Good day and welcome to The Ensign Group Inc. third quarter fiscal year 2007earnings conference call. Today’s conference is being recorded. At this time, Iwould like to turn the conference over to Mr. Greg Stapley, General Counsel.Please go ahead, sir.

Thanks, Robbie and good afternoon and thank you to everyonefor joining us today as we discuss The Ensign Group’s financial results for thethird quarter of 2007. A press release highlighting some of the key financialresults for the third quarter ’07 was issued after the market closed on Friday,December 21st. Hopefully everyone’s had a chance to see and review the release.For those who have not seen the release, it’s available in the press releasesection of Ensign’s website at www.ensigngroup.net. In addition, our 10-Q forthe third quarter was filed the same day and it’s also available for review inthe investor section of the company website. Additionally, a replay of this call will be available until5:00 p.m. Pacific Time on January 9, 2008. The replay can also be accessedthrough our website by clicking on the events and presentations link. Before we begin, I’d like to just take care of a fewhousekeeping items. First, I want to remind you that during today’s call we’llbe making forward-looking statements that relate to possible future events.These forward-looking statements are based on management’s currentexpectations, assumptions, and beliefs about our business, financialperformance and operating results in the industry in which we operate. Suchstatements are subject to risks and uncertainties, which could cause our actualresults to differ materially from those expressed or implied on this call. Participants are encouraged to review the company’s periodicfilings with the SEC, including the 10-Q that was filed last Friday, for a morecomplete discussion of such risk factors and other factors that could impactany forward-looking statements. Participants should not place undue reliance onany forward-looking statements. Also, except as required by federal securities laws, Ensigndoes not undertake any obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents, changing circumstances, or any other reason after the date of thiscall. Second,…

Thanks, Greg. Hi, everyone. Before we discuss the thirdquarter, I wanted to note that this conference call is The Ensign Group’s firstconference call as a public company. We completed our initial public offeringon November 8th with the sale of 4 million shares at an IPO price of $16 pershare for approximately net proceeds of $56.5 million after underwriting feesand operating expenses. In addition, the underwriters also exercised theiroption on the entire 600,000 share over-allotment in November. I want to take this opportunity to welcome new stockholdersto the company. As you know, the recent completion of our IPO adds strength toour already strong balance sheet. We believe that among other things, itenhances our ability to continue executing on our disciplined growth strategy,which I’ll discuss further in a moment. A preview of Ensign’s third quarter 2007 operating resultswas included in free writing prospectus distributed during our recent IPO roadshow and included in the final prospectus for our offering. The final resultsfor the third quarter were consistent with the guidance provided in that freewriting prospectus. Highlights from the quarter include an increase in overalloccupancy from the second quarter to the third quarter of approximately 70basis points and we expect to show an increase in skilled mix on the heals ofthat growth in Q4. We continue to see occupancy trending upward. Sequentialrevenues were up 3.8% over Q2 as well. In addition, our revenues were up 12.7%over the prior year quarter to $104.1 million and total revenue year-to-datewas up 15.8% to $302.3 million compared to the first nine months of last year.These revenue increases were primarily due to the revenue generated by acquiredfacilities and the growth rates mentioned were achieved in spite of generallylower occupancy rates and relatively lower skilled mix and quality mix inrecently acquired facilities. For purposes of these financial results, we have…

Thanks, Christopher and good afternoon, everybody. As Gregmentioned previously, we released our third quarter 2007 financial results andfiled our 10-Q after the markets closed on December 21, 2007. As alsomentioned, a preview of the third quarter operating results was included in thefree writing prospectus distributed during the IPO road show and included inthe final prospectus for our offering. The third quarter results for the metrics discussed in thefree writing prospectus were consistent with the guidance provided.Specifically, for the quarter ended September 30, 2007, total revenue was$104.1 million, up 12.7%, compared to $92.3 million for the prior year quarter.For the nine months ended September 30, 2007, total revenue was $302.3 million,up 15.8% compared to $261.1 million for the first nine months last year. Theserevenue increases were primarily due to the revenue generated by acquiredfacilities and the growth rates mentioned were achieved in spite of generallylower occupancy rates and relatively lower skilled and quality mixes in therecently acquired facilities. The company reported net income for the third quarter of2007 of $4.5 million, or $0.26 per diluted share, compared to $6.4 million, or$0.38 per diluted share for the third quarter of 2006. Net income for the firstnine months of 2007 was $14.3 million, or $0.85 per diluted share, compared to$17.2 million, or $0.13 per diluted share for the first nine months of 2006.These decreases were due in part to: expected costs associated with recentacquisitions; a higher provision for employee health insurance, primarily dueto the number of unusually large claims submitted in the third quarter 2007;increased professional fees and wages, primarily associated with preparationfor becoming a public company; increased depreciation expense related to therecently acquired facilities; and an increase in stock-based compensationexpense, of which approximately $0.5 million related to a single set oftransactions of a type that we do not expect to re-occur in…

Thanks, Alan. We are very pleased to have the demands of theIPO behind us and we’re looking very much forward to focusing on our businessin 2008. We believe the demographics and trends remain favorable for theindustry in general and for Ensign in particular. We expect that 2008 willbring attractive acquisition opportunities at reasonable valuations and webelieve that Ensign is poised to take advantage of compelling growthopportunities as they arise. We also fully expect to continue growingorganically through higher occupancy rates and a shift in patient mix to higherreimbursement rates. As a first-year filer, our next regular filing, our 200710-K, is due in March. We will look forward to updating all of you on ourprogress again at that time and quarterly thereafter. Before I close, I would again like to welcome our newstockholders to the company. We’re especially appreciative of your support andconfidence. I can assure you that we will strive to deliver against theobjectives we set for ourselves for both our stockholders and our residents. At this time, we’ll now turn the call back over to theOperator for your questions. Robbie, if you could instruct the audience on theQ&A procedure.

(Operator Instructions) We’ll go first to Eric Gommel with Stifel Nicolaus.

Good afternoon. My first question really is related to yourdisclosure in the 10-Q. I’m curious if you could comment at all about what arethe implications I guess of a grand jury investigation as opposed to other typesof investigations that maybe are conducting by the DOJ? And I think -- it’s atwo-part question. The other part is I think you said this at the start in yourdisclosures, but are there any criminal implications here that we should beconcerned about?

The fact that there is a grand jury subpoena out there issomething we take very seriously. The Assistant U.S. Attorney that is issuingthe subpoena, as we understand it, is involved on the criminal side primarily,and so we do expect questions that would involve some kind of criminal behaviorto be asked. We’re looking forward to answering those questions. We haveovertly -- or we have openly asked for opportunities to get in front of theU.S. Attorney and to find out what their concerns are and see if we can’t helpthem to allay those concerns. We’ve also been very diligent I think internally in lookingat our systems and processes to make sure that we don’t have any criminalactivity going on. We’ve recently conducted an investigation, an internalinvestigation and it’s not quite complete but the evidence and progress thusfar is suggesting that not only do we not -- are we are not able to find anyevidence of criminal behavior within the organization or even systemic issuesthat would promote negligence or recklessness or fraud, but we are also verypleased that, as we have gone through our ongoing improvements and upgrades toour system over the past couple of years, we have put a number of new systemsand things in place that we think will make our record keeping, which we expectthat these concerns would be focused on, will make our record keeping moreaccurate and more reliable, more timely and easier to track when we have to goback and assemble those records. So I hope -- does that answer your question?

Yeah, and just a follow-up, because you mentioned theinternal investigation that you’ve previously disclosed and were conducting, isthat at all tied do you think to the stuff that the DOJ is looking at or -- Imean, is that --

Well, that’s a good question and initially it was not,because we began that before we knew of the DOJ investigation. However, it dideventually become tied to it because as we started to do our investigation, weidentified a number of facilities at random that we wanted to look at for thekind of issues that we though that we should be looking for. And we did bringin an outside investigator who is a professional, who is an attorney who hasdone these things for 20 years and who is very good at them, to assist us inthat process. When we got that first -- that first, for lack of -- I’lljust call it the subpoena that went to our bank back in February, when we foundout about that in March, we looked at the list of facilities that the DOJ wasthen interested in and we added the facilities that they were interested inthat were not already on our investigation list to the list, expanded thatlist. And so we have looked hard at the facilities that were onthat list and to date feel pretty good about the results of those reviews.

I noticed you have I guess a contingent liability related tothe internal investigation or accrued for some claims that you don’t havedocumentation for. At this point, do you have any -- I mean, is there any other-- do you have any idea what the potential exposure could be at this point towhat the DOJ might be looking at?

Well, since we know very, very little about what the DOJmight be looking at, I don’t think we could answer that question. The reservethat you saw on the Q was calculated based upon the files that we reviewed inthe course of our investigation. As we opened those files, and they were all atleast two years old, as we opened those files, we did not find much in the wayof errors in them. There were a few math errors and things like that that youwould expect to find, but we did have some trouble in some places assemblingback-up documentation. We have been through most of those files now and have foundmost of the back-up documentation. We have not finished those files but inorder to get our Q out, we went ahead and took the ones where we knew that wewere not going to find the back-up documentation, plus the ones that we had notfinished yet finding the back-up documentation, we took a number off those andwe put it on the books.

Great, and I’ll -- just one more question and I’ll jump outof the queue here, or jump back into the queue; you’re comfortable that, as youlook at it from the Ensign point of view, that there is no criminal issue ornegligence on your part in how you are doing the billing and the thingsinternally that are going on at Ensign?

I can tell you that thus far, we have not been able to findanything regarding the way the services are rendered, the way the billing isdone, the way the documentation is done, that concerns us, except that some ofthe documentation was a bit disorganized two years down the road and took somesignificant effort to assemble. I think one of the things that we learned in the course ofthis process is that we need to do a better job of keeping our documentationtogether and we will work on that as we go forward.

Great. Thank you.

Thank you. We’ll go next to James Bellessa with D.A.Davidson. James Bellessa - D.A.Davidson & Company: Good afternoon. In your 10-Q, you talk about the possible,or allegations of possible reimbursement irregularities and I think you justdiscussed that and the charge that you took in the third quarter of $241,000.What is the potential additional charge that you might have seen since you’dtaken the third quarter charge?

We don’t anticipate, at this time, any additional charge.That $241,000 was comprised of roughly $157,000 of charges and then the rest ofit was interest payable on those claims. And we do hope very much that when wefinish scrubbing those files down, that the number will actually go down and godown significantly. To the extent, as long as we don’t have any reason to openother old claims which have already been reviewed and put to bed, we would notexpect any other charges. James Bellessa - D.A.Davidson & Company: You in your Q, you talk about qui tam litigation. I’m notcertain about the legal term there or the Latin, but I think it relates twhistle blowing. Can you elaborate?

Sure. As you correctly recognized, a qui tam suit is awhistle blower suit and they usually get started when somebody goes to thegovernment and says I think a company or a person is engaged in some kind ofillegal activity. The beauty of it for the whistleblower is that if thegovernment decides to pick up the case and run with it, and then eventuallyrecovers anything as a result of the suit, that person can participate in therecovery. The process as I understand, and we have very competent [andoutside] counsel who are former U.S. Attorney and prosecutor who has given ussome good guidance during this process, as we understand it, the process isthat once the claim goes to the government, it starts out of the criminaldivision and the criminal division looks at it and determines whether there isa case there. And at some point, if they decide that they do not want to pursuethe case, they kick it down to the civil division, which takes another look atit. They may simultaneously look at it with the criminal but has a chance aftercriminal is done to take a look at it and see if they want to pursue it as acivil matter with the lower standards burdens of proof associated with civilmatters. If the civil division does not want to do it, then the qui tamrelater, the original whistleblower, has the opportunity to pursue the thing ontheir own. Most qui tam relaters do not have the financial wherewithalto pursue claims on their own and so it is important to them that thegovernment pick that up and use government resources to explore the claim. Does that answer your question? James Bellessa - D.A.Davidson & Company: Yes, on the qui tam relater, at one point you tell us that aletter had been sent to a current employee requesting a meeting last June.Could they be one and the same?

No, the letter that was sent to our current employee lastJune was sent by federal investigators who simply asked for a meeting to talkto that employee. The employee was a person who is intimately involved in theMedicare billing and reimbursement process and is somebody that we would loveto have put in front of them because we think that person would have given somevery good information about our systems and practices. However, when they discovered -- when we called to make theappointment for the employee to go, the government investigator changed theirmind and declined to follow through with the interview. James Bellessa - D.A.Davidson & Company: Now the relater, you don’t know who that is or you aren’ttold or you can perhaps guess but you don’t know?

We do not know who the relater is. We would not be told whothe relater is and in fact, the government has not directly told us anythingabout this investigation or what they are concerned about or what they might belooking at. We look forward to finding some of that stuff out some day. James Bellessa - D.A.Davidson & Company: In the financials, in your first half, both for ’06 and ’07,you had tax rates very close to 40%. Then in the third quarter, they dipped to35% and they did so on the same quarter this year. Can you explain what reasonoccurs, what happens to have the tax rate go down?

Let me respond to you on that. The primary reason for thedifference was differences between the provision that was done in December andthe actual amount that was filed in September when the return was filed. And wedid receive greater-than-anticipated California and federal hiring tax creditsfor 2006, and also there was some final Texas regulations and they have a new margintax structure in Texas and we finally got the regulations and they allowed taxcredits we hadn’t anticipated in December. The other thing that we did have was that some of theuncertain tax positions that we had accrued and accrued interest against otherFIN-48 actually closed with the statute of limitations closing on the tax yearwith the filing in September. And that was the reason for the reduction in Q3. We do expect that Q4 and going forward, we are back to theapproximately 40.2% tax rate, and we’re going to try and do -- to see what canbe done to get a better fix on the employment tax credits that aren’t reallydetermined until much later. James Bellessa - D.A.Davidson & Company: In the most recent quarter, your occupancy percentage tickedup and I think on the road show, you said you had a goal for reach 84%occupancy rate in the fourth quarter of ’08 on a same facility basis. Is thatcorrect, that that’s still a goal?

Yes. As was stated on the road show, for our same-store inthe fourth quarter, we -- our goal is to hit 84% occupancy. James Bellessa - D.A.Davidson & Company: And the quarter is almost over. Do you see that the trend,that you had ticked up in the third quarter, will continue to tick up in thefourth and sequentially through the 2008 period?

From the trends we’ve seen, we fully expect that, yes. James Bellessa - D.A.Davidson & Company: Any view of the -- you aren’t telling us about ’08 guidancebut any view on the ’07 period that is about to close and how your quarter iswrapping up?

Well, Jim, we’re still in the wrapping stages and haven’tclosed the month. At this point, we are still collecting the information toreally go forward with the 2008 projection and would prefer to get the quarterclosed. We are seeing improvement, there’s no question.

Jim, as I said in my remarks, you’ll note that our skilledmix has increased, or I said in my presentation our skilled mix has increasedin Q4 and our overall census has also continued to increase. So we feelcomfortable with where we are headed in Q4. Obviously Q4 is almost done now butwe feel comfortable with the results that we’ve produced in Q4. James Bellessa - D.A.Davidson & Company: Good, and then on the narrative of the formal presentation,you talked about stock-based transactions. Can you go quickly over what youjust said in that sentence? I was writing fast but didn’t catch it all.

What I said, Jim, is one of the increases that we had thatimpacted the profitability was an increase in stock-based compensation ofapproximately $0.5 million related to a single set of transactions of the typethat we do not expect to re-occur in the future. James Bellessa - D.A.Davidson & Company: And then you indicated that you anticipate sizable grants inearly ’08. Can you give us a magnitude of that? What might be the impact on EPSor something that might give us -- get our arms around it?

We’re still in the process of formulating what those wouldbe. We did want to give the market a little preview of the fact that we weregoing to have a spike there, but it should just be a one-time spike. And it’ssimply because once the IPO train started rolling in late 2006 for us, we werenot able to make any option grants. Anybody who knows our company knows howimportant the concept of shared ownership is to us and we have a lot of reallygood employees out there whom we’d like to recognize with ownership. So it will be a one-time thing. We can’t at the moment giveyou a number. James Bellessa - D.A.Davidson & Company: Could it be in the order of 1% or less, the increase inshares outstanding?

We would expect it would be slightly higher than that. James Bellessa - D.A.Davidson & Company: Okay. Thank you very much.

(Operator Instructions) We’ll go next to Ross [Hapermann]with [Hapermann] Fund. Mr. Hapermann, your line is open. Please check your muteswitch. We’ll go next to Eric Gommel with Stifel Nicolaus.

Thanks. Just a couple of follow-ups; I know you had toincrease the investment on your G&A line for additional professionalservices and things. If I looked at third quarter, sort of a G&A percentage,as a percentage of total revenue, should we expect to see an up-tick in that aswe go forward or is there like a target percentage that maybe you’re looking toget to as it relates to revenue? I’m just curious if you could give us someinsight into that.

Right now, Eric, I think that the G&A that we’ve seenthrough 2007 certainly has the component in there for the cost of preparing togo public, and I think on the go-forward basis, what we expect is that therewill be additional costs in the G&A on both the accounting and the legalside but we should see an improvement overall in 2008. And we have a lot of leverage in that G&A. As wecontinue to add facilities, that percentage will go down. There’s no question.

So if I look back just over the last few quarters andthings, it looks like it’s been around 3.8% to 4% of revenue. Is that somethingthat we could look at as a way to model going forward, in that kind of range?

Looking at coming into the public market, I guess I’dhesitate to say that. And I think especially in 2008 with our 404 undertaking,there will be additional costs that will be unique to 2008. And then once weget through that, we’ll be able to stabilize. We’ll be able to give betterclarification on that in the fourth quarter when we present 2008 guidance.

But Eric, if your question is do you expect it to go up ordown significantly, I think the answer is no. We had a lot of one-time chargesin ’07. However, we also recognize that we’ll have a lot of one-time charges in’08 as we go through the 404 process. But I think that because of our increasedcosts in ’07, we don’t expect them -- we don’t anticipate them going up in anysignificant way in ’08.

Great, and then this is my last question; on fourth quarter,do you feel like your -- sort of the gross margins are trending better than saythird quarter? Just looking at what you have right now, I mean, you haven’t gonethrough -- I haven’t looked at the numbers completely at this point but do youthink that some of the things you talked on the road show and stuff, I mean,trends are improving there on that end?

Yes.

Yeah, and I think as Christopher commented, one of thethings we expected to see going into the fourth quarter was an improvement inthe skilled side of the business, and we are seeing that.

And then -- this is my last question -- so on the tax, froma tax perspective, this third quarter sort of lower tax rate appears to be arecurring item because you had it happen last year about this time, but you aregoing to try to find -- I mean, the issue is that on a go-forward basis, weshould really be looking at 40% and you know, you are going to look at some wayto smooth that tax rate out. Is that the way I understood your comment?

Yeah, we are going to look at -- and most of that timing isdriven by the employment tax credit and we are going to look at ways that wecan get better visibility to those earlier and right now, we are usinginternally a 40.2% tax rate for Q4.

Okay, great. Thank you.

(Operator Instructions) We’ll go back to James Bellessa withD.A. Davidson. James Bellessa - D.A.Davidson & Company: I’m looking at my numbers and trying to discern what you’vejust told us and you’ve indicated that G&A had a number of unusual items init this last year; you don’t expect in the next year, ’08, to have the SG&Aline change much, up or down. Is that what the answer was to the previousquestion?

Yeah, I think, Jim, at this point as we go forward and lookfor preparing for the 2008 guidance, we prefer to be specific at that point intime and then some of the additional costs that we had seen in 2007 with thepublic undertaking we do know will be replaced by additional costs related to,for example, implementation of Sarbanes and the 404 requirement. We haven’t atthis point quantified that yet and are going through that process as we startthe activity, so I’m a little reluctant to put a number out there right now atthis point but we will do so with the fourth quarter results. James Bellessa - D.A.Davidson & Company: Sequentially, in your -- from the second quarter to thethird quarter, your average revenue per patient day didn’t change materially.Do you have any characterization how it might look fourth quarter and goingforward into the next year?

I think in fourth quarter, what we are seeing, as we’vementioned previously, an improvement in the skilled mix which will also end upwith an improvement in our average daily revenue rates. James Bellessa - D.A.Davidson & Company: Thank you very much.

Thank you. It appears at this time we have no furtherquestions on the phone. I’d like to turn the call back over to Mr. Christensen,CEO, for any additional or closing comments.

Thank you to everyone for taking the time to be on thiscall. As I mentioned earlier, we are pleased to have the demands of the IPObehind us and we are very excited about 2008 at The Ensign Group. Again, we aregrateful for your confidence and your support and look forward to updating youon all of our progress again in March.

That does conclude today’s call. You may disconnect yourlines at any time.