Fiscal 2006 started extremely well, but quickly became a challenging year for the housing industry and Orleans Homebuilders. Although revenue and net income were the highest in company history, new orders and backlog declined. Net income increased to $63,041,000 in fiscal 2006 from $55,584,000 in fiscal 2005. Diluted earnings per share increased to $3.35 per share from $2.96 per share, an increase of 13%. I am pleased to report that the company’s return on beginning shareholders equity was 27%. During 2006, we delivered 2,303 homes, with revenues totaling $975,483,000.

New orders for fiscal 2006 decreased in most regions because many anxious consumers delayed their purchase decisions. New orders for fiscal 2006 totaled 1,612 homes, with a sales value of $756,922,000, compared to 2,256 homes with a sales value of $874,753,000 for the prior year. As a result, the company’s backlog declined to $334,676,000 on 715 homes at June 30, 2006 from $553,237,000 on 1,406 homes at June 30, 2005.

The current slow down in the housing industry seems to be the result of a decline in consumer confidence and an oversupply of new and resale homes. However, the macroeconomic climate is positive in terms of employment, strength of the economy and reasonable interest rates. Therefore, I believe, that once the oversupply of homes is absorbed and buyers become confident that home prices have stabilized, the market will return to normal. It is truly a story that each market is different. The only market that we are in that has a very large over supply problem is Florida.

We are implementing strategies to preserve capital and improve our bottom line. We continue to evaluate our lots under option. Options which are no longer attractive will be renegotiated or terminated. During fiscal 2006 we wrote off $4.5 million of deposit and pre-acquisition costs associated with lot options. We are working with our subcontractors and vendors to reduce the cost to build our homes. We are reducing our selling, general and administrative expenses and our construction overhead expenses to adjust for a lower level of production and demand. Additionally, we have sales incentives in place to significantly reduce our inventory of speculative homes. The short term outlook is for reduced revenues and profits.

In the long term, our outlook is very positive and we have the capital for future growth. We have increased our book value from $62 million at June 30, 2002 to $292 million at June 30, 2006. We have added strength and depth to our management team. I truly believe that our long-term future looks bright.

Jeffrey P. Orleans
Chairman of the Board