Edgar Filing: HOVNANIAN ENTERPRISES INC

f10q043011.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 APRIL 30, 2011

[ ] 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)

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 79,877,716 shares of Class A Common Stock and 14,562,064 shares of Class B Common Stock were outstanding as of June 3, 2011.

HOVNANIAN ENTERPRISES, INC.

FORM 10-Q

INDEX	PAGE NUMBER

PART I. Financial Information
Item l. Financial Statements:

Condensed Consolidated Balance Sheets as of April 30,
2011 (unaudited) and October 31, 2010	3

Condensed Consolidated Statements of Operations (unaudited) for	5
the three and six months ended April 30, 2011 and 2010

Condensed Consolidated Statement of Equity
(unaudited) for the six months ended April 30, 2011	6

Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended April 30, 2011 and 2010	7

Notes to Condensed Consolidated Financial
Statements (unaudited)	9

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations	32

Item 3. Quantitative and Qualitative Disclosures About Market Risk	62

Item 4. Controls and Procedures	63

PART II. Other Information
Item 1. Legal Proceedings	63

Item 1A. Risk Factors	63

Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds	64

Item 6. Exhibits	65

Signatures	67

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Share Amounts)

	April 30, 2011	October 31, 2010
ASSETS	(Unaudited)	(1)

Homebuilding:
Cash and cash equivalents	$348,119	$359,124

Restricted cash	85,346	108,983

Inventories:
Sold and unsold homes and lots under development	655,918	591,729

Land and land options held for future
development or sale	308,601	348,474

Consolidated inventory not owned:
Specific performance options	12,064	21,065
Variable interest entities	-	32,710
Other options	1,026	7,962

Total consolidated inventory not owned	13,090	61,737

Total inventories	977,609	1,001,940

Investments in and advances to unconsolidated
joint ventures	66,375	38,000

Receivables, deposits, and notes	50,504	61,023

Property, plant, and equipment – net	58,663	62,767

Prepaid expenses and other assets	87,323	83,928

Total homebuilding	1,673,939	1,715,765

Financial services:
Cash and cash equivalents	5,611	8,056
Restricted cash	6,621	4,022
Mortgage loans held for sale	47,372	86,326
Other assets	3,012	3,391

Total financial services	62,616	101,795

Total assets	$1,736,555	$1,817,560

(1) Derived from the audited balance sheet as of October 31, 2010.

See notes to condensed consolidated financial statements (unaudited).

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands Except Share Amounts)

	April 30, 2011	October 31, 2010
LIABILITIES AND EQUITY	(Unaudited)	(1)

Homebuilding:
Nonrecourse land mortgages	$18,934	$4,313
Accounts payable and other liabilities	277,269	319,749
Customers’ deposits	15,227	9,520
Nonrecourse mortgages secured by operating properties	20,210	20,657
Liabilities from inventory not owned	13,090	53,249

Total homebuilding	344,730	407,488

Financial services:
Accounts payable and other liabilities	16,865	16,142
Mortgage warehouse line of credit	33,528	73,643

Total financial services	50,393	89,785

Notes payable:
Senior secured notes	785,372	784,592
Senior notes	827,460	711,585
Senior subordinated notes	-	120,170
TEU senior subordinated amortizing notes	15,615	-
Accrued interest	22,319	23,968

Total notes payable	1,650,766	1,640,315

Income taxes payable	40,483	17,910

Total liabilities	2,086,372	2,155,498

Equity:
Hovnanian Enterprises, Inc. stockholders’ equity deficit:
Preferred stock, $.01 par value - authorized 100,000 shares;
Issued 5,600 shares with a liquidation preference of $140,000
at April 30, 2011 and at October 31, 2010	135,299	135,299
Common stock, Class A, $.01 par value – authorized
200,000,000 shares; issued 91,430,549 shares at April 30, 2011
and 74,809,683 shares at October 31, 2010 (including 11,694,720
shares at April 30, 2011 and October 31, 2010 held in Treasury)	914	748
Common stock, Class B, $.01 par value (convertible
to Class A at time of sale) – authorized 30,000,000 shares;
issued 15,253,812 shares at April 30, 2011 and 15,256,543
shares at October 31, 2010 (including 691,748 shares at
April 30, 2011 and October 31, 2010 held in Treasury)	153	153
Paid in capital - common stock	589,123	463,908
Accumulated deficit	(960,228)	(823,419)
Treasury stock - at cost	(115,257)	(115,257)

Total Hovnanian Enterprises, Inc. stockholders’ equity deficit	(349,996)	(338,568)

Noncontrolling interest in consolidated joint ventures	179	630

Total equity deficit	(349,817)	(337,938)

Total liabilities and equity	$1,736,555	$1,817,560

(1) Derived from the audited balance sheet as of October 31, 2010.

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 April 30,		Six Months Ended April 30,
	2011	2010	2011	2010
Revenues:
Homebuilding:
Sale of homes	$246,974	$310,493	$482,859	$619,846
Land sales and other revenues	2,819	1,033	12,407	3,719

Total homebuilding	249,793	311,526	495,266	623,565
Financial services	5,304	7,059	12,398	14,665

Total revenues	255,097	318,585	507,664	638,230

Expenses:
Homebuilding:
Cost of sales, excluding interest	210,463	256,926	411,893	516,742
Cost of sales interest	13,956	18,745	29,582	38,593
Inventory impairment loss and land option
write-offs	16,925	1,186	30,450	6,152

Total cost of sales	241,344	276,857	471,925	561,487

Selling, general and administrative	39,837	42,359	80,044	85,431

Total homebuilding expenses	281,181	319,216	551,969	646,918

Financial services	5,177	5,631	10,647	11,026

Corporate general and administrative	11,952	14,203	26,960	30,416

Other interest	24,887	23,356	48,872	48,963

Other operations	706	1,767	1,593	3,664

Total expenses	323,903	364,173	640,041	740,987

(Loss) gain on extinguishment of debt	(1,644)	17,217	(1,644)	19,791

(Loss) income from unconsolidated joint ventures	(3,232)	391	(4,224)	18

Loss before income taxes	(73,682)	(27,980)	(138,245)	(82,948)

State and federal income tax (benefit) provision:
State	(372)	657	293	828
Federal	(643)	(3)	(1,729)	(291,331)

Total income taxes	(1,015)	654	(1,436)	(290,503)

Net (loss) income	$(72,667)	$(28,634)	$(136,809)	$207,555

Per share data:
Basic:
(Loss) income per common share	$(0.69)	$(0.36)	$(1.49)	$2.64
Weighted-average number of common
shares outstanding	105,894	78,668	92,020	78,610

Assuming dilution:
(Loss) income per common share	$(0.69)	$(0.36)	$(1.49)	$2.60
Weighted-average number of common
shares outstanding	105,894	78,668	92,020	79,794

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	Noncontrolling Interest	Total

Balance, November 1, 2010	63,114,963	$748	14,564,795	$153	5,600	$135,299	$463,908	$(823,419)	$(115,257)	$630	$(337,938)

Stock options, amortization and issuances	382,249	4					2,565				2,569

Restricted stock amortization, issuances and forfeitures							(179)				(179)

Stock issuance February 14, 2011	13,512,500	135					54,764				54,899

Issuance of prepaid common stock purchase contracts							68,092				68,092

Settlement of prepaid common stock purchase contracts	2,723,386	27					(27)				-

Conversion of Class B to Class A Common Stock	2,731		(2,731)								-

Noncontrolling interest in consolidated joint ventures										(451)	(451)

Net loss								(136,809)			(136,809)

Balance, April 30, 2011	79,735,829	$914	14,562,064	$153	5,600	$135,299	$589,123	$(960,228)	$(115,257)	$179	$(349,817)

See notes to condensed consolidated financial statements (unaudited).

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Six Months Ended
	April 30,
	2011	2010
Cash flows from operating activities:
Net (loss) income	$(136,809)	$207,555
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation	4,565	6,457
Compensation from stock options and awards	3,617	4,515
Amortization of bond discounts and deferred financing costs	2,780	2,471
Gain on sale and retirement of property
and assets	(269)	(43)
Loss (income) from unconsolidated joint ventures	4,224	(18)
Distributions of earnings from unconsolidated joint ventures	293	1,697
Loss (gain) on extinguishment of debt	1,644	(19,791)
Inventory impairment and land option write-offs	30,450	6,152
Decrease in assets:
Mortgage loans held for sale	38,954	11,492
Restricted cash, receivables, prepaids, deposits and
other assets	29,384	24,911
Inventories	(27,660)	(22,377)
(Decrease) increase in liabilities:
State and Federal income tax liabilities	22,573	(36,060)
Customers’ deposits	5,707	(3,937)
Accounts payable, accrued interest and other accrued liabilities	(75,412)	(56,518)
Net cash (used in) provided by provided by operating activities	(95,959)	126,506
Cash flows from investing activities:
Proceeds from sale of property and assets	928	153
Purchase of property, equipment, and other fixed assets	(449)	(947)
Investments in and advances to unconsolidated
joint ventures	(3,228)	(2,553)
Distributions of capital from unconsolidated joint ventures	1,385	1,827
Net cash used in investing activities	(1,364)	(1,520)
Cash flows from financing activities:
(Payments) proceeds from mortgages and notes	(4,359)	8,665
Proceeds from senior debt	151,220
Proceeds from tangible equity units issuance	83,707
Proceeds from common stock issuance	54,899
Net payments related to mortgage
warehouse lines of credit	(40,115)	(8,074)
Deferred financing cost from note issuances	(4,445)	(1,391)
Principal payments and debt repurchases	(157,034)	(92,306)
Net cash provided by (used in) financing activities	83,873	(93,106)
Net (decrease) increase in cash and cash equivalents	(13,450)	31,880
Cash and cash equivalents balance, beginning
of period	367,180	426,692
Cash and cash equivalents balance, end of period	$353,730	$458,572

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands - Unaudited)

(Continued)

	Six Months Ended
	April 30,
	2011	2010
Supplemental disclosures of cash flow:
Cash received during the period for:
Income taxes	$23,984	$254,443

Supplemental disclosure of noncash financing activities:

In the first quarter of fiscal 2011, our partner in a land development joint venture transferred its interest in the venture to us. The consolidation resulted in increases in inventory and non-recourse land mortgages of $9.5 million and $18.5 million, respectively, and a decrease in other liabilities of $9.0 million.

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 16).

The accompanying unaudited Condensed Consolidated Financial Statements include our accounts and those of all wholly-owned subsidiaries after elimination of all significant 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 and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K/A for the year ended October 31, 2010. 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, 2010 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.

2. For the three and six months ended April 30, 2011, the Company’s total stock-based compensation expense was $1.7 million and $3.6 million, respectively, and $2.2 million and $4.5 million for the three and six months ended April 30, 2010, respectively. Included in this total stock-based compensation expense was the vesting of stock options of $1.3 million and $2.6 million for the three and six months ended April 30, 2011, respectively, and $1.3 million and $2.5 million for the three and six months ended April 30, 2010, respectively.

3. Interest costs incurred, expensed and capitalized were:

	Three Months Ended April 30,		Six Months Ended April 30,
(In thousands)	2011	2010	2011	2010

Interest capitalized at
beginning of period	$134,504	$159,026	$136,288	$164,340
Plus interest incurred(1)	39,895	38,201	77,722	78,342
Less cost of sales interest expensed	13,956	18,745	29,582	38,593
Less other interest expensed(2)(3)	24,887	23,356	48,872	48,963
Interest capitalized at end of period(4)	$135,556	$155,126	$135,556	$155,126

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

(2)	Other interest expenses is comprised of interest that does not qualify for capitalization because

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

our debt. Interest on completed homes and land in planning, which does not qualify for

capitalization is expensed.

(3)	Cash paid for interest, net of capitalized interest, is the sum of other interest expensed, as defined above, and interest paid by our mortgage and finance subsidiaries adjusted for the change in accrued interest, which is calculated as follows:

	Six Months Ended April 30,
(In thousands)	2011	2010
Other interest expensed	$48,872	$48,963
Interest paid by our mortgage and finance subsidiaries	1,007	501
Decrease in accrued interest	1,649	1,608
Cash paid for interest, net of capitalized interest	$51,528	$51,072

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

4. Accumulated depreciation at April 30, 2011 and October 31, 2010 amounted to $75.6 million and $73.0 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 six months ended April 30, 2011, our discount rates used for the impairments recorded ranged from 18.0% to 19.8%. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments. We recorded impairment losses, which are included in the Condensed Consolidated Statement of Operations line entitled "Homebuilding – inventory impairment loss and land option write-offs", and deducted from inventory, of $16.3 million and $1.2 million for the three months ended April 30, 2011 and 2010, respectively, and $23.1 million and $4.5 million for the six months ended April 30, 2011 and 2010, respectively.

The following table represents inventory impairments by homebuilding segment for the three and six months ended April 30, 2011 and 2010:

	Three Months Ended		Three Months Ended
(Dollars in millions)	April 30, 2011		April 30, 2010

	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)
Northeast	3	$12.3	$70.7	1	$0.5	$1.0
Mid-Atlantic	2	1.8	9.5	1	0.2	0.9
Midwest	-	-	-	-	-	-
Southeast	-	-	-	1	-	0.2
Southwest	-	-	-	1	0.1	0.2
West	1	2.2	5.1	1	0.4	0.4
Total	6	$16.3	$85.3	5	$1.2	$2.7

	Six Months Ended		Six Months Ended
(Dollars in millions)	April 30, 2011		April 30, 2010

	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)	Number of Communities	Dollar Amount of Impairment	Pre- Impairment Value(1)
Northeast	5	$17.7	$88.6	2	$3.1	$5.7
Mid-Atlantic	3	2.1	10.9	2	0.5	1.5
Midwest	-	-	-	-	-	-
Southeast	-	-	-	6	0.4	1.2
Southwest	-	-	-	1	0.1	0.2
West	2	3.3	10.6	1	0.4	0.4
Total	10	$23.1	$110.1	12	$4.5	$9.0

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

impairments.

We also record losses for the write-offs of options, and approval, engineering and capitalized interest costs when we redesign communities and/or abandon certain engineering costs or we do not exercise options because the communities' forecasted profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs were $0.6 and zero for the three months ended April 30, 2011 and 2010, respectively, and $7.3 million and $1.7 million for the six months ended April 30, 2011 and 2010, 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. These recoveries have not been significant in comparison to the total cost written off.

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 six months ended April 30, 2011 and 2010:

	Three Months Ended
	April 30,
	2011		2010
(Dollars in millions)	Number of Walk-Away Lots	Dollar Amount of Write-Offs	Number of Walk-Away Lots	Dollar Amount of Write-Offs

Northeast	56	$-	-	$(0.1)
Mid-Atlantic	1,522	0.1	173	0.1
Midwest	98	0.4	-	-
Southeast	190	0.1	-	-
Southwest	2	-	409	-
West	-	-	-	-
Total	1,868	$0.6	582	$-

	Six Months Ended
	April 30,
	2011		2010
(Dollars in millions)	Number of Walk-Away Lots	Dollar Amount of Write-Offs	Number of Walk-Away Lots	Dollar Amount of Write-Offs

Northeast	1,045	$3.1	259	$1.5
Mid-Atlantic	1,774	0.5	184	0.1
Midwest	230	0.4	-	(0.1)
Southeast	1,173	0.3	-	0.1
Southwest	70	-	409	0.1
West	143	3.0	-	-
Total	4,435	$7.3	852	$1.7

We have decided to mothball (or stop development on) certain communities where we have determined the current market conditions do 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 first half of fiscal 2011, we did not mothball any communities but re-activated four previously mothballed communities. In addition, during the first half of fiscal 2011, we sold two previously mothballed communities. As of April 30, 2011, the net book value associated with our 52 total mothballed communities was $160.6 million, net of impairment charges of $544.6 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 2011 and 2010, our deductible under our general liability insurance is $20 million per occurrence for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in 2011 and 2010 is $0.1 million up to a $5 million limit. Our aggregate retention in 2011 is $21 million for construction defect, warranty and bodily injury claims. Our aggregate retention in 2010 was $21 million for construction defect and warranty claims, and $20 million for bodily injury claims. Additions and charges in the warranty reserve and general liability reserve for the three and six months ended April 30, 2011 and 2010 are as follows:

	Three Months Ended		Six Months Ended
	April 30,		April 30,
(In thousands)	2011	2010	2011	2011

Balance, beginning of period	$123,189	$130,544	$125,268	$127,869
Additions	5,357	9,543	12,845	19,445
Charges incurred	(9,779)	(12,737)	(19,346)	(19,964)
Balance, end of period	$118,767	$127,350	$118,767	$127,350

Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty data and other industry data to assist us estimate our reserves for 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 $6.3 million and $4.9 million for the three months ended April 30, 2011 and 2010, respectively, and $17.7 million and $10.2 million for the six months ended April 30, 2011 and 2010, respectively, for deliveries in prior years.

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.

The New York State Department of Environmental Conservation assessed a $161,000 civil penalty (of which $96,000 was suspended) against us and required us to perform certain measures in connection with notices of violation for allegedly failing to comply with a storm water permit at an incomplete project in the state of New York. We have paid the $65,000 penalty and anticipate timely completion of the required measures without material expense, although if we do not complete the required measures on time some or all of the suspended penalty could be imposed. Although we do not know the final outcome, we believe any penalties and any other impacts of this matter will not have a material adverse effect on us.

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. We have had negotiations with the plaintiffs recently to settle this case. Based on these negotiations we have accrued an immaterial amount for the potential settlement based on our assessment of the outcome. However, our assessment of the potential outcome may differ from the ultimate resolution of this matter.

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 April 30, 2011, $151.0 million of the total cash and cash equivalents was in cash equivalents, the carrying 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 $66.0 million and $89.5 million of letters of credit outstanding as of April 30, 2011 and October 31, 2010, 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 April 30, 2011 and October 31, 2010, the amount of cash collateral in these segregated accounts was $67.1 million and $92.3 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 JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”) is a short-term borrowing facility that provides up to $50 million through April 4, 2012. 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 the current LIBOR subject to a floor of 1.625% plus the applicable margin ranging from 2.50% to 2.625% based on the takeout investor and type of loan. As of April 30, 2011, the aggregate principal amount of all borrowings under the Chase Master Repurchase Agreement was $33.5 million. We had a second Master Repurchase Agreement with Citibank, N.A. (“Citibank Master Repurchase Agreement”) which was terminated on April 5, 2011.

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 facilities, 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 agreement, we do not consider any of these covenants to be substantive or material. As of April 30, 2011, we believe we were in compliance with the covenants of the Chase Master Repurchase Agreement.

10. At April 30, 2011, we had $797.2 million ($785.4 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 April 30, 2011, we also had $832.7 million of outstanding senior notes ($827.5 million net of discount) comprised of $54.4 million 6 1/2% Senior Notes due 2014, $29.2 million 6 3/8% Senior Notes due 2014, $155.0 million 11 7/8% Senior Notes due 2015, $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 outstanding $15.6 million senior subordinated amortizing notes (as described below). On May 4, 2011, we issued $12.0 million new senior secured notes, as well as redeemed certain senior secured notes. See Note 22 for additional information.

On February 14, 2011, we completed an underwritten public offering of $155.0 million aggregate principal amount of 11 7/8% Senior Notes due 2015 (the “Senior Notes”), which are guaranteed by us and substantially all of our subsidiaries. The Senior Notes bear interest at a rate of 11 7/8% per annum, which is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2011, and mature on October 15, 2015. The Senior Notes are redeemable in whole or in part at K. Hovnanian’s option at 100% of the principal amount thereof plus accrued and unpaid interest to the date of redemption, if any, plus a “make-whole” amount. In addition, K. Hovnanian may redeem up to 35% of the aggregate principal amount of the Senior Notes before April 15, 2014 with the net cash proceeds from certain equity offerings at a price equal to 111.875% of the principal amount thereof plus accrued and unpaid interest.

The net proceeds from the issuances of the Senior Notes, Class A Common Stock (see Note 12) and Tangible Equity Units (see Note 11) were approximately $286.2 million, a portion of which were used to fund the purchase through tender offers, on February 14, 2011, of the following series of K. Hovnanian’s senior and senior subordinated notes: approximately $24.6 million aggregate principal amount of 8% Senior Notes due 2012 (the “2012 Senior Notes”), $44.1 million aggregate principal amount of 8 7/8% Senior Subordinated Notes due 2012 (the “2012 Senior Subordinated Notes”) and $29.2 million aggregate principal amount of 7 3/4% Senior Subordinated Notes due 2013 (the “2013 Notes” and, together with the 2012 Senior Notes and the 2012 Senior Subordinated Notes, the “Tender Offer Notes”). On February 14, 2011, K. Hovnanian called for redemption on March 15, 2011 all Tender Offer Notes that were not tendered in the tender offers for an aggregate redemption price of approximately $60.1 million. Such redemptions were funded with proceeds from the offerings of the Class A Common Stock, the Units and the Senior Notes.

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, our home mortgage subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, certain of our title insurance subsidiaries and our foreign subsidiary (see Note 21). 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, 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 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 April 30, 2011, 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 also continue to evaluate our capital structure and may also continue to make debt purchases and/or exchanges from time to time through tender offers, open market purchases, private transactions, or otherwise or seek to raise additional debt or equity capital, 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 for the foreseeable future. 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 April 30, 2011, the aggregate book value of the real property collateral securing these notes was approximately $748.7 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 $322.3 million as of April 30, 2011, which includes $67.1 million of restricted cash also collateralizing certain letters of credit.

11. On February 9, 2011, we completed an underwritten public offering of an aggregate of 3,000,000 7.25% Tangible Equity Units (the “Units”), and on February 14, 2011, we issued an additional 450,000 Units pursuant to the over-allotment option granted to the underwriters.

Each Unit initially consists of (i) a prepaid stock purchase contract (each a “Purchase Contract”) and (ii) a senior subordinated amortizing note due February 15, 2014 (each, an “Amortizing Note”). The Amortizing Notes have an aggregate principal amount of $15.6 million as of April 30, 2011. On each February 15, May 15, August 15 and November 15, commencing on May 15, 2011, K. Hovnanian will pay holders of Amortizing Notes equal quarterly cash installments of $0.453125 per Amortizing Note (except for the May 15, 2011 installment payment, which was $0.483334 per Amortizing Note), which cash payments in the aggregate will be equivalent to 7.25% per year with respect to each $25 stated amount of Units. Each installment will constitute a payment of interest (at a rate of 12.072% per annum) and a partial repayment of principal on the Amortizing Note, allocated as set forth in the amortization schedule provided in the Indenture under which the Amortizing Notes were issued. The Amortizing Notes have a scheduled final installment payment date of February 15, 2014. If we elect to settle the Purchase Contracts early, holders of the Amortizing Notes will have the right to require K. Hovnanian to repurchase such holders’ Amortizing Notes, except in certain circumstances as described in the indenture governing Amortizing Notes.

Unless settled earlier, on February 15, 2014 (subject to postponement under certain circumstances), each Purchase Contract will automatically settle and we will deliver a number of shares of Class A Common Stock based on the applicable market value, as defined in the purchase contract agreement, which will be between 4.7655 shares and 5.8140 shares per Purchase Contract (subject to adjustment). Each Unit may be separated into its constituent Purchase Contract and Amortizing Note after the initial issuance date of the Units, and the separate components may be combined to create a Unit. The amortizing note component of the Units is recorded as debt, and the purchase contract component of the Units is recorded in equity as additional paid in capital. We have recorded $68.1 million, the initial fair value of the Purchase Contracts, as additional paid in capital as of April 30, 2011.

12. 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 or (loss) (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period. The basic weighted-average number of shares includes 13.7 million shares related to Purchase Contracts which are contingently issuable with no additional cash required to be paid. 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. 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 both the three and six months ended April 30, 2011, 0.5 million incremental shares attributed to non-vested stock and outstanding options to purchase common stock were excluded from the computation of diluted EPS because we had a net loss for the period, and any incremental shares would not be dilutive. In addition, shares related to out-of-the money stock options that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS were 4.2 million and 3.5 million at April 30, 2011 and 2010, respectively, because to do so would have been anti-dilutive for the periods presented. For the three months ended April 30, 2010, 1.0 million incremental shares attributed to non-vested stock and outstanding options to purchase common stock were excluded from the computation of diluted EPS because we had a net loss for the period, and any incremental shares would not be dilutive. For the six months ended April 30, 2010, diluted earnings per common share was computed using the weighted average number of shares outstanding adjusted for the 0.8 million incremental shares attributed to non-vested stock and outstanding options to purchase common stock.

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 six months ended April 30, 2011. As of April 30, 2011, 3.4 million shares of Class A Common Stock have been purchased under this program.

On February 9, 2011, we completed an underwritten public offering of 13,512,500 shares of our Class A Common Stock, including 1,762,500 shares issued pursuant to the over-allotment option granted to the underwriters, at a price of $4.30 per share.

13. 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 six months ended April 30, 2011 and 2010, 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.

14. 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 our 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 stock; (ii) increase the percentage of our 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" (as defined in the applicable Treasury Regulations).

15. 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 to previously profitable years that were not available for carryback prior to the new tax legislation. We recorded the impact of the carryback of $291.3 million in the three months ended January 31, 2010. We received $274.1 million in the second quarter of fiscal 2010 and the remaining $17.2 million in 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 forward to future years to recover the deferred tax assets. In accordance with 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 weakness in the homebuilding industry during 2009, 2010 and the first two quarters of 2011, resulting in additional inventory and intangible impairments, we are in a three-year cumulative loss position as of April 30, 2011. 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 taxes amounted to $840.6 million and $811.0 million at April 30, 2011 and October 31, 2010, respectively. The valuation allowance increased during the six months ended April 30, 2011 primarily due to additional reserves recorded for the federal tax benefits related to the losses incurred during the period.

16. 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, and Pennsylvania)

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

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

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

(5) Southwest (Arizona and 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, operations of the homebuilding segments include sales of land. 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 segment operations was as follows:

	Three Months Ended		Six Months Ended
	April 30,		April 30,
(In thousands)	2011	2010	2011	2010

Revenues:
Northeast	$36,643	$57,046	$81,984	$126,507
Mid-Atlantic	46,840	67,716	93,262	134,739
Midwest	17,484	16,117	31,574	39,549
Southeast	16,918	22,375	32,438	47,160
Southwest	99,248	103,823	190,641	186,371
West	32,724	44,491	65,473	88,970
Total homebuilding	249,857	311,568	495,372	623,296
Financial services	5,304	7,059	12,398	14,665
Corporate and unallocated	(64)	(42)	(106)	269
Total revenues	$255,097	$318,585	$507,664	$638,230

(Loss) income before income taxes:
Northeast	$(20,086)	$(4,551)	$(34,724)	$(14,772)
Mid-Atlantic	(5,830)	1,522	(8,989)	2,121
Midwest	(2,407)	(3,785)	(4,333)	(6,025)
Southeast	(3,660)	(2,767)	(6,680)	(4,955)
Southwest	6,469	7,045	11,872	10,936
West	(8,394)	(4,534)	(17,008)	(10,407)
Homebuilding loss before income taxes	(33,908)	(7,070)	(59,862)	(23,102)
Financial services	127	1,428	1,751	3,639
Corporate and unallocated	(39,901)	(22,338)	(80,134)	(63,485)
Loss before income taxes	$(73,682)	$(27,980)	$(138,245)	$(82,948)

	April 30,	October 31,
(In thousands)	2011	2010

Assets:
Northeast	$452,991	$456,544
Mid-Atlantic	204,827	177,503
Midwest	50,692	47,818
Southeast	70,840	58,765
Southwest	198,767	206,001
West	157,412	195,808
Total homebuilding	1,135,529	1,142,439
Financial services	62,616	101,795
Corporate and unallocated	538,410	573,326
Total assets	$1,736,555	$1,817,560

17. The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company's discretion.

Certain option purchase contracts result in the creation of a variable interest in the entity that owns the land parcel under option. In June 2009, the Financial Accounting Standards Board revised its guidance regarding the determination of a primary beneficiary of a variable interest entity. The revisions were effective for the Company as of November 1, 2010 and amend the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power to direct the significant activities of the entity and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the entity. The revised guidance also increased the required disclosures about a reporting entity's involvement with variable interest entities. The Company has determined it did not have the power to direct the activities that most significantly impact such entities' economic performance, therefore, all of the variable interest entities that were previously reported as consolidated inventory not owned on the Company's balance sheets were deconsolidated which reduced, as of November 1, 2010, Consolidated inventory not owned and Liabilities from inventory not owned by $32.7 million.

We will continue to secure land and lots using options, some of which are with variable interest entities. Including deposits on our unconsolidated variable interest entities, at April 30, 2011, we had total cash and letters of credit deposits amounting to approximately $27.6 million to purchase land and lots with a total purchase price of $657.5 million. The maximum exposure to loss with respect to our land and lot options is limited to the deposits, although some deposits are refundable at our request or refundable if certain conditions are not met.

18. 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.

During the three months ended January 31, 2011, we entered into a joint venture agreement to acquire a portfolio of homebuilding projects, including land we previously owned. We sold the land we owned to the joint venture for net proceeds of $36.1 million, which was equal to our book value in the land at that time, and recorded an investment in unconsolidated joint ventures of $19.7 million for our interest in the venture. During the three months ended April 30, 2011 we expanded this joint venture, selling additional land we owned to the joint venture for net proceeds of $27.2 million, which was equal to our book value in the land at that time, and recorded an additional investment of $11.4 million for our interest in the venture. Separately, during the three months ended January 31, 2011, our partner in a land development joint venture transferred its interest in the venture to us. The consolidation resulted in increases in inventory and non-recourse land mortgages of $9.5 million and $18.5 million, respectively, and a decrease in other liabilities of $9.0 million as of April 30, 2011.

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)		April 30, 2011
	Homebuilding	Land Development	Total
Assets:
Cash and cash equivalents	$27,453	$880	$28,333
Inventories	342,648	15,591	358,239
Other assets	21,084	360	21,444
Total assets	$391,185	$16,831	$408,016

Liabilities and equity:
Accounts payable and accrued liabilities	$20,574	$12,722	$33,296
Notes payable	228,549	21	228,570
Total liabilities	249,123	12,743	261,866
Equity of:
Hovnanian Enterprises, Inc.	58,019	1,699	59,718
Others	84,043	2,389	86,432
Total equity	142,062	4,088	146,150
Total liabilities and equity	$391,185	$16,831	$408,016
Debt to capitalization ratio	62%	1%	61%

(Dollars in thousands)		October 31, 2010
	Homebuilding	Land Development	Total
Assets:
Cash and cash equivalents	$17,538	$161	$17,699
Inventories	247,790	73,864	321,654
Other assets	20,321		20,321
Total assets	$285,649	$74,025	$359,674

Liabilities and equity:
Accounts payable and accrued liabilities	$19,076	$17,266	$36,342
Notes payable	159,715	36,791	196,506
Total liabilities	178,791	54,057	232,848
Equity of:
Hovnanian Enterprises, Inc.	29,208	2,510	31,718
Others	77,650	17,458	95,108
Total equity	106,858	19,968	126,826
Total liabilities and equity	$285,649	$74,025	$359,674
Debt to capitalization ratio	60%	65%	61%

As of April 30, 2011 and October 31, 2010, we had advances outstanding of approximately $13.9 million and $13.5 million, respectively, 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 $66.4 million and $38.0 million at April 30, 2011 and October 31, 2010, 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 six months of fiscal 2011 and 2010, respectively, we did not write down any joint venture investments based on our determination that none of the investments in our joint ventures sustained an other than temporary impairment during those periods.

	For the Three Months Ended April 30, 2011
(In thousands)	Homebuilding	Land Development	Total

Revenues	$29,490	$1,745	$31,235
Cost of sales and expenses	(35,523)	(1,400)	(36,923)
Joint venture net (loss) income	(6,033)	345	(5,688)
Our share of net (loss) income	$(2,927)	$137	$(2,790)

	For the Three Months Ended April 30, 2010
(In thousands)	Homebuilding	Land Development	Total

Revenues	$33,970	$3,989	$37,959
Cost of sales and expenses	(30,115)	(13,027)	(43,142)
Joint venture net income (loss)	$3,855	$(9,038)	$(5,183)
Our share of net income	$510	$30	$540

	For the Six Months Ended April 30, 2011
(In thousands)	Homebuilding	Land Development	Total

Revenues	$52,521	$6,639	$59,160
Cost of sales and expenses	(60,428)	(6,139)	(66,567)
Joint venture net (loss) income	$(7,907)	$500	$(7,407)
Our share of net (loss) income	$(3,929)	$280	$(3,649)

	For the Six Months Ended April 30, 2010
(In thousands)	Homebuilding	Land Development	Total

Revenues	$55,681	$10,260	$65,941
Cost of sales and expenses	(51,409)	(16,151)	(67,560)
Joint venture net income (loss)	$4,272	$(5,891)	$(1,619)
Our share of net income (loss)	$519	$(411)	$108

(Loss) income 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 income or loss of these unconsolidated homebuilding and land development joint ventures. The difference between our share of the income or loss from these unconsolidated joint ventures disclosed in the tables above for the three and six months ended April 30, 2011 and April 30, 2010 compared to the Condensed Consolidated Statements of Operations is due primarily 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 50% or less. 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, most of our more recently established joint ventures have not obtained any financing, therefore the capital is all equity for these joint ventures. 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 recorded by the joint ventures the average debt to capitalization ratio of all our joint ventures is currently 61%. Financing is on a nonrecourse 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 variable interest entity under ASC 810-10 "Consolidation – Overall" 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.

19. Recent Accounting Pronouncements – There have been no accounting pronouncements that have been issued but are not yet effective that would have a material impact on our condensed consolidated financial statements.

20. ASC 820, “Fair Value Measurements and Disclosures”, 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 April 30, 2011	Fair Value at October 31, 2010

Mortgage loans held for sale (1)	Level 2	$46,257	$85,358
Interest rate lock commitments	Level 2	386	79
Forward contracts	Level 2	(1,013)	(254)
		$45,630	$85,183

(1) The aggregate unpaid principal balance was $45.3 million and $84.1 million at April 30, 2011 and October 31, 2010, 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”, 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 April 30, 2011. 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.

For the financial instruments 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 April 30, 2011
(In thousands)	Loans Held For Sale	Mortgage Loan Commitments	Forward Contracts

Increase (decrease) in fair value included in net income (loss), all reflected in financial services revenues	$587	$376	$(800)

	Three Months Ended April 30, 2010
(In thousands)	Loans Held For Sale	Mortgage Loan Commitments	Forward Contracts

Increase (decrease) in fair value included in net income (loss), all reflected in financial services revenues	$168	$70	$(258)

	Six Months Ended April 30, 2011
(In thousands)	Loans Held For Sale	Interest Rate Lock Commitments	Forward Contracts

(Decrease) increase in fair value included in net income (loss), all reflected in financial services revenues	$(380)	$307	$(759)

	Six Months Ended April 30, 2010
(In thousands)	Loans Held For Sale	Interest Rate Lock Commitments	Forward Contracts

(Decrease) increase in fair value included in net income (loss), all reflected in financial services revenues	$(305)	$76	$(143)

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 periods presented. 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
		April 30, 2011
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount	Total Losses	Fair Value

Sold and unsold homes and lots under development	Level 3	$54,573	$(11,823)	$42,750
Land and land options held for future development or sale	Level 3	$30,716	$(4,470)	$26,246

		Three Months Ended
		April 30, 2010
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount	Total Losses	Fair Value

Sold and unsold homes and lots under development	Level 3	$1,744	$(760)	$984
Land and land options held for future development or sale	Level 3	$1,000	$(500)	$500

		Six Months Ended
		April 30, 2011
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount	Total Losses	Fair Value

Sold and unsold homes and lots under development	Level 3	$66,705	$(14,027)	$52,678
Land and land options held for future development or sale	Level 3	$43,430	$(9,045)	$34,385

		Six Months Ended
		April 30, 2010
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount	Total Losses	Fair Value

Sold and unsold homes and lots under development	Level 3	$3,386	$(1,389)	$1,997
Land and land options held for future development or sale	Level 3	$5,629	$(3,120)	$2,509

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 six months ended April 30, 2011, our discount rates used for the impairments recorded ranged from 18.0% to 19.8%. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.

The Financial Services segment had a pipeline of loan applications in process of $243.6 million at April 30, 2011. Loans in process for which interest rates were committed to the borrowers totaled approximately $41.3 million as of April 30, 2011. 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 April 30, 2011, the segment had open commitments amounting to $18.5 million to sell MBS with varying settlement dates through May 18, 2011.

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 $982.2 million, $536.9 million and $12.3 million, respectively, as of April 30, 2011 and $830.7 million, $515.6 million and $113.6 million, respectively, as of October 31, 2010. The fair value of our other financial instruments approximates their recorded values.

21. One of Hovnanian Enterprises, Inc.'s (the "Parent"), wholly owned subsidiaries, K. Hovnanian (the “Subsidiary Issuer”), acts as a finance entity that as of April 30, 2011, had issued and outstanding approximately $797.2 million of senior secured notes ($785.4 million, net of discount), $832.7 million of senior notes ($827.5 million, net of discount), and $15.6 million of senior subordinated Tangible Equity Units. 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 its home mortgage subsidiaries, joint ventures, subsidiaries holding interests in its joint ventures, certain of its title insurance subsidiaries and its foreign subsidiary (collectively, the “Nonguarantor Subsidiaries”), have guaranteed fully and unconditionally, on a joint and several basis, the obligations of the Subsidiary Issuer to pay principal, interest and premiums, if any, 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 Nonguarantor 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

APRIL 30, 2011

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
ASSETS:
Homebuilding	$15,258	$341,474	$1,136,972	$ 180,235	$	$1,673,939
Financial services			7,001	55,615		62,616
Investments in and amounts due to and from consolidated subsidiaries	(325,615)	2,045,494	(2,345,104)	159,329	465,896	-
Total assets	$(310,357)	$2,386,968	$(1,201,131)	$395,179	$465,896	$1,736,555

LIABILITIES AND EQUITY:
Homebuilding	$1,452	$655	$338,843	3,780	$	$344,730
Financial services			6,785	43,608		50,393
Notes payable		1,650,748	18			1,650,766
Income taxes payable	36,671	-	3,812	-		40,483
Stockholders’ (deficit) equity	(348,480)	735,565	(1,550,589)	347,612	465,896	(349,996)
Non-controlling interest in consolidated joint ventures				179		179
Total liabilities and equity	$(310,357)	$2,386,968	$(1,201,131)	$395,179	$465,896	$1,736,555

CONDENSED CONSOLIDATING BALANCE SHEET

OCTOBER 31, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
ASSETS:
Homebuilding	$14,498	$334,551	$1,165,877	$200,839	$	$1,715,765
Financial services			4,435	97,360		101,795
Investments in and amounts due to and from consolidated subsidiaries	(330,310)	2,061,186	(2,202,568)	148,845	322,847	-
Total assets	$(315,812)	$2,395,737	$(1,032,256)	$447,044	$322,847	$1,817,560

LIABILITIES AND EQUITY:
Homebuilding	$1,458	$	$401,567	$4,463	$	$407,488
Financial services			4,271	85,514		89,785
Notes payable		1,640,144	171			1,640,315
Income tax payable	21,298		(3,388)			17,910
Stockholders’ (deficit) equity	(338,568)	755,593	(1,434,877)	356,437	322,847	(338,568)
Non-controlling interest in consolidated joint ventures				630		630
Total liabilities and equity	$(315,812)	$2,395,737	$(1,032,256)	$447,044	$322,847	$1,817,560

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS APRIL 30, 2011

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$3	$(103)	$249,801	$1,332	$(1,240)	$249,793
Financial services			1,209	4,095		5,304
Intercompany charges		28,299	(30,839)	(210)	2,750	-
Total revenues	3	28,196	220,171	5,217	1,510	255,097

Expenses:
Homebuilding	1,558	40,595	277,636	405	(1,468)	318,726
Financial services	82		1,234	3,864	(3)	5,177
Total expenses	1,640	40,595	278,870	4,269	(1,471)	323,903
Loss on extinguishment
of debt		(1,644)				(1,644)
Loss from
unconsolidated joint
ventures			(451)	(2,781)		(3,232)
(Loss) income before income taxes	(1,637)	(14,043)	(59,150)	(1,833)	2,981	(73,682)
State and federal
income tax
(benefit) provision	(5,087)		4,072			(1,015)
Equity in (loss) income
of consolidated
subsidiaries	(76,117)				76,117	-
Net (loss) income	$(72,667)	$(14,043)	$(63,222)	$(1,833)	$79,098	$(72,667)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THREE MONTHS ENDED APRIL 30, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$4	$(123)	$312,600	$286	$(1,241)	$311,526
Financial services			1,447	5,612		7,059
Intercompany charges		32,996	(43,685)	(431)	11,120	-
Total revenues	4	32,873	270,362	5,467	9,879	318,585

Expenses:
Homebuilding	2,092	38,515	315,040	(428)	3,323	358,542
Financial services	130		1,370	4,308	(177)	5,631
Total expenses	2,222	38,515	316,410	3,880	3,146	364,173
Gain on extinguishment
of debt		17,217				17,217
(Loss) income from
unconsolidated joint
ventures			(274)	665		391
(Loss) income before income taxes	(2,218)	11,575	(46,322)	2,252	6,733	(27,980)
State and federal income tax
provision (benefit)	654	4,051	(6,291)	1,314	926	654
Equity in (loss)
income of consolidated
subsidiaries	(25,762)				25,762	-
Net (loss) income	$(28,634)	$7,524	$(40,031)	$938	$31,569	$(28,634)

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

SIX MONTHS ENDED APRIL 30, 2011

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$7	$(198)	$495,709	$2,227	$(2,479)	$495,266
Financial services			2,541	9,857		12,398
Intercompany charges		56,615	(66,297)	(357)	10,039	-
Total revenues	7	56,417	431,953	11,727	7,560	507,664

Expenses:
Homebuilding	3,102	78,985	546,610	855	(158)	629,394
Financial services	170		2,476	8,004	(3)	10,647
Total expenses	3,272	78,985	549,086	8,859	(161)	640,041
Loss on extinguishment
of debt		(1,644)				(1,644)
Loss from
unconsolidated joint
ventures			(701)	(3,523)		(4,224)
(Loss) income before income taxes	(3,265)	(24,212)	(117,834)	(655)	7,721	(138,245)
State and federal income
tax (benefit) provision	(10,968)		9,532			(1,436)
Equity in (loss) income of
consolidated subsidiaries	(144,512)				144,512	-
Net (loss) income	$(136,809)	(24,212)	(127,366)	(655)	152,233	(136,809)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

SIX MONTHS ENDED APRIL 30, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
Revenues:
Homebuilding	$8	$(163)	$625,875	$326	$(2,481)	$623,565
Financial services			2,906	11,759		14,665
Intercompany charges		64,559	(89,904)	(872)	26,217	-
Total revenues	8	64,396	538,877	11,213	23,736	638,230

Expenses:
Homebuilding	4,356	79,119	639,614	(1,107)	7,979	729,961
Financial services	260		2,791	8,327	(352)	11,026
Total expenses	4,616	79,119	642,405	7,220	7,627	740,987
Gain on extinguishment
of debt		19,791				19,791
(Loss) income from
unconsolidated joint
ventures			(668)	686		18
(Loss) income before income taxes	(4,608)	5,068	(104,196)	4,679	16,109	(82,948)
State and federal
Income tax
(benefit) provision	(290,503)	1,774	(297,840)	1,538	294,528	(290,503)
Equity in (loss) income
of consolidated
subsidiaries	(78,340)				78,340	-
Net income (loss)	$207,555	$3,294	$193,644	$3,141	$(200,079)	$207,555

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED APRIL 30, 2011

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
Cash flows from operating activities:
Net (loss) income	$(136,809)	$(24,212)	$(127,366)	$(655)	$152,233	$(136,809)
Adjustments to reconcile net
(loss) income to net cash
(used in) provided by
operating activities	86,595	(35,201)	137,491	4,198	(152,233)	40,850
Net cash (used in) provided by
operating activities	(50,214)	(59,413)	10,125	3,543	-	(95,959)
Net cash (used in)
investing activities			(909)	(455)		(1,364)
Net cash provided by (used in)
financing activities	54,899	73,448	(4,359)	(40,115)		83,873
Intercompany investing and financing activities – net	(4,695)	15,692	(513)	(10,484)		-
Net (decrease) increase in cash	(10)	29,727	4,344	(47,511)	-	(13,450)
Cash and cash equivalents
balance, beginning of period	10	212,370	(12,812)	167,612		367,180
Cash and cash equivalents balance, end of period	$-	$242,097	$(8,468)	$120,101	$ -	$353,730

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED APRIL 30, 2010

(In Thousands)

	Parent	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations	Consolidated
Cash flows from operating activities:
Net income (loss)	$207,555	$3,294	$193,644	$3,141	$(200,079)	$207,555
Adjustments to reconcile net
income (loss) to net cash