinate to all of the Company’s existing and future debt unless it is provided in the instrument creating or evidencing such debt, or pursuant to which such debt is outstanding, that such debt is not superior in right to payment of the junior subordinated notes or the obligations under the parent company’s guarantee, as the case may be.

Under the Indenture, OHI Financing will generally have to make eight consecutive Adjusted Interest Rate coupon payments (other than the eight consecutive Adjusted Interest Rate coupon payments that could be made on each of the coupon payment dates from

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October 30, 2008 to and including July 30, 2010) to cause an event of default under the Indenture (or in some cases six consecutive coupon payments). More specifically, the Indenture provides that the earliest an event of default could occur as a result of the payment of the Adjusted Interest Rate is (i) upon the payment of the Adjusted Interest Rate coupon for October 30, 2010, if applicable, provided there have been eight prior consecutive Adjusted Interest Rate coupons paid by OHI Financing; (ii) on either the fiscal quarter ended March 31, 2010 or the fiscal year ended June 30, 2010, if at either date both the trailing twelve months’ interest coverage ratio is less than 1.25 to 1, and OHI Financing has made the six prior consecutive Adjusted Interest Rate coupon payments; or (iii) on the fiscal quarter ended September 30, 2010, if at such time both the trailing twelve months’ interest coverage ratio is less than 1.75 to 1, and OHI Financing has made the eight prior consecutive Adjusted Interest Rate coupon payments. The Adjusted Interest Rate must be paid for eight (or in some instances six) consecutive coupons in order to trigger an event of default. If the interest coverage ratio test and the minimum consolidated tangible net worth test, are both met, OHI Financing would make the payment of the Regular Interest Rate for the next coupon, and the Adjusted Interest Rate test “resets” requiring OHI Financing to make eight (or in some instances six) new consecutive coupon payments at the Adjusted Interest Rate before triggering an event of default. The interest coverage ratio and minimum consolidated tangible net worth measure are not traditional financial maintenance covenants; they are only utilized in determining if the Adjusted Interest Rate or the Regular Interest Rate is applicable.

The junior subordinated notes and the trust securities could become immediately payable upon an event of default. Under the terms of the Trust Agreement and the Indenture, subject to any applicable cure period, an event of default generally occurs upon:

·non-payment of any interest on the junior subordinated notes when it becomes due and payable, and continuance of the default for a period of 30 days;

·non-payment of the principal of, or any premium on, the junior subordinated notes at their maturity;

·default in the performance, or breach, of any covenant or warranty made by OHI Financing, Inc., in the indenture and the continuance of the default or breach for a period of 30 days after written notice to OHI Financing, Inc.;

·non-payment of any distribution on the trust’s securities when it becomes due and payable, and continuance of the default for a period of 30 days;

·non-payment of the redemption price of any trust’s security when it becomes due and payable;

·default in the performance, or breach, in any material respect of any covenant or warranty of any of the trustees in the Trust Agreement, which default or breach continues for a period of 30 days after written notice to the trustees and OHI Financing, Inc.;

·default in the performance, or breach (which default or breach must be material in certain cases), of any covenant or warranty made by OHI Financing, Inc. In the purchase agreement pursuant to which the trust securities and the junior subordinated notes were sold and purchased and the continuation of such default or breach for a period of 30 days after written notice to OHI Financing, Inc.;

·bankruptcy, insolvency or liquidation of the property trustee, if a successor property trustee has not been appointed within 90 days thereafter;

·the bankruptcy or insolvency of OHI Financing, Inc.; or

·certain dissolutions or liquidations, or terminations of the business or existence, of the trust.

Pursuant to the August 13, 2008 Supplemental Indenture, OHI Financing established a $5,000 reserve fund in September 2007 for the benefit of the holders of the trust preferred securities by posting a letter of credit with the trustee. If the adjusted interest rate is in effect for the four consecutive coupon payments ending July 30, 2009, this reserve fund must be increased by $2,500. Under certain events of default, this reserve fund may be drawn by the trustee and used in respect of the trust preferred obligations. The reserve fund may be released upon the earlier of compliance with the applicable interest coverage ratio resulting in OHI Financing paying interest at the regular interest rate rather than the adjusted interest rate, or redemption or defeasance of the notes in accordance with the terms of the Indenture.

On September 20, 2005, the Company issued $30,000 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 securities are treated as debt obligations 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.

Cash Flow Statement

Net cash used by operating activities for the six months ended December 31, 2008 was $10,922, compared to net cash provided by operating activities of $42,338 for the six months ended December 31, 2007.  The change was primarily due to a loss in the current

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fiscal year prior to taking into account non-cash charges as compared to income in the prior fiscal year before non-cash charges.

Net cash used in investing activities for the six months ended December 31, 2008 was $16,373.  This was related to net purchases of short-term marketable securities — primarily treasury bills and treasury notes - during the first six months of fiscal year 2009.  In the six months ended December 31, 2007, the Company proceeds of $11,300 related to the sale of the Western region.

Net cash used in financing activities for the six months ended December 31, 2008 was $34,251, compared to $41,823 for the six months ended December 31, 2007.  Cash used in financing activities primarily relates to net paydowns on our credit facility during the six months ended December 31, 2008 and 2007.

Lot Positions

As of December 31, 2008, we owned or controlled approximately 6,387 building lots.  Included in the aforementioned lots, we had contracted to purchase, or have under option, undeveloped land and improved building lots for an aggregate purchase price of approximately $99,781 that are expected to yield approximately 1,353 building lots.  The table below shows our lots by region:

Region	Lots owned	Percent of lots owned		Lots under options of agreement of sale	Percent of lots controlled		Total lots owned or  controlled	Percent of total
Northern	2,645	52.5	%	639	47.2	%	3,284	51.4	%
Southern	1,817	36.1	%	456	33.8	%	2,273	35.6	%
Midwestern	330	6.6	%	228	16.9	%	558	8.7	%
Florida	242	4.8	%	30	2.2	%	272	4.3	%
Total	5,034	100.0	%	1,353	100.1	%	6,387	100.0	%

As noted above in our discussion of our Revolving Credit Facility, pursuant to the terms of the First Amendment to the Second Amended Credit Agreement, we cannot purchase any of real estate with the exception of improved land (i.e. finished lost takedowns and/or controlled rolling lot options) purchased in the normal course of business consistent with the projections provided to our lenders.

Undeveloped Land Acquisitions

In recent years, the process of acquiring desirable undeveloped land has been 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, we structure our land acquisitions so that we have the right to cancel our agreements to purchase undeveloped land by forfeiture of our deposit under the agreement.  Included in the balance sheet captions “Inventory not owned — Variable Interest Entities” and “Land deposits and costs of future development,” at December 31, 2008 we had $9,757 invested in 8 parcels of undeveloped land, of which $3,063 is cash deposits, a portion of which is non-refundable.  At December 31, 2008, overall undeveloped parcels of land under contract had an aggregate purchase price of approximately $44,092 and were expected to yield approximately 659 building lots.

We attempt to further mitigate the risks involved in acquiring undeveloped land by structuring our 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 us to periodically review the approval process and make a decision on the viability of developing the parcel to be acquired based upon expected profitability.  In some circumstances we may be required to make deposits solely due to the passage of time.  This structure still provides us an opportunity to periodically review the viability of developing the parcel of land.  In addition, we primarily structure our agreements to purchase undeveloped land to be contingent upon obtaining all governmental approvals necessary for construction.  Under most agreements, we secure the responsibility for obtaining the required governmental approvals as we believe that we have significant expertise in this area.  We intend to complete the acquisition of undeveloped land only after all governmental approvals are in place.  In certain rare circumstances, however, when all extensions have been exhausted, we must make a decision on whether to proceed with the purchase even though all governmental approvals have not yet been received.  In these circumstances, we perform 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.  We compete with many national homebuilders to acquire improved building lots, some of which have greater financial resources than us.  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 rather than us.  In addition, governmental approvals are generally in place when the improved building lots are acquired.

At December 31, 2008, we had contracted to purchase or had under option approximately 694 improved building lots, which include lots that were sold, but for accounting purposes are treated as a financing obligation because they are subject to an option agreement, for an aggregate purchase price of approximately $55,689.  At December 31, 2008, we had $1,000 invested, of which $978 is cash deposits, invested in these improved building lots.

Subject to the restrictions in our Revolving Credit Facility, we expect 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 timing of these acquisitions will depend on market conditions.  We have substantially reduced our land expenditures both to-date and our planned expenditures for the next several quarters to reflect current market conditions.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements.  It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation.  SFAS No. 160 is effective for fiscal year ending June 30, 2010.  The Company is evaluating the impact the adoption of SFAS 160 will have on its consolidated financial statements.

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

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting.  The Statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008 and is not expected to have an impact on the Company’s financial statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.  The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings.  The Company’s outstanding restricted stock awards will be considered participating securities under this FSP. The FSP is effective for the Company’s fiscal year beginning July 1, 2009 and requires retrospective application.  The Company does not expect the adoption of the FSP to have a material impact on its reported earnings per share.

In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The staff position amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46(R) to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. This position is effective for financial statements issued for interim periods and fiscal years ending after December 15, 2008.  The adoption of this pronouncement, which is related to disclosure only, did not have a material impact on the Company’s financial statements.

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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”, “would”, “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 including, without limitation, statements with respect to the downturn in the homebuilding industry; changes in consumer confidence and cancellation rates; the Company’s significant level of debt and anticipated defaults under our revolving credit facility; the Company’s intention to refinance its bank debt, anticipated realization of deferred tax assets; anticipated reappraisals of assets in our borrowing base; the substantial elimination of the possibility of certain defaults under the Company’s $75,000 issue of trust preferred securities until at least September 2010; anticipated tax refunds; potential effects of changes in financial and commodity market prices and interest rates; potential liabilities relating to litigation currently pending against us; anticipated delivery of homes in backlog; fluctuations in market conditions; appropriateness of completed home inventory levels; the overall direction of the housing market; expected warranty costs; future land acquisitions; and the availability of sufficient capital for us to meet our operating needs are made only as of the date of this report.  We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.  For additional information on some potential risks, see the Company’s Annual Report on Form 10-K/A for the fiscal year ended June 30, 2008.

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

Many factors could cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements.

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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, 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 interest charges incurred by the Company of approximately $3,654,000 in a fiscal year, a portion of which may be capitalized and included in cost of sales as homes are delivered.

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 sale 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 (i) exposure to market risk and (ii) management of these risks, since June 30, 2008.

ITEM 4.CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer and Vice President and Corporate Controller 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, Executive Vice President and Chief Financial Officer and Vice President and Corporate Controller 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 including the Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer and Vice President and Corporate Controller as appropriate to allow timely decisions regarding required disclosure.

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.

PART II. OTHER INFORMATION

ITEM 1A.RISK FACTORS

There has been no material changes in our risk factors during the six months ended December 31, 2008.  For additional information regarding risk factors, see our Annual Report on Form 10-K for the year ended June 30, 2008.

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ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On December 4, 2008, the Company held its Annual Meeting of Stockholders pursuant to a notice dated October 28, 2008.  Definitive proxy materials were filed with the Securities and Exchange Commission prior to the meeting.  A total of 17,692,179 shares were voted at the meeting, constituting 93.9% of the 18,839,141 shares entitled to vote.

Proposal 1.

At the Annual Meeting, the ten nominees (Benjamin D. Goldman, Jerome S. Goodman, Robert N. Goodman, Andrew N. Heine, David Kaplan, Lewis Katz, Jeffrey P. Orleans, Robert M. Segal, John W. Temple and Michael T. Vesey) for election to the Company’s Board of Directors were all elected.

		Shares for Which
	Shares Voted For	Vote was Withheld
Benjamin D. Goldman	17,622,822	69,357
Jerome S. Goodman	17,622,612	69,567
Robert N. Goodman	17,619,182	72,997
Andrew N. Heine	17,621,773	70,406
David Kaplan	17,614,882	77,297
Lewis Katz	17,622,067	70,112
Jeffrey P. Orleans	17,622,668	69,511
Robert M. Segal	17,618,303	73,876
John W. Temple	17,615,287	76,892
Michael T. Vesey	17,619,587	72,592

Proposal 2.

At the Annual Meeting, the stockholders approved increasing the number of shares authorized in the Orleans Homebuilders, Inc. Amended and Restated Stock Award Plan from 400,000 shares to 1,000,000 shares.  The vote was as follows:

For	Against	Abstain	Broker non-votes
15,196,203	186,177	3,803	2,305,996

A plurality of the votes cast was required to elect the directors in proposal 1.  The affirmative vote of the majority of the votes cast was required to pass proposal 2.  Fewer shares were voted on Proposal 2 than on Proposal 1.  “Broker non-votes” accounted for this difference in voted shares, and are not considered “votes cast” for purposes of Section 216 of the Delaware General Corporation Law.  For certain types of “non-routine” proposals, such as Proposal 2, brokers do not have the discretionary authority to vote their clients’ shares, and therefore they must refrain from voting on such proposals in the absence of instructions from their clients.

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ITEM 6.EXHIBITS

		Incorporated by Reference
ExhibitNumber	Exhibit Description	Form	Date	ExhibitNumber	FiledHerewith
10.1	Orleans Homebuilders, Inc. Amended and Restated Stock Award Plan	8-K	12/4/08	10.1
10.2	Amendment to Orleans Homebuilders, Inc. Supplemental Executive Retirement Plan	8-K	12/4/08	10.2
10.3	Amendment to Orleans Homebuilders, Inc. Executive Compensation Deferral Plan	8-K	12/4/08	10.3
10.4	Letter Agreement between Garry P. Herdler and Orleans Homebuilders, Inc., dated December 4, 2008	8-K	12/4/08	10.4
10.5	First Amendment to Employment Agreement between Orleans Homebuilders, Inc. and Garry P. Herdler, dated December 4, 2008	8-K	12/4/08	10.5
10.6	Second Amendment to Employment Contract between Jeffrey P. Orleans and Orleans Homebuilders, Inc., dated December 4, 2008	8-K	12/4/08	10.6
10.7	Form of Non-Qualified Stock Option for Employees	8-K	12/4/08	10.7
10.8	Orleans Homebuilders, Inc. Cash Bonus Plan for Garry P. Herdler				X
10.9	First Amendment to Second Amended and Restated Revolving Credit Loan Agreement and First Amendment to Security Agreement dated as of February 11, 2009, by and among Greenwood Financial, Inc. and certain affiliates, Orleans Homebuilders, Inc., Wachovia Bank, National Association and various other lenders party thereto.	8-K	2/7/09	10.1
31.1	Certification of Jeffrey P. Orleans pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification of Michael T. Vesey pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.3	Certification of Garry P. Herdler pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32.1	Certification of Jeffrey P. Orleans pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
32.2	Certification of Michael T. Vesey pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
32.3	Certification of Garry P. Herdler pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

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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)
February 17, 2009	Jeffrey P. Orleans
	Jeffrey P. Orleans
	Chairman of the Board and Chief
	Executive Officer
	(Principal Executive Officer)
February 17, 2009	Michael T. Vesey
	Michael T. Vesey
	President and Chief Operating Officer
February 17, 2009	Garry P. Herdler
	Garry P. Herdler
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)
February 17, 2009	Mark D. Weaver
	Mark D. Weaver
	Vice President and
	Corporate Controller
	(Principal Accounting Officer)

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EXHIBIT INDEX

10.8	Orleans Homebuilders, Inc. Cash Bonus Plan for Garry P. Herdler
31.1	Certification of Jeffrey P. Orleans pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Michael T. Vesey pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3	Certification of Garry P. Herdler pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Jeffrey P. Orleans pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Michael T. Vesey pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3	Certification of Garry P. Herdler pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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