Edgar Filing: HOVNANIAN ENTERPRISES INC

form_10q073110090710.htm

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 quarterly period ended JULY 31, 2010

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-8551

Hovnanian Enterprises, Inc. (Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)

22-1851059 (I.R.S. Employer Identification No.)

110 West Front Street, P.O. Box 500, Red Bank, NJ 07701 (Address of Principal Executive Offices)

732-747-7800 (Registrant's Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

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

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 [ ] Accelerated Filer [ X ]

Non-Accelerated Filer [ ] (Do not check if smaller reporting company) Smaller Reporting Company [ ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 63,113,576 shares of Class A Common Stock and 14,565,245 shares of Class B Common Stock were outstanding as of September 3, 2010.

HOVNANIAN ENTERPRISES, INC.

FORM 10-Q

INDEX	PAGE NUMBER

PART I. Financial Information
Item l. Financial Statements:

Condensed Consolidated Balance Sheets as of July 31,
2010 (unaudited) and October 31, 2009	3

Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended July 31, 2010 and 2009	5

Condensed Consolidated Statement of Equity
(unaudited) for the nine months ended July 31, 2010	6

Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended July 31, 2010 and 2009	7

Notes to Condensed Consolidated Financial
Statements (unaudited)	9

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations	31

Item 3. Quantitative and Qualitative Disclosures
About Market Risk	60

Item 4. Controls and Procedures	61

PART II. Other Information
Item 1. Legal Proceedings	61

Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds	61

Item 6. Exhibits	62

Signatures	63

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Share Amounts)

	July 31, 2010	October 31, 2009
ASSETS	(Unaudited)	(1)

Homebuilding:
Cash and cash equivalents	$390,921	$419,955

Restricted cash	117,792	152,674

Inventories:
Sold and unsold homes and lots under development	566,338	631,302

Land and land options held for future
development or sale	433,853	372,143

Consolidated inventory not owned:
Specific performance options	20,679	30,534
Variable interest entities	34,817	45,436
Other options	13,135	30,498

Total consolidated inventory not owned	68,631	106,468

Total inventories	1,068,822	1,109,913

Investments in and advances to unconsolidated
joint ventures	37,553	41,260

Receivables, deposits, and notes	51,476	44,418

Property, plant, and equipment – net	66,093	73,918

Prepaid expenses and other assets	87,844	98,159

Total homebuilding	1,820,501	1,940,297

Financial services:
Cash and cash equivalents	19,315	6,737
Restricted cash	3,648	4,654
Mortgage loans held for sale	61,456	69,546
Other assets	4,857	3,343

Total financial services	89,276	84,280

Total assets	$1,909,777	$2,024,577

(1) Derived from the audited balance sheet as of October 31, 2009.

See notes to condensed consolidated financial statements (unaudited).

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Share Amounts)

	July 31, 2010	October 31, 2009
LIABILITIES AND EQUITY	(Unaudited)	(1)

Homebuilding:
Nonrecourse land mortgages	$5,425	$-
Accounts payable and other liabilities	282,009	325,722
Customers’ deposits	11,268	18,811
Nonrecourse mortgages secured by operating
properties	20,875	21,507
Liabilities from inventory not owned	59,590	96,908

Total homebuilding	379,167	462,948

Financial services:
Accounts payable and other liabilities	13,919	14,507
Mortgage warehouse line of credit	55,958	55,857

Total financial services	69,877	70,364

Notes payable:
Senior secured notes	784,219	783,148
Senior notes	711,508	822,312
Senior subordinated notes	120,170	146,241
Accrued interest	33,095	26,078

Total notes payable	1,648,992	1,777,779

Income tax payable	19,167	62,354

Total liabilities	2,117,203	2,373,445

Equity:
Hovnanian Enterprises, Inc. stockholders’ equity deficit:
Preferred stock, $.01 par value - authorized 100,000
shares; issued 5,600 shares at July 31,
2010 and at October 31, 2009 with a
liquidation preference of $140,000	135,299	135,299
Common stock, Class A, $.01 par value – authorized
200,000,000 shares; issued 74,808,246 shares at
July 31, 2010 and 74,376,946 shares at
October 31, 2009 (including 11,694,720
shares at July 31, 2010 and
October 31, 2009 held in Treasury)	748	744
Common stock, Class B, $.01 par value (convertible
to Class A at time of sale) – authorized
30,000,000 shares; issued 15,257,043 shares at
July 31, 2010 and 15,265,067 shares at
October 31, 2009 (including 691,748 shares at
July 31, 2010 and October 31, 2009 held in
Treasury)	153	153
Paid in capital - common stock	462,207	455,470
Accumulated deficit	(691,306)	(826,007)
Treasury stock - at cost	(115,257)	(115,257)

Total Hovnanian Enterprises, Inc. stockholders’ equity deficit	(208,156)	(349,598)

Non-controlling interest in consolidated joint ventures	730	730

Total equity deficit	(207,426)	(348,868)

Total liabilities and equity	$1,909,777	$2,024,577

(1) Derived from the audited balance sheet as of October 31, 2009.

See notes to condensed consolidated financial statements (unaudited).

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)

(Unaudited)

	Three Months Ended July 31,		Nine Months Ended July 31,
	2010	2009	2010	2009
Revenues:
Homebuilding:
Sale of homes	$368,077	$367,141	$987,923	$1,107,891
Land sales and other revenues	3,770	11,044	7,489	24,731

Total homebuilding	371,847	378,185	995,412	1,132,622
Financial services	8,753	8,929	23,418	26,275

Total revenues	380,600	387,114	1,018,830	1,158,897

Expenses:
Homebuilding:
Cost of sales, excluding interest	306,054	337,869	822,796	1,029,693
Cost of sales interest	22,184	24,621	60,777	73,790
Inventory impairment loss and land option write-offs	48,959	101,130	55,111	521,505

Total cost of sales	377,197	463,620	938,684	1,624,988

Selling, general and administrative	42,184	55,264	127,615	187,130

Total homebuilding expenses	419,381	518,884	1,066,299	1,812,118

Financial services	6,168	6,345	17,194	19,568

Corporate general and administrative	14,816	15,494	45,232	64,763

Other interest	22,671	23,942	71,634	66,696

Other operations	1,791	1,957	5,455	8,550

Total expenses	464,827	566,622	1,205,814	1,971,695

Gain on extinguishment of debt	5,256	37,016	25,047	427,804

Loss from unconsolidated joint
ventures	(871)	(5,537)	(853)	(38,220)

Loss before income taxes	(79,842)	(148,029)	(162,790)	(423,214)

State and federal income tax (benefit) provision:
State	(6,988)	1,542	(6,160)	23,318
Federal	-	19,341	(291,331)	19,411

Total taxes	(6,988)	20,883	(297,491)	42,729

Net (loss) income	$(72,854)	$(168,912)	$134,701	$(465,943)

Per share data:
Basic:
(Loss) income per common share	$(0.92)	$(2.16)	$1.71	$(5.96)
Weighted average number of common
shares outstanding	78,763	78,065	78,662	78,208

Assuming dilution:
(Loss) income per common share	$(0.92)	$(2.16)	$1.69	$(5.96)
Weighted average number of common
shares outstanding	78,763	78,065	79,873	78,208

See notes to condensed consolidated financial statements (unaudited).

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(In Thousands Except Share Amounts)

(Unaudited)

	A Common Stock		B Common Stock		Preferred Stock
	Shares Issued and Outstanding	Amount	Shares Issued and Outstanding	Amount	Shares Issued and Outstanding	Amount	Paid-In Capital	Accumulated Deficit	Treasury Stock	Non-Controlling Interest	Total Equity Deficit

Balance, November 1, 2009	62,682,226	$744	14,573,319	$153	5,600	$135,299	$455,470	$(826,007)	$(115,257)	$730	$(348,868)

Stock options amortization and issuances, net of tax	152,590	1					3,785				3,786

Restricted stock amortization, issuances and forfeitures, net of tax	270,686	3					2,952				2,955

Conversion of Class B to Class A Common Stock	8,024		(8,024)								-

Net income								134,701			134,701

Balance, July 31, 2010	63,113,526	$748	14,565,295	$153	5,600	$135,299	$462,207	$(691,306)	$(115,257)	$730	$(207,426)

See notes to condensed consolidated financial statements (unaudited).

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Nine Months Ended
	July 31,
	2010	2009
Cash flows from operating activities:
Net income (loss)	$134,701	$(465,943)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation	9,089	13,114
Compensation from stock options and awards	7,022	10,968
Stock option cancellations	-	12,269
Amortization of bond discounts and deferred financing costs	3,757	915
(Gain) loss on sale and retirement of property
and assets	(71)	320
Loss from unconsolidated joint ventures	853	38,220
Distributions of earnings from unconsolidated joint ventures	1,812	2,418
Gain on extinguishment of debt	(25,047)	(427,804)
Inventory impairment and land option write-offs	55,111	521,505
Decrease (increase) in assets:
Mortgage notes receivable	8,090	30,458
Restricted cash, receivables, prepaids, deposits and
other assets	36,258	36,035
Inventories	(14,020)	272,123
State and Federal income tax assets	-	126,826
(Decrease) increase in liabilities:
State and Federal income tax liabilities	(43,187)	60,428
Customers’ deposits	(7,543)	(3,007)
Accounts payable, interest and other accrued liabilities	(74,884)	(174,230)
Net cash provided by operating activities	91,941	54,615
Cash flows from investing activities:
Net proceeds from sale of property and assets	348	1,009
Purchase of property, equipment and other fixed assets	(1,503)	(552)
Investments in and advances to unconsolidated
joint ventures	(3,595)	(9,637)
Distributions of capital from unconsolidated joint ventures	4,637	4,596
Net cash used in investing activities	(113)	(4,584)
Cash flows from financing activities:
Proceeds (payments) from mortgages and notes	4,793	(1,864)
Net payments related to mortgage
warehouse line of credit	101	(34,971)
Deferred financing costs from note issuances	(1,602)	(3,987)
Principal payments and debt repurchases	(111,576)	(306,136)
Net cash used in financing activities	(108,284)	(346,958)
Net increase (decrease) in cash and cash equivalents	(16,456)	(296,927)
Cash and cash equivalents balance, beginning
of period	426,692	848,056
Cash and cash equivalents balance, end of period	$410,236	$551,129

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands - Unaudited)

(Continued)

	Nine Months Ended
	July 31,
	2010	2009
Supplemental disclosures of cash flow:
Cash paid (received) during the period for:
Interest, net of capitalized interest	$125,912	$181,136
Income taxes	$(254,304)	$(145,437)

Supplemental disclosure of noncash financing activities:

In the first quarter of fiscal 2009, the Company issued $29.3 million of 18.0% Senior Secured Notes due 2017 in exchange for $71.4 million of unsecured senior notes.

See notes to condensed consolidated financial statements (unaudited).

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

Hovnanian Enterprises, Inc. and Subsidiaries (“the Company”, “we”, “us” or “our”) has reportable segments consisting of six Homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and the Financial Services segment (see Note 15).

The accompanying unaudited Condensed Consolidated Financial Statements include our accounts and those of all wholly-owned subsidiaries after elimination of all intercompany balances and transactions. Certain immaterial prior year amounts have been reclassified to conform to the current year presentation.

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments for interim periods presented have been made, which include normal recurring accruals and deferrals necessary for a fair presentation of our consolidated financial position, results of operations, and cash flows. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements. Results for interim periods are not necessarily indicative of the results which might be expected for a full year. The balance sheet at October 31, 2009 has been derived from the audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) as the primary source of accounting principles generally accepted in the United States of America (“US GAAP”) recognized by the FASB to be applied by nongovernmental entities. Although the establishment of the ASC did not change US GAAP, it did change the way we refer to US GAAP throughout this document to reflect the updated referencing convention.

2. For the three and nine months ended July 31, 2010, the Company’s total stock-based compensation expense was $2.6 million and $7.1 million, respectively. Included in this total stock-based compensation expense was the vesting of stock options of $1.2 million and $3.7 million for the three and nine months ended July 31, 2010, respectively.

3. Interest costs incurred, expensed and capitalized were:

	Three Months Ended July 31,		Nine Months Ended July 31,
(In thousands)	2010	2009	2010	2009

Interest capitalized at
beginning of period	$155,126	$179,282	$164,340	$170,107
Plus interest incurred(1)	38,107	43,944	116,449	145,042
Less cost of sales interest
expensed	22,184	24,621	60,777	73,790
Less other interest expensed(2)(3)	22,671	23,942	71,634	66,696
Interest capitalized at
end of period(4)	$148,378	$174,663	$148,378	$174,663

(1) Data does not include interest incurred by our mortgage and finance subsidiaries.

(2)	Our assets that qualify for interest capitalization (inventory under development) do not exceed

our debt, and therefore, the portion of interest not covered by qualifying assets must be directly

expensed.

(3)	Interest on completed homes and land in planning, which does not qualify for capitalization,

must be expensed directly.

(4)	We have incurred significant inventory impairments in recent years, which are determined based

on total inventory including capitalized interest. However, the capitalized interest amounts shown

above are gross amounts before allocating any portion of the impairments to capitalized interest.

4. Accumulated depreciation at July 31, 2010 and October 31, 2009 amounted to $72.2 million and $67.4 million, respectively, for our homebuilding property, plant and equipment.

5. We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. For the nine months ended July 31, 2010, our discount rates used for the impairments recorded ranged from 17.5% to 20.3%. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory impairments, which are presented in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from Inventory of $49.7 million and $94.6 million for the three months ended July 31, 2010 and 2009, respectively, and $54.1 million and $491.4 million for the nine months ended July 31, 2010 and 2009, respectively.

The following table represents inventory impairments by homebuilding segment for the three and nine months ended July 31, 2010 and 2009:

	Three Months Ended		Three Months Ended
(Dollars in millions)	July 31, 2010		July 31, 2009

	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)
Northeast	6	$13.5	$29.8	5	$20.3	$65.9
Mid-Atlantic	-	-	-	9	14.5	36.5
Midwest	-	-	-	4	1.4	5.0
Southeast	7	1.1	3.8	17	2.8	11.8
Southwest	1	0.1	0.2	7	6.0	21.3
West	14	35.0	48.4	9	49.6	72.7
Total	28	$49.7	$82.2	51	$94.6	$213.2

	Nine Months Ended		Nine Months Ended
(Dollars in millions)	July 31, 2010		July 31, 2009

	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)
Northeast	8	$16.6	$35.5	24	$181.9	$392.7
Mid-Atlantic	2	0.5	1.5	46	40.8	131.8
Midwest	-	-	-	8	5.4	17.0
Southeast	13	1.5	5.0	73	28.3	94.1
Southwest	2	0.2	0.4	41	32.4	84.4
West	15	35.3	48.8	49	202.6	372.2
Total	40	$54.1	$91.2	241	$491.4	$1,092.2

(1) Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s

impairments.

"Homebuilding-Inventory impairment loss and land option write-offs" on the Condensed Consolidated Statements of Operations also includes write-offs of options, and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not intend to exercise options in various locations because the communities' proforma profitability is not projected to produce adequate returns on investment commensurate with the risk. The total write-offs were $(0.7) million and $6.5 million for the three months ended July 31, 2010 and 2009, respectively, and $1.0 million and $30.1 million for the nine months ended July 31, 2010 and 2009, respectively. Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs.

The following table represents write-offs of such costs (after giving effect to any recovered deposits in the applicable period) and the number of lots walked away from by homebuilding segment for the three and nine months ended July 31, 2010 and 2009:

	Three Months Ended July 31,				Nine Months Ended July 31,
	2010		2009		2010		2009

(Dollars in millions)	Number of Walk-Away Lots	Dollar Amount of Write-Offs	Number of Walk-Away Lots	Dollar Amount of Write-Offs	Number of Walk-Away Lots	Dollar Amount of Write-Offs	Number of Walk-Away Lots	Dollar Amount of Write-Offs

Northeast	-	-	78	$3.2	259	$1.5	684	$9.7
Mid-Atlantic	-	-	4	(0.3)	184	0.1	1,906	8.2
Midwest	547	-	64	-	547	(0.1)	222	1.4
Southeast	-	$(0.7)	-	-	-	(0.6)	153	(0.1)
Southwest	-	-	121	3.6	409	0.1	879	10.3
West	-	-	158	-	-	-	158	0.6
Total	547	$(0.7)	425	$6.5	1,399	$1.0	4,002	$30.1

We have decided to mothball (or stop development on) certain communities in some of our segments where we have determined the current performance does not justify further investment at this time. When we decide to mothball a community, the inventory is reclassified from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale”. During the third quarter of fiscal 2010, we did not mothball any communities but re-activated one previously mothballed community and sold five previously mothballed communities, which is the primary cause of the net reduction in the book value of our mothballed communities of $41.1 million, net of an impairment reserve balance of $12.2 million. As of July 31, 2010, the net book value associated with our 61 total mothballed communities was $234.8 million, net of impairment charges of $543.1 million.

6. We establish a warranty accrual for repair costs under $5,000 per occurrence to homes, community amenities and land development infrastructure. We accrue for warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. In addition, we accrue for warranty costs over $5,000 per occurrence as part of our general liability insurance deductible, which is expensed as selling, general and administrative costs. For homes delivered in fiscal 2010 and 2009, our deductible under our general liability insurance is $20 million per occurrence with an aggregate $20 million for liability claims and an aggregate $21.5 million for construction defect claims. Additions and charges in the warranty reserve and general liability accrual for the three and nine months ended July 31, 2010 and 2009 were as follows:

	Three Months Ended		Nine Months Ended
	July 31,		July 31,
(In thousands)	2010	2009	2010	2009

Balance, beginning of period	$127,350	$118,887	$127,868	$125,738
Additions	7,600	21,610	27,046	42,657
Charges incurred	(11,313)	(10,839)	(31,277)	(38,737)
Balance, end of period	$123,637	$129,658	$123,637	$129,658

Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty data and other data to assist management estimate our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and workers compensation programs. The estimates include provisions for inflation, claims handling and legal fees.

Insurance claims paid by our insurance carriers were $6.9 million and $6.8 million for the three months ended July 31, 2010 and 2009, respectively, and $17.1 million and $26.3 million for the nine months ended July 31, 2010 and 2009, respectively.

7. We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations, and we are subject to extensive and complex regulations that affect the development and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.

We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment. The particular environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and homebuilding activity.

As previously reported in the Company’s 10-Q for the quarters ended January 31, 2010 and April 30, 2010, the Company was engaged in discussions with the U. S. Environmental Protection Agency (“EPA”) and the U.S. Department of Justice (“DOJ”) regarding alleged violations of storm water discharge requirements. In resolution of this matter, in April 2010 we agreed to the terms of a Consent Decree with the EPA, DOJ and the states of Virginia, Maryland, West Virginia and the District of Columbia (collectively the “States”). The Consent Decree was approved by the federal district court in August 2010. Under the terms of the Consent Decree we have paid a fine of $1.0 million collectively to the United States and the States and have agreed to perform under the terms of the Consent Decree for a minimum of three years, which includes implementing certain operational and training measures nationwide to facilitate ongoing compliance with storm water regulations.

We anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules, and regulations and their interpretations and application.

The Company is also involved in the following litigation:

A subsidiary of the Company has been named as a defendant in a purported class action suit filed on May 30, 2007 in the United States District Court for the Middle District of Florida, Randolph Sewell, et al., v. D’Allesandro & Woodyard, et al., alleging violations of the federal securities acts, among other allegations, in connection with the sale of some of the subsidiary’s homes in Fort Myers, Florida. Plaintiffs filed an amended complaint on October 19, 2007. Plaintiffs sought to represent a class of certain home purchasers in southwestern Florida and sought damages, rescission of certain purchase agreements, restitution of out-of-pocket expenses, and attorneys’ fees and costs. The Company’s subsidiary filed a Motion to Dismiss the amended complaint on December 14, 2007. Following oral argument on the Motion in September 2008, the court dismissed the amended complaint with leave for plaintiffs to amend. Plaintiffs filed a second amended complaint on October 31, 2008. The Company’s subsidiary filed a Motion to Dismiss this second amended complaint. The Court dismissed portions of the second amended complaint. The Court dismissed additional portions of the second amended complaint on April 28, 2010. While we have determined that a loss related to this case is not probable, it is not possible to estimate a loss or range of loss related to this matter at this time.

8. Cash and cash equivalents include cash deposited in checking accounts, overnight repurchase agreements, certificates of deposit, Treasury Bills and government money market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in major financial institutions. At July 31, 2010, $238.9 million of the total cash and cash equivalents was in cash equivalents, the book value of which approximates fair value.

9. In connection with the issuance of our senior secured first lien notes in the fourth quarter of fiscal 2009, we terminated our revolving credit facility and refinanced the borrowing capacity thereunder. Also in connection with the refinancing, we entered into certain stand alone cash collateralized letter of credit agreements and facilities under which there were a total of $97.3 million and $130.3 million of letters of credit outstanding as of July 31, 2010 and October 31, 2009, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. As of July 31, 2010 and October 31, 2009, the amount of cash collateral in these segregated accounts was $101.5 million and $135.2 million, respectively, which is reflected in “Restricted cash” on the Condensed Consolidated Balance Sheets.

Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. Our secured Master Repurchase Agreement with Citibank, N.A. (“Citibank Master Repurchase Agreement”) is a short-term borrowing facility that provides up to $50 million through April 5, 2011. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable upon the sale of each mortgage loan to a permanent investor at LIBOR plus 4.00%. As of July 31, 2010, the aggregate principal amount of all borrowings under the Citibank Master Repurchase Agreement was $36.3 million. The Citibank Master Repurchase Agreement requires K. Hovnanian Mortgage to satisfy and maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size of the facility, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the Citibank Master Repurchase Agreement, we do not consider any of these covenants to be substantive or material. As of July 31, 2010, we believe we were in compliance with the covenants of the Citibank Master Repurchase Agreement.

In addition to the Citibank Master Repurchase Agreement discussed above, on July 19, 2010, K. Hovnanian Mortgage executed a secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”) which is a short-term borrowing facility that provides up to $25 million through July 18, 2011. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly on outstanding advances at LIBOR floor of 2.00% plus applicable margin ranging from 2.50% to 3.00% based on the takeout investor and type of loan. As of July 31, 2010, the aggregate principal amount of all borrowings under the Chase Master Repurchase Agreement was $19.7 million. The Chase Master Repurchase Agreement requires K. Hovnanian Mortgage to satisfy and maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size of the facility, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the Chase Master Repurchase Agreement, we do not consider any of these covenants to be substantive or material. As of July 31, 2010, we believe we were in compliance with the covenants of the Chase Master Repurchase Agreement.

10. At July 31, 2010, we had $797.2 million ($784.2 million net of discount) of outstanding senior secured notes, comprised of $0.5 million 11 1/2% Senior Secured Notes due 2013, $785.0 million 10 5/8% Senior Secured Notes due 2016 and $11.7 million 18% Senior Secured Notes due 2017. At July 31, 2010 we also had $713.2 million of outstanding senior notes ($711.5 million net of discount), comprised of $35.5 million 8% Senior Notes due 2012, $54.4 million 6 1/2% Senior Notes due 2014, $29.2 million 6 3/8% Senior Notes due 2014, $52.7 million 6 1/4% Senior Notes due 2015, $173.2 million 6 1/4% Senior Notes due 2016, $172.3 million 7 1/2% Senior Notes due 2016 and $195.9 million 8 5/8% Senior Notes due 2017. In addition, we had $120.2 million of outstanding senior subordinated notes, comprised of $66.7 million 8 7/8% Senior Subordinated Notes due 2012, and $53.5 million 7 3/4% Senior Subordinated Notes due 2013.

During the three months ended January 31, 2010, the remaining $13.6 million of our 6% Senior Subordinated Notes due 2010 matured and was paid. In addition, during the three and nine months ended July 31, 2010, we repurchased in open market transactions $2.0 million and $27.0 million principal amount of our 6 1/2% Senior Notes due 2014, respectively, $9.0 million and $54.5 million principal amount of our 6 3/8% Senior Notes due 2014, respectively, $13.6 million and $29.5 million principal amount of our 6 1/4% Senior Notes due 2015, respectively. Also, during the nine months ended July 31, 2010, we repurchased in open market transactions $1.4 million principal amount of 8 7/8% Senior Subordinated Notes due 2012, and $11.1 million principal amount of 7 3/4% Senior Subordinated Notes due 2013. The aggregate purchase price for these repurchases was $19.3 million and $97.9 million for the three and nine months ended July 31, 2010, respectively, plus accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $5.3 million and $25.0 million for the three and nine months ended July 31, 2010, respectively, net of the write-off of unamortized discounts and fees. The gains from the repurchases are included in the Condensed Consolidated Statement of Operations for the three and nine months ended July 31, 2010 as “Gain on extinguishment of debt”.

We and each of our subsidiaries are guarantors of the senior secured, senior and senior subordinated notes, except for K. Hovnanian Enterprises, Inc. (“K. Hovnanian”), the issuer of the notes, certain of our financial services subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures and our foreign subsidiary (see Note 20). The indentures governing the senior secured, senior and senior subordinated notes do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries, including K. Hovnanian, the issuer of the senior secured, senior and senior subordinated notes, to incur additional indebtedness (other than certain permitted indebtedness, refinancing indebtedness and non-recourse indebtedness), pay dividends and make distributions on common and preferred stock, repurchase senior notes and senior subordinated notes (with respect to the senior secured first-lien notes indenture), make other restricted payments, make investments, sell certain assets, incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all assets and enter into certain transactions with affiliates. The indentures also contain events of default which would permit the holders of the senior secured, senior, and senior subordinated notes to declare those notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the notes or other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy, and insolvency and, with respect to the indentures governing the senior secured notes, the failure of the documents granting security for the senior secured notes to be in full force and effect and the failure of the liens on any material portion of the collateral securing the senior secured notes to be valid and perfected. As of July 31, 2010, we believe we were in compliance with the covenants of the indentures governing our outstanding notes. Under the terms of the indentures, we have the right to make certain redemptions and, depending on market conditions and covenant restrictions, may do so from time to time. We may also continue to make debt purchases and/or exchanges from time to time through tender offers, open market purchases, private transactions, or otherwise depending on market conditions and covenant restrictions.

If our consolidated fixed charge coverage ratio, as defined in the indentures governing our senior secured, senior, and senior subordinated notes, is less than 2.0 to 1.0, we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness, and non-recourse indebtedness. As a result of this restriction, we are currently restricted from paying dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. If current market trends continue or worsen, we will continue to be restricted from paying dividends through fiscal 2010, and possibly beyond. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our bond indentures or otherwise affect compliance with any of the covenants contained in the bond indentures.

The 10 5/8% Senior Secured Notes due 2016 are secured by a first-priority lien, the 11 1/2% Senior Secured Notes due 2013 are secured by a second-priority lien and the 18% Senior Secured Notes due 2017 are secured by a third-priority lien, in each case, subject to permitted liens and other exceptions, on substantially all the assets owned by us, K. Hovnanian (the issuer of the senior secured notes) and the guarantors, in the case of the 11 1/2% Senior Secured Notes due 2013 and the 18% Senior Secured Notes due 2017, to the extent such assets secure obligations under the 10 5/8% Senior Secured Notes due 2016. At July 31, 2010, the aggregate book value of the real property collateral securing these notes was approximately $776.6 million, which does not include the impact of inventory investments, home deliveries, or impairments thereafter and which may differ from the appraised value. In addition, cash collateral securing these notes was $357.4 million as of July 31, 2010, which includes $101.5 million of restricted cash also collateralizing certain letters of credit. Subsequent to such date, cash uses include general business operations and real estate and other investments.

11. Each share of Class A Common Stock entitles its holder to one vote per share and each share of Class B Common Stock entitles its holder to ten votes per share. The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock. If a shareholder desires to sell shares of Class B Common Stock, such stock must be converted into shares of Class A Common Stock.

Basic earnings per share is computed by dividing net income (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and non-vested shares of restricted stock. For the nine months ended July 31, 2010, diluted earnings per common share was computed using the weighted average number of shares outstanding adjusted for the 1.2 million incremental shares attributed to non-vested stock and outstanding options to purchase common stock. Any options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation. For the nine months ended July 31, 2010, 3.5 million options to purchase common stock had an exercise price greater than the average market price. For the three months ended July 31, 2010, and the three and nine months ended July 31, 2009, 7.1 million, 8.0 million and 6.8 million, respectively, of non-vested stock and options to purchase common stock were outstanding and anti-dilutive as we had a net loss in each of those periods.

On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 4 million shares of Class A Common Stock. There have been no purchases during the nine months ended July 31, 2010. As of July 31, 2010, 3.4 million shares of Class A Common Stock have been purchased under this program.

12. On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%. The Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares beginning on the fifth anniversary of their issuance. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on the NASDAQ Global Market under the symbol “HOVNP”. During the three and nine months ended July 31, 2010 and 2009, we did not make any dividend payments on the Series A Preferred Stock as a result of covenant restrictions in the indentures governing our senior secured, senior and senior subordinated notes discussed above. We anticipate we will be restricted from paying dividends for the foreseeable future.

13. On August 4, 2008, we announced that our Board of Directors adopted a shareholder rights plan (the “Rights Plan”) designed to preserve shareholder value and the value of certain income tax assets primarily associated with net operating loss carryforwards (“NOL”) and built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses would be limited if there was an “ownership change” under Section 382. This would occur if shareholders owning (or deemed under Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a defined period of time. The Rights Plan was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382. Under the Rights Plan, one right was distributed for each share of Class A Common Stock and Class B Common Stock outstanding as of the close of business on August 15, 2008. Effective August 15, 2008, if any person or group acquires 4.9% or more of the outstanding shares of Class A Common Stock without the approval of the Board of Directors, there would be a triggering event causing significant dilution in the voting power of such person or group. However, existing stockholders who owned, at the time of the Rights Plan’s adoption, 4.9% or more of the outstanding shares of Class A Common Stock will trigger a dilutive event only if they acquire additional shares. The approval of the Board of Directors’ decision to adopt the Rights Plan may be terminated by the Board at any time, prior to the Rights being triggered. The Rights Plan will continue in effect until August 15, 2018, unless it expires earlier in accordance with its terms. The approval of the Board of Directors’ decision to adopt the Rights Plan was submitted to a stockholder vote and approved at a Special Meeting of stockholders held on December 5, 2008. Also at the Special Meeting on December 5, 2008, our stockholders approved an amendment to our Certificate of Incorporation to restrict certain transfers of Class A Common Stock in order to preserve the tax treatment of our net operating loss carryforwards and built-in losses under Section 382 of the Internal Revenue Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders and Class B stockholders, the transfer restrictions in the amended Certificate of Incorporation generally restrict any direct or indirect transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect would be to: (i) increase the direct or indirect ownership of our stock by any person (or public group) from less than 5% to 5% or more of our common stock; (ii) increase the percentage of our common stock owned directly or indirectly by a person (or public group) owning or deemed to own 5% or more of our common stock; or (iii) create a new public group. Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership (direct or indirect) of common stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect ownership of common stock would by attribution cause another person (or public group) to exceed such threshold.

14. Total income tax benefit was $7.0 million for the three months ended July 31, 2010, primarily due to a decrease in tax reserves for uncertain tax positions. The total income tax benefit was $297.5 million for the nine months ended July 31, 2010, primarily due to the benefit recognized for a federal net operating loss carryback. On November 6, 2009, President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009, under which the Company was able to carryback its 2009 net operating loss five years to previously profitable years that were not available to the Company for carryback prior to this tax legislation. We recorded a benefit for the carryback of $291.3 million in the first quarter of fiscal 2010. We received $274.1 million of the federal income tax refund in the second quarter of 2010 and expect to receive the remaining $17.2 million by the first quarter of fiscal 2011.

Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If the combination of future years income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried back to income in prior years, if available, or carried forward to future years to recover the deferred tax assets. In accordance with ASC 740 “Income Taxes” (ASC 740), we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a "more likely than not" standard. Given the continued downturn in the homebuilding industry during 2007, 2008 and 2009, which has resulted in additional inventory and intangible impairments, we were in a three year cumulative loss position as of October 31, 2009. According to ASC 740, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable. Our valuation allowance for current and deferred tax assets increased $33.0 million during the three months ended July 31, 2010 due to reserving for the federal tax benefit generated from the losses during the period. However, the allowance decreased $240.9 million during the nine months ended July 31, 2010 primarily due to the impact of the federal net operating loss carryback recorded in the first quarter of 2010, partially offset by additional reserves recorded for the federal tax benefit generated from the losses during the period. At July 31, 2010, our total valuation allowance amounted to $746.6 million.

15. Our operating segments are components of our business for which discrete financial information is available and reviewed regularly by the chief operating decision-maker, our Chief Executive Officer, to evaluate performance and make operating decisions. Based on this criteria, each of our communities qualifies as an operating segment, and therefore, it is impractical to provide segment disclosures for this many segments. As such, we have aggregated the homebuilding operating segments into six reportable segments.

Our homebuilding operating segments are aggregated into reportable segments based primarily upon geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes. The Company’s reportable segments consist of the following six homebuilding segments and a financial services segment:

Homebuilding:

(1) Northeast (New Jersey, New York, Pennsylvania)

(2) Mid-Atlantic (Delaware, Maryland, Virginia, West Virginia, Washington D.C.)

(3) Midwest (Illinois, Kentucky, Minnesota, Ohio)

(4) Southeast (Florida, Georgia, North Carolina, South Carolina)

(5) Southwest (Arizona, Texas)

(6) West (California)

Financial Services

Operations of the Company’s Homebuilding segments primarily include the sale and construction of single-family attached and detached homes, attached townhomes and condominiums, mid-rise condominiums, urban infill and active adult homes in planned residential developments. In addition, from time to time, the homebuilding segments include land sales. Operations of the Company’s Financial Services segment include mortgage banking and title services provided to the homebuilding operations’ customers. We do not retain or service mortgages that we originate but rather sell the mortgages and related servicing rights to investors.

Corporate and unallocated primarily represents operations at our headquarters in Red Bank, New Jersey. This includes our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality, and safety. It also includes interest income and interest expense resulting from interest incurred that cannot be capitalized in inventory in the Homebuilding segments, as well as the gains or losses on extinguishment of debt from debt repurchases or exchanges.

Evaluation of segment performance is based primarily on operating earnings from continuing operations before provision for income taxes (“(Loss) income before income taxes”). (Loss) income before income taxes for the Homebuilding segments consists of revenues generated from the sales of homes and land, (loss) income from unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and administrative expenses, interest expense and non-controlling interest expense. Income before income taxes for the Financial Services segment consists of revenues generated from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses and interest expenses incurred by the Financial Services segment.

Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.

Financial information relating to the Company’s operations was as follows:

	Three Months Ended		Nine Months Ended
	July 31,		July 31,
(In thousands)	2010	2009	2010	2009

Revenues:
Northeast	$92,179	$86,163	$218,686	$259,610
Mid-Atlantic	72,876	76,521	207,615	217,362
Midwest	24,437	30,075	63,986	81,069
Southeast	28,843	23,617	76,003	92,404
Southwest	103,597	113,403	289,968	317,370
West	49,966	48,070	138,936	161,438
Total homebuilding	371,898	377,849	995,194	1,129,253
Financial services	8,753	8,929	23,418	26,275
Corporate and unallocated	(51)	336	218	3,369
Total revenues	$380,600	$387,114	$1,018,830	$1,158,897

(Loss) income before income taxes:
Northeast	$(15,510)	$(43,201)	$(30,281)	$(273,511)
Mid-Atlantic	3,248	(16,834)	5,369	(66,590)
Midwest	(1,190)	(3,806)	(7,215)	(18,548)
Southeast	(1,352)	(7,900)	(6,307)	(47,933)
Southwest	7,033	(16,036)	17,969	(55,760)
West	(39,070)	(63,795)	(49,477)	(259,582)
Homebuilding loss before income taxes	(46,841)	(151,572)	(69,942)	(721,924)
Financial services	2,585	2,584	6,224	6,707
Corporate and unallocated	(35,586)	959	(99,072)	292,003
Loss before income taxes	$(79,842)	$(148,029)	$(162,790)	$(423,214)

	July 31,	October 31,
(In thousands)	2010	2009

Assets:
Northeast	$507,603	$559,257
Mid-Atlantic	180,009	200,908
Midwest	56,988	54,560
Southeast	53,853	60,441
Southwest	211,146	191,495
West	182,191	163,710
Total homebuilding	1,191,790	1,230,371
Financial services	89,276	84,280
Corporate and unallocated	628,711	709,926
Total assets	$1,909,777	$2,024,577

16. Per ASC 810 “Consolidation” (“ASC 810”), a Variable Interest Entity (“VIE”) is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE pursuant to ASC 810, 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 ASC 810, we have concluded that, whenever we option land or lots from an entity and pay a non-refundable deposit, a VIE is created under condition (ii) (b) and (c) of the previous paragraph. We have 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 with a significant nonrefundable option fee (we currently define significant as greater than $100,000 because we have determined that in the aggregate the VIEs related to deposits of this size or less are not material), we compute expected losses and residual returns based on the probability of future cash flows as outlined in ASC 810. If we are deemed to be the primary beneficiary of the VIE, we consolidate it on our balance sheet. The fair value of the VIE inventory, as of the date of consolidation, is reported as “Consolidated inventory not owned - variable interest entities”.

Typically, the determining factor in whether or not we are the primary beneficiary is the nonrefundable deposit amount as a percentage of the total purchase price because it determines the amount of the first risk of loss we take on the contract. The higher this percentage deposit, the more likely we are to be the primary beneficiary. Other important criteria that impact the outcome of the analysis are the probability of getting the property through the approval process for residential homes, because this impacts the ultimate value of the property, as well as determining who is the party responsible (seller or buyer) for funding the approval process and development work that will take place prior to our decision to exercise the option.

Management believes the guidance for VIEs was not clearly thought out for application in the homebuilding industry for land and lot options, because we can have an option and put down a small deposit as a percentage of the purchase price and still have to consolidate the entity. Our exposure to loss as a result of our involvement with the VIE is only the deposit, not its total assets consolidated on our balance sheet. In certain cases, we will have to place inventory the VIE has optioned to other developers on our balance sheet. In addition, if the VIE has creditors, its debt will be placed on our balance sheet even though the creditors have no recourse against us. Based on these observations, we believe consolidating VIEs based on land and lot option deposits does not reflect the economic realities or risks of owning and developing land.

At July 31, 2010, all seven VIEs we were required to consolidate were the result of our options to purchase land or lots from the selling entities. We have cash deposits to these VIEs totaling $5.8 million. Our option deposits represent our maximum exposure to loss. The fair value of the property owned by these VIEs, as of the date of consolidation, was $34.8 million. Because we do not own an equity interest in any of the unaffiliated VIEs that we must consolidate pursuant to ASC 810, we generally have little or no control or influence over the operations of these entities or their owners. When our requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required. In most cases, we determine the fair value of the assets of the consolidated entities based on the remaining contractual purchase price of the land or lots we are purchasing. In these cases, it is assumed that the entities funded the acquisition of the property with debt and the only asset recorded is the land or lots we have the option to buy with a related offset for the assumed third party financing of the variable interest entity. At July 31, 2010, the balance reported in liabilities from inventory not owned related to these VIEs was $29.0 million. Creditors of these seven VIEs have no recourse against us.

We will continue to control land and lots using options. Including the deposits with the seven VIEs described above, at July 31, 2010, we had total cash and letters of credit deposits amounting to approximately $37.9 million to purchase land and lots with a total purchase price of $811.2 million. Not all our deposits are with VIEs. The maximum exposure to loss is limited to the deposits, although some deposits are refundable at our request or refundable if certain conditions are not met.

See Note 18 for a recent accounting pronouncement which may impact our accounting for VIEs.

17. We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that are sold directly to third party homebuyers. Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties. The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.

(Dollars in thousands)		July 31, 2010
	Homebuilding	Land Development	Total
Assets:
Cash and cash equivalents	$19,853	$410	$20,263
Inventories	258,684	73,565	332,249
Other assets	16,732	-	16,732
Total assets	$295,269	$73,975	$369,244

Liabilities and equity:
Accounts payable and accrued liabilities	$22,315	$16,495	$38,810
Notes payable	165,769	37,628	203,397
Total liabilities	188,084	54,123	$242,207
Equity of:
Hovnanian Enterprises, Inc.	29,873	2,738	32,611
Others	77,312	17,114	94,426
Total equity	107,185	19,852	127,037
Total liabilities and equity	$295,269	$73,975	$369,244
Debt to capitalization ratio	61%	65%	62%

(Dollars in thousands)		October 31, 2009
	Homebuilding	Land Development	Total
Assets:
Cash and cash equivalents	$22,502	$1,539	$24,041
Inventories	281,556	83,833	365,389
Other assets	25,889	87	25,976
Total assets	$329,947	$85,459	$415,406

Liabilities and equity:
Accounts payable and accrued liabilities	$19,236	$17,108	$36,344
Notes payable	193,567	40,051	233,618
Total liabilities	212,803	57,159	269,962
Equity of:
Hovnanian Enterprises, Inc.	32,183	9,068	41,251
Others	84,961	19,232	104,193
Total equity	117,144	28,300	145,444
Total liabilities and equity	$329,947	$85,459	$415,406
Debt to capitalization ratio	62%	59%	62%

As of both July 31, 2010 and October 31, 2009, we had advances outstanding of approximately $12.1 million to these unconsolidated joint ventures, which were included in the “Accounts payable and accrued liabilities” balances in the table above. On our Condensed Consolidated Balance Sheets our “Investments in and advances to unconsolidated joint ventures” amounted to $37.6 million and $41.3 million at July 31, 2010 and October 31, 2009, respectively. In some cases, our net investment in these joint ventures is less than our proportionate share of the equity reflected in the table above because of the differences between asset impairments recorded against our joint venture investments and any impairments recorded in the applicable joint venture. During the first nine months of fiscal 2010, we did not write down any joint venture investments based on our determination that none of the investments in our joint ventures have sustained an other than temporary impairment during that period.

	For the Three Months Ended July 31, 2010
(Dollars in thousands)	Homebuilding	Land Development	Total

Revenues	$45,729	$2,346	$48,075
Cost of sales and expenses	(49,754)	(2,490)	(52,244)
Joint venture net loss	$(4,025)	$(144)	$(4,169)
Our share of net loss	$(553)	$(83)	$(636)

	For the Three Months Ended July 31, 2009
(Dollars in thousands)	Homebuilding	Land Development	Total

Revenues	$24,387	$9,120	$33,507
Cost of sales and expenses	(29,602)	(9,303)	(38,905)
Joint venture net loss	$(5,215)	$(183)	$(5,398)
Our share of net loss	$(774)	$(214)	$(988)

	For the Nine Months Ended July 31, 2010
(Dollars in thousands)	Homebuilding	Land Development	Total

Revenues	$101,410	$12,606	$114,016
Cost of sales and expenses	(101,163)	(18,641)	(119,804)
Joint venture net income (loss)	$247	$(6,035)	$(5,788)
Our share of net loss	$(34)	$(494)	$(528)

	For the Nine Months Ended July 31, 2009
(Dollars in thousands)	Homebuilding	Land Development	Total

Revenues	$73,314	$12,611	$85,925
Cost of sales and expenses	(189,967)	(13,880)	(203,847)
Joint venture net loss	$(116,653)	$(1,269)	$(117,922)
Our share of net loss	$(19,452)	$(674)	$(20,126)

Loss from unconsolidated joint ventures is reflected as a separate line in the accompanying Condensed Consolidated Statements of Operations and reflects our proportionate share of the loss of these unconsolidated homebuilding and land development joint ventures. The difference between our share of the loss from these unconsolidated joint ventures disclosed in the tables above for the three and nine months ended July 31, 2009 compared to the Condensed Consolidated Statements of Operations is due primarily to the write down of our investment in joint ventures where we determined that our investment had an other than temporary impairment. For the three and nine months ended July 31, 2010, the minor difference is primarily due to one joint venture that had net income for which we do not get any share of the profit because of the cumulative equity position of the joint venture, the reclassification of the intercompany portion of management fee income from certain joint ventures and the deferral of income for lots purchased by us from certain joint ventures. Our ownership interests in the joint ventures vary but are generally less than or equal to 50%. In determining whether or not we must consolidate joint ventures where we are the manager of the joint venture, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business.

Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing, however, our more recently established joint ventures have not obtained any financing, therefore all capital is equity. Generally, the amount of such financing is targeted to be no more than 50% of the joint venture’s total assets. However, because of impairments realized in the joint ventures the average debt to capitalization ratio of all our joint ventures is currently 62%. This financing is obtained on a non-recourse basis, with guarantees from us limited only to performance and completion of development, environmental indemnification, standard warranty and representation against fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some instances, the joint venture entity is considered a VIE under ASC 810 due to the returns being capped to the equity holders; however, in these instances, we are not the primary beneficiary, and therefore we do not consolidate these entities.

18. Recent Accounting Pronouncements - In December 2007, the FASB issued an update to ASC 810. The amended guidance contained in ASC 810 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income or loss specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. Our net income or loss attributable to noncontrolling interest is insignificant for all periods presented and therefore reported in “Other operations” in the Condensed Consolidated Statements of Operations. 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. We implemented this standard effective November 1, 2009, resulting in a change in the classification of noncontrolling interests on the balance sheets and statements of equity.

In June 2009, the FASB issued an update to ASC 810, which amends the existing quantitative guidance used in determining the primary beneficiary of a VIE by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the most significant activities of the VIE and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE and requires enhanced disclosures to provide more information about an enterprise’s involvement in a variable interest entity. This statement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. This statement is effective for us on November 1, 2010. We are currently evaluating the impact, if any, that this statement may have on our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. This guidance was effective for the Company in our second quarter of fiscal 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, which is related to disclosure only, will not have a material impact on our condensed consolidated financial statements.

19. ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides a framework for measuring fair value, expands disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized 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 value determined using significant unobservable inputs.

Our financial instruments measured at fair value on a recurring basis are summarized below:

(In thousands)	Fair Value Hierarchy	Fair Value at July 31, 2010	Fair Value at October 31, 2009

Mortgage loans held for sale (1)	Level 2	$59,271	$65,786
Interest rate lock commitments	Level 2	453	254
Forward contracts	Level 2	(1,410)	(702)
		$58,314	$65,338

(1) The aggregate unpaid principal balance was $57.5 million and $64.8 million at July 31, 2010 and October 31, 2009, respectively.

We elected the fair-value option for our loans held for sale for mortgage loans originated subsequent to October 31, 2008 in accordance with ASC 825, “Financial Instruments” (“ASC 825”), which permits us to measure financial instruments at fair value on a contract-by-contract basis. Management believes that the election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. In addition, the fair value of servicing rights is included in the Company’s loans held for sale as of July 31, 2010. Prior to February 1, 2008, the fair value of the servicing rights was not recognized until the related loan was sold. Fair value of the servicing rights is determined based on values in the Company’s servicing sales contracts. Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics.

The assets accounted for under ASC 825 are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in the Financial Services segment’s earnings (loss). The changes in fair values that are included in earnings (loss) are shown, by financial instrument and financial statement line item, below:

	Three Months Ended July 31, 2010
(In thousands)	Loans Held For Sale	Mortgage Loan Commitments	Forward Contracts

Increase (decrease) in fair value included in net (loss) income, all reflected in financial services revenues	$1,088	$122	$(565)

	Three Months Ended July 31, 2009
(In thousands)	Loans Held For Sale	Mortgage Loan Commitments	Forward Contracts

Increase (decrease) in fair value included in net (loss) income, all reflected in financial services revenues	$822	$401	$(1,450)

	Nine Months Ended July 31, 2010
(In thousands)	Loans Held For Sale	Mortgage Loan Commitments	Forward Contracts

Increase (decrease) in fair value included in net (loss) income, all reflected in financial services revenues	$783	$198	$(708)

	Nine Months Ended July 31, 2009
(In thousands)	Loans Held For Sale	Mortgage Loan Commitments	Forward Contracts

Increase (decrease) in fair value included in net (loss) income, all reflected in financial services revenues	$2,348	$910	$(2,860)

The Financial Services segment had a pipeline of loan applications in process of $240.0 million at July 31, 2010. Loans in process for which interest rates were committed to the borrowers totaled approximately $84.4 million as of July 31, 2010. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements.

The Financial Services segment uses investor commitments and forward sales of mandatory mortgage-backed securities (“MBS”) to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At July 31, 2010, the segment had open commitments amounting to $25.5 million to sell MBS with varying settlement dates through August 19, 2010.

Our financial instruments consist of cash and cash equivalents, restricted cash, receivables, deposits and notes, accounts payable and other liabilities, customer deposits, mortgage loans held for sale, nonrecourse land and operating properties mortgages, letter of credit agreements and facilities, mortgage warehouse line of credit, accrued interest, and the senior secured, senior and senior subordinated notes payable. The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. The fair value of each of the senior secured, senior and senior subordinated notes is estimated based on recent trades for the same or similar issues or the quoted market prices on the current rates offered to us for debt of the same remaining maturities. The fair value of the senior secured, senior and senior subordinated notes is estimated at $804.0 million, $525.3 million and $111.7 million, respectively, as of July 31, 2010 and $788.2 million, $603.5 million and $113.3 million, respectively, as of October 31, 2009. The fair value of our other financial instruments approximates their recorded values.

The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the three and nine months ended July 31, 2010. The assets measured at fair value on a nonrecurring basis are all within the Company’s Homebuilding operations and are summarized below:

Non-financial Assets

		Three Months Ended
		July 31, 2010
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount	Total Losses	Fair Value

Sold and unsold homes and lots under development	Level 3	$52,787	$(27,428)	$25,359
Land and land options held for future development or sale	Level 3	$29,434	$(22,219)	$7,215

		Nine Months Ended
		July 31, 2010
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount	Total Losses	Fair Value

Sold and unsold homes and lots under development	Level 3	$56,173	$(28,817)	$27,356
Land and land options held for future development or sale	Level 3	$35,063	$(25,339)	$9,724

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. For the nine months ended July 31, 2010, our discount rates used for the impairments recorded ranged from 17.5% to 20.3%. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory impairments, which are presented in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from Inventory of $49.7 million and $94.6 million for the three months ended July 31, 2010 and 2009, respectively, and $54.1 million and $491.4 million for the nine months ended July 31, 2010 and 2009, respectively.

20. Hovnanian Enterprises, Inc., the parent company (the “Parent”) is the issuer of publicly traded common stock and preferred stock, which is represented by depository shares. One of its wholly owned subsidiaries, K. Hovnanian Enterprises, Inc. (the “Subsidiary Issuer”), acts as a finance entity that as of July 31, 2010 had issued and outstanding $797.2 million face value of senior secured notes ($784.2 million, net of discount), $713.2 million face value of senior notes ($711.5 million, net of discount), and $120.2 million of senior subordinated notes. The senior secured notes, senior notes and senior subordinated notes are fully and unconditionally guaranteed by the Parent.

In addition to the Parent, each of the wholly owned subsidiaries of the Parent other than the Subsidiary Issuer (collectively, the “Guarantor Subsidiaries”), with the exception of certain of our financial service subsidiaries, joint ventures, subsidiaries holding interests in our joint ventures and our foreign subsidiary (collectively, the “Non-guarantor Subsidiaries”), have guaranteed fully and unconditionally, on a joint and several basis, the obligations of the Subsidiary Issuer to pay principal and interest under the senior secured notes, senior notes and senior subordinated notes.

In lieu of providing separate financial statements for the Guarantor Subsidiaries, we have included the accompanying condensed consolidating financial statements. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to users of our consolidated financial statements. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.

The following condensed consolidating financial statements present the results of operations, financial position and cash flows of (i) the Parent, (ii) the Subsidiary Issuer, (iii) the Guarantor Subsidiaries, (iv) the Non-guarantor Subsidiaries and (v) the eliminations to arrive at the information for Hovnanian Enterprises, Inc. on a consolidated basis.

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET

JULY 31, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non- Guarantor Subsidiaries	Eliminations	Consolidated
ASSETS:
Homebuilding	$13,879	$370,906	$1,236,361	$199,355	$	$1,820,501
Financial services			4,120	85,156		89,276
Investments in and amounts due to and from consolidated subsidiaries	(200,612)	2,070,587	(2,182,803)	124,827	188,001	-
Total assets	$(186,733)	$2,441,493	$(942,322)	$409,338	$188,001	$1,909,777

LIABILITIES AND EQUITY:
Homebuilding	$126	$	$376,615	$2,426	$	$379,167
Financial services			3,941	65,936		69,877
Notes payable		1,648,824	168			1,648,992
Income taxes payable	21,297	329	(2,464)	5		19,167
Stockholders’ (deficit) equity	(208,156)	792,340	(1,320,582)	340,241	188,001	(208,156)
Non-controlling interest in consolidated joint ventures				730		730
Total liabilities and equity	$(186,733)	$2,441,493	$(942,322)	$409,338	$188,001	$1,909,777

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET

OCTOBER 31, 2009

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non- Guarantor Subsidiaries	Eliminations	Consolidated
ASSETS:
Homebuilding	$14,752	$449,096	$1,285,699	$190,750	$	$1,940,297
Financial services			5,885	78,395		84,280
Investments in and amounts due to and from consolidated subsidiaries	(308,706)	2,067,571	(1,573,827)	(209,735)	24,697	-
Total assets	$(293,954)	$2,516,667	$(282,243)	$59,410	$24,697	$2,024,577

LIABILITIES AND EQUITY:
Homebuilding	$	$469	$454,718	$7,761	$	$462,948
Financial services			5,651	64,713		70,364
Notes payable		1,777,658	121			1,777,779
Income tax payable	55,644		6,710			62,354
Stockholders’ (deficit) equity	(349,598)	738,540	(749,443)	(13,794)	24,697	(349,598)
Non-controlling interest in consolidated joint ventures				730		730
Total liabilities and equity	$(293,954)	$2,516,667	$(282,243)	$59,410	$24,697	$2,024,577

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$7	$(89)	$369,733	$3,435	$(1,239)	$371,847
Financial services			1,690	7,063		8,753
Intercompany charges		32,566	(49,356)	664	16,126	-
Total revenues	7	32,477	322,067	11,162	14,887	380,600

Expenses:
Homebuilding	2,509	38,480	410,146	1,484	6,040	458,659
Financial services	124		1,397	4,804	(157)	6,168
Total expenses	2,633	38,480	411,543	6,288	5,883	464,827
Gain on extinguishment
of debt		5,256				5,256
Loss from
unconsolidated joint
ventures			(420)	(451)		(871)
(Loss) income before income taxes	(2,626)	(747)	(89,896)	4,423	9,004	(79,842)
State and federal income tax
(benefit) provision	(14,735)	(1,774)	305,583	(1,534)	(294,528)	(6,988)
Equity in income (loss)
of consolidated
subsidiaries	(84,963)				84,963	-
Net (loss) income	$(72,854)	$1,027	$(395,479)	$5,957	$388,495	$(72,854)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2009

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$13	$321	$378,854	$240	$(1,243)	$378,185
Financial services			2,117	6,812		8,929
Intercompany charges		44,691	(61,433)	(208)	16,950	-
Total revenues	13	45,012	319,538	6,844	15,707	387,114

Expenses:
Homebuilding	1,994	45,143	508,726	543	3,871	560,277
Financial services	122		1,588	4,806	(171)	6,345
Total expenses	2,116	45,143	510,314	5,349	3,700	566,622
Gain on extinguishment
of debt		37,041	(25)			37,016
Loss from
unconsolidated joint
ventures			(290)	(5,247)		(5,537)
(Loss) income before income taxes	(2,103)	36,910	(191,091)	(3,752)	12,007	(148,029)
State and federal
income tax
provision (benefit)	20,883	12,918	2,727	1,772	(17,417)	20,883
Equity in income (loss)
of consolidated
subsidiaries	(145,926)				145,926	-
Net (loss) income	$(168,912)	$23,992	$(193,818)	$(5,524)	$175,350	$(168,912)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

NINE MONTHS ENDED JULY 31, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$15	$(252)	$995,608	$3,761	$(3,720)	$995,412
Financial services			4,596	18,822		23,418
Intercompany charges		97,125	(139,260)	(208)	42,343	-
Total revenues	15	96,873	860,944	22,375	38,623	1,018,830

Expenses:
Homebuilding	6,865	117,599	1,049,760	377	14,019	1,188,620
Financial services	384		4,188	13,131	(509)	17,194
Total expenses	7,249	117,599	1,053,948	13,508	13,510	1,205,814
Gain on extinguishment
of debt		25,047				25,047
(Loss) income from
unconsolidated joint
ventures			(1,088)	235		(853)
(Loss) income before income taxes	(7,234)	4,321	(194,092)	9,102	25,113	(162,790)
State and federal income
tax (benefit) provision	(305,238)		7,743	4		(297,491)
Equity in income (loss)
of consolidated
subsidiaries	(163,303)				163,303	-
Net (loss) income	$134,701	$4,321	$(201,835)	$9,098	$188,416	$134,701

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

NINE MONTHS ENDED JULY 31, 2009

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$13	$3,287	$1,131,675	$1,366	$(3,719)	$1,132,622
Financial services			5,938	20,337		26,275
Intercompany charges		170,658	(202,290)	(725)	32,357	-
Total revenues	13	173,945	935,323	20,978	28,638	1,158,897

Expenses:
Homebuilding	22,852	148,323	1,785,051	2,233	(6,332)	1,952,127
Financial services	496		4,971	14,474	(373)	19,568
Total expenses	23,348	148,323	1,790,022	16,707	(6,705)	1,971,695
Gain on extinguishment
of debt		427,598	206			427,804
Loss from
unconsolidated joint
ventures			(32,435)	(5,785)		(38,220)
(Loss) income before income taxes	(23,335)	453,220	(886,928)	(1,514)	35,343	(423,214)
State and federal income
tax provision (benefit)	42,729	158,627	(120,906)	806	(38,527)	42,729
Equity in income (loss)
of consolidated
subsidiaries	(399,879)				399,879	-
Net (loss) income	$(465,943)	$294,593	$(766,022)	$(2,320)	$473,749	$(465,943)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED JULY 31, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated
Cash flows from operating activities:
Net income (loss)	$134,701	$3,992	$(201,506)	$9,098	$188,416	$134,701
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities	(26,607)	69,277	(59,209)	162,195	(188,416)	(42,760)
Net cash provided by (used in)
operating activities	108,094	73,269	(260,715)	171,293	-	91,941
Net cash (used in) provided by
investing activities			(1,008)	895		(113)
Net cash (used in) provided by
financing activities		(113,178)	4,793	101		(108,284)
Intercompany investing and financing activities – net	(108,094)	(3,016)	445,672	(334,562)		-
Net (decrease) increase in cash	-	(42,925)	188,742	(162,273)	-	(16,456)
Cash and cash equivalents
balance, beginning of period	10	292,407	(15,584)	149,859		426,692
Cash and cash equivalents balance, end of period	$10	$249,482	$173,158	$(12,414)	$ -	$410,236

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED JULY 31, 2009

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated
Cash flows from operating activities:
Net (loss) income	$(465,943)	$294,593	$(766,022)	$(2,320)	$473,749	$(465,943)
Adjustments to reconcile net
(loss) income to net cash
(used in) provided by
operating activities	(241,775)	(235,596)	1,472,503	(825)	(473,749)	520,558
Net cash (used in) provided by
operating activities	(707,718)	58,997	706,481	(3,145)	-	54,615
Net cash provided by (used in)
investing activities			253	(4,837)		(4,584)
Net cash used in
financing activities		(310,123)	(1,864)	(34,971)		(346,958)
Intercompany investing and financing activities – net	707,711	(41,393)	(701,935)	35,617		-
Net (decrease) increase in cash	(7)	(292,519)	2,935	(7,336)	-	(296,927)
Cash and cash equivalents
balance, beginning of period	17	846,495	(15,950)	17,494		848,056
Cash and cash equivalents balance, end of period	$10	$553,976	$(13,015)	$10,158	$ -	$551,129

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Beginning during the second half of our fiscal year ended October 31, 2006, the U. S. housing market has been impacted by a declining consumer confidence, increasing home foreclosure rates and increasing supplies of resale and new home inventories. The result has been weakened demand for new homes, slower sales, higher than normal cancellation rates, and increased price discounts and other sales incentives to attract homebuyers. Additionally, the availability of certain mortgage financing products became more constrained starting in February 2007 when the mortgage industry began to more closely scrutinize subprime, Alt-A, and other non-prime mortgage products. The overall economy weakened significantly and fears of a prolonged economic weakness are still present due to high unemployment levels, further deterioration in consumer confidence and the reduction in extensions of credit and consumer spending. As a result, we experienced significant decreases in our revenues and gross margins during 2007, 2008 and 2009 compared with prior years. During 2010, the homebuilding market has exhibited a large degree of choppiness. Signs of this choppiness can be seen in key measures, such as our gross margin, cancellation rates and total deliveries. Although we continued to see declines in deliveries and revenues during the first and second quarters of fiscal 2010, both were relatively flat in the third quarter compared to the same period in the prior year. This occurred because we had a strong delivery quarter as we delivered a lot of homes for customers taking advantage of the federal homebuyer tax credit that expired June 30, 2010. Our gross margin percentage has increased to 16.8% for the nine months ended July 31, 2010 from 7.7% for the nine months ended July 31, 2009, and our contract cancellation rate of 23% in the third quarter of fiscal 2010 is consistent with more normalized levels, as seen in fiscal 2003 and 2004. Net contracts per active selling community decreased to 17.1 for the nine months ended July 31, 2010 compared to 20.1 in the same period in the prior year. Active selling communities decreased by 7.6% compared with the same period a year ago. Although we remain cautiously optimistic, several challenges such as persistently high unemployment levels, the expiration of the federal homebuyers’ tax credit on April 30, 2010 and the threat of more foreclosures continue to hinder a recovery in the housing market.

We have exposure to additional impairments of our inventories, which, as of July 31, 2010, have a book value of $1.1 billion, net of $885.6 million of impairments recorded on 170 of our communities. We also have $76.7 million invested in 14,793 lots under option, including cash and letters of credit option deposits of $37.9 million as of July 31, 2010. We will record a write-off for the amounts associated with an option if we determine it is probable we will not exercise it. As of July 31, 2010, we have total investments in, and advances to, unconsolidated joint ventures of $37.6 million. Each of our joint ventures assesses its inventory and other long-lived assets for impairment and we separately assess our investment in joint ventures for recoverability, which has resulted in total reductions in our investment in joint ventures of $115.8 million from the second half of fiscal 2006, the first period in which we had impairments on our joint ventures, through July 31, 2010. We still have exposure to future write-downs of our investment in unconsolidated joint ventures if conditions deteriorate further in the markets in which our joint ventures operate.

As the market for new homes declined, we adjusted our approach to land acquisition and construction practices and shortened our land pipeline, reduced production volumes, and balanced home price and profitability with sales pace. We delayed and cancelled planned land purchases and renegotiated land prices and significantly reduced our total number of controlled lots owned and under option. Additionally, we significantly reduced our total number of speculative homes put into production over the past several years. Recently, however, we have begun to see more opportunities to purchase land at prices that make economic sense in light of the current sales prices and sales paces and plan to pursue such land acquisitions. New land purchases at pricing that will generate good investment returns and drive greater operating efficiencies are needed to return to profitability. During the first three quarters of fiscal 2010, we increased our controlled lots by 4,665 and we opened 53 new communities. During the third quarter of fiscal 2010, we purchased approximately 850 lots within 45 newly identified communities (communities that were controlled subsequent to January 31, 2009). In the third quarter of fiscal 2010 compared to the second quarter of fiscal 2010, we had an increase in active communities in consecutive quarters. This is the first consecutive quarter increase in community count since the second quarter of fiscal 2007. In addition, we put under option approximately 4,700 lots in 62 newly identified communities during the third quarter of 2010. We have also closely evaluated and made reductions in selling, general and administrative expenses, including corporate general and administrative expenses, reducing these expenses $138.3 million from $459.9 million in fiscal 2008 to $321.6 million in fiscal 2009 due in large part to a 74.5% reduction in head count at the end of fiscal 2009 from our peak in June 2006. Given the persistence of these difficult market conditions, improving the efficiency of our selling, general and administrative expenses will continue to be a significant area of focus. For the nine months ended July 31, 2010, homebuilding selling, general and administrative costs declined 31.8% to $127.6 million compared to the nine months ended July 31, 2009.

CRITICAL ACCOUNTING POLICIES