Good day, ladies and gentlemen and welcome to the fourthquarter and fiscal year 2007 Liquidity Services, Inc. earnings conference call.(Operator Instructions) I would now like to turn the presentation over to yourhost for today’s call, Ms. Julie Davis, Director of Investor Relations. Pleaseproceed.

Good afternoon and welcome to Liquidity Services Inc.earnings release conference call for the fiscal year 2007 and the three monthsended September 30, 2007.During this call, we will refer to Liquidity Services Inc. as LSI. Presentingtoday are Bill Angrick, our Chairman and Chief Executive Officer; and JimRallo, our Treasurer and Chief Financial Officer. This conference call is also being broadcast through theInternet and is available through the Investor Relations section of theLiquidity Services Inc. website. Before we begin, I’d like to remind you that mattersdiscussed on this call contain forward-looking statements that involve risksand uncertainties concerning LSI’s expected financial performance as well asLSI’s strategic and operational plans. These forward-looking statements involvea number of risks and uncertainties that could cause actual results to differmaterially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors,some of which are beyond our control. These forward-looking statements speak asof today and you should not rely on them as representing our views in the futureand we undertake no obligation to update these statements after this call. Please refer to our SEC filings, as well as our currentearnings release posted a few minutes ago on our website, for a more detaileddescription of the risk factors that may affect our results. Copies of thesedocuments may be obtained from the SEC or by visiting the Investor Relationssection of our website. To supplement the company’s consolidated financialstatements presented in accordance with GAAP, we use certain non-GAAP measures.These non-GAAP measures include EBITDA, adjusted EBITDA, adjusted net incomeand adjusted EPS. We believe thesenon-GAAP measures provide useful information to both management and investors. Thesemeasures, however, should not be considered a substitute for or superior toGAAP results. A reconciliation of all non-GAAP measures included in thisconference call to the nearest GAAP measure can be found in the financialtables included in the press release. We also use certain supplemental operating data as a measureof certain components of operating performance which we also believe is usefulfor management and investors. This supplemental operating data includes GMV andshould not be considered a substitute for, or superior to, GAAP results. At this time, I’d like to turn the presentation over to ourCEO, Bill Angrick.

Thanks and good afternoon. As detailed in our earnings pressrelease LSI had a strong finish to fiscal 2007 as we continue to execute ourstrategy to further develop the leading ecommerce marketplace for wholesale,surplus and salvage assets. LSI’s strong results are due to the tremendous effortsof our dedicated employees, our continued focus on delivering value to ourcustomers and our shared passion for continuous improvement in our business. LSI has made great strides this past year towards meetingall of our long-term strategic objectives, including: expanding our reputationas a best in class solution for the reverse supply chain; building a criticalmass of supply and demand within our ecommerce marketplace; continuing todiversify our business; and enhancing our organization and processes to supporta much larger enterprise. We’re very proud of our many accomplishments during fiscal2007. Highlights include: fiscal ’07 GMV grew 35% year over year and isapproaching a $250 million annualized run rate. More impressive is ourachievement of these results despite a 20% year over year decline in GMV fromour DoD surplus business, due to a reengineering of this contract which I’llcomment on later. GMV associated with our commercial business grew 137% year overyear in fiscal ’07. Our commercial division has now completed eight consecutivequarters of over 100% growth and we now possess the broadest and deepestportfolio of large Fortune 500 sellers in the history of the company. GMV associated with our DoD scrap business grew 40% year overyear in fiscal ’07. Our innovative online marketplace now supports the sale ofover 271 million pounds of scrap metal per year and is the leading onlinemarketplace in this vertical. GMV associated with our DoD surplus business grewsequentially for the second consecutive quarter during Q4, and property flowtrends continued to improve. Moreover, during fiscal ’07 LSI further integratedwith the DoD to support our client’s important mission through the developmentand implementation of our inventory assurance program. Our ability tosuccessfully deliver this strategic and innovative solution resulted in LSIreceiving an incentive payment under our modified DoD surplus contract duringQ4. Our buyer marketplace continued to deliver strong resultsfor our sellers as we averaged over five auction participants per completedtransaction during fiscal ’07. We now enjoy over 1.1 million annual auctionparticipants in our online marketplaces and in Q4 the number of auctionparticipants increased 19% year over year to 293,000; an all-time quarterlyrecord for LSI. In summary, during this past year our team did a terrificjob leveraging our knowledge and domain expertise to strengthen our positionand plant the seeds for future growth. At this time I will turn over the presentation to Jim Rallo,our CFO and Treasurer, to further summarize our recent financial performanceand results.

Thanks, Bill. We were pleased with adjusted EBITDA andadjusted diluted earnings per share for the fourth quarter and the year. We’reahead of the high end of our guidance as a result of the incentive features inour surplus contract that allowed us to earn 30.5% of the profit sharingdistribution. For the fiscal year 2007 measurement period, we received aperformance payment of approximately $1.5 million in the fourth quarter. Thisincentive will be measured quarterly beginning in fiscal year 2008. I will now discuss in more detail our results for thequarter and then the fiscal year. The company continues to experience strongtop line growth as the amount of gross merchandise volume or GMV transactedthrough our marketplaces increased $12.2 million or 26.6% to $58.1 million forthe three months ended September 30, 2007 from $45.9 million for the three months ended September 30, 2006. We believe thisincrease is attributed to our investment in our sales and marketingorganization, the acquisition of SDR on October 16, 2006 as well as increasedmarket acceptance by corporate sellers and professional buyers of our online marketplacesas an efficient channel to auction and purchase wholesale surplus and salvageassets, which resulted in 115.7% growth in our commercial marketplace over thesame period last year. Revenue increased $11.9 million or 30% to $51.7 million forthe three months ended September 30, 2007 from $39.8 million for the three months ended September 30, 2006. This increase wasprimarily due to the items driving GMV growth. Cost of goods sold, excluding amortization,increased $10 million or 266.6% to $13.8 million for the three months ended September 30, 2007 from $3.8 millionfor the three months ended September 30, 2006. As a percentage of revenue, cost of goods sold excludingamortization increased to 26.6% for the three months ended September 30, 2007 from 9.4% for the three monthsended September 30, 2006.These increases are…

Thanks, Jim. Looking ahead to fiscal 2008, we are a muchstronger company and better positioned to take advantage of marketopportunities today versus one year ago. First, we’re better equipped to servethe needs of large volume commercial clients, the growing size and liquidity ofour online marketplace and integrated value-added services represent anincreasingly attractive solution for large retailers and manufacturers,particularly in a slowing economy. As aresult, business development activity within our commercial business remainsstrong. Second, we are well positioned to achieve attractive grossmargins whether under consignment, profit sharing or purchase arrangements withsellers. As one of the largest marketplaces for the pricing and sale of goodsin the reverse supply chain, we are able to establish strike prices for thegoods that flow through our marketplace that deliver positive economic returnsto LSI. As such, we are comfortable working under any of these pricing models,including taking title to inventory when a client deems this a requirement toconduct business with LSI. Third, we have positioned our services to play a morestrategic role in supporting our DoD client’s mission. We believe we havedelivered outcomes and results that enhance our creditability and value to thisimportant client. We also believe our past performance record is a strong,competitive advantage in the public sector marketplace. We are very proud of our strong results to date and remainvery excited about the long-term prospects for building our business. Ourgrowth strategy during fiscal 2008 will continue to emphasize the followingelements: First, we will grow our transaction volume with existingcommercial and government sellers by leveraging our growing network of buyers,merchandising expertise and marketing programs. Second, we will continue to add sellers in both thecommercial and public sector marketplace based on our strong value propositionand growing scale benefits. Third, based on the insights gained from serving the reversesupply chain, we will bundle the appropriate value-added services with ouronline marketplace to uniquely serve the needs of sellers and buyers in thissector of the economy. Fourth, we will continue to invest in the branding andpromotion of our marketplace with buyers, as we believe we have only modestlypenetrated the addressable buyer marketplace in the U.S.and abroad. Finally, we will consolidate our position in the fragmentedand large reverse supply chain marketplace via acquisition. In closing, LSI is executing in line with our statedobjectives through operational and financial discipline. We thank you for yourtime and attention today, and look forward to addressing any questions you mayhave at this time.

Your first question comes from Stephen Ju - RBC Capital Markets.

Your consignment model GMV in the commercial marketplace isdown sequentially quarter on quarter. Isthere any commentary around that? Do you have some legacy consignment clientsswitching over to the purchase model? What’s going on over there?

First, we like all of our pricing models, as we generatepositive returns under the purchase consignment and profit-sharing models. We are comfortable working with them. We have worked under all of these scenariosfor many years. Our job is to addressthe needs of our clients in the marketplace. These pricing models may fluctuate over time, depending upon the companieswe serve. We haven’t seen what you are suggesting -- achangeover. We have noted a tranche ofFortune 500 commercial sellers newer to our business over the last 12 to 18months who have adopted the purchase model initially with our marketplace. Others have actually transitioned to theconsignment model and we believe that we are well-suited to address any ofthese models with our clients. We’d rather have our marketplace adapt to Fortune500 sellers rather than having their finance and operational departments adaptto us.

Your next question comes from Shawn Milne - Oppenheimer.

Jim, you booked about a $1.5million in surplus incentive in the quarter. Can you just give us a little morecolor on how you expect that to lay out as we go through ’08? I know you talked about it being quarterly,but should we think of that as $1.5 million spread through four quarters? Ifyou can add some more color there. Secondly, in terms of GMVguidance in the December quarter, certainly you’ve got some tough compares inthe surplus business and the commercial business. Can you give me a sense for if you are takinga pretty conservative assumption on your scrap business in the December quarter?Because we’ve seen that actually be pretty strong quarter to-date. Lastly, Bill, maybe you could step back and provide a biggerpicture overview in your commercial business. We’ve seen that business ramp pretty significantly over the last coupleof years. You had guided it down intoSeptember of course already, but we areseeing a pick-up now. Can you give us asense for what your pipeline looks like in term of the number of sellers andwhat your new executive has added in terms of process to the commercialbusiness that would give the marketplace a little bit more comfort that thisbusiness is going to continue to grow at a healthy rate? That’s a mouthful, butif you can answer those, that would be great. Thanks.

Shawn, I’ll take the first one, this is Jim. As far as the surplus incentive goes in measuringover next year, we do expect to receive that quarterly. I would expect the amount to be $1.5 millionover next year or potentially slightly greater. As you know, if the surplusbusiness is stronger because it affects our profit-sharing distribution percentagethat number could be slightly more than that next year. I think as of now, $1.5 million spread over fourquarters is a fine way to look at it.

Let me just interject relative to our financialtargets. We have, on a consistent basisif you have listened to us over the last two years, indicated our target growthis 25% year over year in GMV and we really do focus on growing the businessover the long term as opposed to meeting individual quarterly targets. In some cases, individual quarters can behigher or lower than that overall target. That’s not a big concern to us. We would say specifically relative to the Q1 ‘08 guidance,the year-over-year comparison for DoD surplus is difficult since this was thelast quarter, Q1 ’07, before the rollout of our new inventory assuranceprocedures. The DoD growth trajectory ishealthy and as we move through the current year fiscal ‘08, we will benefitfrom higher growth rates on a year-over-year comparable basis versus thatexperienced in the first quarter of fiscal ‘08. In addition, the growth trajectory in our commercialbusiness is very healthy for the quarter and as this segment continues tobecome a larger proportion of our overall business, our overall growth ratewill be higher for the full year than in the first quarter. Ithink, as we have discussed during the course of fiscal ‘07, we have continuedto prepare our organization to support the needs of large commercial customersand public sector agencies. The neworganization that we continue to refine around commercial has added managementcapacity and talent in every area from operational, fulfillment support. As youknow, we now have six distribution center hubs and we’ve added an individual tomanage that nationally. In addition, folks in each individual distribution centerreporting to that national individual to refine and further improve ourproductivity and our throughput. Wethink that productivity and leverage is important to our growth and our valueproposition to clients. We’ve addedsenior management capacity in our marketing area that will help us continue tobrand and promote our marketplace to buyers both online and offline, both U.S.and internationally. That’s veryimportant to continuing the robust liquidity that we deliver to oursellers. We’ve also added senior management capacity in the accountmanagement function, which manages the metrics on an account-by-account basiswith existing sellers, and that’s very important to continuing to execute onthis growth. As you know, we hired a new Chief Information Officer withinthe last six weeks. Eric Dean is anindustry veteran who served as the CIO of the predecessor to Accenture whichwas Anderson Worldwide at that time. Healso served in a similar role as CIO for United Airlines, the parent UALCorporation. Clearly an individualthat’s able to gear operations and infrastructure along with actual applicationdevelopment to support significant-sized organizations and growthorganizations. So, we feel that we have prepared the ground to support asignificant enterprise over the many coming years and we, as I said, areentering the year much more formidable in terms of operational processes andmanagement depth than at any time in our history.

Your next question comes from Colin Sebastian - LazardCapital Markets.

I wanted to follow-up a little bit on the prior question onthe mix shift in the commercial business. First of all, how are you feelingabout the inventory balances, especially your comfort level and protection forany aging of merchandise? Secondly, on a relative basis, how do you expect thosedifferent models to grow next year?

Let me just comment on how we have looked at our businessand growth. As we’ve continued to moveto serve larger customers, we continue to experience the need to have clientsbegin to work with us at larger volumes and using a purchase model with some ofthese newer accounts has increased our inventory balance. However, equally the volume of goods moving in ourmarketplace is growing and that has been evidenced by strong business trendsgoing into fiscal 2008. I think it’s important to understand that whetherpurchase or consignment, these are profitable arrangements for our business andthat as these individual sellers increase the volume of goods moving through ourmarketplace, they become more reliant on our marketplace. Our inventoryturnover actually is running quite well. Its 30 to 45 days, which is very strong. Second, understand that our marketplace is a marketplace forsurplus and salvage goods so our carrying cost is quite low relative to retailor wholesale cost, which reduces the risk of a diminishment in value. Third, many of our categories are not subject to big swings invalue our product obsolescence, because they are stable items such as apparel,building tools and general merchandise. So we feel very good about our ability to grow our businesswhether under consignment or purchase. As I mentioned in my opening comments, we have the biggest marketplaceto price these goods and we are able to control and set stripe prices thatallow us to drive positive economic returns for our business, and that’s howwe’ve managed it successfully -- not just this last year but for many years.

Could you talk also about the progress you are making withsome of these larger sellers? It lookslike from the website that there are some pretty healthy volumes from a fewhigh-profile retailers. I just wanted toget your perspective.

Well, I have to say this is continued execution of our valueproposition. We believe that as we areable to offer an end-to-end solution nationally that handles the pricing andsale of goods, but also the pre and post sale value-added services to shipmerchandise, sell, collect the funds and deliver attractive value back to theclient, that we are a best-in-class marketplace and that’s reflected in thefact that many of our existing sellers are increasing the number of productcategories to our marketplace. You willsee categories that you’ve not seen in the past moving to our marketplace. That’s an important development. We understand that on both sides we get leverage andefficiencies by growing volume. We getleverage in logistics and that’s very important with energy costs where theyare, if we can save our clients’ shipping costs by increasing the scale of ourprograms, by leveraging more of our distribution center hubs, or putting ourpersonnel in their distribution centers, that’s very important. I think clients frankly in slower growth economies are moreapt to want to implement solutions like ours to make sure that they’re able tocontinue to recover working capital in their own business and in our experience,during 2000-2002, those were very goodyears for this business. I think that’s also helping increase the demand forour service in the marketplace.

Your next question comes from Malindi Davies – CIBC World Markets. Malindi Davies – CIBCWorld Markets: What kind of progress are you making with growing the buyeractivity in the marketplace? Do you have a long-term goal for total auctionparticipants for example? Is this a metric by which the sales and marketingpeople are incented? Second, can you talk about what you might be looking for asyou assess potential M&A targets?

Sure. First, let mejust comment on our approach to marketing. We are a marketplace of individual product marketplaces and we do targetmarket each and every auction; and each and every auction has activity thatwe’re able to measure and manage. Ourmarketing team has a dashboard of performance metrics at the vertical levelthat they are managed to and they are heavily incented to both grow the buyerbase and retain the buyer base. We have consistently tracked a number of auctionparticipants which we believe is a very transparent and useful metric todemonstrate the number of buyers that will be available to bid against one andanother in an individual auction. We’requite pleased that we continue to grow the aggregate number of auctionparticipants, the year-over-year growth of the auction participants actuallyincreased in this most recent quarter; it jumped to 19% over a 12% year over yearversus the annual growth rate. We’re finding ways to continue to grow theactivity with our buyers. Have we scratched the surface of the potential? I don’t think so. I think there are millions of small businessbuyers who are interested in spending a $1,000 to a few thousand dollars onmerchandise if they knew about our marketplace. Our average sales price continues to grow. Jim noted those figures in his remarks. We believe that we can continue to attract awide range of buyers within each of these product verticals, which typicallyare consumer electronics, technology, hardware, building tools, apparel. There is a significant depth of the market we haven’t eventouched, that’s why we’re going to continue to brand and promote in the US. Obviously with the exchange rates the waythey are, we’re an increasingly attractive marketplace to folks outside of theUS and I think that will be an opportunity for us in fiscal ‘08 and beyond. That’sa great opportunity for us. I think you had another question on acquisitions. We havebeen very consistent in indicating that the foundation of our growth is aclassic organic growth strategy. We dobelieve that we are in a unique place to consolidate our market position andgiven a lot of the experience we have, both technology experience, operationalexperience, we can integrate acquisitions very effectively. We are looking at opportunities to grow our network ofbuyers and sellers in the commercial marketplace, in the public sectormarketplace. Sometimes this is a simpledecision, do you buy or build? We will see opportunities to buy. We do believethat the themes will be consistent with what we’ve done in the past, mostrecently with STR. We’ll find situationswhere we can grow our buyer base, our seller audience and in some cases valued-addedservices that help us integrate further with sellers and buyers. Those themeswill likely play out as we move through time.

Your next question comes from Bruce Simpson - WilliamBlair.

Can you comment on where we are on the communication withthe DoD about renewing the surplus contract?

Well, just as a matter of the way the public sector works,we’re in the same boat as anyone else on this call. We have not been in receipt of anysolicitation or RFP for recompete. We’revery focused on executing under our current contract and when any officialnotice is issued, we’ll be receiving it in the public domain like others andreviewing it. But as I said earlier, wedo believe our ability to not only have expanded our role by providing a rangeof high quality solutions involving the checking and review of inventory hasstrengthen our credibility, I mean we’ve actually delivered on that valueproposition. We’ve actually implementedand achieved results that at the end of the day I think create competitivebarriers for us but more importantly serve the needs of that client.

Is your guidance implicit in 2008 that it just gets extendedwithout a further RFP?

Correct. We willoperate under that business in any event through the full year fiscal 2008merely as a function of we have an inventory pipeline that you would not turn off. In those contracts, if you are familiar,there is always a wind down period anyway; so yes, that’s our assumption.

Jim did I misunderstand the extent of the change in 123-Rexpense? What is that ‘08 relative to ‘07?

That’s basically a doubling every quarter ‘08 versus‘07. We do annual grants of options,usually at the beginning of the year. Wedid an annual grant to several hundred employees this October. That will be out, when you look at the Q,actually, which we’ll file in February but that did result in significantstock-based compensation expense, mostly driven by the volatility index in ourstock, as you can imagine.

So, it sounds like maybe it goes from a penny or so aquarter to perhaps $0.015 to $0.02 per quarter on a GAAP basis? Its impact? Isthat right?

I would say at least $0.02, yes.

Was the pilot program that rolled off, did that already rolloff? If so, can you quantify how much of the sequential drop in the consignmentmodel GMV that accounted for?

As we said on our call last quarter, that’s pilot programdid drop off at the very beginning of the quarter. That resulted in approximately $1 million ofloss this quarter; the fourth quarter, that is. I would say also we saw some more seasonality in our consignment modelthan we did in the purchase model, primarily because in the purchase model wehad inventory already in the warehouse set up and ready to go, versus some ofour consignment sellers, whether there is a slightly longer lead time before wereceive that product from them. You didsee that effect this quarter on both the consignment and purchase models as faras that mix change.

My last question has to do with the number of accounts. I think that you guys had talked in the pastabout having identified 300 major sellers and targeting 30 of them. Can you give us a sense of the actual numberof commercial sellers that you are servicing? How that changed either in thequarter or at the end of fiscal ‘07 versus the end of fiscal ‘06?

We disclose that number every quarter, Bruce. I would say that number is somewhere between360 and 370 sellers, which we consider to be significant. Most of those sellers, as you know, aremiddle market type sellers. We continueat this point to have around 35 we consider to be large retail sellers in ourmarketplace that are driving a significant volume of business.

How do you feel about the pipeline of that particular set ofsellers?

We feel very good about that pipeline and we have,throughout the year, observed that first introducing these retailers, and insome cases manufacturers to our marketplace, is important. Then you have plenty of growth opportunity byserving the needs of that existing portfolio well. I think what gives us great comfort going into fiscal ‘08 isthat we understand the needs of these large organizations selling with ustoday. There is lots of additionalvolume with these existing sellers and so we are just blocking and tackling andthat will allow us to grow our business significantly over the long term.

Your next question comes from Steve Weinstein - PacificCrest.

On your last conference call you indicated that you weren’tnecessarily expecting to receive the incentive payment from the surpluscontract and that could slip into 2008. Whatmetrics did you achieve to be able to recognize it in the quarter? Second, looking at your GMV guidance for ’08, basically16.5% growth if I use the midpoint for the current quarter. To achieve themidpoint for your full year would imply some acceleration probably like to 26%,27% for the remaining three quarters. I’m wondering if there is something you arelooking at that would accelerate the growth like a customer coming down thepipe, something you might win, something you know you are going to turn on.Or is it just you are relying on easiercomps or some seasonality to get you there?

Let me address the question regarding Q1. I related on anearlier question several of the points that are affecting our overall view of2008. One is that indeed when you look at Q1 ‘08 versus Q1 ‘07 for our DoDsurplus business that is a difficult comparison because in Q1 fiscal ‘07 wewere not operating for that full quarter under the inventory assuranceprogram. It clearly is a differentenvironment relative to this current quarter versus prior quarter. That said, the DoD business as you can imagine with the factthat we have successfully implemented this inventory assurance program thatthat is very helpful around the table both for the rank and file of managerswho handle property flow at the DoD as well as up the leadership of DoD tounderstand that we’re doing a great job there and we will continue to makeevery effort to sustain that performance. So property flow we expect to be healthy and continue to growduring the course of the year. As youcan imagine, if we continue to grow property flow and performance during thecourse of fiscal ‘08 and you look at the year-over-year comparison, wellnaturally the growth rate is going to be higher, Steve, during the course offiscal ‘08. I think equally on the commercial side, we’ve worked veryhard over the last 18 to 24 months to introduce our service to a wide range ofclients that each bring needs to the table and I think we’re in a much moreformidable position to decide what are the right programs to grow andaccelerate the growth of those programs then we were a year ago. We see thatthe growth trajectory in the commercial business for Q1 is quite good and weexpect that to continue to grow based on existing programs. That fact will result in better growth for the overallcompany because commercial as a percentage of the whole will grow during thecourse of fiscal ‘08.

And my first question?

I think that’s just the parties are able to audit and reviewthe performance of our work there and it was very helpful to the DoD that the GAOissued a favorable report and had done independent work on evaluating ourperformance. There was also a pressrelease actually issued by the Director of the DLA praising the significantprogress made. I think just the results over the course of the last year or sowere quite evident to that client and they elected to reward LSI for theservice rendered.

Your next question comes from JD Padgett - The BostonCompany.

One question just on surplus, it was up nicely sequentially.Is that potentially reflective of the log jam breaking there in terms of flowof goods?

I think there is an operational bottleneck question but alsoan organizational behavior aspect to seeing improved property flow. I think on the former, yes incrementally wewould see property stored and not sold until there is a joint confidence,mutual confidence that you had a program that will appropriately screen. As you build that confidence that operational bottleneck subsides and you seeincreased flow. Second, just organizationally everyone feels better aboutour program when you have the ability to look back over the last 12 months anddemonstrate tangible progress. At the front end of the program you haveuncertainty; a year into the program you have much greater understanding of theroles of all the parties and the actual effectiveness of the solution thatwe’ve developed. I think that sort of intangible is veryimportant to sustaining growth in the surplus business with the DoD.

Are there goods that are building up either in yourwarehouses or at government sites as you’ve gone through this operationbottleneck?

There have been some centers with goods that haveaccumulated. Yes that’s correct.

And then hopefully once everybody gets comfortable that flowstarts to accelerate, but I know you want to mange that carefully to preservegood pricing and so forth?

Absolutely. I thinkwe have been able to deal with the good and the bad historically so we areprepared for any scenario.

JD, just to clarify a point. We do not have surplus or scrap products moving through our distributioncenters. Those all move throughfacilities on bases around the country.

I am somewhat tryingto reconcile the commentary and the press release about the outlook continuesto build in pretty modest expected increases in surplus, but it looks like thetrajectory has finally started to go up into the right. What’s the right way tobe thinking about the prospects for surplus in fiscal ’08? Something where ifyou get back up past peak levels where you are doing $80 million or $85 millionGMV?

I think if you’ve known us as a management team, we try togive you the best information we have at the time that we do our updates withowners and analysts. We have mentionedwe expect sequential growth. It is a quarter by quarter sort of review of allfacts around our inventory insurance services and the logistics issue. We haven’t been willing to be very aggressiveon DoD surplus just based on how much change there has been over the lastyear. We are very encouraged by the fact that we now have twoconsecutive quarters of sequential growth. We are very encouraged by the fact that the amount of property flowingto us, which we can see ahead of the sale 45 to 60 days, is improving. So incremental improvement is our view andthat’s reflected in our guidance.

So think about that growing quarter over quarter for manyquarters to come?

At this juncture, that’s our view of the business trend.

All of the operational refinements that you have put in haveinflated the cost structure. Is any ofthat expense that we see in there now, does it fall off it some point once youhave everything set in place? Or have we built up to this level and we shouldthink about this is the new baseline?

You are not going to see expenses fall off; there iscertainly a component of those expenses which are fixed and a component that’svariable. When you look at the workunder the inventory assurance program they we are doing for the DoD, obviouslythose processes that we put in place, those are permanent they are a part ofthe contract. On the commercial side of the business there is a lot morevariable costs than the DoD side. However, if that business continues to grow we are obviously going tocontinue to invest albeit not at the same rate. I don’t think you are going to see those expenses on an absolute basisstart to drop off.

On the government side there is not really any excessive costto get all the consultants or whatever one-time factors would be in thereweighing in on how you going to implement the inventory insurance?

No. We didn’t use anyconsultants Actually there are about 50 employees and they are actually ouremployees that operate these four centers for us. They are permanent members of the team.

So the key takeaway is just you have all that in place nowso any growth should leverage well after that?

That’s a good point. Additionally, I mean I think when you add in the incentive payment thatwe just received that helps obviously offset the margin decline which we sawthroughout early fiscal year 2007. Weactually ended up on a margin basis a little bit stronger than 2006, given thefact that we did roll our inventory assurance for the whole year, we werepublic for the full year of ‘07 and we feel pretty good about these finalresults.

Your next question comes from Stephen Ju - RBC CapitalMarkets.

What is your CapEx outlook for fiscal ‘08?

Good question, Stephen. That’s frankly unchanged, we would expect it to be somewhere around $2.5million for next year. I think we endedup at like $2.5 million or $2.6 million for this year.

We have used all the time we had for questions fortoday. Jim Rallo will be happy to takeany follow-up questions at 202-558-6207. Now, I would like to turn the call back over for closing remarks.

Thank you for joining us today. Again, if you have any follow-up questionsplease contact Jim Rallo or myself. My direct line is 202-558-6234. Thank you.