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UPDATE: From Chad Ford at about 2:09 pm central.
"The Knicks and Rockets spoke this morning about a potential Tracy McGrady trade. Sources familiar with the negotiations told ESPN.com that while the Knicks told the Rockets that they remain interested in acquiring McGrady in a deal for Larry Hughes and Jared Jeffries, they are still unwilling to meet all of the Rockets' demands -- cap relief, Jordan Hill, the swapping of 2011 first-round picks and the Knicks' 2012 first-round pick. "We'd like McGrady and the cap relief," one Knicks source said. "But the Rockets are asking for too much. We're willing to pay a premium to make a deal. But the price right now is still too high." According to the source, the Rockets are still looking for other partners. The Bulls have been mentioned as a possibility, however, sources believe that their offer is less attractive than the Knicks' -- even if the Knicks don't give the Rockets everything they're asking for."
I don't think it's happening folks...but hey, you never know.