Robert Toll - Chairman, CEO Joel Rassman - CFO Joe Sicree - Chief Accounting Officer

Dave Bogart - UBS Ivy Zelman - Credit Suisse Ray Kwon - JP Morgan Alex Barron - JMP Securities Jo Hamala - Citigroup Timothy Jones - Wasserman and Associates John Emerich - Iron Works Capital Keith Wiley - Goldman Sachs Dan Oppenheim - Banc of America Securities Steve Fockens - Lehman Brothers Douglas Pratt - Galyan Group Rick Murray - Raymond James Darren Firestein - Wachovia Securities Stephen East - FIG Joel Locker - FDS Mike Wood - Banc of America Securities Presentation:

Welcome to the Toll Brothers third quarter 2006 earnings release conference call. (Operator Instructions) I will now turn the call over to Mr. Robert Toll, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, Sheila. Welcome and thank you for joining us. With me today are Joel Rassman, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira McCarron, Chief Marketing Officer; and Greg Ziegler, EVP of Finance. Before I begin, I ask you to read the statement on forward-looking information in today's release and on our website. I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, weather, and other factors obviously beyond our control that could significantly affect future results. Those listening on the web can e-mail questions to rtoll@tollbrothersinc.com. We'll try to answer as many as possible. Fiscal year '06 third quarter net income was $174.6 million or $1.07 per share diluted compared to '05's third quarter record of $215.5 million or $1.27 per share diluted. In fiscal year '06, third quarter net income included pre-tax writedowns of $23.9 million or $0.09 per share after tax. $21.1 million of the writedowns were related to lots under option while $2.8 million was related to an existing community in metro Detroit. Fiscal year '05 third quarter pre-tax writedowns totaled $1.2 million. '06 third quarter earnings per share declined 16%, including writedowns versus fiscal year '05. Excluding writedowns, earnings per share declined 9%. Fiscal year '06 nine month net income was a record $513.4 million or $3.10 per share diluted compared to '05's previous nine-month record of $495.9 million, or $2.94 per share diluted. Nine month net income included pre-tax writedowns of $37 million or $0.14 per share after tax. In '05, nine month pre-tax writedowns were $3.7 million or $0.01 per share after tax. '06 nine month earnings per share rose 5% including writedowns versus '05. Excluding writedowns, earnings per share increased 10%. '06 third quarter total revenues were $1.53 billion compared to the third quarter record of $1.55 billion in '05. Third quarter end backlog was $5.59 billion compared to the third quarter record of $6.43 billion in '05. Signed contracts were $1.05 billion compared to the third quarter record of $1.92 billion in '05. Fiscal year '06 nine-month record total revenues were $4.31 billion compared to the previous nine month record of $3.77 billion in '05 and signed contracts were $3.75 billion compared to the nine-month record of $5.56 billion in '05. Joel will go into more detail on fiscal year '06 and '07 guidance when he does the numbers, but based on our projected net income of fiscal year '06 of between $727 million and $763 million -- or $4.41 to $4.63 per share -- we expect to produce return on fiscal year '06 beginning shareholders' equity of 26% to 28%. Although there is much doom and gloom in the market regarding our industry, one should take note that even with down revenue in '07, we still expect to be highly profitable. During third quarter '06, we bought back approximately 1.68 million shares of our stock at an average price of approximately $28.43. For the first nine months of '06, we bought back approximately 3.62 million shares of our stock at an average price of approximately $30.25 compared to 830,000 shares in the first nine months of '05. The continuing malaise in the housing market, we believe, is a result of an oversupply of inventory and a decline in confidence. The speculative buyers of '04 and '05 are now sellers. Builders that build speculative homes are trying to move them by offering large incentives and discounts. Some anxious buyers are canceling contracts for homes already being built, thereby creating more specs. This overhang in supply and the aggressive discounting of many builders is undermining consumer confidence and keeping buyers on the sidelines, as they continue to worry about the direction of home prices. This is logical. With mortgage interest rates still relatively quite low, the ten-year is at 4.80% today, the economy basically sound, and household formation still increasing, we continue to believe that when buyers become confident that home prices have stabilized -- that is, probably hit bottom -- the market will return to firm footing. In the current environment, we have reduced our land position. In total, we now own or control approximately 82,900 lots compared to approximately 91,200 at second quarter end. We continue to re-evaluate the lots in our approval pipeline and to renegotiate or drop those options that we believe are no longer attractive. After 13 consecutive years of record earnings, we believe we are well prepared for the future. Our Company is run by seasoned leadership. Our senior management team averages over 20 years with the Company, and has been through challenging markets before. Harvard University's Joint Center for Housing Studies projects an increase in household formations and housing demand during the next ten years. With those demographics and the continuing increase in affluent households, a much deeper capital base, a national geographic presence, a well-established brand name and a much wider range of product lines to serve luxury buyers, we look forward to growth and prosperity in the future. Now, let me turn it over to Joel to do the numbers.

Thank you, Bob. For the third quarter home building revenues was approximately $1.53 billion as we delivered 2,157 homes at an average price of $690,000 and recognized $41 million of revenues from percentage of completion buildings. Gross margins exclusive of interest expense was 29.34%, or approximately 20 basis points lower than the midpoint of our guidance. However, the difference was the result of higher write-offs than budgeted, that's 136 basis points higher, offset by better margins due to a richer mix of deliveries -- about 60 basis points -- and combined lower incentives and lower construction costs than estimated, which yielded us 56 basis points. Write-offs this quarter were $23.9 million compared to last year's $1.2 million and they were obviously much higher than our budgeted guidance of $4 million. The write-offs reflect $21.1 million attributable to option land principally in Florida and California. and $2.8 million attributable to an existing community in Detroit. The majority of the option write-offs were attributable to land options signed in the last two to two-and-a-half years. Percentage of completion revenues were $19 million lower than the bottom of our range and the majority of the difference was attributed to construction being slower than anticipated. Margins were also slightly lower at 22.27% compared to our guidance. Land sale net profits of $250,000 were lower than our guidance of $1 million. Other income and joint venture income combined of $17 million was $3 million higher than guidance, the majority of which was attributable to keeping deposits from higher cancellations and interest income. Interest expense is based on specific lots closed, and the 2% of revenues was slightly better than the 2.1% guidance we gave you. SG&A at 9.67% of revenues was 38 basis points better than the midpoint of our previous guidance, as we had lower levels of spending principally related to lower payroll costs. Our effective tax rate for the quarter was 38.8%, slightly higher than our guidance of 38.6%. The last component of earnings per share is the average number of shares which at 163.5 million was lower than our estimate of 165 million, as the average share price was lower in the quarter than we estimated and we had bought back some additional shares. As to the fourth quarter, we expect to deliver between 2,500 and 2,800 homes bringing the total deliveries for the year to between 8,500 and 8,800 homes. We expect the average delivered price to be between $695,000 and $705,000. Although there is a chance it may be slightly higher. This is an increase of $5,000 per home from our previous guidance. We estimate that land sales will be approximately $4.5 million with a 10% gross margin and that other income should be approximately $7 million, the same as our previous guidance. Joint venture income should be approximately $12 million, $8 million less than our previous guidance as a result of lower estimated land sales in one of our joint ventures. We estimate that gross margins will be approximately 29.8% to 30% as a percentage of home buildings revenues, which is slightly lower than our previous guidance, reflecting, in part, the effect of the richer mix of closings that we had in the third quarter. We expect that gross margins on a percentage of completion buildings will be approximately 22%. We believe SG&A will be 8.5% to 8.7% of total revenues for the fourth quarter, higher than our previous guidance, principally as a result of lower estimated revenues offset in part by lower expected spending. We estimate that interest expense should be approximately 2.1% of revenues. The last component of earnings per share is share count. Based on our current share's price and after giving effect to the 3.6 million shares we bought back so far this year, we expect the average number of shares to be used in diluted EPS at $163.5 million for the fourth quarter and $165 million for the year. We are still working on our detailed quarterly projections for 2007 including cost of sales and SG&A estimates for the year, as well as for the individual quarters. It is difficult to project 2007 performance in this changing market. As Bob Toll cautioned and as I would like to reiterate, please read our statement on forward-looking information. We would expect that we may update our 2007 guidance in our year end backlog and revenues conference call in November, our conference call in December for earnings and throughout the year. Based upon 7,362 homes in backlog at July 31, our expected deliveries of between 2,500 and 2,800 homes in the fourth quarter, the current pace of deposits, expected community opens, and after considering the softer market conditions, we currently estimate that we can deliver between 7,000 and 8,000 homes in 2007 at an average delivery price of between $635,000 and $645,000. This estimated delivery price reflects the significant change in mix of units in 2007 versus 2006, as we expect over 30% of the homes delivered in 2007 will be multis compared to our estimate of 21% in 2006. We also expect there will be a significant increase in deliveries from newer, lower-price single family communities which are offering smaller product, and accordingly have lower prices, as well as active adult community increases. The change in mix could also have a significant effect on the average delivered price in 2007 quarter to quarter. In addition, we expect revenues in buildings under percentage of completion accounting to be approximately $450 million to $550 million. These buildings have a backlog of 663 units and our estimates are based on the expected deliveries in these buildings as well as expected construction activities, as well as the new buildings we are just starting. We expect land sales to be minimum, about $5 million for the entire year. Based on the scheduled settlements, we would expect deliveries in the first quarter to be between 1,500 and 1,800 with an average price of between $640,000 and $650,000 per home, and that percentage of completion revenues will be between $75 million and $100 million.

Thanks, Joel. Sheila, we're ready to take questions.

(Operator Instructions) We'll take our first question from Dave Bogart - UBS. Dave Bogart - UBS: How are you doing? Congratulations on a good quarter.

Thank you, Dave. Dave Bogart - UBS: I was wondering if you could give us some more details on how you build up to the unit closing guidance for fiscal '07? It appears that the overall close is 7,000 to 8,000 units less than what you're going to have in backlog at the end of the year. Maybe you can talk about where the additional units are coming from.

It's more than we'll have in backlog at the beginning of the year, I believe.

I think that's what Dave meant to say.

If you just start with 7,360 units, roughly, we're going to deliver the midpoint of our range at 2,650 units. I'm oversimplifying here. If we did exactly the same number of contracts in each of the next two quarters, and delivered it all, that number would be between 7,000 and 8,000, so roughly 7,400 units. Dave Bogart - UBS: Are there units coming from homes that have been canceled that aren't in backlog now that you plan to sell during the year? Do you have any idea what the margins would look like on those kind of units?

There are units that will be coming in that would be part of the canceled units as there are every quarter, but there'll be a little bit more in the next quarter, I would guess, because we had higher cancellations. We don't have an idea of the margins on those specifically at this point.

Some of the margins will be high and some of the margins won't be. We've noted that from the past.

Right. In the last conference call we talked specifically about Orlando and it appeared that our net income as compared to margins after keeping deposits would be roughly the same as it would have been had we closed on the houses originally excepting it will show up in different line items and different quarters. Dave Bogart - UBS: If we could switch gears a little bit. On the lower-priced homes, the mix shift towards the lower-priced homes, and some smaller units, how do the margins on those compare to the margin on the more traditional homes that you're delivering now?

When we underwrote them, they were basically the same in each geographic region. I don't think that's significantly different.

I would guess that the margin is going to be a little bit less.

Only because of geographic mixes.

There's another factor, which is in the softer real estate market, multis, a fortiori force you to build specs, and with specs in a softer real estate market you'll have lessened margins because we're less likely to be bullish and hold, and we're more likely to give a good price to move product. Dave Bogart - UBS: I guess on those same lines, do you have any idea what the cycle time, how they differ for the smaller and lower priced?

Smaller units get delivered much quicker. On average, a large single-family home gets delivered at about ten months of backlog and a small single-family unit probably six or seven and a multi probably five or six.

Excepting the multi-family, where we do 60 to the acre where you get very dense; it's suburban, but it's like urban development. Those buildings can take you 18 months to deliver. Dave Bogart - UBS: Do you think in general, though, the return on capital on the small single-family stuff is higher because it turns faster?

Probably.

Our next question comes from Ivy Zelman - Credit Suisse. Ivy Zelman - Credit Suisse: Joel, to go through your guidance, first question is related to your units. It obviously assumes that flat orders for the next two quarters. I'm wondering given the current environment why you would be so bullish, assuming even flat orders?

I lost a few of your words. But we have more selling communities this quarter than we had last quarter. We have more selling communities projected for the first quarter of 2007 than we had in this quarter. We would think that based on those increased selling communities and the mix being slightly higher to the multi-family communities that we would end up with at least the same kind of sales that we had in this last quarter. But obviously the time will tell. I didn't think it was bullish.

I didn't think it was bullish, either. Ivy, it's not our intention to be bullish.

In addition, we actually looked at estimated closing seven different ways and the numbers consistently came out in that range. Ivy Zelman - Credit Suisse: Okay. But to go back to my point, when your orders are running down year-over-year nearly 50% to assume flat would be a very dramatic improvement. So you're relying on the new communities. What percentage?

Yes. We are assuming no further deterioration on a year-over-year basis is correct, Ivy. if that's bullish, then I guess we're guilty. But we thought that we could hold our own at roughly 47%, 48% of what we had been doing in the prior year. Ivy Zelman - Credit Suisse: If you looked at it that way, typically the fourth quarter, calendar fourth quarter is a much slower selling period than the third calendar quarter. So wouldn't you historically have a sequential decline in absolute units in the fourth calendar quarter?

That may be so.

But that was only one. I gave you the simplified answer, Ivy, but if I looked at it on an individual community basis based on average sales taken in each individual community, I'd get the same answers.

Ivy, remember, our quarters end not on the calendar, our year end is 10/31, I don't think we have deterioration in August, September, October from May, June, July. I think you probably would see the same sales per quarter historically. Joe Sicree: That's correct. Ivy Zelman - Credit Suisse: In the first quarter of '07, you would not expect to see a deceleration in orders from your fourth quarter fiscal?

November, December, January, generally not a great time for selling homes. Would you expect to see a decrease in that quarter from the fourth quarter Ivy asks Joe Sicree? Joe Sicree: Historically it has been down slightly.

It has been down slightly, historically. Ivy Zelman - Credit Suisse: Right. So in your assumptions to get to 7,000 to 8,000 closing, what are you assuming in that first fiscal quarter?

That's only one way, Ivy that we looked at it. I gave you an oversimplified answer. I also looked at in on a specific community basis. On the specific community basis, based on what we expect to do in each individual community, we end up with a very similar answer in terms of deliveries for next year. Ivy Zelman - Credit Suisse: Maybe you guys have a very detailed roll-up of how you're getting to your unit guidance and pricing guidance for '07?

We do. Ivy Zelman - Credit Suisse: Is there a reason why you're not giving us EPS guidance at this time, and when will you give us EPS guidance?

We traditionally give you EPS guidance on our earnings conference call in the fourth quarter and we would expect that we could give you earnings EPS guidance in the fourth quarter as we traditionally have done. Ivy Zelman - Credit Suisse: I guess I'm just wondering why?

Not done. Ivy Zelman - Credit Suisse: Okay, but you must have some idea of what margins are going to be looking like, or no?

I have some idea, but I have not completed the review. Until I complete the review, giving only partial information is not appropriate.

Well, seeing as how this is not meet the press, let us go on.

We'll take our next question from Ray Kwon- JP Morgan. Ray Kwon - JP Morgan: In your prepared remarks, you guys mentioned that you budgeted for write-off in the third quarter. What are you guys expecting for fourth quarter in 2007 in terms of your budgeting?

Well, for the fourth quarter of 2006, we've increased the budget without any real basis to $10 million instead of the $4 million I used to use, only because it's tougher times and we're being very careful on the options that we have. But as to 2007, we have not given you guidance yet, but we would expect that 2007 will be higher in write-offs if the economy continues, because we will continue to be careful in exercising options if the market deteriorates.

That's exactly right. Ray Kwon - JP Morgan: On your SG&A, I was wondering if you had any concrete initiatives to improve your cost structure and if you had any basis point targets or goals?

Yes, we do. We have been hiring very few people and for very specific tasks. So we are not growing. We have been substantially cutting back overhead. Before the obvious doldrums of the market set in to the psyche, we were hiring and training for continued expansion. It's obvious from our numbers that we'll not see expansion for a year or two at the most, I would guess; but that is just a guess. Nevertheless, without expansion, you can pare back your overhead for all those who are in training or were hired for expansion. So we are in a substantial cut back mode of our overheads. Ray Kwon - JP Morgan: Anything that you could quantify for us?

The answer to that is yes, but no.

We'll take our next question from Alex Barron - JMP Securities. Alex Barron - JMP Securities: Yes, thank you. I was hoping you could break down for us the 7,000 to 8,000 by whether that's consolidated or how it breaks down into the percentage of completion units and the JV units?

That's just regular consolidated deliveries. In addition, we will have $450 million to $500 million of percentage of completion revenues and they will be a significant number, but I don't have the exact count of those units in the buildings, using percentage of completion method we will have deliveries. But we don't have a final count on that yet. Alex Barron - JMP Securities: My second question has to do with your cancellation rate, I think you guys had previously said it was 18%, and you said 13% was Florida.

No we didn’t. We said that of the 317 cancellations, 13% of those ended up being in Orlando as an example, which had a very high cancellation rate. Alex Barron - JMP Securities: I'm trying to understand the 13%. Is it 13 of the total 300 something cancellations?

Yes. 13% of the 300 plus.

We'll take our next question from Jo Hamala - Citigroup. Jo Hamala - Citigroup: I had a question about your option deposits. We did some back of the envelope calculations and it seems like you had roughly $2,500 in option deposits per lot and that sound like a pretty low number. Is that typical?

We reduced optioned lots by a little over 10,000 optioned lots. And the average for the 10,000 plus option lots was a little under $2,200 per lot. But it is just a mathematical number. It could be higher or lower depending on the specific deals that we are not choosing to exercise options on.

It seems to be logical. It's 4% to 5% is generally what your down payment would be, what your default deposit would be on an option contract. I should say a contract. All contracts that do not have specific performance clauses within are, in effect, option contracts. So if I were to buy $10 million worth of real estate from you -- ground that is -- and give you $500,000 down non-refundable, if I violate the contract, then if I walk from the contract, you keep $500,000 and that would be 5%. That would be in line with the stats that we're giving you. Jo Hamala - Citigroup: Can you give us the break out of optioned versus owned lots? Joe Sicree: 47% is optioned.

We'll take our next question from Timothy Jones - Wasserman and Associates. Timothy Jones - Wasserman and Associates: I want to congratulate you on that last conference call you had, really good.

Thank you. Timothy Jones - Wasserman and Associates: A couple questions if you please. One, you did a great job of breaking down markets A, B, C, D and a couple adds. Can you give me a handful of markets that you see that you might be seeing a turnaround, a bottoming out? I know this is a subjective guess, but do you see anything to try to form a bottom? Then equally, some that are showing no improvement?

I don't see any forming a bottom, Tim. I have the same comment about a few of the markets that have been noted in general for the last several months, which is that the Texas markets continue to do well. The Denver market has been doing quite well for us. The Arizona market, that's Phoenix, has not been doing as poorly for us as it has apparently been doing for others. I don't see a turnaround in any of the markets specifically. Do you have any turnarounds?

I thought in the last conference call you talked to Virginia if you looked at the last two or three months, looks like it had the same kind of activity.

We're still on the bottom in Virginia. I don't see any turnaround there. So that's it. Timothy Jones - Wasserman and Associates: One of your biggest competitors, he mentioned Phoenix might be trying to turn around, he also mentioned Las Vegas. But you say it’s held its own and then get worse in the last three months. Is that correct?

That's correct and that's about where it still is from our perspective, from our experience. Timothy Jones - Wasserman and Associates: Second question is, you said of the write-offs on the options, which is about $22 million or something, was most of it Florida did you say?

No, most of it was California. Timothy Jones - Wasserman and Associates: You said something about Florida along with that.

The question that was asked referred to the last conference call, Tim. We had said that 13% of the cancellations had come out of Orlando. Timothy Jones - Wasserman and Associates: I understand that with your acquisition, right?

Right, with the Lancer acquisition. Timothy Jones - Wasserman and Associates: Lastly, most builders are slowing down their subdivisions in light of what's happening and no one knows exactly when things are going to improve. You seem to be keeping the accelerator on as far as new community openings. Can you just amplify your thinking in that regard?

Yes, I don't believe that the other builders are slowing down those communities which are about to open any more than Toll Brothers is. Once you put your juggernaut in place for improvements and start ripping up the ground and building your roads, well then you're going to complete that. You don't send that equipment home and just leave a lot of mud lay around wait for EPA to come and get you. You've got to finish and stabilize. Once you've sunk the money into the improvements, I think it's foolish to just sit on the ground. At that point, you would erect a couple of models, which are minimal expense compared to the cost of land acquisition plus improvements and you would go forward with your project. Now what may be different is if you were optioning that -- true option, not an option characterized as an agreement to sale where we're buying land – but if you were truly optioning lots 4.25 or 6.25 then it's easy to slow down because then the developer sits on the ground and the improvements. But I'm guessing 95% of the time or 99% of the time Toll Brothers is the developer as well as the builder. We're working on our own lots. We don't have that option of slowing down the take downs, as it were, of options. Timothy Jones - Wasserman and Associates: Ca I expand that. Let's use the case where you have a phase, you obviously will finish out that phase?

That's right. Timothy Jones - Wasserman and Associates: If it's not doing well, will you then stop the next phase?

Yes, sure. We will reduce the pace of improvements to match the pace of sales of recent experience so that we don't over-improve the property. We certainly are doing that. I mean, where we used to sell 40 a year if we are selling 20 a year, obviously we would improve when we get down to 5 lots, we would improve 20 lots, not 40 lots if that's modularly possible, because you're still controlled by the water line and the sewer line, the detention base, and layout et cetera. You may not be able to do exactly 20, you may have to do 30, you may only be able to do 10.

Our next question comes from John Emerich - Iron Works Capital. John Emerich - Iron Works Capital: Thanks. Not looking for EPS guidance in any way, but your guidance for next year on units and prices has given us some order of magnitude on the price decline we'll be looking at.

Remember that wasn't a price decline, that was a price shift. John Emerich - Iron Works Capital: No, I'm talking about the overall revenue decline. Just a very high level question here. Given what land prices have done in the last three years and what that did for gross margins, just as a starting point, is it reasonable to go back to the model and seeing gross margins and maybe even operating margins back where they were three our four years ago is more of a reasonable starting point? Rather than saying we're going to hold on to what we had in the last 18 months have really benefited from this rapid appreciation in land prices.

We have benefited, but I don't think we're going to hold on to all of that benefit, that would be impossible. We would have to have the same demand and the same prices and I don't think you do. So I would expect an erosion there. John Emerich - Iron Works Capital: Is this environment going to be more similar to what it was, as I say four years ago before things really took off than it is?

You know, that's anybody's guess. That's logical, but I don't think logic will prevail, but we're getting too far afield of fact and it's just pure speculation. The demographics haven't changed. The growth in population has not slowed down. The job formation, the non-growth of unemployment, the great statistics seem to indicate that you have the same conditions for the same market that drove us over the edge with over-speculation extent. When the market returns, after the home buyer gains confidence and belief that by believing that we've gone past the bottom, it's not unnatural to think that first you'll have a normal market, such as 2002, 2001 and then you will have a more excited market such as 2003 and then you may return to the market of 2004 and 2005 and then you may get back to the market that we're in right now. So it's too hard to predict, but because of the demographics and the reaction that occurred because of those demographics in the past, it's not unreasonable to expect that you won't have the same thing. John Emerich - Iron Works Capital: Okay, and last question, we often hear about the two studies done by Harvard Joint Center for Housing and the Brookings Institute. That seems to be the foundation of the bullishness in the next 10 to 20 years. It talks about household formation of 1.5 million; we're building houses 1.8 million, 1.9 million or something like that on an annual basis, or at least we had been. If you go back and look at that number and how it was derived by Brookings originally, they make a fairly large assumption about the difference between 1.5 million and 2 million, if you will, in the need coming from lost homes, if you will. Almost like a couple of Katrina’s every year. They themselves say it seems a little strange. But that's what the data tells them, so they kind of stuck with it.

I'm sorry, I thought I heard a recent announcement by census that our population is now at 300 million. I think if you go back 20 years, our population was at about 200 million. So somewhere, we picked up another 100 million people in the United States and over a 20-year period, that represents a lot of new demand for housing, I think.

There were second homes.

Thank you very much. I guess 20 years ago we were lucky if we built 5% second homes. Today I'll bet it's 25% or 30%, but I have no facts for that.

And there's not a Katrina, I think, effect, you have a natural housing stock that was built early in the century and during the 1940s and 1950s that is aging, some of which has to be replaced with new housing and that's part of the statistics they're talking about. John Emerich - Iron Works Capital: That's fair enough, thank you very much.

Our next question comes from Keith Wiley - Goldman Sachs. Keith Wiley - Goldman Sachs: Yes, I just noticed that your land holdings have increased pretty significantly year-over-year from your most recent Q from about $1 billion to about $2.3 billion. I'm just wondering is there a reason for that? Were you able to get those purchases at below market prices by exercising old options? Or are you paying full market prices for that land?

I don't have those numbers in front of me, but we had indicated that we had opened up a significant number of new communities in this last year and we're continuing to do that, that would make land go up. I don't think that it went up the way you said. I may be wrong, we will check and come back to you. Keith Wiley - Goldman Sachs: It's probably not raw land on the balance sheet, it's more developed land that's getting ready to be sold.

We went up $600 million in the six to nine months. Land development went up $600 million. We had indicated last year that we had a lot of new communities opening up that had been delayed in the approval process that we were acquiring that we were going to start. You've seen that in the community count already increased and the community count we've talked about that we think will happen next year. Keith Wiley - Goldman Sachs: So you really haven't been out there buying a bunch of raw land in the last year?

These are deals that we had contracted for a number of years ago, we took you through the approval process in general, and how acquiring title to the land where we had put it under contract a number of years ago.

Our next question comes from Dan Oppenheim - Banc of America Securities. Dan Oppenheim - Banc of America Securities: Thanks, I was wondering about the land options. It looks as though, just from your land holdings each quarter. There's a lot of land probably put under option in '05. When would you look at writing off some of those options?

Right now. If we think that the deals don't make sense, we look at each quarter, we look at land under control. Optioned and controlled. If we think that we have a need to take a writedown, we do it every single quarter. Dan Oppenheim - Banc of America Securities: So land from '05 right now is still working out to be positive returns?

I can't tell you what year, but if it was a deal that we thought we needed to write off, we have taken the write-off already under the assumption we weren't going to buy it. If it still pencils out, we have not. Dan Oppenheim - Banc of America Securities: And one second question. You made the comment in the press release about not focusing or not building more at affordable price points. I understand that if you were doing more in terms of condos in Manhattan where it's 1,000 square foot and you're building to suit as applied on square feet. You entered the Martinsburg, West Virginia market last year where there's some units there, single family or town homes in the upper ones and the twos.

I think it was this year, wasn't it? Yes. But go ahead. Dan Oppenheim - Banc of America Securities: That just seems to be more willingness to build at lower price points, where if we look at the absolute dollar --.

That's true for that community, yes. We are very heavy in the north Virginia market and we thought it wise to balance by going out further. Obviously we couldn't be in the same location stay in and come in with a lower price because the land wouldn't permit it. But we could go out further and build the lower price because we see so many customers coming through all of our communities, and I'm guessing we must have 40 or 50 communities in the North Virginia, Maryland market. When you get somebody to one of these communities who can't afford, you do the old Sid Stone thing, roll up your sleeves and say you want more for your money, you say you're not satisfied, I am going to give you a map to get to the Martinsburg communities of Toll Brothers. So we saw an opportunity to create some synergy by developing a little further out. That's what the Martinsburg operation represents. Dan Oppenheim - Banc of America Securities: With the other land, would you say that's unique in terms of looking to build at lower price points?

Yes, yes that's fairly unique.

Our next question comes from Steve Fockens - Lehman Brothers. Steve Fockens - Lehman Brothers: As you think about having to invest for the business over the next two, three, or four years, what kind of level of inventory investment do you think is necessary to support what your current future view is?

What kind of investment is necessary? Well, no investment is necessary, we have the 82,000 lots. Certainly we could continue to build 7,000 or 8,000 or 9,000 homes a year for the next several years without any additional land acquisition or investment as you say, If we're given an opportunity today that we think is a good opportunity, we will invest. I would expect to see fewer in the near term and then more depending upon the length of the downturn of this market as time passes. I'm sorry I can't answer any better. Steve Fockens - Lehman Brothers: Maybe let me ask another way. If you really thought over the next few years you would average somewhere between, call it, 7,000 and 8,500 units a year, is there any reason your inventory couldn't shrink?

Couldn't shrink? No inventory, I think you've answered your own question. Joel? I don't think it will, by the way.

We have a lot of communities coming through the pipeline of approvals that we would expect to get this year that we expect to open up. We have in 2007, we expect to increase community count. Because we expect to increase community count, I would expect that we would have inventory levels, in terms of land, higher a year from now than we do today because we expect that we can continue to put out our footprint further and further out in different product lines in some of our existing areas. In other regions that we may be very small in as we grow those regions. I would expect that a year from now we will have higher community count.

Definitely. Some Internet questions. This one from Edward Ryan at Mansion Partners. Please comment on trends in the pricing of building materials. For the most part down.

Lumber's down. Concrete are up slightly.

Labor appears to be going down and land. Land pricing is definitely going down. Do we anticipate weakness? It's just an obvious answer. As long as the market can be characterized as weak, I would expect to have continued weakness in the price of building materials, except those that are oil-based. I think I'd be hard-pressed to ask a shingle manufacturer to cut his price since that's nothing but liquid oil. This question from Guy Benstead of Cedar Ridge Partners. You state share count to calculate EPS for fiscal year '06 will be approximately 163.5 million shares same as the third quarter, does that mean you plan no further share repurchases during the fourth quarter '06?

The share repurchases during a quarter have very little impact on that quarter's outstanding shares. Since we're in a blackout period up until next week sometime, at least the end of this week, I guess, that even if we started to buy shares next week, it would have very small weighted average impact on the average number of shares for the quarter. The bigger effect is what will happen to the stock price.

But to answer the question more directly, I wouldn't say I have no further share repurchase plans, but they are much subdued from the prior activity of the prior three quarters. Thank you. Do we have another question from the Internet? This from Robert Tracy. What is the break out on inventory land CIP? Land deposits, sample homes and other? Should we expect inventory as of October '06 to be up, down, or flat?

Land and land development costs are about $2.3 billion, construction progress is $3.3 billion. Sample homes are $230 million, land deposits and predevelopment costs are $350 million, that's roughly $6.2 billion. Yes, I would guess that inventories will be higher in the fourth quarter where they are today based on community openings.

I'm impressed. Thank you, Joel. Sheila?

We'll take our next question from Douglas Pratt - Galyan Group. Douglas Pratt - Galyan Group: To put a finer point on some of the cost increases particularly in materials, are you saying they're actually falling, for example, year-over-year or sequentially?

Well, lumber, everybody knows is down. Douglas Pratt - Galyan Group: Copper, cement?

I said copper, concrete, and dry wall are slightly up year-over-year.

Is copper only slightly at this point?

Well, the three together.

Because copper did take a huge increase. Although we're not using much copper anymore. Douglas Pratt - Galyan Group: Does that mean we should look for something -- when you say slightly, is that 3%, 5%, 6%? What kind of percentage number is that, kind of is slightly to you?

Drywall in the third quarter went up on average $500 a house. Copper in the third quarter went up on average $300 a house, except in Texas for some reason, concrete stayed roughly flat excepting in Texas. Stucco went up roughly $200 a house.

Does copper limit your choices for electrical?

It comes off of our standard buying, how we calculate our standard buying per house.

Because we pay for an electrician, he supplies the wire. Douglas Pratt - Galyan Group: Two quick follow-ups. Number one, I'm not familiar with the study that's been mentioned. I assume it suggests household formation is up something like 1% to 1.5% going forward, which I think has been sort of the trend. Also what kind of incentives?

You said household formations are up 1% and 1.5%. Douglas Pratt - Galyan Group: Annually household formations grow somewhere around 1% to 1.5%, I believe.

Yes, but that's a good idea. If you send the e-mail to rtoll@tollbrothersinc.com, we'll send you the study. Douglas Pratt - Galyan Group: Okay. Finally, what sort of incentives are you paying to brokers right now? Has there been any change since your last call?

No. We pay on average 3% to brokers. Some territories it's less and some territories are slightly better. In tough climates such as we're in, you offer special incentives to brokers. If you sell three homes in the next three quarters, you get a free trip, I'm not sure where. If you sell two homes in this quarter, you get a spending certificate so much at Neiman Marcus or Macy's or what have you. That gives you a good idea of our broker programs.

Our next question comes from Rick Murray - Raymond James. Rick Murray - Raymond James: Hey, good afternoon, I was curious, Bob, if you could give us a sense quantitatively, and I know it's a difficult thing to ask of you, but a sense for the degree of magnitude that you believe or perceive land prices are changing in perhaps Florida or California or anywhere that you may have some insight like that?

My sense is that they're changing quite a bit and quite more rapidly than in past home building recessions, slowdowns. The nominal prices are not changing as much as the terms. September '05, sellers of land were demanding full pay if it were a $30 million piece, you would give $1.5 million to $2 million down and as soon as you achieve preliminary plan so that you know you had vested rights, you had to close. Then on your nickel, which is substantial, you went through the planning process, the engineering process, the wetland approval, the water and sewer approval so that you would then get into the ground about on average 15 months from the time you had spent the money. Now, the same seller will offer the same piece of dirt for the same money, however, $500,000 down refundable, if you don't achieve your approvals. You don't have to pay till you get all your approvals so you're riding on the land seller nickel instead of your own, for the time period you're securing all of the approvals, which can be as much as five years. When it comes time to close, you only have to close on 20 lots and then take down six a quarter for the next, it could be ten years or five years. So when you throw in the discount because of the slowness in payment, the stretched out terms, you get a pretty substantial difference. Rick Murray - Raymond James: Despite the fact that billions of dollars of public builder land deals have returned to the market, you haven't seen any impact on nominal prices yet?

Not really, no. We have found a substantial difference in prices with sellers that we have and I think other builders are finding the same. You go back and renegotiate. You can take $100 million deal back to from $100 million to $72 million. But there was all cash at the end of the time period. So the $72 million was laid out as fast as the $100 million was going to be laid out. That was something that just comes to mind, it was a substantial discount. Hope that helps. Rick Murray - Raymond James: Yes, that's great. The other question I had was can you give us any update on traffic or deposit or contract trends through August?

Yes, I think it's been about the same as it was in the last conference call. It looks like in August, we have in deposits per community gone down. But August was pretty much above where we were in July. So August is pretty much above July. Well, not pretty much, but somewhat. In terms of traffic, our traffic in August is down a hair over July. All these stats I'm giving you are on a per community basis. I hope that helps.

Our next question comes from Darren Firestein - Wachovia Securities. Darren Firestein - Wachovia Securities: Hey, guys. Just a quick question. Either in the homes delivered this quarter or in backlog, do you happen to have an average selling price for your multi-family and/or attached products?

Multi-family. Greg Ziegler: In the backlog?

Greg, as you look for this, although the question wasn't asked in this fashion, you have to give a further breakdown because the average price of high-rise is going to be different from the average price of the past -- Greg Ziegler: 578 is -- I'm sorry that's the wrong number.

That's high.

$499,000 is the average price of our multi-family, and $809,000 is the average price of our single family, that does not include high-rise.

Greg, anything to add to that? Greg Ziegler: After that it was 486.

486. Okay. Darren Firestein - Wachovia Securities: Okay. Terrific. Thank you very much.

I have a question from Tim Humphreys at GJ Capital. And he says Bob, I understand that incentives play a larger strategic role during a downturn -- Yes, that's definitely true. They play no role when we're doing well -- and that for obvious reasons protecting your backlog et cetera reduced pricing is really a last resort. Very last we have not done that yet. We do our best to always hold nominal pricing. Tim goes on to say although your average price is up year-over-year, have you been forced to reduce prices in any communities? Not yet. If so, what percentage of total communities? See the former question for an answer. What metrics do you use to determine when a community requires a price adjustment? That's very easy, we look at the sales results every week. And with those results come a repeat of the results of the last eight weeks and so you just look at how you've done over the past eight weeks in deposits, how you've done in agreements, how you've done in canceled deposits, how you've done in canceled agreements. Then you decide whether you're willing to accept what has been going on and stick with your pricing or whether you are in effect going to lower your pricing by increasing your incentives. Some incentives are invisible in that you include extra things with the home. Some of the incentives are very visible, in that you say that we have 10,000 or $20,000 to help customize your home. Some of the incentives are difficult for the client but easy for us to calculate, in that right now we have a special 2.99% first-year mortgage program and it's simply accomplished by buying down the rate on a mortgage and so we know exactly what we're giving there. I hope that helps Tim. Sheila?

Our next question comes from Stephen East - FIG. Stephen East - FIG: Good afternoon, guys. Bob, if I could just follow on that. Buying down the mortgages. Roughly how much is that cost per home?

$14,000 is the writedown where we're using.

Is that the one we're using?

What we're using is $14,000 a house.

Okay, there you go. Stephen East - FIG: All right. Thank you. And then when you go through the options and evaluate whether you're writing those off, what type of assumptions do you make moving forward as far as, do you assume current pricing or do you assume some kind of incremental or declining pricing? Do you assume current absorption rates?

Forgive me if I'm wrong, but I think you were confusing and combining two different kinds of write-offs. I think you're talking in the latter part of your question about impairment and I think in the prior part of your question you're talking about the ordinary write-offs. When you write off a piece of ground, if you've got $500,000 in deposit in the ground, and $400,000 in predevelopment costs, you've got $900,000 the write-off and that's it. You're out $900,000. If what you're doing is writing down a piece of a community, where because of the pace and price you are not making any money when you sell your home that you're losing on a GAAP basis, $1. Then you have to go and look at the entire community discounted so that you make 15%, I think.

For average communities that's what it is.

That amount of money that it takes to writedown that community to give you the 15% return is what your write-off is. Stephen East - FIG: I appreciate that. I guess what I was thinking on the first part of your answer. When you originally put a piece of property under option, you make some assumptions about what type of product you're going to put there, the pricing that you're going to put there. How long you're going to be there. Now when you look at that option again to decide, hey, do we want to go forward with it? I know there are other issues, but if we go back to those specific items, are you taking current market conditions or are you trying to…?

Forward. That's why you're dropping the deal. When you entered into the agreement, signed up the piece of ground, your assumption was, as an example that you were going to build $800,000 homes, that they were going to be 3,300 feet. And that you were going to sell 40 of them a year. Now that you look at the market and you see that you're going to not be able to sell them for $800,000 -- actually more usually what occurs is you could still get 800 but instead of 40 a year, you can only get 20 a year. You're going to get 20 a year, you're going to be in this piece twice as long. Your interest is going to balloon up on you. Now underwriting, which before had yielded us a return on investment of 22% and a profit -- just on a gross basis against sales price -- of 12% yields you half of the amount and you're only going to make 6% and you're only going to make on your return on investment, 10%. You say you'd rather deploy, you're not interested in those returns, you'd rather deploy your money and management elsewhere. Go back to the seller and say, pace is slow, we need a reduction in price or a lengthening in payment terms. Seller says no, you say well, then I'm very sorry we're moving on and here's our deposit. We drop the predevelopment cost, of course because they're no longer an asset. They're worthless. Stephen East - FIG: One last question, on labor you talked about, you're seeing a decline. Sequentially, if you look at it year-over-year generally--.

I overstated that. We're seeing a little decline. The markets are still hot for labor because we're still building backlog. Note our release where we're projecting sales less than we're doing currently in settlements. But because we're doing those settlements, we need people to build those homes. The labor market has not gone down much. We see cracks in it now. But it's not as significant as I may have implied.

Our next question comes from Joel Locker - FDS. Joel Locker - FDS: Just had a question on your outside broker commissions. Do you pay those, all of those at the signing of the sales contract or at the closing?

No, generally at the closing. In a soft market, you will offer the brokerage community that you will pay half of the commission at the issuance of a mortgage commitment for the property. If it's very soft, you'll pay half the commission with the signing of the agreement. It depends on the market. Joel Locker - FDS: In a weak market if you're paying a 4% outside broker commission, give them half?

It's unusual by the way, for us to pay 4%; 3% generally does it. We have found that the relationship with the broker, believe it or not is more important than the extra point. You generally can't buy brokers past a certain point. Ordinary co-op is about 3%. Joel Locker - FDS: So even if you did that, though, instead of get a 7% deposit, you might get a 5% deposit because 2% will go to the broker. Or half of the 4% Or half of 3%?

No, no, they're completely separated, the deposit we get from the client doesn't change. Joel Locker - FDS: Right. But I'm saying if you sold $1 million.

You're talking about how much I've got left in my pocket? Joel Locker - FDS: You give $15,000 to the broker and have $55,000 left pretty much? Now just on the gypsum and wallboard. Are you seeing any heating and supply there? I mean that's the one.

We don't have any problem in supply. Yes. As a matter of fact the truth, nobody has a problem with supply in America. They just have a problem with price. I guarantee you can get whatever you want, you just have to pay the price. Joel Locker - FDS: I'm saying there seems like there might be excess supply in that certain material based on the price hikes and that being so dependent on actual residential housing. Was wondering what your opinion on it?

Don't have one. I'm sorry. It's beyond my knowledge. Joel Locker - FDS: All right. Thanks a lot.

You're welcome. I have a question from John Culler at AdVest. Why is inventory up 5% sequentially even though backlog is down and some land was written off? Joel?

Most of the things that we've written off were options, not land, we had $2.8 million of land writedowns. We have more land costs because we bought land to open new communities, which we've talked about a few times. We have more models being built in those new communities which decreases it. We do have some spec homes that were supposed to sell that didn't sell. We have higher inventory on our homes account for percentage of completion, which is a new category which we didn't have in prior years. Therefore, those homes, are in inventory until they're delivered.

Thank you, Joel. I have a question from John Stewart at AIF Banking Corp. Bob, do you believe your investment allocation for land acquisitions in Florida and California will decrease in the short-term given the higher slow down in those markets? I would say, yes in Florida. With respect to California, perhaps not. We need inventory in southern California very much. In northern California it's been very spotty. Some communities have been very, very slow. Some communities have been seeing pretty substantial demand. So it's on an opportunistic basis, spot basis in northern California, geography, location determines. In southern California, in general, I would say we are looking for inventory. Florida, yes, I would say we'll not invest as much as we have. Sheila?

Our next question comes from Ivy Zelman - Credit Suisse.

Hey, guys this is actually Allen on for Ivy. Just a quick follow-up on the community counts topic. When should we kind of expect community count growth to slow or even come down? I know you mentioned you had some projects in the pipeline in the next few quarters. Do you envision that number coming down any time soon?

I do not envision our community count coming down for the next year.

We'll go next to John Emerich, Iron Works Capital. Please go ahead. John Emerich - Iron Works Capital: Thanks, I just had one follow-up What was cash flow from operations in the quarter?

We don't do cash flow from operations so I can't answer your question. We'll be glad to walk you through how you define it if you give somebody a call. You can give Fred a call or Joe Sicree a call and we'll be glad to try to figure out how to help you get that answer. But it's not a number we follow. John Emerich - Iron Works Capital: It will show up in the 10-Q, right?

Right. But it's not a number we do for the conference call. John Emerich - Iron Works Capital: You won't talk about it. Okay. Thank you.

It's not we won't talk about it. I haven't done it yet.

We'll take our final question from Dan Oppenheim - Banc of America Securities. Please go ahead. Mike Wood - Banc of America Securities: Hi, this is Mike Wood, on for Dan. Question about the write-off that you took in the quarter, were they on options that you were required to take down at the point where you walked away from them?

Sure. If we're not required to pay more money, why throw it in the trash can, might as well hold on to it. Mike Wood - Banc of America Securities: I was thinking that the options, is it fair to assume then that the options that you purchased after those, that you won't have to take down for quite some time now? They were purchased at a higher cost and then I would think they would have a greater likelihood of being written down.

I'm sorry, I don't follow you.

We review every quarter the land we have under control and if the deals are not probable of being closed or not probable that we'll acquire them because they don't pencil out we take the writedown that that point in time, which could be three years before the date is required to close. It could be a month before the date it's required to close. Every quarter we're looking at all our land owned and controlled and we do that process continually, which is why every quarter I tell you to put in your estimates a write-off estimate. Traditionally over time we've been accurate. In any one quarter we could be significantly off.

You're right. I forgot. Thank you, Joel. Mike Wood - Banc of America Securities: Thanks.

You're very welcome. Sheila, thank you very much.

You're welcome, sir.

Everybody, thanks very much for joining us. Have a good day. Good-bye.

That does conclude today's presentation. We thank you for your participation and you may disconnect at this time.