Good morning and thank you for joining us today forHovnanian Enterprises’ fiscal 2007 fourth quarter earnings conference call. Bynow you should have received a copy of the earnings press release. However, ifanyone is missing a copy and would like one please contact Donna Roberts at732-383-2200. We will send you a copy of the release and ensure that you are onthe company’s distribution list. There will be a replay of today’s call. This telephone replaywill be available after the completion of the call and run for one week. Thereplay can be accessed by dialing 888-286-8010, pass code 47517323. Again, thereplay number is 888-286-8010, pass code 47517323. An archive of the webcastlive will be available for 12 months. This conference is being recorded forrebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the fourthquarter results and then open up the line for questions. The company will alsobe webcasting a flat presentation, along with the opening comments formanagement. The slides are available on the investors’ page of the companywebsite at www.khov.com. Those listeners that would like to follow along shouldlog on to the website at this time. Before we begin I would like to remind everyone that thecautionary language and forward-looking statements contained in the pressrelease also applies to any comments made during this conference call and theinformation on the slide presentation. I would now like to turn the call over to the management,Mr. Ara Hovnanian, President and Chief Executive Officer of HovnanianEnterprises. Ara, please go ahead.

Good morning and thank you for participating in today’s callto review the results of our fourth quarter and fiscal year ended October ’07.Joining me from the company are Larry Sorsby, Executive Vice President and CFO,Kevin Hake, Senior Vice President and Treasurer, Paul Buchanan, Senior VicePresident and Corporate Controller, Brad O’Connor, Vice President and AssociateCorporate Controller, and Jeff O’Keefe, Director of Investor Relations. Overall the housing market remains very challenging,resulting the first fiscal year loss for our company in a very long time. For afull year the company was just below break even before land related andintangible charges, with a pre-tax loss of $21 million equivalent to about0.04% of revenues. -- 51. We’re working hard on the cost side of the equationto get us on the other side of break even. We’ve had further reductions inconstruction costs and overheads. In addition, the significant number of ourremaining land options have been renegotiated, reducing our land costs andextending terms, which should also help our margins as we build through our ownloss and start to deliver more homes on lots with renegotiated prices. The sizable loss we are reporting for fiscal ’07 was largelyrelated to our charges in the fourth quarter and the full year, so I’d like tobegin by discussing those charges. First, charges regarding definite lifeintangibles. If you turn to slide two, in the fourth quarter we wrote off $78million of definite life intangibles. These were most of the remainingintangibles associated with the various company acquisitions over the lastseven or eight years. In total we impaired or amortized $217 million indefinite life intangibles in fiscal ’06 and fiscal ’07. As you can see on the slide, we ended ’07 with only $4.2million remaining in definite life intangibles. This means that there’s verylittle definite life intangible balance left for any further potentialimpairments. It…

Thank you, Ara. Let me start by further explaining one ofthe more complicated components of our year-end release. On December 7thErnst and Young distributed their interpretation of FAS-109 as it applies tohomebuilders. After consulting with E&Y and completing our own research onFAS-109, we determined that we were required to take an after-tax non-cashcharge during the fourth quarter by reporting a $216 million valuationallowance against our deferred-tax assets. Even though 2007 represented ourfirst loss in many years and we only had a $21 million pre-tax loss prior toland-related charges and all impairments, under FAS-109 we were required to setup valuation allowance for our deferred tax assets. Due to our October year end, we once again find ourselvesbeing the first builder that has to deal with a new or unusual accountingissue. I can assure you that the other public builders will also soon bedealing with this issue. So let me try to explain and clarify how FAS-109works. Under FAS-109 homebuilders were advised that they have to determine ifthey are in a three-year cumulative loss position. Even with the $626 millionnon-cash pre-tax charges we took during fiscal 2007, we determined that we werenot in a three-year accumulative loss position at our October 31st,2007, year end. However, this fact did not cause FAS-109 issues to go away. Wewere then advised that even if we were not in a three-year accumulative lossposition at the end of 2007 we then had to project forwards to ascertainwhether it was likely we would be in a three-year cumulative loss position atthe end of fiscal 2008. That meant that we had to drop off our highlyprofitable 2005 year and replace it with our 2008 projections. We determinedthat it was likely that we would be in a three-year accumulative loss positionby the end of 2008 and that is why we…

Thanks, Larry. I’d like to step back for a moment to give alittle bit of long-term perspective because it’s easy to get caught up in thethroes of this current market downturn, which no doubt feels very negativeright now. I’d like to look at the longer-term history of our industry. If youturn to slide 18 it shows you housing starts over the last 30 years in thiscountry. Obviously we’re one of the quintessential cyclical industries. Alittle like the autos, but we’re not threatened by imports. There have been a lot of ups and downs in our industry. I’veput in here in blue the most recent data for ’07. That’s annualized housingstarts as of November, which were down to just over 1.1 million starts peryear. These numbers just came out yesterday and we’re at a 16-year low. As youcan see, ’07 is clearly a very sharp correction, although not unprecedented asyou look at past cycles. If you look at the arrows indicating the downwardcorrections you’ll see that 1975 and ’81 both had downturns that were also verysharp and quite similar in degree of downturn. I suppose the only good thing Ican say about the sharp downturn in the current correction is in at least thosetwo cycles where we saw a sharp downturn it was followed by a very sharpupturn. After under producing longer-term demand for long enough the marketdoes tend to correct sharply. At least, it has in the past. The last down turn in the late ‘80s and early ‘90s was quitedifferent in nature from this one and one that was much more gradual inreductions year by year, never really having a sharp correction in any oneyear. The corollary is that we also had a gradual recovery, never having asharp upturn in any year. The years shown with a gray over…

(Operator Instructions) Your first question is from the lineof Stephen Kim of Citigroup. Please proceed.

Thanks, guys. You covered a lot of ground. It’s hard to knowexactly where to begin. Let me start with the commentary regarding your grossmargin. I think you had indicated, Larry, that the Fort Myers effect with acouple of quarters worth of zero gross margin, would it be fair for us toassume that the remainder of your business outside of Fort Myers is probablystill likely to generate a low double-digit gross margin?

Yes. I mean, we didn’t have that many deliveries in thefourth quarter from Fort Myers, so the fourth quarter gross margin of a littleover 10% wasn’t really impacted by Fort Myers.

Steve, just to be clear, what Larry was trying to explain isthat we expect in our first quarter we’ll be delivering those margins, thosehomes in Fort Myers and that’s where you’ll see the additional effect for thatquarter of those homes.

Okay. So yeah, that’s going to be a pretty huge effect ifit’s all happening in one quarter. Okay, so that’s important. And I’ll leavethe FAS ruling for someone else. Let me ask you about your joint ventures. You gave some, Ithink you gave some commentary about the debt that resides at the jointventure. I was curious if you could give us a sense for what your proportion atshare, you know, let’s just use a completely draconian assumption instead ofassumptions and say that worst case scenario you’ve got to shoulder a bunch ofdebt related to the joint ventures. Could you quantify for us what you thinkthat might be and walk us through the relevant parts?

I guess I’m a little confused by your question. I mean, thedebt is truly non-recourse. They can’t put the debt back to us. We have nottaken the same approach some of our peers have with respect to providingmaintenance and other types of financial guarantees that would prevent thebanks to come back. So I don’t really understand the question.

Okay. So you basically say that there are no sort of waysthat they can come back to you. Your proportionate share you would say isbasically zero in terms of repayment guarantees, contingent payment obligationsand all the rest of it. That really doesn’t relate to you in your jointventures.

Correct. That’s correct. And Steve, just to emphasize, thatwas specifically our strategy in going with low-leveraged joint ventures. Ourtarget was to be under 50% and, as our chart indicates, we’re at about 45% atthe end of the last quarter. That’s why we were able to attain those kind ofterms.

Perfect. Thanks very much.

Your next question comes from the line of Carl Reichardt withWachovia Securities. Please proceed. Carl Reichardt –Wachovia Securities: Good morning, guys. How are you?

Great.

Good morning. Carl Reichardt –Wachovia Securities: Larry, I hate to ask you to do this. I’m a little confusedabout the comment that I think, Ara, actually you made earlier about furtherimpairments due to shift to cost from communities that you’re walking away fromwhere you’ve got costs allocated to lots that you aren’t going to build on now.Can you quantify that numerically for us, I guess for the year? And maybeexplain it in a way that allows me to get to kind of a number that I should bethinking about as things go forward?

Yeah. Sorry for the confusion. Okay. When you walk away froman option the easy and identifiable costs to write off are the option deposits.And that’s pretty straight forward. What gets more complex is when you havecommon costs in an ongoing community and you’re keeping some lots but walkingaway from other lots. Essentially what happens is rather than record someproportionate share of those common costs in the write-off of options, insteadyou re-allocate those common costs to the land that you still own in the earlysections. And then once you have those additional costs you do an impairmentcalculation and if it impairs, triggers an impairment then you have additionalcosts that indirectly are related to the decision to walk away. I believe thosewere $77 million in our recent quarter. Carl Reichardt – WachoviaSecurities: Okay. So it’s an increase in the costs side of the forwardprojection on the impairment because you have to re-allocate to what you stillown.

That’s correct. Carl Reichardt –Wachovia Securities: Okay. I just want to make sure. The $77 million. Okay. Mysecond and final question is, bigger picture, you mentioned that you were asmaller company in past cycles and fewer markets. As you look at your footprinttoday and recognizing that some of your lot count has shrunk in some of themarkets you’ve entered more recently. Do you anticipate significantly shrinkingyour geographic footprint or even if you run out of lots in a market likeCalifornia or elsewhere staying in those markets and continuing to re-invest inthere in those places?

Yes. Our current plan is not to shrink our footprint, butshrink the size of the foot that’s in that footprint, if you will. We just planto pare down our inventories in virtually all of our markets. Carl Reichardt – WachoviaSecurities: Okay.

And use other strategies to mitigate risk that being in someof those markets that takes more dollars to play, like in California. Sothere’s different strategies that we are contemplating once the market turns toreduce our exposure, Carl. Carl Reichardt –Wachovia Securities: Okay. I appreciate that, guys. Thanks much.

Your next question comes from the line of Michael Rehautwith JP Morgan. Please proceed. Michael Rehaut – JPMorgan Securities Inc.: Hi. Thanks. Good morning, everyone. First question is oncash flow. I was wondering if you could share with us some of the drivers ofbeing able to exceed. In the fourth quarter your, I believe it was, guidance of175 to 250 and likewise why it seems like your, you know, if this has anythingto do with seemingly lowering the goal of ’08 where you had previously said$100 million to $400 million and now you’re just saying over $100 million. Ifyou could give us insight into both, you know, 4Q drivers and how that’saffecting your outlook for ’08. And then I have a second question.

Sure. I’ll try and begin. Some of the drivers, obviouslymaking the tough decisions of walking away from some more land andrenegotiating the takedown schedules of some of the ones that we continued withcertainly helped us exceed our projections. Being even more strict with landdevelopment was certainly one of the factors. And also, as you saw, we madegood progress in reducing our specs. That was one of the factors as well thathelped increase our cash flow.

Going forward into ’08, keep in mind that I believe that wemade the $100 million to $400 million project for ’08 at least two or threequarters ago. The market has weakened in the intervening time period. So eventhough we are taking additional steps that Ara just outlined to control kind ofthe outflow of cash, deliveries have not been as strong as we would haveotherwise expected, margins have been a little bit lower than we would have otherwiseexpected, and therefore we’re moderating our position. We’re not saying wecan’t get to $400 million. We don’t know exactly where we’re going to end up atthis point, but we’re more confident saying in excess of $100 million.

Basically the issue, say, is similar to trying to projectearnings and revenues. Everyone in our industry has been reluctant to do that.Clearly, and particularly as you get further out, cash flow is very tied tothat. So we’re trying to be on the safer side of our guidance. Michael Rehaut – JPMorgan Securities Inc.: Okay. Thank you. The second question is just related to someof your comments about month-to-month trends. Obviously you’ve had a lot ofsuccess getting units in or orders in the door for the Sale of the Century. Itseemed like perhaps that could have contributed to kind of an opposite periodwhere in October and November you had an extreme low. Then more recently younoted a pick-up in December. I was wondering if you could give us some perspectivein terms of, you know, is this volatility in some ways related to or begun bythe Sale of the Century? How would you characterize December relative toOctober and November and relative to September? How are we to think about whatperhaps has spurred some of the December pick-up, perhaps from incentives? Ifyou could just give some background on that.

Well, first, yes, undoubtedly our national sales promotiondid have an effect on sales in the subsequent weeks. But thus far what we’re seeingin December is not just relative to that post-sale slow down. What we have beensaying for a while is that the psychology is such an important part of what’sgoing on in the marketplace. Again, compared to other cycles, interest rates are at recordlows. Mortgage rates have actually dropped; 30-year mortgage rates haveactually dropped in the last month for a conventional product, which is themajority of our housing product. Prices have been dropping for a while so thathousing is definitely much more affordable. And at this stage job growth iscontinuing. So what we’ve really been battling is just a lot of negativepsychology. Now, I’m not saying that psychology completely changed andhomebuyers are doing cartwheels or potential homebuyers are doing cartwheelsdown the sidewalk, but what did change in December is at least some glimmer ofpositive news with both our President and the Treasury Secretary announcingsome plan for the sub-prime recess, which have really been problematic and ofconcern for people. Keep in mind, sub-primes I think in the total amount ofoutstanding mortgages are about 7% of the total mortgages outstanding and, infact, I think the adjustable sub-primes are an even smaller percentage. Butit’s been getting a huge amount of press. So some good news about the recesshas definitely helped. And then on top of that, if you remember the feds triedto send earlier a message to the market to not anticipate rates and then at thebeginning of December it changes that message and in fact lowered rates. All of that, you know, while not solving all of theproblems, were steps that helped create a little more positive consumersentiment, a little better confidence, and I believe that is part of whathelped improve the sales environment in the most recent weeks. Michael Rehaut – JPMorgan Securities Inc.: And was that seen across the board nationally or moreprevalent in certain regions?

We did not see it related to any one market. It has beenpretty uniform in the last three weeks. Michael Rehaut – JPMorgan Securities Inc.: And degree of magnitude in terms of improvement versusNovember?

Substantial. It was almost like somebody took the faucetsthat had been slown to a trickle and opened it to kind of a medium-high kind oflevel. I mean, December’s a tough market to judge anyway, as you know, becauseit’s a seasonal slow time of the year. But from being well below ourexpectations, every week in October, every week in November, we’re now at or aboveexpectations to date in December. Michael Rehaut – JPMorgan Securities Inc.: Okay. One last question and then I’ll move on. The grossmargins, could you just for the fourth quarter, was there any benefit in thatfrom prior impairments in previous quarters?

Sure, we had a little benefit. We’ll have a benefit, a bigbenefit in ’08, obviously, as well, in every quarter given the large amount ofimpairments that we have taken in the last two years. Michael Rehaut – JPMorgan Securities Inc.: Larry, do you have a sense of the dollar impact?

I think the team’s looking for it. What was it?

It was $88 million, Mike. Michael Rehaut – JPMorgan Securities Inc.: Eighty-eight million benefit from, in the gross margin fromimpairments from prior quarters.

Yes. Michael Rehaut – JPMorgan Securities Inc.: Okay. Thank you.

Mike, one point in that. Some of that is in the land saleclose of sales as well. It’s not just home building cost of sales. Michael Rehaut – JPMorgan Securities Inc.: Okay. If it’s possible to get that to me later the breakdownor if you have it now, that’d be great.

We don’t have it now. We’ll try and get back to you. Michael Rehaut – JPMorgan Securities Inc.: All right. Thank you.

Your next question comes from the line of David Goldbergwith UBS. Please proceed. David Goldberg – UBS: Thanks. Good morning. Larry, I was wondering if you couldgive us an idea of how you got to the $216 million for the FAS-109 charge andwhat gives you the confidence of the deferred-tax assets that are still on thebalance sheet are going to be recognized?

I want to take the second half of that question and I’m goingto let Brad O’Connor answer the first half. The reason that we’re confidentthat we’ll be able to use them is, you know, we’ve been in business for almost50 years. We’ve been through these down cycles. We are going to return toprofitability just as I believe virtually all of the other home builders willas well. And as we return to profitability we will be able to take a taxbenefit every time we earn a dollar. David Goldberg – UBS: But how does that differ from --

We return to a three-year, or when we get out of athree-year accumulative loss we’ll be able to reverse the entire allowance in asingle shot. So the only way you wouldn’t be able to realize the benefit is ifyou never make money again. David Goldberg – UBS: I guess what I’m trying to understand is the differencebetween what was taken in the reserve and what’s still on the balance sheet as non-reserved. Brad O’Connor: Let me try to answer that part of the question. The way wedetermine how much we needed to reserve is we looked at what deferred-taxassets would actually turn in ’08, which we would be allowed to carry back fortwo years to 2006 when we had income. So those we know we will use. As well as,we have some amount of deferred-tax liabilities that will turn in the timeframeof the 20-year period we’re talking about which will also be able to be usedagainst the assets. So the amount that’s remaining in the balance sheet is whatwill turn in ’08 and be used against, be carried back to ‘06s income, as wellas the small amount of deferred-tax liabilities that will turn during the timeframe of the assets and be used against those assets. So that’s how we are leftwith what we’re left with on the balance sheet. David Goldberg – UBS: Perfect. And if I could get a follow up on that, I guess myquestion would be about the three-year for accumulative loss situation you guysjudged you were in. What kind of assumptions are you putting into your modelsto get to that level? Does it include impairments?

Well, again, to emphasize, we are not in accumulative lossposition now. Which was what we initially thought was the key test. We are notin accumulative loss position. The issue is as you look forward, which has beenclarified in an interpretation, and you drop the highly profitable fiscal ’05where we had pre-tax earnings of almost $800 million. When you drop that, ifyou have ’08, which would be nowhere near that level of profitability, that’swhat could drive you into accumulative loss position if you look forward.

David, again, I’m going to talk about it from the industry’sperspective rather than Hovnanian specifically. I believe virtually theindustry as a whole had a grand slam year in ’05. If you drop that foreverybody then you have ’06 which was kind of a so-so year for the industry,’07 which was a bad year for the industry, and add a projection for ’08, evenif you project modest to reasonable profitability virtually the entire industryis going to be in a three-year accumulative loss. David Goldberg – UBS: I got you. So it’s not an ’07-’08-’09 calculation, it’s an’06-’07-’08 calculation.

Yes.

That’s correct. David Goldberg – UBS: That’s right. Got it. If I could sneak one more in. Ara, youwere talking about the macro-economic conditions and the idea that existinghome sales prices need to come down to become more in line where new home saleprice declines, new home sale prices are now. Do you think that if we start tosee more pressure on existing home sale prices that’s going to cause anotherround of decline in new home sale prices again even though they’ll remain outof equilibrium?

I don’t think so because traditionally, I mean, look,there’s always pressure in the markets and we’ll see what the future holds, buttraditionally new home prices sell at a premium to a comparable existing home.It is a very odd scenario right now where existing home buyers, many of themhave just held on to higher prices. That’s why you see this inventory rising inthe new homes and yet new homebuilders’ inventories are generally starting todrop. So I think it’s got to get back to the normal balance that’s been inplace for decades, which is that a comparable existing house should sell at adiscount to a comparable new house. David Goldberg – UBS: Okay. Thanks.

Your next question comes from the line of Andrew Brausa withBanc of America Securities. Please proceed. Andrew Brausa – Bancof America Securities: Hi, guys. I wanted to just address quickly, in yournegotiations with your lenders on your amendment to your credit facility, howshould we think about the potential for layering, meaning that collateral issomething that’s at the table for negotiation in providing your bank lenders oris everything under negotiation and are all options opened? Have you guys thoughtabout that? Can you frame that a little bit for us, being that we are on thepublic side of things?

Sure. Well, I think at this point, there are many things onthe table, including securitization on the revolving credit facility. Reallyit’s just a matter of what the entire package looks like. Obviously we are notthe first to seek amendments. In fact, we are one of the few that hasn’t had tohave an amendment yet, so we’re about to go through that process. But I suspect like everyone, all things are on the table andwe have to look at the total package to determine what makes the most sense.

Okay, and I guess the second question I have is with regardto draw on the revolving facility. In the first half of last year, you drewabout $400 million in the first two quarters of the fiscal year on the facilityand this year, you expect a modest draw up from 207 in the fourth quarter. Isit possible for you to maybe drill down that a little bit and give us kind of arange that modest would quantify?

No.

No, it’s -- frankly, we’ve had a lot of moving parts. Rightnow, it’s a little hard to be really precise so we suspect our increases willbe modest relative to what they were.

But Andrew, it’s also why we don’t give quarterly cash flowprojections. I mean, they go hand in hand, and if you look at the two prioryear pattern, which we showed you on the chart, that gives you some indicationof the way our sort of normal seasonality. Two years ago, we were also growing still and growing ourinventories in some of those early quarters. We don’t expect to be doing that.We do just expect a normal seasonal pattern so it’s very challenging to projecton a month-by-month and quarter-by-quarter basis, which is why we are hesitantto do that. We think by the end of next year, we’ll have generatedpositive cash flow and paid down the revolver and debt from where we are today.

Your next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed.

Thanks. The first question I wanted to ask was on yourpricing and incentive trends and the effect that it’s having on your grossmargins. Now the steep drop in your gross margins in the last quarter wouldtell me that you were being pretty aggressive in terms of pricing andincentives in late spring and the summer. Now, heading obviously into the dealof the century, Ara, you had said previously that that was more just collectinga lot of promotions that had been out there already. So my question is I just wanted to get an update on that --does the deal of the century pricing mean that we should expect furtherpressure on gross margins in coming quarters? And also, what has happened sincethe deal of the century?

Well, I think you are cleverly trying to get us to projectour gross margins, which we are trying to stay away from. I’d say gross margins in general clearly were affected bydeal of the century, but also to a greater extent have been affected by themarket in general. I don’t see that there’s been a big change in our incentivesor pricing in the most recent months.

How about this -- what has happened in the communities,let’s say, where the deal of the century was very successful after that salewas over? I mean, did you pull the promotions that were in place or have you kept them in place or have you increasedthem?

In many instances where sales were very good, we pulled thepromotion and went back to either pre promotion pricing or something close tothat. And then in other cases where sales did not do well, as well as we hadhoped in deal of the century, something very close to the deal of the centurymight still be in place. So it’s varied dramatically. Frankly, again this is generally a very difficult time toreally gauge what’s going on in the marketplace. As you know, everybody is morefocused on the holidays and New Year’s, so we really can’t get a goodindication of what’s going on until after Super Bowl.

Okay, great. And my second question on your inventories, youdid a great job of giving us a lot of details on the amount of lots you will betaking down through options, also on the spec part of the inventory. So thethird piece though, I just wanted to get a little bit more detail, the landunder development which you described. Obviously you are deferring a lot of theinfrastructure and development costs that you’d normally be putting in. And Ithink the amount from the slide was about $1.6 billion or so of -- I’m sorry,$1.8 billion or so I think of land under development. I just wanted to see if Icould get a sense of if I wanted to model what that would be on a finishedbasis, how much would I add to that? I’m just looking for an order ofmagnitude. Would I add 25% to that, 50% to that?

It’s just not something -- it’s just not a metric that wetrack in that way, so I’d love to give you that info because we love lots ofdata but that’s just not a way that we track it.

Okay. Thanks a lot.

Your next question comes from the line of Dan Oppenheim withBanc of America Securities. Please proceed.

This is Mike Wood. Can you give us the dollar amountinvested in unsold inventory currently, and also how much you think you canwork that down next year?

We show you the total of sold and unsold loans on that samechart of $1.4 billion.

He’s looking for the unsold.

Yeah.

Yeah, we don’t break that out. In general, just a number,I’d suspect that unsold will start to trend down a little bit. Keep in mindwhat we track, and it’s a little different than some builders, we track a homeas soon as it’s started, not just finished unsold homes. So frankly, in a lotof the cases, we hope to get a sale before the house is even completed. In today’s environment, while we’d love to bring unsoldhomes down to zero, it is prudent to have some unsold homes on hand at each community.We are running about five right now throughout the country. And the reason for that more than ever in the past is thatthere are many consumers that don’t want to sign a contract to build a newhouse until they have sold their existing house. The problem is that oncethey’ve sold their existing house, they typically have to move in 45 days, 30or 45 days, and you can’t build a house that rapidly. So it is important tohave some level of specs a little higher than we generally have targeted. Having said that, specs because of accidental specs, if youwill, people that canceled in their contracts, did creep a little higher so westill believe we’ve got some opportunity to reduce our general spec level. Wejust haven’t quantified what that would mean in dollars and cents.

Okay, and we’ve seen some large land sales from some of thelarge competitors out there. How are you thinking about the trade-off ofpotentially selling land to pad cash flow and work down your land inventoryversus needing to put out more cash for construction in order to work throughland inventory that way?

Well, we’ve done a number of land sales. We certainlyfollowed what’s gone on in the industry and the very interesting transactionwith Lennar and Morgan Stanley. We are very familiar with joint ventures, as wehave done a few. You know, as I said earlier in regard to the credit facility,the same would be here. We’re looking at all options that make sense for our companygoing forward. We don’t have any definitive plans but it certainly is one ofmany intriguing options in the environment today.

Thanks.

Your next question comes from the line of Wayne Coopermanwith Cobalt Capital. Please proceed.

You wrote off a lot of stuff this quarter and you still havea $19 book value. I was wondering if you could actually opine what I shouldtake that to mean. I mean, does that imply that you should earn some kind ofreturn on that $19 book value, or you could sell all the rest of your assetsand we could get $19? Because your stock’s at $7 and something doesn’t makesense.

The stock is too cheap.

Seriously, though, what does $19 mean to me? I mean, are wegoing to earn a 15% return on that $19 book value? Are we going to keep sellingassets that are now at the same price we’ve written them down to?

Well, as I am sure you are well aware, Wall Street has notbeen kind to homebuilders. Many are selling below book value and --

[They believe] in the book value. You guys just wrote off alot of stuff. The $19 is now your kind of -- what you would think accurate bookvalue, or at least that’s part of the question.

What you are really asking us to do is make a projection andas I think we’ve made it pretty clear, we are just not in a position that weare going to make a projection.

I don’t even want a projection. I just wonder if you couldjust talk about what you guys see as the -- what’s embedded in that? Do youthink you could sell your assets for what you’ve written them down to or do youthink they are written to a level where you actually earn a return on them?

If you are planning on a 15% return on $20 of book value, Iwouldn’t bank on that at this moment. Fifteen-percent ROE is for normal times.We are not in normal times, so I say if that’s your benchmark, I wouldn’t counton that for the short term.

Yeah, when the market recovers, which it ultimately will do,we’ll get back to earning those kinds of returns. But when we are still in acyclical correction or downturn, it’s difficult to approach a 15% return andthat’s about all we can say at this point.

Yeah, I mean obviously when the markets were better, we wereearning in excess of 40% returns on our after tax, on our beginning equity.Fifteen-percent we kind of consider a more normalized part of the market. Andthen when you are in a trough of the market, you’d expect to earn below thatfor sure.

The other -- I mean, would you guys expect to sell off moreraw land or assets and get close to your book value and pay down debt that way?

No. I think generally speaking, the most logical courseright now is to continue building and selling homes. We think that maximizes valueand cash flow. As opportunities arise on land sales or potential jointventures, we are certainly going to explore those as well. The main focus andcertainly the main thrust is continuing to build through the housing and wethink that maximizes the recoverable dollars that we’ve got invested.

Okay, thank you.

Your next question comes from the line of Susan Berliner with Bear Stearns. Please proceed.

I just wanted to make sure I was clear. The $100 million,does that include any pay down on the bank line for next year?

Well, we’re not talking about exactly what we are doing withthe $100 million. We are just saying we can expect to generate more than $100million of cash flow.

So that does not incorporate any additional pay down on thebank line?

We’re not saying we’re going to have excess cash of $100million after paying down some amount of debt, if that’s what your question is.We’re just saying that we are going to generate in excess of $100 million ofcash flow and then we’ll determine how to best use it.

Maybe you’re confused about what ourdefinition of cash flow is. We were careful about that when we started talkingabout cash flow and there’s actually a pretty clear description as a footnoteat the end of our press release about non-GAAP financial measures, andessentially if you are looking for what that number is, you can get it off ofour cash flow statement, which we’ll be filing shortly for the year and for thequarter. But it is essentially equal to whatour cash flow from operating activities plus our cash flow from investingactivities, but we have a funny category on there called changes in mortgagenotes receivable at our mortgage company, so it excludes that. So back to your question, it’s priorto any changes in debt. So we are going to generated $100 million or more nextyear prior to any changes in debt. Maybe that answers it for you.

That helps. And can you quantify atall, I think last quarter you kind of quantified how much you would spend onland. Can you update us at all on that going forward?

I don’t think we did give that andit’s just something we don’t generally look at in terms of -- we look atoverall changes in projected inventories really more than the sub-components ofwhat the money’s being spent on.

Kevin, can you describe that at all, what your change ininventory would be going forward? Do you see that accelerating?

Well, we’re going to generate $100 million of cash flow nextyear and very little of that potentially from EBITDA, so most of that is goingto be from changes in the balance sheet, primarily inventory.

Okay. Thank you.

Your next question comes from the line of Larry Taylor.Please proceed.

Thank you. I wonder if we can sort of follow-up; you hadgiven us an $88 million figure as the contribution from write-downs on landunder product you delivered in the fourth quarter. Roughly what percentage ofthe lots that were delivered in the fourth quarter had write-downs in them?

We don’t track that number.

I mean as a ballpark, is it half, is it -- I mean, I’m notasking for 10 decimal places but just a rough -- is it 90%, is it --

I mean, it’s just not something we track, Larry. We justdon’t have it.

Do you have any sense in terms of subsequent to thewrite-downs that you’ve taken, what that number might look like going forward?

We’re just not projecting that along with any of ourprojections, Larry. I don’t think any builder is.

I think you gave some color on a number of communitieswritten down and those that we haven’t. We just don’t track where ourdeliveries are coming out of which community, impairments or not impaired.

Okay. Thank you very much.

Your next question comes from the line of Alex Barron withAgency Trading Group. Please proceed.

Thanks. I hope you can hear me. I wanted to ask about thedeal of the century. I was under the impression that most of the homes thatparticipated in that program were basically finished specs, so I’m kind of alittle surprised why only 450 or so have been delivered so far. Can you commenton that?

Sure. Actually, it was interesting that -- and we hadannounced this earlier -- that while we thought the big focus would be on spec,that in fact we sold a lot of new orders as well. So in fact I think we announcedit was less than 50% of our sales were spec. So many of our homes are currentlybeing built from that for our customers.

We announced that publicly, Alex. I’m not sure why you cameto the conclusion that most if not all of them were specs.

Okay. I guess it was just from some company, some communityvisits I made that that was my understanding, so maybe I got it wrong.

It certainly varied from one community to the other and somecommunities definitely emphasized specs more. Others targeted specific lotsthat they thought were more challenging, so the actual selection varied greatlyfrom community to community.

I wanted to switch topics here a little bit. I understandthe FAS-109 and I’m sorry I’m not that familiar with this accountingpronouncement, but to understand the three year cumulative loss position, isthis on a pretax basis? Is it also on a last 12 months basis or do you only doit at the end of every fiscal year?

It’s a pretax basis and what we did, Alex, again just toclarify, is we looked as of the 36 months ended October 31st ’07, we determinedthat we were not in a three-year cumulative loss position. In spite of that,what we then did was drop off the 12 months ending October 31st ’05 andreplaced that highly profitable year with a reasonable projection of what ’08would be, which obviously will not look nearly as good as ’05. And when we dropoff ’05 and add ’08, it’s likely that we will be in a three-year cumulativeloss, in light of the loss we just posted for our ’07 year.

So basically that’s why in a sense you reversed what you hadbaked in before and then you took a new charge this quarter?

Ara didn’t mention that but it has nothing to do withFAS-109. That’s just in essence what’s kind of occurred.

Okay. You mentioned that some other builders might not, orsome other auditors might not interpret things the same way. Are you referringto that only Ernst & Young has a three-year cumulative loss interpretationor is that standard across the group?

I don’t want to speak for what the other auditors may or maynot do. We are aware that not all of the firms are interpreting or applyingFAS-109 in an identical manner, that Ian Wye has advised us to apply it andthat’s about all I’m going to say.

FAS-109 does not go into the level of detail to tell youwhat three years you are supposed to look at, et cetera. It’s an --

-- doesn’t even define three years.

It’s an interpretation, so firms may interpret differently.

So what I’m saying is, is the three years something theyinvented or is that something --

That’s their interpretation.

Okay.

And frankly, I think the three years is probably common. Theissue is do you only use the current year and two backwards, or do you actuallyproject? And I think that’s where some of the variation may come.

And I think it’s also that even if you are determined to bein a three-year cumulative loss, regardless of whether it is historical threeyears or two years historical and one year prospectively, if a firm or acompany believe that they were going to be in a position of being able torecover and generate profits in the near-term years, which is an accountingterm, then even then certain firms may not advise clients that they need totake the charge.

Now, some people have been talking lately about taking taxcarry-backs, not carry-forwards, and being able to I guess collect some moneyfrom the government. You guys aren’t in a position to do that?

We are. The issue is you can carry back to two years, sothat would be ’05 and ’06 for us for this current year, and we are doing thatand do get refunds. But the impairments we have, and particularly in some ofthe cases of the intangibles, they go beyond what you can currently deduct andreceive refunds for.

But since like ’05 is going to be behind us, does that mean-- is it pretty immaterial what you were able to get back or can you quantifythat?

Well, it was a material amount but we didn’t fully receive-- I mean, if we had done a transaction like Lennar did and sold a bunch ofassets at steep discounts right before the end of our fiscal year, we wouldhave gotten a much more material number and a refund than we are going to bereceiving now. There is nothing we can do now to go back and recover a cashrefund for the ’05 year because our -- that’s more than two years carry backnow because our ’07 year is now ended, so all we can do is focus on the ’06year and the ’06 year, we will get a refund of virtually 100% of the taxes thatwe paid in that year.

Okay. All right. Thanks, guys.

Your next question comes from the line of Jim Wilson withJMP Securities. Please proceed.

Thanks. Two questions; one, Larry, I was wondering, theinventory item on the balance sheet of land and land options for futuredevelopment, it actually went up year over year and I was wondering if youcould explain a bit of the components, since I assume land options themselveswent down, but maybe I’m wrong.

Repeat the question again?

Well, on the balance sheet, when you are on your assets andyour inventory, obviously your in-process inventory sold on some homes wentdown but your next item of land and land options held for future development orsale increased year over year and I was wondering sort of what the componentswere that drove that up, since I assume within it land options themselves indollars actually declined.

One of the primary reasons that went up was because we didhave properties that we called mothballed. Those communities went from beingunder development into being held for future sale.

Is that a pretty material number? Is there any way ofdescribing what is actually -- is some of it just options --

-- the number in the conference call, we gave you thenumbers on how much is invested in option deposits, which --

Okay. So that and so the difference -- that would be thedifference, okay.

Well, the difference is not all of it but most of that’s agood --

Okay, well, that will be fine. Okay, that’s fine. And thenthe other one then, I was just looking through cancellations and looking andnoticing the number on the sale of the century, obviously wasn’t too bad, like20%, 21%, but your total cancellations for the whole quarter were 40, so doingthe math right, that would imply an awfully high cancellation rate on thenon-sale of the century stuff. Is that about right? And any thoughts orcomments on that?

I think that’s factually correct and I think one of thereasons that that occurred was that we had people in our backlog that had beenpreviously approved for certain mortgage programs that subsequently became notavailable and therefore they couldn’t find alternatives they had qualified forand they cancelled, as well as people just getting nervous about what was goingon in the housing industry and deciding not to move forward with theirtransactions.

Okay, any geographic concentration or anything in particularto color that further?

Well, I think that’s a fairly generic response that we arehearing pretty much everywhere in the country, other than -- well, even inTexas we had the people using Alt-A and sub-prime, so I think it’s fairlygeneric.

Okay, makes sense. All right, thanks.

Your next question comes from the line of Stephen Kim withCitigroup.

Thanks. I had a couple of follow-ups. Can you start with thecash flow? I just want to understand the impact of the Fort Myers deliveries onyour cash flow. For example, I think you indicated there was like almost $500million worth of -- yes, can you hear me?

Yeah, let me just short-circuit you there; because we’vealready got the cash because these people bought a lot from us and then wentand got a third party construction loan and as we built the house, we wereadvanced monies under their construction draws --

Got it. Construction --

-- for the most part is going to be cash flow neutral.

Got it. Forgot about that. Okay, yeah, because I was reallyconfused other than that. Okay, fine. That helps. And then the second thingrelates to the FAS rule. I just want to make sure that I’m clear. I meanobviously from my perspective, it seems a little silly but essentially, theonly way -- what this really seems to do is just create a deeper V in your GAAPearnings, whereas it doesn’t really seem to have much impact at all on yourcash. It doesn’t impair your ability to use deferred tax assets in terms ofreducing your cash tax payments going forward. What it does though is it sort of warps your reportedearnings going forward. Once you become profitable, you are just going to havean all-at-once recovery that is going to boost your book value in much the sameway that it just hit your book value, basically.

You are exactly 100% accurate.

So by extension, if somebody wanted to let’s say evaluateyour company, your stock on a price-to-book basis, one would therefore thinkthat they should be taking your stated book value and perhaps assuming anongoing concern, be adding back this $3 of book value hit, theoretically aswell.

That would be a logical analysis and conclusion to gothrough and it also is perhaps highlights why some of the accounting firmsdon’t necessarily come to exactly the same conclusion because they are fearfulthat in future periods, if you take the charge now that perhaps future periodswill have higher than normal earnings and can be criticized for that.

Yeah, no, absolutely. Okay, a couple of just housekeepingitems, if I could; there was -- you gave disclosure on the number of owned andoption lots. Can you give us a sense for what the JV lots balance stands at theend of the quarter?

Someone is looking that up.

Okay, and then meanwhile, I had another housekeeping itemregarding your -- what is the purchase price of the options that you currentlyhold? I think it was $3 billion last quarter. I’m just trying to figure outroughly, do you know what it was this quarter?

I know we have that in the draft of the K, if anybody hasthat. We’ll look that up to and if we don’t get it in a couple of seconds,we’ll call you with both those numbers.

Okay. That’s fine, and I guess just lastly, just aconceptual question as it relates to modeling; over the last couple of years,your conversion ratios, you know, the number of closings you generated in anyquarter relative to your backlog was surprisingly low -- not surprising, butsignificantly lower and that obviously related to this Fort Myers acquisitionyou had. And so therefore, as this fades in the rearview mirror, oneshould naturally expect that your conversion ratios would be higher, sort ofgoing back to --

Higher than they’ve been in the last couple or threequarters, yes.

Absolutely, which is -- okay, got it. Perfect. Thank youvery much and if I can get that data later.

We have one answer for you, Steve.

The JV lots are about 4,300.

And zero under option in the JVs.

Zero under option in the -- okay, right. Got it. Okay. Allright.

We’ll get back to you with -- hold on. You think you haveoption dollars here and we can answer that? Is this just JV or is this --

No, it’s for everything. It’s $2.1 billion.

Okay, great. Thank you very much.

Your next question comes from the line of Chris Melendezwith J.P. Morgan. Please proceed.

I have two questions; first, can you give me some color onthe negotiations with the banks for the amendment -- give me more comfort onwhy you feel like that you’ll be able to accomplish this in January?

Well, let me just -- first off, you all have been veryaccommodating in your own firm and approved our waiver very timely, so weappreciate that. Secondly, similar to all of our peers who have gone for atleast one amendment, most of them have, and some of them two and three times,we expect to have similar success as we negotiate our amendment going forward.But I’m not going to be able to give you any color on the negotiations beyondthat point.

Well, not on the negotiations, but is it a smaller syndicatethan normal? I think we’ve talked in the past in that you’re very close with threeor four banks and the line --

No, it’s just -- we are not bifurcating our line at thispoint or anything like that. It’s the full bank group that we’re dealing with.

Okay, so can you give me a number on, you know, in theprocess --

It’s like 26 banks or something like that. It’s all publiclyavailable and it’s not much different than any other big builders.

Okay, and then secondly is that with regard to inventoryreduction, you guys were talking about a -- in the fourth quarter about a 15%reduction, $597 million sequentially. What should I expect for next year, asort of similar number?

Repeat the question?

With regard to your inventory reduction in the fourthquarter, sequentially you produced a 15% reduction, 14.5% reduction of $597million. Can I expect a similar number to that for 2008?

I’m just not going to be making projections for you, so --

We answered earlier that we are going to generate $100million of cash flow for the year and we expect most of that likely to comethrough, or more, and there’s potential upside to that but it is largely goingto come through inventory reduction. So that’s the answer for the year.

Lastly, with the borrowing base, is that 200 now?

That’s what it was as of October 31, 2007, yes, that’s whatwe --

Two-hundred million? Okay. Thanks.

Your next question comes from the line of Keith Wiley fromGoldman Sachs. Please proceed.

I’m just wondering if your cash flow projections areincorporating any significant land sales or if you are considering doing anyother means to help get the revolver down?

We’re just not going to give you the details of our cashflow projections. We are confident that we are going to be able to achieve inexcess of $100 million cash flow in the year.

Okay, and then one more, if you don’t mind; as far as yourwrite-downs that you’ve taken so far, most economists are expecting anadditional price decline in housing as a result of all the foreclosures thatare expected to come in 2008. Are you incorporating additional price declinesfor next year into your write-downs, or if there is additional price declines,should we expect possibly additional write-downs?

Well, as I discussed in my portion, we think there is goingto be a lot more pressure on existing homes and foreclosures would be --competition for existing homes than there is on new home prices. New homeprices have already gone through a significant downward adjustment.

But you don’t think there will be much more additionaldownward price adjustment on --

We really don’t know. We think that the new home buildersare way in front of the existing home sellers and have taken significantly morecuts than existing homes, and when you hear economists quote the Case-Shillerindex, that’s only on existing homes and we acknowledge that existing homeshaven’t come down much. But I think if you talk to just about any of the publicbuilders, they’ll tell you that they have significantly lowered prices. Are more price decreases going to be needed in the future?You know, we don’t have a crystal ball that answers that question.

But Keith, with regard to the second part of your question,it wouldn’t matter what rosy scenario or what negative future view we had.We’ve been very clear how impairments work and how we go through that processand we think we are reasonably conservative in that process but we are usingwhat we believe are today’s conditions and projecting that for a fairly longperiod going out in the future. If it’s a very long life community, then we may go someimprovement in pace, generally not in pricing, out a couple of years. So theaccountants are very much -- work closely with us in terms of being veryconsistent in the approach we take and wouldn’t really want us to be assumingthere is going to be a further decline in pricing and things are going to getworse. Making our impairment number bigger would not be something auditorswould necessarily look favorable on, unless that was our standard approach. So if things deteriorate significantly further, I thinkwe’ve been clear on this comment in prior calls -- yes, if pricing does fallfurther, that could trigger further impairment.

Okay. Thank you.

Your next question is a follow-up from the line of MichaelRehaut with J.P. Morgan. Please proceed.

Thanks. I know it’s getting a little long here in the toothwith this call but just a couple of quick questions. Can you give an idea ofthe geographic dispersion of the asset impairment charges?

We’ll see if we happen to have that --

It will be in the 10-K that’s going to be filed in the nextfew days. I don’t know if we have it right here.

We didn’t give it here but I think we’ve given it in thepast through the last quarter and I think you are going to see a similarweighting towards California and the east. It will be in our K.

Okay. Also, there was a question about land sales and cashflow and you declined to give an idea to what that could contribute to ’08 cashflow but in terms of 4Q and perhaps fiscal ’07, can you give us an idea whatland sales -- how much land sales contributed to those periods?

-- land sales.

Sorry?

Land sales I think in the fourth quarter were about $42million. That was the gross --

Yeah, that was -- no, no, that’s revenues. [Multiple Speakers]

Okay. And just lastly, you gave a breakdown of the lotsunder option and you have about 25,000 that are in Texas, North Carolina, D.C.and the Northeast. Is it safe to say that the remainder is in largelyCalifornia or Florida --

-- actually then there are about 4,200 in California,Florida, Minnesota, and Chicago. So then the rest are in other smaller markets-- South Carolina, Georgia, Ohio, Phoenix and a few others, little markets.

Thanks very much.

Your next question comes from the line of Timothy Jones withWasserman and Associates. Please proceed. Timothy Jones -Wasserman & Associates: Good afternoon. Just a quick question on this Fort Myerssituation, I find it very intriguing. I don’t think in 40 years I’ve seensomething like this, but am I to understand that the people bought the lots andpaid you for that portion -- you’ve got that from a cash flow basis, and nowthat for the -- you got 80% of the construction loan, but since they arekeeping construction loans and not changing them to conventional loans, youlose the last 20%. Is that correct?

You basically have it right. They may have gotten aconstruction loan that has paid us for the lot rather than the customeractually paying us for the lot but I think the rest of it, you are pretty muchon track. Timothy Jones -Wasserman & Associates: So basically you are not getting that last 20%. Does thecustomers borrowing go down by that amount too, since he’s not in your profit?

I’m sorry, what did you say? Timothy Jones -Wasserman & Associates: In other words, you were supposed to get $100 but you got$80. The other $20 was your profit. Does the customer basically own instead of$100, does he own $80 to you for the construction loan?

Does he owe 80 on the construction loan? Timothy Jones -Wasserman & Associates: In other words, does he own 80% instead of the 100% becausepart of that was just what you were going to get as your profit.

Tim, are you saying owe -- o-w-e -- or are you saying own,o-w-n? Timothy Jones -Wasserman & Associates: No, what they owed. What they had to owe if you wereborrowing $100 but $20 of that was going to you and you are not taking it now,do they actually owe $80 to the construction loan company?

Yes, they have a construction loan to the bank and yoursimple analysis, roughly $80 is what they owe the bank. Timothy Jones -Wasserman & Associates: Okay, lastly, when you said zero gross margins, you weretalking just about these 1,400 homes in Fort Myers, hopefully.

Correct. Timothy Jones -Wasserman & Associates: Okay. Thank you. Have a nice holiday.

Your next question comes from the line of Joel Locker withFBN Securities. Please proceed.

Just wanted to dig a little more in-depth on the grossmargin. I guess the sequential drop last quarter was about 45 basis points andthe two quarters before that was about 200 basis points. And this time it was570. And this is actually with an impairment reversal that would actually addto the gross margin, so I just wanted to see if there was maybe a higherpercentage of specs that were actually closed versus the prior quarter or whatwas behind just the massive fall-off on gross margins?

I think it’s an indication of the market conditions outthere and in general.

Well, and earlier in the year, we had a lot more sales frombacklog that was obtained during better pricing times with higher margins, andas we delivered through the backlog it shifted to more new sales, which clearlyhave a lower margin.

And the people in backlog, just to keep them there, did youhave to give them another 5% or 6% from the actual contract price just to makesure they close or -- it’s just --

I wouldn’t describe it as an additional 5% or 6%, but werewe negotiating with customers from time to time that were in our backlog asthey saw us adjust prices for people that haven’t yet bought, the answer isyes. We did make adjustments.

Right. It just seems, you know, you had a 230 bp reversal inimpairments in the third quarter and this quarter, it looks like maybe 400 or500, so that would actually add 2% or so to gross margin. So it technicallymight have dropped somewhere between 700 and 800 basis points sequentially,which just seems like something severe more than just continued deterioration.

I think it’s continued deterioration.

Yeah. I think we’ve tried to describe it as best we could.

All right. Thanks a lot.

And there are no other questions at this time. I would liketo turn the call back over to Mr. Ara Hovnanian for closing remarks.

Thank you very much. As I started out by saying, these areindeed challenging times but not times that are unfamiliar to our industry orour company. We will navigate through these difficult times as we have manytimes in our 50-year history and we look forward to more positive news onfuture conference calls in the future. Thank you very much.

This concludes our conference for today. Thank you forparticipating and have a nice day. All parties may now disconnect.