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Toll Brothers, Inc. (NYSE:TOL)

F4Q07 Update Call

November 8, 20072:00 pm ET

Executives

Robert Toll - Chairman and Chief Executive Officer

Joel Rassman – Executive Vice President, Treasurer, ChiefFinancial Officer, and Director

Fred Cooper - Senior Vice President of Finance and InvestorRelations

Joe Sicree – Senior Vice President and Chief AccountingOfficer

Kira McCarron - Chief Marketing Officer

Don Salmon - President of TBI Mortgage

Greg Zigler - Executive Vice President of Finance.

Analysts

Nishu Sood - Deutsche Bank Securities

Ray Huang – JP Morgan

David Goldberg – UBS Securities

Alan Ratner - Zelman & Associates

Saul Gerathon - Merrill Lynch

Stephen Kim - Citigroup

Daniel Oppenheim - Banc of America

Timothy Jones - Wasserman & Associates

Rick Dowdle - ARX

Alex Barron - Agency Trading Group

Clifford Allison - UBS

Janice Nyeman - Charles Schwab

Operator

Good afternoon. Myname is Crystal, and I will be yourconference operator today. At this time,I would like to welcome everyone to the fourth quarter 2007 outlook conference call.(Operator Instructions). I will now turn the conference over to Robert Toll, chairmanand CEO. Please go ahead, sir.

Robert Toll

Thanks, Crystal,hello, everybody. Thanks for joining us. With me today are Joel Rassman, ChiefFinancial Officer, Fred Cooper, Senior Vice President of Finance and InvestorRelations, Joe Sicree, Chief Accounting Officer, Kira McCarron, Chief MarketingOfficer, Don Salmon, President of TBI Mortgage, and Greg Zigler, EVP ofFinance.

Before I begin, I ask you to read the statement onforward-looking information in today's release and on our website. I caution you that many statements on thiscall are based on assumptions about the economy, world events, housing andfinancial markets, and many other factors beyond our control that couldsignificantly affect future results.

Those listening on the web can e-mail questions to rtoll@tollbrothersinc,that's all one word, .com. We'll try toanswer as many as possible.

We've just announced preliminary results for our fourthquarter and fiscal year ending October 31, 2007. We will announcefinal results when we release earnings on December 6th, 2007.

For the fourth quarter, home building revenues wereapproximately $1.17 billion dollars, declined 36% compared to fourth quarter'06. Backlog of approximately $2.85billion dollars, declined 36% compared to '06.

Gross signed contracts for '07's fourth quarter ofapproximately $693.7 million dollars, and 1,073 homes declined 38% and 33%respectively versus fourth quarter '06. Wehad 417 cancellations in '07's fourth quarter, totaling approximately $328.5million dollars compared to 585 cancellations, totaling $412.3 million dollars infourth quarter '06.

The fourth quarter cancellation rate was 38.9% as a percentof current quarter contracts compared to 36.7% in '06's fourth quarter. As a percent of beginning quarter backlog, thecancellation rate was 8.3% compared to 7.3% in fourth quarter '06.

Fiscal year '07 fourth quarter net signed contracts totaled656 homes, or approximately $365.2 million dollars, a decline of 35% in unitsand 48% in dollars compared to fiscal year '06's fourth quarter.

The average price per unit of gross contracts signed in thefourth quarter was $646,000, compared to $667,000 in '07's third quarter. This was consistent with our previouslydiscussed expectations, as our product mix in the near term shifted to a higherpercentage of multifamily versus single-family communities than in the past.

Multis tend to be lower priced. However, the average price of the 417cancellations in fourth quarter '07 was a much higher $788,000 per unit. The cancellations were heavily concentrated inhigh-priced markets and product lines.

The effect of these cancellations, coupled with the company'sproduct mix shift, reduced the average price of net signed contracts in fiscalyear '07's fourth quarter to a much lower $557,000 per unit.

For the fiscal year ended October 31, '07, the homebuildingrevenues were approximately $4.63 billion dollars, and net signed contractswere approximately $3.01 billion dollars, a decline of 24% in home buildingrevenues, and 33% in contracts compared to fiscal year '06's year end results.

We ended the fourth quarter with nearly $900 million in cashand more than $1.2 billion dollars available under our bank credit facility,which matures in March of 2011. As wecontinue to manage and reevaluate our land position, we ended this fourthquarter with approximately 59,300 lots owned and optioned, compared to 91,200lots at our peak in second quarter '06.

We ended the fourth quarter with 315 selling communities,down from a peak of 325 at second quarter end. We expect to be selling from approximately 300communities by fiscal year end '08.

We continue to believe that excess supply created bycancellations, speculative buyers and overly ambitious builders, as well ascustomer concerns about selling their existing homes, and a general lack ofconsumer confidence are the primary impediments to our market's recovery.

An inability to obtain mortgages does not appear to be amajor factor for our buyers, although it may affect our buyers' buyers.

We saw some further weakness this quarter compared to thethird and second quarters, and some further slowing in October versusSeptember. The base of customercancellations increased this fourth quarter.

Net contracts were down 35% in units from one year ago. This decline was higher than the mid 20%declines in our second and third quarters, compared to the prior year quarters.

The growth in the rate of cancellations, the decline in newcontracts, and the weaknesses we observed in October suggest that we still havetough times ahead, which we believe are reflected in our estimates for fourthquarter impairments.

While we have not yet finalized our impairment analysis, weestimate that pretax write-downs in fiscal year '07's fourth quarter will bebetween $250 million and $450 million dollars.

We have been in the current down period since September '05,we can't predict how long this down period will last, but the foundation of thehousing market, primarily solid demographics, has remained strong. Many of our perspective clients are on thesidelines watching and waiting.

Actually fewer sites are proceeding through the landapproval process, which could result in a shortage of buildable lots in ourindustry when confidence returns and markets reach equilibrium.

Government data indicates that production of new homes hasplummeted, which we believe should help expedite the clearing of excess inventory. We also believe that the government datais even short in its reality, in projecting the reality of what production isof new homes today.

Perhaps as the presidential campaign heats up and moves tothe front page, negative articles about housing will move off the front page,then hopefully, the positive underpinnings of low interest rates, lowunemployment, and a decent economy will raise new home buyer confidence.

Now, Crystal, we'll open it up for questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from the line ofNishu Sood with Deutsche Bank.

Nishu Sood - DeutscheBank

Thanks, good afternoon, guys.

Robert Toll

Hi.

Nishu Sood - DeutscheBank

First question, looking at your order pace, 656 ordersacross 315 communities, obviously that would indicate that a number of yourcommunities, perhaps even your submarkets overall, are going weeks, perhapseven months without seeing a sale.

So my question was, Bob, looking back to the downturn in theearly '90’s, how bad was it back then, if you look at it on a kind of similarbasis, and what was the, what were the tactics you employed back then to kindof respond to that, that type of demand softness?

Robert Toll

Well, in comparison, we're pretty and I would say we'repretty much worse now, not by a whole lot, but we're worse now than we were in'88, '89, '90, and the tactics that we employed then are the same tactics thatwe're employing now, which is primarily to offer special incentives on any specinventory that we have, and with respect to, to-be-built product, to offer someincentive, but not so much as to cut into the value that we evaluate the groundas having.

So that, if by cutting a price on a home by $50,000, if youcount everything as being constant other than land, you're dropping the land by$50,000, and you take a look at what that brings you to on a land evaluation,and if you think that that land is not worth that, then you're okay, and if youthink the land is worth more than that, then you made a mistake and you raiseyour prices.

So it’s pretty much the same, same tactics and we do thinkthat this is worse than it was in '88 through '90, first month of '91.

Nishu Sood - DeutscheBank

So, I know at some stage if the pessimists are right and theeconomy does weaken a lot more substantially, I mean, you could reasonably seethe vast majority of your communities not having any sales for long stretchesof time. So what's your threshold forwhen you began to become much more aggressive in terms of pricing, pricing tokind of prop up your absorptions again?

Robert Toll

As long as you don't need to develop cash flow in thatmethod, in order to protect yourself from covenants in your bank lines, or theability to feed your overhead, if you haven't cut your overhead sufficiently,then on a theoretical basis, you would have to be more aggressive. But fortunately, for the time being, that'snot us.

Joel Rassman

We look at our communities, each community separately.

Robert Toll

This is Joel.

Joel Rassman

That decision is made on a community by community basis, andthere are times that we've determined that a community could effectively beclosed because it doesn't have incremental value to keep it open versus theoverheads, but most times we still think it's positive to market from thatcommunity and we continue to do so.

Nishu Sood - DeutscheBank

Great, one finalquick question, if you could, the cancellations you mentioned in the highpriced point products were higher.

Joel Rassman

Yes, geographically primarily geographic issue.

Nishu Sood - DeutscheBank

Which geographies?

Joel Rassman

Californiaprimarily. California,Arizona.

Nishu Sood - DeutscheBank

Okay, thanks.

Robert Toll

You're very welcome. Crystal?

Operator

Your next question is from the line of Michael Rehaut withJPMorgan.

Ray Huang - JPMorgan

Hi, guys. This isactually Ray Huang for Mike. I waswondering if you could give some color on the tower business, it looks likeorders are down well below the company average, I'm just wondering about thefunction of demand or if you guys just sold out of the tower communities?

Robert Toll

Function and demand is pretty strong. Actually there was an anomaly. It took us longer to complete than we shouldhave and it gave some the opportunity because we had exceeded the time periodin the agreement of sale to walk.

We're not unhappy with the walking, becausewe're selling the units in most cases for more money. But when you get some walking and then you getsome coming back in, the net effect is evenness, or no progress it might look,I think actually things are a lot better than they look in the tower businessbecause of that factor.

Joel Rassman

Its communities capped on a percentage basis that we breakout, not towers, and there were very few of them, there are very few offeringsof homes left to sell in those re-buildings, I think.

Ray Huang - JPMorgan

Okay, then if you could just provide your local marketcommentary. Obviously there's going tobe a lot of F-minus' but you could humor us?

Robert Toll

Do you want to finish? Let me find that paper I gathered in here. Okay. Massachusetts,Rhode Island is an F. Connecticutis a B, which is strange, except that most of Connecticutthat we build in funnels down into the New Yorkand suburb and New York market.

That's probably the reason. New Yorksuburbs, these are really excerpts. Putnamand Dutches are C-plus. Our city livingdivision in New York City is a B. Our city living in New Jersey, that's Hoboken, New Jersey city, is a B-plus. New Jerseyitself is a D, with the exception of the Princeton area,which is a B.

Michigan is anF-minus, while Illinois, Chicago,is just an F. Minnesota is all the way up from an F-minus to an F. Mid-Atlanticstates, the Philadelphia suburbshave slipped down to a D. The Pocono’sare an F-minus. Delawareis a B. Maryland Shore its offerings are an F-minus.

Washington, DC,Maryland is a D. Virginia is aD-plus. West Virginia is a D-minus. That's actually better than most of ourmargins, unfortunately. Raleighis a D-plus now. And that's a seriousslip for Raleigh. And Charlottehas gone all the way down, in our experience, to an F, and that's probably dueto the two banks laying off. Hilton Headhas gone way down for us to an F-minus.

Atlanta, Georgiaright now is an F-minus, but we're really not a good judge. We are cutting roads and we have a trailer. It's tough to get to the trailer. We have nothing to show, so that might accountfor the F-minus. But it's definitely themarket as well.

Florida Central, let's see, Orlandoprimarily is D-minus. Florida East Coast,F. Florida North, Jacksonville, etcetera, F. Florida Tampa, F-minus, and Florida West, a C. Now that's a significant change recently. We've had 24 deposits in the last four weeks.

I'm not sure that it's not due to more aggressive discountsthat we gave on some of the spec homes as the spec homes neared completion. Austin, Texasis a C. Dallas, Texas is a C. And San Antonio, Texas, I'm sorry tosay, has gone down to a flunk, F.

West territory, Northern Californiais a D. Southern California is an F. Andthat's surprising. Even Orange County, where we have some prettyneat offerings has slipped seriously down. California, Palm Springs, F-minus. That could be seasonal.

We can't tell, except the season should be starting now. Arizonais an F. Vegas has its own special category along with Tampa. It's got an F-minus-minus. Renois an F. And Colorado was aC-minus. The fact that I differentiatebetween, I don't think there were any F-pluses.

But the fact that I differentiate between F, F-minus andF-minus-minus, shows you that the drop in the market and to the extent thatwe've gone to in order for me to give you gradations, I go from miserable tooutright purgatory. Thank you.

Ray Huang - JPMorgan

Thank you.

Robert Toll

You're welcome.

Operator

Okay. Your nextquestion is from the line of David Goldberg with UBS.

David Goldberg - UBS

Thanks, good afternoon.

Robert Toll

Hi.

David Goldberg - UBS

I guess my first question is about what you're seeing fromyour smaller private builder peers, if you're seeing more distress among them,greater capital constraints? And if not,maybe when you would expect to see something like that?

Robert Toll

About now, we're receiving phone calls from the private builders,and we're looking at some of the land, but unfortunately, the private buildershave, for the most part, just in time kind of provisioning of land so that theland they have got is land that they bought at '04, '05 prices and that's toohigh for this market. So I'm afraidwe're going to have to wait in order to acquire some of that until we see theblood in the streets, as they say.

David Goldberg - UBS

I guess the follow-up question would be, I mean, you guys obviouslyhave a lot of cash on the balance sheet. Do you just leave it there until you start tosee some greater distress, more blood on the streets?

Robert Toll

Have you got another idea? I don't mean that sarcastically orfacetiously. I mean seriously. What else?

David Goldberg - UBS

Maybe there are opportunities I don't know. Good question. What are the other opportunities? I guess…

Robert Toll

Well, there are some opportunities that we're looking at.

David Goldberg - UBS

Maybe international expansion, maybe, who knows?

Robert Toll

Yes, we're looking at international expansion, but we'realso looking at debt acquisition, playing with those that play in the distressmarket. But, in term the vast bulk ofthe cash will be left for the opportunities that unfortunately, we believe wewill see before this is over. I don'twant to wish for it to continue to be poor that would be silly.

But I think having seen this movie before in '74, in '80, '81 and '82, in '88, '89, '90, '91, we're bestadvised to sit on our cash and wait for opportunity.

David Goldberg - UBS

And then, if I could sneak one more in, the range in theimpairment charges from 250 to 450, can you just give us an idea what's drivingthe size of that range? I mean what kindof…

Robert Toll

I can, but I would rather let Joel do it.

David Goldberg - UBS

There you go.

Robert Toll

Joel?

Joel Rassman

The process requires a lot of information is coming out ofthe quarter. The quarter just ended. And we therefore have to run those, thatinformation through. So, we do a topside review first to try to see if we can develop a range for you based on acertain set of assumptions and that's the range that comes out of it. I recognize it's a very large range, but…

Robert Toll

But there it is.

Joel Rassman

Right.

David Goldberg - UBS

Thanks, guys.

Robert Toll

Thank you.

Operator

Your next question is from the line of Alan Ratner withZelman & Associates.

Alan Ratner - Zelman& Associates

Good afternoon, guys.

Robert Toll

Hi Alan.

Alan Ratner - Zelman& Associates

One quick housekeeping question here, do you happen to havethe breakout of your completed contract revenues that came from towers in thequarter?

Robert Toll

Anybody have that?

Joel Rassman

Completed contract revenue that came from towers…

Robert Toll

Because they completed, you can skip. He just means contract revenue what we have…

Joel Rassman

We had $70 million of closing. I think the question probably was where itcomes from, but remember; we pick up revenues as the building is being built. We actually have $70 million worth of closingswith respect to 110 Third Avenue,but only a portion of that gets recognized in this period. The rest got recognized in previous periods aswe built the building.

Robert Toll

Because of that percentage of completion method which we'redoing…

Alan Ratner - Zelman& Associates

Which you are shifting to completed contract, and I thinkyou had said…

Robert Toll

Yes, we are.

Alan Ratner - Zelman& Associates

We wonder that you were going to start recognizing completedcontract revenues on the tower side, so that's what I was asking there.

Robert Toll

Right.

Joel Rassman

And the rest came from Hobokenand then, basically inland Florida.

Alan Ratner - Zelman& Associates

Well, the second question I had was on your comments on themix shift. I was wondering if you couldgive any quantification of that just maybe percentage of orders that you'retaking on the attached or the multifamily side and maybe just give someexamples in the marketplace.

Joel Rassman

In the fourth quarter of last year, which was higher than weexpected, we had 59% of our orders on gross basis coming from single families,communities. In the fourth quarter ofthis year, we had 49% of our orders coming from single-family communities.

Robert Toll

Joel, I'm impressed. That'sgood.

Alan Ratner - Zelman& Associates

Were there any markets in particular that there was agreater than average shift there?

Joel Rassman

No, generally, I think we went through it in otherconference calls, but I don't remember the mix, but it’s all…

Robert Toll

I think there's a greater than average shift in California,but that's got to do with the product available, not with the marketnecessarily.

Joel Rassman

Yes, none of this is market-driven. It's all opportunistic. Many of these are deals we tied up three or fouror five, six years ago and they came through the approval process…

Robert Toll

That's right.

Alan Ratner - Zelman& Associates

Got it, okay. Sothat's something that you would continue to see over the next two quarters,that 50-50 split or so?

Joel Rassman

We had expected that, we would see the effect on revenues inlate 2007, which we are and in 2008, significantly, and I'll update that forthe next conference call, if you would like, as to where we think thepercentage of closings will be. I can'tobviously, don't know what orders will be, but I know that the general trendwill be to more somewhat multis than singles.

Alan Ratner - Zelman& Associates

Okay, great. Thanks alot.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Kenneth Zenger withMerrill Lynch.

Saul Gerathon -Merrill Lynch

Hi, this is Saul Gerathon for Ken.

Robert Toll

Hi.

Saul Gerathon -Merrill Lynch

How are you doing?

Robert Toll

Good.

Saul Gerathon -Merrill Lynch

As your guys product mix…

Robert Toll

Change that to fair.

Saul Gerathon -Merrill Lynch

Excuse me?

Robert Toll

Excuse me, you asked me how I was doing. I said good and I said let me change that tofair.

Saul Gerathon -Merrill Lynch

So, my question is, as your guy’s product mix resemblesother builders with more cash and lower priced products. How should we expect this to impact yourmargins? And if you could just kind ofgo into what the profit dispersion is between your lower and your higher pricedhomes?

Robert Toll

First of all, we'll address the comment that we are shiftingto appear as other builders. I hope not. It's not our intention to do that. When you have a mix shift, there's stillexpensive multis, but multis are less than singles generally, except for thetowers. I didn't mean to imply by myprior comments that we were shifting the nature of our business, we arecertainly not. And with respect to thesecond part of the question, Joel?

Joel Rassman

When we underwrite individual communities, we basicallyunderwrite them for the same levels of returns and where the difference comesout in a strong economy, which we're currently, housing economies we'recurrently not in, you get the opportunity to raise prices more in veryexpensive single-family homes than you would in the more affordable product,and so you have a cap on your profits, but since this is not a strong economy Iwould answer your question, we get roughly the same margins on all theproperty.

Robert Toll

Right.

Saul Gerathon -Merrill Lynch

Okay, and then just wondering in your commentary, youhighlighted that your buyers are not having difficulties finding mortgages.

Robert Toll

That's correct.

Saul Gerathon -Merrill Lynch

I also noticed that the cancellation rate, it had obviouslyincreased materially, but the bulk of the cancellations happened in high costregions and product lines and I'm just wondering if you could reconcile thiswith your earlier commentary.

Robert Toll

I would guess I don't have the stats. Actually I do have the stats, that much of thecancellations comes from the buyers, our buyers' inability to sell their oldproperty, their used home, may even be that they're buyer's buyer, in otherwords, that they had an agreement for the sale, but their buyer's buyer had towalk because he couldn't sell his home or other related matters.

We see cancellations, large number of cancellations comingout of family job status change or reduced financial position, but we don't seeit for mortgages.

Joel Rassman

11% of the cancellation were for mortgage-related, but on oursurvey from mortgage-related issues.

Robert Toll

We have 17% coming from unfortunately, what appeared to beinvestors or those who just wanted to walk from the product, they didn't likethe value any longer. Translation, theyhave read one too many Times articles and decided now is not the time to buy ahome.

29% are in that changed financial position, job loss,relocation, divorce, medical issues, buyer deceased; Military has impacted usjust slightly. 18% come out of existinghomes not sold, so there are a number of reasons why we're seeing such highcancellations.

The reason you see them in the higher price product is thehigher price guy is likely to have a higher priced older home that he's got tosell and the daisy chain is having trouble.

Saul Gerathon -Merrill Lynch

Okay, and then just one last question on the, specificallyon the west segment, the orders I noticed were down a little over 80%. I was just wondering if you could give us whatthe gross orders were to get an indication of how much that decline was earnedby cancellations.

Robert Toll

Go ahead, Joel.

Joel Rassman

173 gross orders and 156 cancellations.

Saul Gerathon -Merrill Lynch

Okay, great. Allright, thanks, guys.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Stephen Kim ofCitigroup. Stephen Kim?

Stephen Kim -Citigroup

Hey, Bob, can you hear me?

Robert Toll

Yes, I can hear you well, Stephen.

Stephen Kim -Citigroup

Okay, great. Couplequestions for you. One, related toDave's question earlier, regarding how you might use your funds that areaccumulating in the balance sheet. Historically,your company has sought to go into new frontiers by sort of paying your dumbtax, doing it the hard way, putting in the sweat equity to learn the businessesand you've done it that way, even when you've entered a new geography or ifyou've developed your expertise in multifamily and high-rise stuff.

Are there sub-sectors or adjacent markets or opportunitiesthat you have been eyeing over the last few years, where you feel like yourfunds, at the appropriate time, whether it be a year from now or longer, youmight actually look to acquire expertise in an adjacency or should we prettymuch assume that whatever you use your cash for eventually will be pretty muchalong the same lines as we've seen it over the last several years?

Robert Toll

I would say honestly that it's the latter. The only exception is that we looked at someforeign opportunities and we obviously want at the minimum, joint venture withlocals as opposed to doing it the way that you described and paying the dumbtax.

We don't want to pay the dumb tax for Slovenia,Romania, China,or India. That dumb tax, I'm afraid, is too high.

Stephen Kim -Citigroup

Right.

Robert Toll

So that's the only exception.

Stephen Kim -Citigroup

Okay, and then moving on from there, obviously right now youhave indicated an intention to sort of scale down aggressively in places whereit really doesn't make a whole lot of sense to sell right now, whether you askto see a price really isn't factoring well into your equation and you have thefinancial flexibility to do that.

I guess I was curious as to whether what you're doing toensure that you have the operational flexibility to be able to rebound because obviously one would assume them.

Robert Toll

We discuss that every week as we review all the communities,our system is that all 315 or whatever it is are spoken about and discussedwith the regional presidents every week.

We review, and with regard to making sure that we haveoperational capability for a rebound, A, remember this is not the kind ofbusiness where the price this isn't the oil barrels. We won't find ourselves going from 97 to 86and back up to 95. We'll have the time.

And secondly, we're making sure that as an area shrinks inoverhead, that is management, take Arizonaas an example, you might have 20 operations, ordinarily you would have 20project managers, you've reduced yourself to five or six project managers, whoare overseeing all the operations.

But you make sure that you want to keep five or six so thatwhen the business does return, you've got the infrastructure, the core ofmanagement necessary to go and build the product.

But you don't keep the, you don't keep 20 superintendents. You might not even keep 5 superintendents. You don't keep 20 clerks of the work in thetrailers. You keep two or three and soon and so forth.

Stephen Kim -Citigroup

I guess.

Robert Toll

What we do keep, is we do keep our best sales people andalmost every one of the communities, I think with maybe one or two exceptionsout of 300 some odd, we're open seven days a week and we have a sales staff onhand.

Stephen Kim -Citigroup

I guess I wasn't so much thinking about the personnel,although thanks for that. I think thatis an important part of it, but I was referring to things other than personnel,things related to, do you have, do you have the ability to move on plannedcommunities or phases that are being mothballed, or …

Robert Toll

That's no trouble at all.

Stephen Kim -Citigroup

Okay. And then lastlyI was wondering …

Robert Toll

Remember, as we're mothballing, so is the excavator/roadcontractor who has got all that iron. He'smothballing his iron. It doesn't take alot to call that out of the yard and to start to push dirt and lay asphalt andget started again.

You might have some difficulty in starting up operationswith carpentry, except that we're paneled and trussed, so we've got amechanical manufacturing capability, which is easily geared up, plumbers.

If the market loses too many plumbers, then it's going to beslow to come back until you train people for that operation, but I don't seethat yet. We haven't been down longenough for that kind of shift to take place.

Stephen Kim -Citigroup

Got it, okay. Andthen lastly, I was wondering if you could comment or give us a feeling for whenyou start coming back into the market and I know that it's obviously notnecessarily going to be the next few months or maybe, who knows, even the nextyear.

But at some point you're obviously going to be looking tothe act on opportunities as you see them. Do you have an idea right now for any differences, material differencesin the way you approach your negotiations with some of the land sellers, interms of aside from price, in terms of looking to change the way you maystructure takedowns? For instance…

Robert Toll

Yes. You always dothat. I'm sorry for cutting you off, butI think I've got it. You always do thatin these times, whether it's '82 or '88 or 2007. What you do is you've now got the capabilityto go to a seller and say, look, you're sitting it's not going anywhere.

We're sitting. We'llput up a model and we'll take down lots as we sell homes, as opposed to payingthe $10 million bucks up front for black acre. So in that regard you get a change in termsthat you would offer in down markets.

Stephen Kim -Citigroup

And is there any opportunity to maybe lock in a minimumprofit, because we're hearing that in some markets, some builders are able tosort of negotiate in these difficult times already, some vehicles whereby wherethey can at least guarantee a minimum profit.

Is that something you're seeing?

Robert Toll

I don't understand. Howdo you guarantee a minimum profit?

Stephen Kim -Citigroup

It's basically not a hard lot cost, if the lot cost isbought sort of contemporaneous with selling the home, that kind of …

Robert Toll

Oh, I get it. No, wehaven't got any of that.

Stephen Kim -Citigroup

Is that something that you would be interested in exploringor is that sort of something, which is more for just in time type builders asopposed to folks who sit on land longer, like yourself?

Robert Toll

No, we would be, we would be quite happy to see that. We haven't, we haven't seen any of it.

Joel Rassman

Downside.

Robert Toll

No, as I understand what you're saying is that, I pay forthe land as a percentage of the sale price of the house to be determined whenwe arrive at the sale price of the house. So that if I put the land in for I'm beingsilly here, but if I put the land in for $10 in the quotient, then I can buy alot for $10?

I don't see how the seller does that, but maybe you got somedesperate sellers out there. We haven'trun into that.

Stephen Kim -Citigroup

Got it, great, appreciate it, thanks, Bob.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Dan Oppenheim withBanc of America Securities.

Dan Oppenheim - Bancof America

Thanks very much. Waswondering if in the California,where you had a lot of cancellations and generally talked about being resistantto cutting prices below what you view as the intrinsic value.

Are you going to do more on the spec homes that you havethere following cancellations to get rid of that inventory?

Robert Toll

Yes.

Dan Oppenheim - Bancof America

Okay, and then also in terms of the land impairments, youtalked about how assuming some further weakness there and in the past I believeJoel has talked about how impairments there is not an assumption of furtherweakness in the market when calculating the impairments.

Joel Rassman

I think we've always evaluated the markets and in our owninternal evaluations we often include additional incentives to move product orslower paces than we're currently having if the market warrants it.

So I think it's an individual community-by-communityevaluation.

Robert Toll

Let me give you an example. If you haven't sold anything in a month or twomonths and Joel's reviewing all in his banner merry manner, reviewing everycommunity when it's the end of the quarter.

And he gets to the regional president, myself, and theproject manager, the vice president, and we have a little meeting and Joelsays, well, it's been two months, you haven't sold anything, what do you thinkit will take to sell a home here?

And then we get into that fight, well, why do you want toknow, Joel? He says well, if you thinkit's going to be 300 instead of 500, then I would suggest that you've got landhere that you are down 200 alot.

And then we have to not only go down, but we have to make alittle money because impairments are taken below breakeven, they're taken downto a discounted value so that you're left with a potential to make money.

That's how it's arrived at. So, yes, to some extent, Joel's, and hisgang's evaluation that give us the impairments take into considerationpotential future deterioration or erosion. Generally that's not the case, but it can be.

Dan Oppenheim - Bancof America

Okay, thanks. Justfinal question, I was just wondering, there have been a lot of comments aboutlooking for land. Given the land supplythat you have right now, how much appetite, how much land would you want tohave, given that you're not really trying to move through what you have vialower prices?

Robert Toll

It depends on the price of the land that's being offered. If and when the banks start to take back theproperty and the regulators then force the banks to kick that property out, andif you were the only buyer for that stuff, then you can imagine some prettygreat prices. At that point, we'll havea pretty significant appetite.

Dan Oppenheim - Bancof America

Right, in that scenario, though, that sounds pretty dismal,I'd imagine your land would be significantly impaired though, if you were thenhaving all the land going back to the banks from other projects, just givenwhat happened to home pricing and such.

Robert Toll

No. Our land would besignificantly impaired in an environment like that, perhaps.

Dan Oppenheim - Bancof America

Thanks very much.

Robert Toll

But, that's a race or kind of operation as opposed tostraight business profit and loss kind of evaluation.

Dan Oppenheim - Bancof America

Okay, thank you.

Operator

Your next question comes from the line of Timothy Jones withWasserman & Associates.

Timothy Jones -Wasserman & Associates

Hello, Robert.

Robert Toll

How are you doing, Tim?

Timothy Jones -Wasserman & Associates

I'm doing fine.

Robert Toll

Good.

Timothy Jones -Wasserman & Associates

First question, could you give me for this year and lastyear your units under construction, your finished, and unfinished spec unitsthis year and last year?

Joel Rassman

I would rather wait for the year-end call to…

Robert Toll

Okay.

Joel Rassman

To deal with what that is, but our backlog is generallyunder construction and our spec units are probably roughly the same as where wewere in the third quarter.

Timothy Jones -Wasserman & Associates

Okay. That's goodenough. Mr. Bernanke today, obviouslyhad nothing else to do because no one cares what's going on with the industryit said that he expected housing to drop in the second quarter of next year.

I talk regularly with about 15 builders. I know of no builder who would suggest that atthis time. Can you look into his head,other than politics and try to give me a comment, it happened just today?

Robert Toll

Yes, that's fortuitous. I was talking to a couple of fed governors,actually, very recently and I was asked, when I thought it would turn around? And I said that I had no idea, but that Ithought the earliest that we could expect would be when the presidentialcampaign got into high enough gear that the candidates were clear.

So, that it wasn't an issue of who's going to run on what ticketand that the candidates started to talk, as they usually do, as to thegreatness of America and looking forward and being positive and removing thefocus from the reality and the trouble that we have today and I thought thatmight give us the first opportunity to turn around and I suggested that thattime period probably would be April or May of '08. So, that could be what's in the head of Mr.Bernanke. But I really have no idea. It's just a guess.

Timothy Jones -Wasserman & Associates

Before I go to my second question, it's kind of interesting. At least half of all the time spent andthis is several hours today, that Bernanke was how to do with housing. It was amazing. I've never seen his account for 10%, let aloneover 50%. But that was the conference.

Robert Toll

Well, it makes sense, Tim, because the housing industryprobably accounts for what…

Joel Rassman

Employment is directly or indirectly related to housing wasthe last…

Timothy Jones -Wasserman & Associates

Okay. We know therewas the problem. Okay. Second question, last question, I'm sorry; I gaveyou two questions, so I'll come back into queue.

Robert Toll

Thank you, Tim. Crystal,I have a question from Kevin Kinahan of BankUnited. Where is the community that you got 24deposits to get the C rating?

Joel Rassman

West Coast of Florida he was talking about. Oh, it wasn't one community. I'm sorry. I gave you the wrong impression. In the West Coast of Florida, West Gold Coast,we have, from memory, about seven or eight, at least, communities. I can give you an exact number, Mr. Kenehan,in a moment.

Central Florida, East Florida, North Florida, west, three,six, we have nine different communities and this week, for instance, we tookseven deposits in those nine communities. The week before we took seven, the week beforethat, we took seven.

So, that's a tremendous turnaround. And while some of it is accounted for by moreaggressive discounting on speculative inventory as this inventory moves throughthe construction process and becomes more complete, a whole bunch of it, of thedemand for that is either anomalous or perhaps predictive. We would hope for the latter, but I wouldn'tspend any money on that. Crystal?

Operator

Okay. Your nextquestion comes from the line of Rick Dowdle with ARX.

Rick Dowdle - ARX

Just a quick question on your asset management or balancesheet management, with the closing in on $1 billion here of cash, is there anythoughts or could you give your thoughts on the balance between debt repaymentand hoarding liquidity for the near future? You do have some callable debt.

Robert Toll

I think it would be foolish for us to pay debt. We have no effective use of our line. We've got $1.2 billion available under theline. Yes, we have $300 million, butthat's because you guarantee the banks you would keep that borrowed in order tokeep them happy with the line.

So, we can't pay that back. Well, if you could, I would, but you canalways re-borrow it. You can't re-borrowit. Oh, in that case, we would keep itout there; our price for the money is very cheap. And I would think liquidity is more importantthan reducing that line.

Rick Dowdle - ARX

Great, thank you.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Alex Barron withAgency Trading Group.

Alex Barron - AgencyTrading Group

Hi, Bob. Hi Joel.

Robert Toll

How are you doing?

Alex Barron - AgencyTrading Group

Great, thanks. Hey, Iwanted to ask you maybe, this is for Joel, some builders say that when they gothrough the impairment analysis that it's possible to only impair standinginventory and that the remainder of the land, if it's raw, you can just leaveit alone and doesn't need an impairment is that true? Is that your understanding?

Robert Toll

That's a builder with a different, with a differentaccountant than we have.

Joel Rassman

No, the answer is not the way we look at it.

Robert Toll

The question was broader than that. He's asking you to comment on industry, notindustry, but accounting, since you guys don't call yourself an industry,accounting standards.

Joel Rassman

There maybe reasons why the only impairment you have is yourstanding speculative inventory, but it's not the normal.

Alex Barron - AgencyTrading Group

Okay. Yes, thereasons given were that, based on the recovery model of their thinking of wherethe market was going to go in the future, that basically, if your cash flow'sgoing forward on all that raw land were positive, that wouldn't need to impairit.

Robert Toll

That is absolutely correct, but you've got to find anaccountant who would buy that, and I'm not sure I would even to sell it, whywould I want to sell that, unless I had some kind of covenant that didn'tpermit me to go further.

Joel Rassman

I think you should talk to the guy who gave you the comment.

Robert Toll

That's right, thank you, Joel.

Alex Barron - AgencyTrading Group

Okay. My otherquestion is just kind of general also. So,if we start to see some private builders, maybe even some public builders gobankrupt and maybe they are forced to sell their land at distressed prices, doyou think that that's going to force more impairment because now there's goingto be kind of comparables for land parcels out there?

Robert Toll

It's possible, sure. Makessense, doesn't it?

Joel Rassman

If you're using comparable prices as your floor…

Robert Toll

Not as your floor, as your estimate.

Joel Rassman

No, you don't write down to the comparable land prices, youwrite it down to whether you can make money.

Robert Toll

I know, but at a certain point, it's certainly, it'scertainly logical that your accountant would look at you and say, how can youput your ground down for $50,000 alot when the guy next door just sold land for $10,000 a lot? I don't think it's a question. It's just a statement of theory that you'vegiven us, and I can say that, yes, makes sense, but who knows?

Alex Barron - AgencyTrading Group

My last question is, if I look at your lot position, I guessmore interesting, more interested in the owned lot position, how many of thatis, I guess associated with communities that are currently open for sale versushow many lots are for communities that haven't even opened yet?

Robert Toll

I'm sorry.

Joel Rassman

He doesn't want the breakout between owned and controlled. He wants to know if we're land banking a lotof land, I think, that is, wait for the future, and generally we don't do that. There are some situations in which wehave, have land that would have, we would have expected to open, but because ofthe slow market, we're holding off on opening. But I don't think…

Robert Toll

It's not much, no. I'msorry?

Joel Rassman

It's too early to give any other good data.

Robert Toll

But you've got, 59,000 owned and controlled.

Joel Rassman

We think 60% plus owned, but I don't think that's thequestion he's asking.

Robert Toll

Yes, we've got 60 of…

Joel Rassman

Inactive communities.

Alex Barron - AgencyTrading Group

Right. That's…

Joel Rassman

Most of it is in active most of what's owned is in activecommunities.

Alex Barron - AgencyTrading Group

Okay, all right great. Thanks.

Robert Toll

I wouldn't think so. Yougot 36,000 lots owned I don't have 36,000 lots in active communities.

Joel Rassman

We haven't done it yet.

Robert Toll

We do it for the 10-K? All right then…

Joel Rassman

December.

Robert Toll

Sorry.

Alex Barron - AgencyTrading Group

Okay. Thanks Bob.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Clifford Allisonwith UBS.

Robert Toll

Hi Clifford.

Clifford Allison -UBS

Hi, guys. Thanks fortaking my question. First, I just wantedto confirm something I thought I heard. Didyou say that your bank debt balance is now down to $300 million?

Robert Toll

Yes, I said that we had $300 million approximately borrowedfrom the banks, because that is one of the conditions, one of the conditions ofour credit facility. It's a term loan.

Clifford Allison -UBS

Okay, great, great.

Robert Toll

And I think that the time of that term is coincident withthe 2011, so it's consistent with the rest of the line.

Clifford Allison -UBS

All right, and then another question I had was what sort of,how much gains are you seeing now as you go back to renegotiate theconstruction costs of your homes? Howmuch are you able to reduce the cost of sales side through that? And are you looking at other, lot of homebuilders have talked about reducing the number of floor plans in order to takedown manufacturing costs. Are youworking on things like that to try and…

Robert Toll

No. As America’sluxury homebuilder, reducing floor plans as a method of gaining efficiency, andyou certainly would is not our thing with respect to reduction in subcontractorand material pricing, that is our thing, and I haven't got a number for you, becausewe look at it on a month-to-month basis. I can't recall over the last three months whatwe've reduced prices for material and labor.

Joel Rassman

$2000, inthis quarter on an average house.

Clifford Allison -UBS

Okay, great. Thankyou.

Operator

Your final question comes from the line of Janice Nyemanwith Charles Schwab.

Janice Nyeman -Charles Schwab

Hey, guys. I waswondering how many of those lots are owned versus optioned?

Robert Toll

36,000 are…

Joel Rassman

We think are roughly 36,000…

Robert Toll

On roughly.

Joel Rassman

It's roughly. Wedon't have the actual count yet.

Janice Nyeman -Charles Schwab

Okay.

Robert Toll

But that's pretty good.

Janice Nyeman -Charles Schwab

Okay, and then what are you guys doing with your cash?

Robert Toll

We've been asked that now. I'm sorry, maybe you haven't been aboard, areyou asking…

Janice Nyeman -Charles Schwab

What are you investing it in?

Robert Toll

What are we doing with our cash?

Joel Rassman

Are you asking what are we?

Janice Nyeman -Charles Schwab

What are you investing it in on a short-term basis?

Joel Rassman

On a short-term basis, we use high quality tax-freeprimarily instruments.

Janice Nyeman -Charles Schwab

Okay, and what sort of yield are you obtaining on that?

Joel Rassman

We have been obtaining on a before-tax equivalent basis,because there is some invested in high quality taxable stuff, on an averageprobably 5.6% for the last quarter.

Janice Nyeman -Charles Schwab

Okay. So why is itbeneficial to Toll to take this negative R between paying out 8.25% on thesenior sub notes versus calling them potentially?

Joel Rassman

It's only availability of money. I can't raise easily, money in the capitalmarkets, and I think in the long-term, we will be able to utilize that money ina more efficient fashion than just paying down debt. If we're wrong, we can always pay down debt.

Robert Toll

However, no representation is made with respect to whetherwe are going to call that or not.

Joel Rassman

Right.

Robert Toll

At any time including immediately.

Janice Nyeman -Charles Schwab

Okay, and if you were to call it, it's a 30-day notice tothe trustee, would you give us that same 30-day notice, or would you just letus know later than that 30 days?

Robert Toll

Joel, this is certainly a question for you.

Joel Rassman

I have not, we have not at this point made a decision to dosomething that we're willing to make public, even if we do take the decision, soI would have to judge it. But I do knowthat you hold our bonds, and if you have an interest, we'd be glad to talk toyou separately when we're ready.

Janice Nyeman -Charles Schwab

Fair enough, thanks.

Robert Toll

You're very welcome. Crystal,I have a question from Ange Salam. Shesays -- or he says -- hi, I was wondering if you could comment further on thestatement you made about possible debt acquisitions?

Joel Rassman

That we know of.

Robert Toll

Yes, does that mean you would consider buying a distressedbuilder in a debt-financed acquisition? Ithink the questions are over my head. Imean what I meant to imply was that we are, we are looking at, we are dealingwith people who make a living buying distressed debt, not distressed buildernecessarily, but distressed debt.

And going in with them, buying the debt with them and thentwo things take place. Either the debtgets paid in full and we make a bundle of money that way, or the debt doesn'tget paid, in which case we acquire the assets of the company, and then wemanage them and build it out. Joel, doyou have something to add to that?

Joel Rassman

I think that's well. Ithink we're in the initial stages of conversations with a number of people.

Robert Toll

Okay. Crystal,do you have any other questions?

Operator

No sir, not at this time.

Robert Toll

Okay. Thank youeverybody. I appreciate your time andpatience. Crystal,thank you.

Operator

Yes, sir, you have a wonderful day.

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Source: Toll Brothers F4Q07 (Qtr End 10/31/07) Earnings Call Transcript

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