Toll Brothers (TOL) 10-Q 2006 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2006

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ to _____________

Commission file number 1-9186

TOLL BROTHERS, INC.

(Exact name of registrant as specified in its charter)

Delaware	23-2416878
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
250 Gibraltar Road, Horsham, Pennsylvania	19044
(Address of principal executive offices)	(Zip Code)

(215) 938-8000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “an accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer                Accelerated filer                Non-accelerated filer

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At March 6, 2006, there were approximately 154,786,000 shares of Common Stock, $.01 par value, outstanding.

TOLL BROTHERS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page No.
Statement on Forward-Looking Information			1
PART I.	Financial Information
	ITEM 1.	Financial Statements
		Condensed Consolidated Balance Sheets at January 31, 2006 (Unaudited)      and October 31, 2005	2
		Condensed Consolidated Statements of Income (Unaudited) For the      Three Months ended January 31, 2006 and 2005	3
		Condensed Consolidated Statements of Cash Flows (Unaudited) For the      Three Months ended January 31, 2006 and 2005	4
		Notes to Condensed Consolidated Financial Statements (Unaudited)	5
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and      Results of Operations	17
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	ITEM 4.	Controls and Procedures	27
PART II.	Other Information
.	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.	Defaults upon Senior Securities	28
	Item 4.	Submission of Matters to a Vote of Security Holders	28
.	Item 5.	Other Information	28
	Item 6.	Exhibits	29
SIGNATURES			29

STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information included herein and in our other reports, SEC filings, statements and presentations is forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning our anticipated operating results, financial resources, changes in revenues, changes in profitability, interest expense, growth and expansion, anticipated income to be realized from our investments in unconsolidated entities, the ability to acquire land, the ability to secure governmental approvals and the ability to open new communities, the ability to sell homes and properties, the ability to deliver homes from backlog, the average delivered prices of homes, the ability to secure materials and subcontractors, the ability to maintain the liquidity and capital necessary to expand and take advantage of future opportunities, and stock market valuations. In some cases you can identify those so called forward-looking statements by words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project,” “intend,” “can,” “could,” “might,” or “continue” or the negative of those words or other comparable words. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in our other reports, SEC filings, statements and presentations. These risks and uncertainties include local, regional and national economic conditions, the demand for homes, domestic and international political events, uncertainties created by terrorist attacks, the effects of governmental regulation, the competitive environment in which we operate, fluctuations in interest rates, changes in home prices, the availability and cost of land for future growth, the availability of capital, uncertainties and fluctuations in capital and securities markets, changes in tax laws and their interpretation, legal proceedings, the availability of adequate insurance at reasonable cost, the ability of customers to finance the purchase of homes, the availability and cost of labor and materials, and weather conditions. Additional information concerning potential factors that we believe could cause our actual results to differ materially from expected and historical results is included in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended October 31, 2005. Moreover, the financial guidance contained herein related to our expected results of operations for fiscal 2006 reflects our expectations as of February 23, 2006 and is not being reconfirmed or updated by this Quarterly Report on Form 10-Q.

If one or more of the assumptions underlying our forward-looking statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by the forward-looking statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking statements. This statement is provided as permitted by the Private Securities Litigation Reform Act of 1995.

When this report uses the words “we,” “us,” and “our,” they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. Reference herein to “fiscal 2006,” “fiscal 2005,” and “fiscal 2004,” refer to our fiscal year ending October 31, 2006, and our fiscal years ended October 31, 2005 and October 31, 2004.

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PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)

	January 31, 2006			October 31, 2005
	(Unaudited)
ASSETS
Cash and cash equivalents	$	363,563		$	689,219
Inventory		5,531,129			5,068,624
Property, construction and office equipment, net		88,444			79,524
Receivables, prepaid expenses and other assets		178,008			185,620
Contracts receivable		57,569
Mortgage loans receivable		49,017			99,858
Customer deposits held in escrow		85,126			68,601
Investments in and advances to unconsolidated entities		206,222			152,394
	$	6,559,078		$	6,343,840
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Loans payable	$	388,847		$	250,552
Senior notes		1,140,312			1,140,028
Senior subordinated notes		350,000			350,000
Mortgage company warehouse loan		38,406			89,674
Customer deposits		432,608			415,602
Accounts payable		226,763			256,557
Accrued expenses		735,641			791,769
Income taxes payable		300,610			282,147
Total liabilities		3,613,187			3,576,329
Minority interest		3,940			3,940
Stockholders’ equity
Preferred stock, none issued
Common stock, 156,292 issued at January 31, 2006 and October 31, 2005		1,563			1,563
Additional paid-in capital		228,110			242,546
Retained earnings		2,739,911			2,576,061
Treasury stock, at cost – 784 shares and 1,349 shares at January 31, 2006 and October 31, 2005,      respectively		(27,633	)		(56,599	)
Total stockholders’ equity		2,941,951			2,763,571
	$	6,559,078		$	6,343,840

See accompanying notes

2

TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)

	Three months ended January 31,
	2006		2005
Revenues:
Traditional home sales	$	1,278,709	$	989,097
Percentage of completion		57,569
Land sales		4,678		1,225
		1,340,956		990,322
Cost of revenues:
Traditional home sales		884,091		685,493
Percentage of completion		47,346
Land sales		3,836		779
Interest		28,754		21,812
		964,027		708,084
Selling, general and administrative		139,178		107,065
Income from operations		237,751		175,173
Other:
Equity earnings in unconsolidated entities		16,569		1,935
Interest and other		11,327		6,883
Income before income taxes		265,647		183,991
Income taxes		101,797		73,798
Net income	$	163,850	$	110,193
Earnings per share:
Basic	$	1.06	$	0.73
Diluted	$	0.98	$	0.66
Weighted average number of shares:
Basic		155,076		151,653
Diluted		167,027		166,084

See accompanying notes

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TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

	Three months ended January 31,
	2006			2005
Cash flow from operating activities:
Net income	$	163,850		$	110,193
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		6,908			4,251
Amortization of initial benefit obligation		449			950
Share-based compensation		11,075
Equity earnings in unconsolidated entities		(16,569	)		(1,935	)
Distributions from unconsolidated entities		2,643			495
Deferred tax provision		7,625			15,366
Provision for inventory write-offs		1,129			2,343
Changes in operating assets and liabilities
Increase in inventory		(250,124	)		(222,058	)
Origination of mortgage loans		(176,908	)		(181,558	)
Sale of mortgage loans		227,749			207,077
Increase in contracts receivable		(57,569	)
Decrease (increase) in receivables, prepaid expenses and other assets		8,016			(7,626	)
Increase in customer deposits		481			22,311
(Decrease) increase in accounts payable and accrued expenses		(85,441	)		20,708
Increase (decrease) in current income taxes payable		19,173			(14,568	)
Net cash used in operating activities		(137,513	)		(44,051	)
Cash flow from investing activities:
Purchase of property and equipment, net		(14,264	)		(9,137	)
Purchases of marketable securities		(985,820	)		(1,039,017	)
Sale of marketable securities		985,820			1,009,257
Investments in and advances to unconsolidated entities		(71,369	)		(16,214	)
Acquisition of joint venture interest		(40,751	)
Distributions from unconsolidated entities		2,512			1,755
Net cash used in investing activities		(123,872	)		(53,356	)
Cash flow from financing activities:
Proceeds from loans payable		258,712			246,167
Principal payments of loans payable		(307,180	)		(289,528	)
Proceeds from stock based benefit plans		5,972			15,776
Purchase of treasury stock		(21,775	)		(220	)
Net cash used in financing activities		(64,271	)		(27,805	)
Net decrease in cash and cash equivalents		(325,656	)		(125,212	)
Cash and cash equivalents, beginning of period		689,219			465,834
Cash and cash equivalents, end of period	$	363,563		$	340,622

     See accompanying notes

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TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Toll Brothers, Inc. (the “Company”), a Delaware corporation, and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in 50% or less owned partnerships and affiliates are accounted for using the equity method unless it is determined that the Company has effective control of the entity, in which case the entity would be consolidated.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The October 31, 2005 balance sheet amounts and disclosures included herein have been derived from our October 31, 2005 audited financial statements. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements, we suggest that they be read in conjunction with the consolidated financial statements and notes thereto included in our October 31, 2005 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position as of January 31, 2006 and the results of our operations and cash flows for the three months ended January 31, 2006 and 2005. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). In April 2005, the SEC adopted a rule permitting implementation of SFAS 123R at the beginning of the fiscal year commencing after June 15, 2005. Under the provisions of SFAS 123R, an entity is required to treat all stock-based compensation as a cost that is reflected in the financial statements. The Company was required to adopt SFAS 123R beginning in its fiscal quarter ended January 31, 2006. Under the provisions of SFAS 123R, the Company had the choice of adopting the fair-value-based method of expensing of stock options using (a) the “modified prospective method”, whereby the Company recognizes the expense only for periods beginning after October 31, 2005, or (b) the “modified retrospective method”, whereby the Company recognizes the expense for all years and interim periods since the effective date of SFAS 123, or for only those interim periods during the year of initial adoption of SFAS 123R. The Company adopted SFAS 123R using the modified prospective method. See Note 7, “Stock Based Benefit Plans”, for information regarding expensing of stock options in fiscal 2006 and for pro forma information regarding the Company’s expensing of stock options for fiscal 2005.

Stock Split

On June 9, 2005, the Company’s Board of Directors declared a two-for-one split of the Company’s common stock in the form of a stock dividend to stockholders of record on June 21, 2005. The additional shares of stock were distributed as of the close of business on July 8, 2005. All share and per share information has been adjusted and restated to reflect this split.

Acquisition

In January 2004, the Company entered into a joint venture in which it had a 50% interest with an unrelated party to develop Maxwell Place, an approximately 800-unit luxury condominium community in Hoboken, New Jersey. In November 2005, the Company acquired its partner’s 50% equity ownership interest in this joint venture. As a result of the acquisition, the Company now owns 100% of the joint venture and it

5

has been included as a consolidated subsidiary of the Company as of the acquisition date. As of the acquisition date, the joint venture had open contracts of sale to deliver 165 units with a sales value of approximately $128.3 million. The Company’s investment in and subsequent purchase of the partner’s interest in the joint venture is not material to the financial position of the Company. The Company is recognizing revenue and costs related to this project using the percentage of completion method of accounting.

Reclassification

The presentation of certain prior year amounts have been reclassified to conform to the fiscal 2006 presentation.

2. Inventory

Inventory consisted of the following (amounts in thousands):

	January 31,		October 31,
	2006		2005
Land and land development costs	$	2,033,897	$	1,717,825
Construction in progress		2,849,308		2,709,795
Sample homes and sales offices		207,770		202,286
Land deposits and costs of future development		428,019		427,192
Other		12,135		11,526
		$5,531,129	$	5,068,624

Construction in progress includes the cost of homes under construction, land and land development costs and the carrying costs of lots that have been substantially improved.

The Company capitalizes certain interest costs to inventory during the development and construction period. Capitalized interest is charged to cost of revenues when the related inventory is delivered for traditional home sales or when the related inventory is charged to cost of revenues under percentage of completion accounting. Interest incurred, capitalized and expensed for the three-month periods ended January 31, 2006 and 2005 is summarized as follows (amounts in thousands):

	2006			2005
Interest capitalized, beginning of period	$	162,672		$	173,442
Interest incurred		32,436			29,150
Capitalized interest in inventory acquired		6,679
Interest expensed to cost of revenues		(28,754	)		(21,812	)
Write-off to other		(171	)		(107	)
Interest capitalized, end of period	$	172,862		$	180,673

Interest included in cost of revenues for the three-month periods ended January 31, 2006 and 2005 were (amounts in thousands):

	2006		2005
Traditional home sales revenue	$	26,830	$	21,758
Percentage of completion revenues		1,417
Land sales revenues		507		54
		$28,754	$	21,812

The Company has evaluated its land purchase contracts to determine if the selling entity is a variable interest entity (“VIE”) and if it is, whether the Company is the primary beneficiary of the entity. The Company does not possess legal title to the land and its risk is generally limited to deposits paid to the seller. The creditors of the seller generally have no recourse against the Company. At January 31, 2006 and

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October 31, 2005, the Company had determined that it was not the primary beneficiary of any VIE related to its land purchase contracts and had not recorded any land purchase contracts as inventory.

3. Investments in and Advances to Unconsolidated Entities

The Company has investments in and advances to several joint ventures with unrelated parties to develop land. Some of these joint ventures develop land for the sole use of the venture partners, including the Company, and others develop land for sale to the venture partners and to unrelated builders. The Company recognizes its share of earnings from the sale of home sites to other builders. The Company does not recognize earnings from home sites it purchases from the joint ventures, but instead reduces its cost basis in these home sites by its share of the earnings on the home sites. At January 31, 2006, the Company had approximately $144.8 million invested in or advanced to these joint ventures and was committed to contributing additional capital in an aggregate amount of approximately $152.1 million (net of the Company’s $129.6 million of loan guarantees related to two of the joint ventures’ loans) if required by the joint ventures. At January 31, 2006, two of the joint ventures had an aggregate of $1.03 billion of loan commitments, and had approximately $810.0 million borrowed against the commitments, of which the Company’s guarantee of its pro-rata share of the borrowings was $102.1 million.

In October 2004, the Company entered into a joint venture in which it has a 50% interest with an unrelated party to convert a 525-unit apartment complex, The Hudson Tea Buildings, located in Hoboken, New Jersey, into luxury condominium units. At January 31, 2006, the Company had investments in and advances to the joint venture of $35.4 million, and was committed to making up to $1.5 million of additional investments in and advances to the joint venture.

In November 2005, the Company entered into a joint venture in which it has a 50% interest with an unrelated party to develop two luxury condominium buildings in Brooklyn, New York. At January 31, 2006, the Company had investments in and advances to the joint venture of $11.3 million, and was committed to making up to $20.5 million of additional investments in and advances to the joint venture if required by the joint venture. At January 31, 2006, the joint venture had a $254.2 million loan commitment and had approximately $85.7 million borrowed against the commitment of which the Company’s guaranteed $18.0 million.

In fiscal 2005, the Company, together with the Pennsylvania State Employees Retirement System (“PASERS”), formed Toll Brothers Realty Trust Group II (“Trust II”) to be in a position to take advantage of commercial real estate opportunities. Trust II is owned 50% by the Company and 50% by PASERS. At January 31, 2006, the Company had an investment of $8.0 million in Trust II. In addition, the Company and PASERS each entered into subscription agreements that expire in September 2007, whereby each agreed to invest additional capital in an amount not to exceed $11.1 million if required by Trust II. The Company provides development and management services to Trust II and recognized fees for such services under the terms of various agreements in the amounts of $.3 million in the three months ended January 31, 2006. Prior to the formation of Trust II, the Company used Toll Brothers Realty Trust Group (“Trust”) to invest in commercial real estate opportunities.

The Trust, formed in 1998, is effectively owned one-third by the Company; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Zvi Barzilay (and members of his family), Joel H. Rassman and other members of the Company’s senior management; and one-third by PASERS (collectively, the “Shareholders”). The Shareholders entered into subscription agreements whereby each group has agreed to invest additional capital in an amount not to exceed $1.9 million if required by the Trust. The subscription agreements expire in August 2006. At January 31, 2006, the Company had an investment of $6.5 million in the Trust. The Company provides development, finance and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $.6 million and $.4 million in the three months ended January 31, 2006 and 2005, respectively. The Company believes that the transactions between itself and the Trust were on terms no less favorable than it would have agreed to with unrelated parties.

The Company’s investments in these entities are accounted for using the equity method.

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4. Accrued Expenses/ Warranty Costs

Accrued expenses at January 31, 2006 and October 31, 2005 consisted of the following (amounts in thousands):

	January 31,		October 31,
	2006		2005
Land, land development and construction costs	$	333,815	$	385,031
Compensation and employee benefit costs		106,375		122,836
Insurance and litigation		102,542		92,809
Warranty costs		54,649		54,722
Interest		36,795		34,431
Other		101,465		101,940
		$735,641	$	791,769

The Company accrues for the expected warranty costs at the time each home is closed and title and possession have been transferred to the home buyer. Costs are accrued based upon historical experience. Changes in the warranty accrual for the three-month periods ended January 31, 2006 and 2005 are as follows (amounts in thousands):

	2006			2005
Balance, beginning of period	$	54,722		$	42,133
Additions		8,531			6,682
Charges incurred		(8,604	)		(5,336	)
Balance, end of period	$	54,649		$	43,479

5. Employee Retirement Plan

In October 2004, the Company established an unfunded defined benefit retirement plan (the “Retirement Plan”) effective as of September 1, 2004, which covers a number of senior executives and a director of the Company. For the three-month periods ended January 31, 2006 and 2005, the Company recognized the following costs related to this plan (amounts in thousands):

	2006		2005
Service cost	$	67	$	78
Interest cost		205		194
Amortization of initial benefit obligation		449		950
	$	721	$	1,222

The Company used a 5.65% and a 5.69% discount rate in its calculation of the present value of its projected benefit obligations for fiscal 2006 and 2005, respectively.

6. Income Taxes

The Company’s estimated combined federal and state income tax rate for the three-month periods ended January 31, 2006 and 2005 before providing for the effect of permanent book-tax differences (“Base Rate”) was 39.1% and 38.5%, respectively. The effective tax rates for the three-month periods ended January 31, 2006 and 2005 were 38.3% and 40.1%, respectively.

For the three-month period ended January 31, 2006, the difference between the Company’s Base Rate and effective tax rate was primarily due to the impact on the Company’s tax rate from tax-free income and the manufacturing tax credit, offset, in part, by the non-deductible portion of stock option expense related to incentive stock options.

For the three-month period ended January 31, 2005, the primary difference between the Company’s Base Rate and effective tax rate was the effect of an adjustment due to the recomputation of the Company’s net

8

deferred tax liability of approximately $3.7 million resulting from the change in the Company’s Base Rate from 37.0% at October 31, 2004 to 38.5% at January 31, 2005 offset, in part, by tax-free income.

7. Stock Based Benefit Plans

Prior to the adoption of SFAS 123R, the Company accounted for its stock option plans according to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation cost was recognized upon issuance or exercise of stock options in fiscal 2005. The Company has developed a lattice model which it used for the fiscal 2006 and 2005 valuations. Prior to fiscal 2005, the Company used the Black-Scholes pricing model to value stock options.

The fair value of each option award is estimated on the date of grant using a lattice-based option valuation model that uses assumptions noted in the following table. The lattice-based option valuation models incorporate ranges of assumptions for inputs; those ranges are disclosed in the table below. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected life of options granted is derived from the historical exercise patterns and anticipated future patterns and represents the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	2006		2005
Expected volatility		36.33% – 38.28%		27.0% – 33.46%
Weighted-average volatility		37.55%		31.31%
Risk-free interest rate		4.38% – 4.51%		3.13% – 4.2%
Expected life (years)		4.11 – 9.07		2.8 – 9.07
Dividends		none		none
Weighted-average grant date fair value
per share of options granted		$15.30		$11.67

During the three-month period ended January 31, 2006, the Company recognized $11.0 million of expense and an income tax benefit of $4.0 million related to options awards. The Company expects to recognize approximately $26.8 million of expense and $9.2 million of income tax benefit for the full fiscal 2006 year related to option awards.

Had the Company adopted SFAS 123R as of November 1, 2004, pro forma income before taxes, income taxes, net income and net income per share for the three-month period ended January 31, 2005 would have been as follows (amounts in thousands, except per share amounts):

	SFAS 123 R
	As Reported		Adjustment			Pro Forma
Income before income taxes	$	183,991	$	(6,025	)	$	177,966
Income taxes		73,798		(1,853	)		71,945
Net income	$	110,193	$	(4,172	)	$	106,021
Basic net income per share	$	.73				$	.70
Diluted net income per share	$	.66				$	.64

8. Earnings per Share Information

Information pertaining to the calculation of earnings per share for the three-month periods ended January 31, 2006 and 2005 are as follows (amounts in thousands):

	2006		2005
Basic weighted-average shares		155,076		151,653
Common stock equivalents		11,951		14,431
Diluted weighted-average shares		167,027		166,084

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9. Stock Repurchase Program

In March 2003, the Company’s Board of Directors authorized the repurchase of up to 20 million shares of its Common Stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of providing shares for its various employee benefit plans. At January 31, 2006, the number of shares that the Company was authorized to repurchase was approximately 15.1 million shares.

10. Commitments and Contingencies

At January 31, 2006, the aggregate purchase price of land parcels under option, referred to herein as “land purchase contracts,” “options,” or “option agreements,” was approximately $4.71 billion (including $1.16 billion of land to be acquired from joint ventures which the Company has invested in, made advances to or made loan guarantees on behalf of), of which it had paid or deposited approximately $295.2 million. The amounts included in the purchase price of such land parcels has not been reduced by any amounts the Company has invested in or made advances to the joint ventures. The Company’s option agreements to acquire the home sites do not typically require the Company to buy the home sites, although the Company may, in some cases, forfeit any deposit balance outstanding if and at the time it terminates an option contract. Of the $295.2 million the Company had paid or deposited on these purchase agreements at January 31, 2006, $210.3 million was non-refundable. Any deposit in the form of a stand-by letter of credit is recorded as a liability at the time the stand-by letter of credit is issued. Included in accrued liabilities is $84.0 million representing the Company’s outstanding stand-by letters of credit issued in connection with its options to purchase home sites.

At January 31, 2006, the Company had outstanding surety bonds amounting to approximately $702.9 million, related primarily to its obligations to various governmental entities to construct improvements in the Company’s various communities. The Company estimates that approximately $282.2 million of work remains on these improvements. The Company has an additional $91.4 million of surety bonds outstanding that guarantee other obligations of the Company. The Company does not believe it is likely that any outstanding bonds will be drawn upon.

At January 31, 2006, the Company had agreements of sale outstanding to deliver 8,635 homes with an aggregate sales value of approximately $6.0 billion of which the Company recognized $57.6 million of revenues using percentage of completion accounting.

At January 31, 2006, the Company was committed to providing approximately $626.6 million of mortgage loans to its home buyers and to others. All loans with committed interest rates are covered by take-out commitments from third-party lenders, which minimize the Company’s interest rate risk. The Company also arranges a variety of mortgages through programs that are offered to its home buyers through outside mortgage lenders.

The Company has a $1.2 billion, unsecured revolving credit facility with 30 banks, which extends to July 15, 2009. At January 31, 2006, interest was payable on borrowings under the facility at 0.625% (subject to adjustment based upon the Company’s debt rating and leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by the Company from time to time. At January 31, 2006, the Company had no outstanding borrowings against the facility and letters of credit of approximately $301.1 million were outstanding under the facility. Under the terms of the revolving credit agreement, the Company is not permitted to allow its maximum leverage ratio (as defined in the agreement) to exceed 2.00:1.00 and was required to maintain a minimum tangible net worth (as defined in the agreement) of approximately $1.70 billion at January 31, 2006. At January 31, 2006, the Company’s leverage ratio was approximately .57:1.00 and its tangible net worth was approximately $2.90 billion. Based upon the minimum tangible net worth requirement, the Company’s ability to pay dividends and repurchase its common stock was limited to an aggregate amount of approximately $1.19 billion at January 31, 2006.

The Company is involved in various claims and litigation arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material effect on the business or on the financial condition of the Company.

10

11. Supplemental Disclosure to Statements of Cash Flows

The following are supplemental disclosures to the statements of cash flows for the three months ended January 31, 2006 and 2005 (amounts in thousands):

	2006		2005
Cash flow information:
Interest paid, net of amount capitalized	$	22,602	$	16,092
Income taxes paid	$	75,000	$	73,000
Non-cash activity:
Cost of inventory acquired through seller financing	$	46,120	$	47,752
Income tax benefit related to exercise of employee stock options	$	8,333	$	32,500
Stock bonus awards	$	10,926	$	30,396
Acquisition of joint venture assets and liabilities
Fair value of assets acquired	$	181,473
Liabilities assumed	$	110,548
Cash paid	$	40,751

12. Supplemental Guarantor Information

Toll Brothers Finance Corp., a 100% owned, indirect subsidiary (the “Subsidiary Issuer”) of the Company, is the issuer of four series of senior notes aggregating $1.15 billion. The obligations of the Subsidiary Issuer to pay principal, premiums, if any, and interest are guaranteed jointly and severally on a senior basis by the Company and substantially all of its 100% owned home building subsidiaries (the “Guarantor Subsidiaries”). The guarantees are full and unconditional. The Company’s non-home building subsidiaries and certain home building subsidiaries (the “Non-Guarantor Subsidiaries”) do not guarantee the debt. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that such disclosures would not be material to investors. The Subsidiary Issuer has not had and does not have any operations other than the issuance of the four series of senior notes and the lending of the proceeds from the senior notes to subsidiaries of the Company. Supplemental consolidating financial information of the Company, the Subsidiary Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the eliminations to arrive at the Company on a consolidated basis are as follows:

11

Condensed Consolidating Balance Sheet at January 31, 2006 ($ in thousands)

	Toll								Non-
	Brothers,			Subsidiary		Guarantor			Guarantor
	Inc.			Issuer		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents							329,327			34,236						363,563
Inventory							5,251,316			279,813						5,531,129
Property, construction and office equipment, net							78,986			9,458						88,444
Receivables, prepaid expenses and other assets					5,386		113,114			89,383			(29,875	)		178,008
Contracts receivable							28,015			29,554						57,569
Mortgage loans receivable										49,017						49,017
Customer deposits held in escrow							62,115			23,011						85,126
Investments in and advances to unconsolidated entities							206,222									206,222
Investments in and advances to consolidated entities		3,244,507			1,154,658		(1,485,357	)		(44,573	)		(2,869,235	)		—
		3,244,507			1,160,044		4,583,738			469,899			(2,899,110	)		6,559,078
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Loans payable							165,667			223,180						388,847
Senior notes					1,140,312											1,140,312
Senior subordinated notes							350,000									350,000
Mortgage company warehouse loan										38,406						38,406
Customer deposits							409,597			23,011						432,608
Accounts payable							221,913			4,850						226,763
Accrued expenses					19,732		633,220			112,737			(30,048	)		735,641
Income taxes payable		302,556								(1,946	)					300,610
Total liabilities		302,556			1,160,044		1,780,397			400,238			(30,048	)		3,613,187
Minority interest										3,940						3,940
Stockholders’ equity
Common stock		1,563								2,003			(2,003	)		1,563
Additional paid-in capital		228,110					3,775			2,734			(6,509	)		228,110
Retained earnings		2,739,911					2,799,566			60,980			(2,860,550	)		2,739,911
Treasury stock, at cost		(27,633	)													(27,633	)
Total stockholders’ equity		2,941,951			—		2,803,341			65,721			(2,869,062	)		2,941,951
		3,244,507			1,160,044		4,583,738			469,899			(2,899,110	)		6,559,078

12

Condensed Consolidating Balance Sheet at October 31, 2005 ($ in thousands)

	Toll								Non-
	Brothers,			Subsidiary		Guarantor			Guarantor
	Inc.			Issuer		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Cash & cash equivalents							664,312			24,907						689,219
Inventory							4,951,168			117,456						5,068,624
Property, construction & office equipment – net							70,438			9,086			��			79,524
Receivables, prepaid expenses and other assets					5,453		123,815			89,115			(32,763	)		185,620
Mortgage loans receivable										99,858						99,858
Customer deposits held in escrow							68,601									68,601
Investments in & advances to unconsolidated entities							152,394									152,394
Investments in & advances to consolidated entities		3,047,664			1,155,164		(1,503,295	)		3,318			(2,702,851	)		—
		3,047,664			1,160,617		4,527,433			343,740			(2,735,614	)		6,343,840
LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities:
Loans payable							162,761			87,791						250,552
Senior notes					1,140,028											1,140,028
Senior subordinated notes							350,000									350,000
Mortgage company warehouse loan										89,674						89,674
Customer deposits							415,602									415,602
Accounts payable							256,548			9						256,557
Accrued expenses					20,589		701,627			102,425			(32,872	)		791,769
Income taxes payable		284,093								(1,946	)					282,147
Total liabilities		284,093			1,160,617		1,886,538			277,953			(32,872	)		3,576,329
Minority interest										3,940						3,940
Stockholders’ equity:
Common stock		1,563								2,003			(2,003	)		1,563
Additional paid-in capital		242,546					4,420			2,734			(7,154	)		242,546
Retained earnings		2,576,061					2,636,475			57,110			(2,693,585	)		2,576,061
Treasury stock		(56,599	)													(56,599	)
Total stockholders’ equity		2,763,571			—		2,640,895			61,847			(2,702,742	)		2,763,571
		3,047,664			1,160,617		4,527,433			343,740			(2,735,614	)		6,343,840

13

Condensed Consolidating Statement of Income for the three months ended January 31, 2006
($ in thousands)

	Toll								Non-
	Brothers,			Subsidiary			Guarantor		Guarantor
	Inc.			Issuer			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Revenues:
Traditional home sales								1,278,709								1,278,709
Percentage of completion								28,015		29,554						57,569
Land sales								4,678								4,678
		—			—			1,311,402		29,554			—			1,340,956
Costs of revenues:
Traditional home sales								883,469		1,271			(649	)		884,091
Percentage of completion								21,616		25,730						47,346
Land sales								3,836								3,836
Interest					16,735			28,553		766			(17,300	)		28,754
		—			16,735			937,474		27,767			(17,949	)		964,027
Selling, general and administrative		17			173			139,554		7,421			(7,987	)		139,178
Income from operations		(17	)		(16,908	)		234,374		(5,634	)		25,936			237,751
Other:
Equity earnings								16,569								16,569
Interest and other					16,908			14,720		11,996			(32,297	)		11,327
Earnings from subsidiaries		265,664											(265,664	)		—
Income before income taxes		265,647			—			265,663		6,362			(272,025	)		265,647
Income taxes		101,797						102,572		2,488			(105,060	)		101,797
Net income		163,850			—			163,091		(3,874	)		(166,965	)		163,850

Condensed Consolidating Statement of Income for the three months ended January 31, 2005
($ in thousands)

	Toll								Non-
	Brothers,			Subsidiary			Guarantor		Guarantor
	Inc.			Issuer			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Revenues:
Home sales								989,097								989,097
Land sales								1,225								1,225
		—			—			990,322		—			—			990,322
Costs of revenues:
Home sales								684,798		1,105			(410	)		685,493
Land sales								779								779
Interest					12,712			21,784		541			(13,225	)		21,812
		—			12,712			707,361		1,646			(13,635	)		708,084
Selling, general and administrative		10			140			107,085		5,910			(6,080	)		107,065
Income from operations		(10	)		(12,852	)		175,876		(7,556	)		19,715			175,173
Other:
Equity earnings								1,935								1,935
Interest and other					12,852			6,190		10,865			(23,024	)		6,883
Earnings from subsidiaries		184,001											(184,001	)		—
Income before income taxes		183,991			—			184,001		3,309			(187,310	)		183,991
Income taxes		73,798						67,228		1,223			(68,451	)		73,798
Net income		110,193			—			116,773		2,086			(118,859	)		110,193

14

Condensed Consolidating Statement of Cash Flows for the three months ended January 31, 2006
($ in thousands)

	Toll									Non-
	Brothers,			Subsidiary			Guarantor			Guarantor
	Inc.			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flow from operating activities:
Net income	��	163,850						163,091			3,874			(166,965	)		163,850
Adjustments to reconcile net income to net    cash used in operating activities:
Depreciation and amortization					285			6,050			573						6,908
Amortization of initial benefit obligation								449									449
Share based compensation		11,075															11,075
Equity earnings in unconsolidated entities								(16,569	)								(16,569	)
Distributions from unconsolidated entities								2,643									2,643
Deferred tax provision		7,625															7,625
Provision for inventory write-offs								1,129									1,129
Changes in operating assets and liabilities
Increase in inventory								(215,654	)		(34,470	)					(250,124	)
Origination of mortgage loans											(176,908	)					(176,908	)
Sale of mortgage loans											227,749						227,749
Contracts receivable								(28,015	)		(29,554	)					(57,569	)
(Increase) decrease in receivables, prepaid expenses and other assets		(196,846	)		573			(7,613	)		47,977			163,925			8,016
Increase in customer deposits								481									481
Increase (decrease) in accounts payable and accrued expenses		10,926			(858	)		(104,876	)		6,327			3,040			(85,441	)
Increase in current income taxes payable		19,173															19,173
Net cash (used in) provided by operating activities		15,803			—			(198,884	)		45,568			—			(137,513	)
Cash flow from investing activities:
Purchase of property and equipment, net								(13,469	)		(795	)		—			(14,264	)
Purchase of marketable securities								(970,820	)		(15,000	)					(985,820	)
Sale of marketable securities								970,820			15,000						985,820
Investments in and advances to    unconsolidated entities								(71,369	)								(71,369	)
Acquisition of joint venture interest								(40,751	)								(40,751	)
Distributions from unconsolidated entities								2,512									2,512
Net cash used in investing activities		—			—			(123,077	)		(795	)		—			(123,872	)
Cash flow from financing activities:
Proceeds from loans payable								80,870			177,842						258,712
Principal payments of loans payable								(93,894	)		(213,286	)					(307,180	)
Proceeds from stock based benefit plans		5,972															5,972
Purchase of treasury stock		(21,775	)														(21,775	)
Net cash used in financing activities		(15,803	)		—			(13,024	)		(35,444	)		—			(64,271	)
Net (decrease) increase in cash and cash equivalents		—			—			(334,985	)		9,329			—			(325,656	)
Cash and cash equivalents, beginning of period								664,312			24,907						689,219
Cash and cash equivalents, end of period		—			—			329,327			34,236			—			363,563

15

Condensed Consolidating Statement of Cash Flows for the three months ended January 31, 2005
($ in thousands)

	Toll									Non-
	Brothers,			Subsidiary			Guarantor			Guarantor
	Inc.			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flow from operating activities:
Net income		110,193						116,773			2,086			(118,859	)		110,193
Adjustments to reconcile net income to net    cash used in operating activities:
Depreciation and amortization					125			3,728			398						4,251
Amortization of initial benefit obligation								950									950
Equity earnings in unconsolidated entities								(1,935	)								(1,935	)
Distributions from unconsolidated entities								495									495
Deferred tax provision		15,366															15,366
Provision for inventory write-offs								2,343									2,343
Changes in operating assets and liabilities (Increase) decrease in inventory								(222,059	)		1						(222,058	)
Origination of mortgage loans											(181,558	)					(181,558	)
Sale of mortgage loans											207,077						207,077
(Increase) decrease in receivables, prepaid    expenses and other assets		(156,943	)		(2,400	)		37,573			(11,561	)		125,705			(7,626	)
Increase in customer deposits								22,311									22,311
Increase (decrease) in accounts payable and    accrued expenses		30,396			2,275			(16,560	)		11,443			(6,846	)		20,708
Decrease in current income taxes payable		(14,568	)														(14,568	)
Net cash (used in) provided
by operating activities		(15,556	)		—			(56,381	)		27,886			—			(44,051	)
Cash flow from investing activities:
Purchases of property and equipment, net								(8,402	)		(735	)					(9,137	)
Purchases of marketable securities								(1,034,017	)		(5,000	)					(1,039,017	)
Sale of marketable securities								1,005,257			4,000						1,009,257
Investments in and advances to    unconsolidated entities								(16,214	)								(16,214	)
Distributions from unconsolidated      entities								1,755									1,755
Net cash used in investing activities		—			—			(51,621	)		(1,735	)		—			(53,356	)
Cash flow from financing activities:
Proceeds from loans payable								80,182			165,985						246,167
Principal payments of loans payable								(95,756	)		(193,772	)					(289,528	)
Proceeds from stock based benefit plans		15,776															15,776
Purchase of treasury stock		(220	)														(220	)
Net cash provided by
(used in) financing activities		15,556			—			(15,574	)		(27,787	)		—			(27,805	)
Net decrease in cash and cash
equivalents		—			—			(123,576	)		(1,636	)		—			(125,212	)
Cash and cash equivalents, beginning of period								455,836			9,998						465,834
Cash and cash equivalents, end of period		—			—			332,260			8,362			—			340,622

16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our first quarter of fiscal 2006 was another record quarter for us with respect to revenue and net income. Revenues and net income for the three months ended January 31, 2006 increased 35% and 49%, respectively, as compared to the comparable quarter of fiscal 2005. In addition, our backlog, consisting of homes under contract but not yet delivered, at January 31, 2006 of $5.95 billion increased 22% over our backlog at January 31, 2005.

Beginning in the fourth quarter of fiscal 2005 and continuing throughout our first quarter of fiscal 2006 and into the second quarter of fiscal 2006, we have experienced a slowdown in new contracts signed. The value of new contracts signed in the first quarter of fiscal 2006 was $1.14 billion, a 21% decline compared to the value of new contracts signed in the first quarter of fiscal 2005. We believe this slowdown is attributable to a softening of demand, a lack of available home sites caused by delays in new community openings, delays in approvals of new phases of existing communities, our reluctance to sign new contracts that would require us to extend delivery dates beyond the twelve months that we are quoting to prospective home buyers in many communities, a decline in consumer confidence and, in some markets, increased supply due to the availability of homes previously purchased by speculative buyers at competing communities. In addition, it appears that customers are taking more time in making home buying decisions. Despite this slowdown, we remain cautiously optimistic about the future growth of our business. Our industry demographics remain strong due to the continuing regulation-induced constraints on lot supplies and the growing number of affluent households.

On February 23, 2006, we filed a Form 8-K with the SEC that provided financial guidance related to our expected results of operations for fiscal 2006. The guidance contained in this Form 10-Q is the guidance given in the Form 8-K filed on February 23, 2006. We have not reconfirmed or updated this guidance since the filing of the Form 8-K. The guidance stated that, based upon our evaluation of our backlog, our communities open and the expected timing of new community openings in fiscal 2006, we believe that in fiscal 2006 we will deliver between 9,200 homes and 9,900 homes with an average delivered price between $670,000 and $680,000; recognize between $280 million and $300 million of revenues using the percentage of completion method of accounting related to several high-rise residences that are under construction; earn net income between $790 million and $870 million; and achieve diluted earnings per share between $4.77 and $5.26 per share.

Geographic and product diversification, access to lower-cost capital, a versatile and abundant home mortgage market and improving demographics are creating opportunities for those builders who can control land and persevere through the increasingly difficult regulatory approval process. We believe that this evolution in our industry favors the large publicly traded home building companies with the capital and expertise to control home sites and gain market share. We currently own or control approximately 87,000 home sites in 50 markets we consider to be affluent, a substantial number of which sites already have the approvals necessary for development. We believe that as the approval process becomes more difficult, and as the political pressure from no-growth proponents increases, our expertise in taking land through the approval process and our already approved land positions should allow us to continue to grow for a number of years to come.

Because of the length of time that it takes to obtain the necessary approvals on a property, complete the land improvements on it and deliver a home after a home buyer signs an agreement of sale, we are subject to many risks. We attempt to reduce our risk by controlling land for future development through options whenever possible, thus allowing us to obtain the necessary governmental approvals before acquiring title to the land; generally commencing construction of a home only after executing an agreement of sale and receiving a substantial downpayment from a buyer; and using subcontractors to perform home construction and land development work on a fixed-price basis.

Our revenues have grown on average over 20% per year in the last decade. We have funded this growth through the reinvestment of profits, bank borrowings and capital market transactions. At January 31, 2006, we

17

had $363.6 million of cash and cash equivalents and approximately $899 million available under our bank revolving credit facility which extends to July 15, 2009. With these resources and our history of success in accessing the public debt markets, we believe we have the resources available to continue to grow in fiscal 2006 and beyond.

CRITICAL ACCOUNTING POLICIES

We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Inventory

Inventory is stated at the lower of cost or fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). In addition to direct land acquisition, land development and home construction costs, costs include interest, real estate taxes and direct overhead related to development and construction, which are capitalized to inventories during the period beginning with the commencement of development and ending with the completion of construction.

Once a parcel of land has been approved for development, it generally takes four to five years to fully develop, sell and deliver all the homes in one of our typical communities. Longer or shorter time periods are possible depending on the number of home sites in a community. Our master planned communities, consisting of several smaller communities, may take up to 10 years or more to complete. Because our inventory is considered a long-lived asset under U.S. generally accepted accounting principles, we are required to regularly review the carrying value of each of our communities and write down the value of those communities for which we believe the values are not recoverable. When the profitability of a current community deteriorates, the sales pace declines significantly or some other factor indicates a possible impairment in the recoverability of the asset, we evaluate the property in accordance with the guidelines of SFAS 144. If this evaluation indicates that an impairment loss should be recognized, we charge cost of sales for the estimated impairment loss in the period determined.

In addition, we review all land held for future communities or future sections of current communities, whether owned or under contract, to determine whether or not we expect to proceed with the development of the land as originally contemplated. Based upon this review, we decide (a) as to land that is under a purchase contract but not owned, whether the contract will likely be terminated or renegotiated, and (b) as to land we own, whether the land will likely be developed as contemplated or in an alternative manner, or should be sold. We then further determine which costs that have been capitalized to the property are recoverable and which costs should be written off. We recognized $1.1 million and $2.3 million of write-offs of costs related to current and future communities in the three months ended January 31, 2006 and 2005, respectively.

We have a significant number of land purchase contracts, sometimes referred to herein as “land purchase contracts,” “options,” or “option agreements,” which we evaluate in accordance with the Financial Accounting Standards Board (“FASB”) Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”), as amended by FIN 46R. Pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses or receives a majority of the expected residual returns of a variable interest entity (“VIE”) is considered to be the primary beneficiary and must consolidate the operations of the VIE. A VIE is an entity with insufficient equity investment or in which the equity investors lack some of the characteristics of a controlling financial interest. For land purchase contracts with sellers meeting the definition of a VIE, we perform a review to determine which party is the primary beneficiary of the VIE. This review requires substantive judgment and estimation. These judgments and estimates involve assigning probabilities to various estimated cash flow possibilities relative to the entity’s expected profits and losses and the cash flows associated with changes in the fair value of the land under contract. Because, in most cases, we do not have any ownership interests in the entities with which we contract to purchase land, we generally do not have the ability to compel these entities to provide assistance in our review. In many instances, these entities provide us little, if any, financial information.

18

Revenue and Cost Recognition

Traditional Home Sales

Because the construction time for one of our traditional homes is generally less than one year, revenues and cost of revenues from traditional home sales are recorded at the time each home is delivered and title and possession are transferred to the buyer. Closing normally occurs shortly after construction is substantially completed.

Land, land development and related costs, both incurred and estimated to be incurred in the future, are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs subsequent to the commencement of delivery of homes are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific identification method. The estimated land, common area development and related costs of master planned communities, including the cost of golf courses, net of their estimated residual value, are allocated to individual communities within a master planned community on a relative sales value basis. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs are allocated to the remaining home sites in each of the communities of the master planned community.

High-Rise/Mid-Rise Projects

We are developing several high-rise/mid-rise projects that will take substantially more than one year to complete. If these projects qualify, revenues and costs will be recognized using the percentage of completion method of accounting in accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”). Under the provisions of SFAS 66, revenues and costs are to be recognized when construction is beyond the preliminary stage, the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit, sufficient units in the project have been sold to ensure that the property will not be converted to rental property, the sales proceeds are collectible and the aggregate sales proceeds and the total cost of the project can be reasonably estimated. Revenues and costs of individual projects are recognized on the individual project’s aggregate value of units for which the home buyers have signed binding agreements of sale, less an allowance for cancellations, and are based on the percentage of total estimated construction costs that have been incurred. Total estimated revenues and construction costs will be reviewed periodically and any change will be applied to the current and future periods. We began recognizing revenue and costs using percentage of completion accounting on several projects in fiscal 2006.

Land Sales

Land sales revenues and cost of revenues are recorded at the time that title and possession of the property have been transferred to the buyer. We recognize the pro rata share of revenues and cost of revenues of land sales to entities in which we have a 50% or less interest based upon the ownership percentage attributable to the non-Company investors. Any profit not recognized in a transaction reduces our investment in the entity.

Use of Estimates

In the ordinary course of doing business, we must make estimates and judgments that affect decisions on how we operate and the reported amounts of assets, liabilities, revenues and expenses. These estimates include, but are not limited to, those related to the recognition of income and expenses, impairment of assets, estimates of future improvement and amenity costs, capitalization of costs to inventory, provisions for litigation, insurance and warranty costs, and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, we evaluate and adjust our estimates based on the information currently available. Actual results may differ from these estimates and assumptions or conditions.

OFF-BALANCE SHEET ARRANGEMENTS

We have investments in and advances to several joint ventures, to Toll Brothers Realty Trust Group (“Trust”) and to Toll Brothers Realty Trust Group II (“Trust II”). At January 31, 2006, we had investments

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in and advances to these entities of $206.2 million, were committed to invest or advance an additional $187.1 million in the aggregate to these entities if needed and had guaranteed approximately $147.6 million of these entities’ indebtedness and/or loan commitments. See Note 3 to the Condensed Consolidated Financial Statements, “Investments in and Advances to Unconsolidated Entities” for more information regarding these entities. We do not believe that these arrangements, individually or in the aggregate, have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity or capital resources. Our investments in these entities are accounted for using the equity method.

RESULTS OF OPERATIONS

The following table sets forth, for the three-month periods ended January 31, 2006 and 2005, a comparison of certain income statement items related to our operations (amounts in millions):

	2006					2005
	$		%			$		%
Traditional home sales
Revenues		1,278.7					989.1
Costs		884.1		69.1	%		685.5		69.3	%
		394.6					303.6
Percentage of completion
Revenues		57.6					—
Costs		47.3		82.2	%		—
		10.2					—
Land sales
Revenues		4.7					1.2
Costs		3.8		82.0	%		0.8		63.6	%
		0.8					0.4
Interest*		28.8		2.1	%		21.8		2.2	%
Total
Revenues		1,341.0					990.3
Costs		964.0		71.9	%		708.1		71.5	%
		377.0					282.2
Selling, general and administrative*		139.2		10.4	%		107.1		10.8	%
Income from operations		237.8					175.2
Other
Equity earnings in unconsolidated entities		16.6					1.9
Interest and other		11.3					6.9
Income before income taxes		265.6					184.0
Income taxes		101.8					73.8
Net income		163.9					110.2

* Percentages are based on total revenues.

Note: Amounts may not add and percentage may not calculate due to rounding.

TRADITIONAL HOME SALES REVENUES AND COSTS

Home sales revenues for the three months ended January 31, 2006 were higher than those for the comparable period of 2005 by approximately $289.6 million, or 29%. The increase was attributable to an 18% increase in the number of homes delivered and a 9% increase in the average price of the homes delivered. The increase in the average price of the homes delivered in the fiscal 2006 period was the result of increased selling prices and a shift in the location of homes delivered to more expensive areas offset by a change in product mix to smaller, lower-priced products such as attached homes and age-qualified homes.

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The increase in the number of homes delivered in the three-month period ended January 31, 2006 was primarily due to the higher backlog of homes at October 31, 2005 as compared to October 31, 2004, which was primarily the result of a 19% increase in the number of new contracts signed in fiscal 2005 over fiscal 2004.

The value of new sales contracts signed was $1.01 billion (1,395 homes) in the three months ended January 31, 2006, a 30% decrease compared to the value of contracts signed in the comparable period of fiscal 2005 of $1.44 billion (2,171 homes). This decrease is attributable to a 36% decrease in the number of new contracts signed, offset, in part, by a 9% increase in the average value of each contract. The increase in the average value of contracts was due primarily to the location and size of homes sold and increases in base selling prices. We believe the slowdown in new contract signings was attributable to a softening of demand, a lack of available home sites caused by delays in new community openings, delays in approvals of new phases of existing communities, our reluctance to sign new contracts that would require us to extend delivery dates beyond the twelve months that we were quoting to prospective home buyers in many communities, a decline in consumer confidence and, in some markets, availability of homes previously purchased by speculative buyers. In addition, it appears that customers are taking more time in making home buying decisions. Despite this slowdown, we remain cautiously optimistic about the future growth of our business. Our industry demographics remain strong due to the continuing regulation-induced constraints on lot supplies, the growing number of affluent households and the number of new communities that were opened in the three-month period ended January 31, 2006 and the expected new communities to be opened during the remainder of fiscal 2006. At January 31, 2006, we were selling from 258 communities compared to 225 communities at January 31, 2005 and 230 communities at October 31, 2005. We expect to have approximately 265 selling communities at October 31, 2006. At January 31, 2006, we had approximately 87,000 home sites under our control nationwide in markets we consider to be affluent.

At January 31, 2006, our backlog of homes under contract was $5.57 billion (8,106 homes), 16% higher than the $4.82 billion (7,234 homes) backlog at January 31, 2005. The increase in backlog at January 31, 2006 compared to the backlog at January 31, 2005 is primarily attributable to a higher backlog at October 31, 2005 as compared to the backlog at October 31, 2004, offset, in part, by the decrease in the value and number of new contracts signed in the fiscal 2006 period as compared to the fiscal 2005 period, and by higher deliveries in the fiscal 2006 period as compared to the fiscal 2005 period. Based on the size of our current backlog, the expected demand for our product, the increased number of selling communities from which we are operating and the additional communities we expect to open in the coming months, we believe that we will deliver between 9,200 and 9,900 homes in fiscal 2006 and that the average delivered price of those homes will be between $670,000 and $680,000.

Home costs as a percentage of home sales revenue were slightly lower in the three-month period ended January 31, 2006 as compared to the comparable period of fiscal 2005. The decrease was largely the result of selling prices increasing at a greater rate than costs and lower inventory write-offs. In the three-month periods ended January 31, 2006 and 2005, we recognized inventory write-downs and the expensing of costs that we believed not to be recoverable of $1.1 million and $2.3 million, respectively. For the full 2006 fiscal year, we expect that home costs as a percentage of home sales revenues will increase between 135 and 155 basis points as compared to the full 2005 fiscal year, due to costs increasing faster than selling prices and a change in the mix of homes delivered to higher cost homes.

PERCENTAGE OF COMPLETION REVENUES AND COSTS

We are developing several high-rise/mid-rise projects for which we are recognizing revenues and costs using the percentage of completion method of accounting. Revenues and costs of individual projects are recognized on the individual project’s aggregate value of units for which home buyers have signed binding agreements of sale, less an allowance for cancellations, and are based on the percentage of total estimated construction costs that have been incurred. Total estimated revenues and construction costs are reviewed periodically and any change is applied to current and future periods. We began recognizing revenue and costs using percentage of completion accounting on several projects in fiscal 2006. In the three-month period ended January 31, 2006, we recognized $57.6 million of revenues and $47.3 million of costs on these projects. Based on the size of our current backlog, the expected demand for our product, and the projected construction

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schedule, we believe that for the full 2006 fiscal year, revenues recognized under the percentage of completion accounting method will be between $280 million and $300 million and costs will be approximately 81% of revenues.

LAND SALES REVENUES AND COSTS

We are developing several communities in which we expect to sell a portion of the land to other builders or entities. The amount and profitability of land sales will vary from year to year depending upon the sale and delivery of the specific land parcels. In the three-month periods ended January 31, 2006 and 2005, land sales were $4.7 million and $1.2 million, respectively. Cost of land sales was approximately 82.0% and 63.6% of land sales revenues in the three-month periods ended January 31, 2006 and 2005, respectively. For the full fiscal 2006 year, land sales are expected to be approximately $21.0 million, and cost of land sales is expected to be approximately $15.8 million.

INTEREST EXPENSE

We determine interest expense on a specific lot-by-lot basis for our traditional homebuilding operations and on a parcel-by-parcel basis for land sales. As a percentage of total revenues, interest expense varies depending on many factors, including the period of time that we owned the land, the length of time that the homes delivered during the period were under construction, and the interest rates and the amount of debt carried by us in proportion to the amount of our inventory during those periods. Interest expense for projects using the percentage of completion method of revenue recognition is determined based on the total estimated interest for the project and the percentage of total estimated construction costs that have been incurred to date.

Interest expense as a percentage of revenues was slightly lower in the three-month period ended January 31, 2006 as compared to the comparable period of fiscal 2005. For the full 2006 fiscal year, we expect interest expense as a percentage of total revenues to be approximately 2.2% as compared to 2.16% in fiscal 2005.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”)

SG&A spending increased by $32.1 million, or 30%, in the three-month period ended January 31, 2006 as compared to the comparable period of fiscal 2005. This increased spending was principally due to the costs incurred to support the 35% increase in revenues, the costs associated with the increase in the number of selling communities that we had during the three-month period of fiscal 2006 as compared to the comparable period of fiscal 2005, the expensing of stock options pursuant to SFAS 123R in fiscal 2006, and the continued costs incurred in the search for new land to replace the home sites that were sold during the period and to expand our land position to enable us to grow in the future. For the full 2006 fiscal year, we expect that SG&A as a percentage of revenues will be between 9.3% and 9.4% of revenues as compared to 8.33% for the full 2005 fiscal year. The expected increase is due to the increased costs attributable to the significant growth in new selling communities that we expect to have in fiscal 2006 that will not generate revenues until late fiscal 2006 and fiscal 2007, and the expensing of stock options pursuant to SFAS 123R in fiscal 2006.

EQUITY EARNINGS IN UNCONSOLIDATED ENTITIES

We are a participant in several joint ventures and in the Trust and Trust II. We recognize our proportionate share of the earnings from these entities. See Note 3 to the Condensed Consolidated Financial Statements, “Investments in and Advances to Unconsolidated Entities” for more information regarding our investments in and commitments to these entities. Many of our joint ventures are land development projects or high-rise/mid-rise construction projects and do not generate revenues and earnings for a number of years during the development of the property. Once development is complete, the joint ventures will generally, over a relatively short period of time, generate revenues and earnings until all the assets of the entities are sold. Because there is not a steady flow of revenues and earnings from these entities, the earnings recognized from these entities will vary significantly from quarter to quarter and year to year. In the three months ended January 31, 2006, we recognized $16.6 million of earnings from unconsolidated entities as compared to $1.9 million in the comparable period of fiscal 2005. For fiscal 2006, we expect to recognize approximately $60.0 million of earnings from our investments in these joint ventures and in the Trust and Trust II.

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INTEREST AND OTHER INCOME

For the three months ended January 31, 2006, interest and other income was $11.3 million, an increase of $4.4 million from the $6.9 million recognized in the comparable period of fiscal 2005. This increase was primarily the result of higher interest income, higher management and construction fee income and higher income realized from our ancillary businesses in the fiscal 2006 period. For the full 2006 fiscal year, we expect interest and other income to be approximately $30.0 million compared to $41.2 million in fiscal 2005 due primarily to an expected decrease in interest income.

INCOME BEFORE INCOME TAXES

For the three-month period ended January 31, 2006, income before taxes was $265.6 million, an increase of 44% over the $184.0 million earned in the comparable period of fiscal 2005.

INCOME TAXES

Income taxes were provided at an effective rate of 38.3% and 40.1% for the three-month periods ended January 31, 2006 and 2005, respectively. The difference in rates in the three-month period of fiscal 2006 as compared to the comparable period of fiscal 2005 was due primarily to a change in the estimated Base Rate to 39.1% from 38.5% in three-month period ended January 31, 2006 compared to the comparable period of 2005 and the impact of recomputing our net deferred tax liability using the new fiscal 2005 Base Rate from the 37.0% Base Rate at October 31, 2004. In addition, we earned more tax free income in the fiscal 2006 period as compared to the fiscal 2005 period and benefited from the new manufacturing tax credit in fiscal 2006. These benefits were offset in part by a portion of the stock option expense recognized in fiscal 2006 that is not deductible for income taxes. For the full fiscal 2006 year, we expect that our effective tax rate will be approximately 38.6% as compared to 39.1% in fiscal 2005.

CAPITAL RESOURCES AND LIQUIDITY

Funding for our business has been provided principally by cash flow from operating activities, unsecured bank borrowings and the public debt and equity markets. We have used our cash flow from operating activities, bank borrowings and the proceeds of public debt and equity offerings to acquire additional land for new communities, fund additional expenditures for land development, fund construction costs needed to meet the requirements of our increased backlog and the increasing number of communities in which we are offering homes for sale, invest in unconsolidated entities, repurchase our stock, and repay debt.

Cash flow from operating activities decreased in the three-month period ended January 31, 2006 as compared to the comparable period of fiscal 2005. This decrease was primarily the result of increased inventory levels, offset in part by our strong revenue growth in the fiscal 2006 period as compared to the fiscal 2005 period.

We expect that our inventory will continue to increase and we are currently negotiating and searching for additional opportunities to obtain control of land for future communities. At January 31, 2006, the aggregate purchase price of land parcels under option and purchase agreements was approximately $4.71 billion (including approximately $1.16 billion of land to be acquired from joint ventures which we have invested in, made advances to or made loan guarantees on behalf of) of which we had paid or deposited approximately $295.2 million.

In general, cash flow from operating activities assumes that, as each home is delivered, we will purchase a home site to replace it. Because we own several years’ supply of home sites, we do not need to buy home sites immediately to replace the ones delivered. In addition, we generally do not begin construction of our traditional single-family homes until we have a signed contract with the home buyer. We generally will not start construction of a high-rise/mid-rise project until a significant number of units are sold. Because of the significant amount of time between when a home buyer enters into a contract to purchase a home and when the construction of the home is completed and delivered to the home buyer, we believe we can estimate, with reasonable accuracy, the number of homes we will deliver in the next 9 to 12 months. Should our business decline significantly, our inventory would decrease as we complete and deliver the homes under construction but do not commence construction of as many new homes, resulting in a temporary increase in our cash flow

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from operations. In addition, under such circumstances, we might delay or curtail our acquisition of additional land, which would further reduce our inventory levels and cash needs.

In both the fiscal 2006 and 2005 periods, we have had a significant amount of cash invested in either short-term cash equivalents or short-term interest-bearing marketable securities. In addition, we have made a number of investments in unconsolidated entities related to the acquisition and development of land for future home sites or in entities that are constructing or converting apartment buildings into luxury condominiums. Our investment activities related to marketable securities and investments in and distributions of investments from unconsolidated entities are included in the Condensed Consolidated Statements of Cash Flows in the section “Cash flow from investing activities.”

We have a $1.2 billion unsecured credit facility with 30 banks which extends through July 15, 2009. At January 31, 2006, interest was payable on borrowings under the facility at 0.625% (subject to adjustment based upon our debt ratings and leverage ratio) above the Eurodollar rate or other specified variable rates as selected by us from time to time. We have also elected to periodically maintain a loan balance outstanding on our revolving credit facility; such borrowing is purely elective by us and is not required by the terms of our revolving credit facility. At January 31, 2006, we had no borrowings outstanding against the facility and had approximately $301.1 million of letters of credit outstanding under it.

To reduce borrowing costs, extend the maturities of our long-term debt and raise additional funds for general corporate purposes, during the last several fiscal years we issued four series of senior notes aggregating $1.15 billion, and used the proceeds to redeem $470 million of senior subordinated notes and, together with other available cash, to repay a $222.5 million bank term loan. In addition, we raised approximately $86.2 million from the issuance of six million shares of our common stock in a public offering in August 2003.

We believe that we will be able to continue to fund our expected growth and meet our contractual obligations through a combination of existing cash resources, cash flow from operating activities, our existing sources of credit and the public debt and equity markets.

INFLATION

The long-term impact of inflation on us is manifested in increased costs for land, land development, construction and overhead, as well as in increased sales prices of our homes. We generally contract for land significantly before development and sales efforts begin. Accordingly, to the extent land acquisition costs are fixed, increases or decreases in the sales prices of homes may affect our profits. Because the sales price of each of our homes is fixed at the time a buyer enters into a contract to acquire a home, and because we generally contract to sell our homes before we begin construction, any inflation of costs in excess of those anticipated may result in lower gross margins. We generally attempt to minimize that effect by entering into fixed-price contracts with our subcontractors and material suppliers for specified periods of time, which generally do not exceed one year.

In general, housing demand is adversely affected by increases in interest rates and housing costs. Interest rates, the length of time that land remains in inventory and the proportion of inventory that is financed affect our interest costs. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, affecting prospective buyers’ ability to adequately finance home purchases, our revenues, gross margins and net income would be adversely affected. Increases in sales prices, whether the result of inflation or demand, may affect the ability of prospective buyers to afford new homes.

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HOUSING DATA
($ in millions)

Revenue	Three months ended January 31,
	2006		2005		2006		2005
Region	Units		Units		$		$
Northeast (CT,MA,NJ,NY,RI)		308		229		196.0		123.3
Mid-Atlantic (DE,MD,PA,VA)		589		663		393.6		386.9
Midwest (IL,MI,OH)		109		95		75.6		57.0
Southeast (FL,NC,SC)		397		155		212.9		84.4
Southwest (AZ,CO,NV,TX)		340		248		247.3		155.8
West (CA)		136		200		153.3		181.7
Total traditional		1,879		1,590		1,278.7		989.1
Percentage of completion*						57.6
Total consolidated		1,879		1,590		1,336.3		989.1
Unconsolidated entities		99		63		52.1		26.4
		1,978		1,653		1,388.4		1,015.5

New Contracts	Three months ended January 31,
	2006		2005		2006		2005
Region	Units		Units		$		$
Northeast (CT,MA,NJ,NY,RI)		198		319		135.3		200.7
Mid-Atlantic (DE,MD,PA,VA)		456		767		313.5		471.4
Midwest (IL,MI,OH)		67		112		42.1		78.0
Southeast (FL,NC,SC)		254		379		164.0		202.3
Southwest (AZ,CO,NV,TX)		307		366		229.4		254.3
West (CA)		113		228		125.2		233.4
Total traditional		1,395		2,171		1,009.5		1,440.1
Percentage of completion*		149		2		130.4		3.0
Total consolidated		1,544		2,173		1,139.9		1,443.1
Unconsolidated entities		28		36		16.8		15.6
		1,572		2,209		1,156.7		1,458.7

Backlog	At January 31,
	2006		2005		2006			2005
Region	Units		Units		$			$
Northeast (CT,MA,NJ,NY,RI)		1,242		1,118		841.1			676.8
Mid-Atlantic (DE,MD,PA,VA)		2,197		2,349		1,486.3			1,456.8
Midwest (IL,MI,OH)		401		463		285.5			305.4
Southeast (FL,NC,SC)		1,877		894		1,028.4			517.1
Southwest (AZ,CO,NV,TX)		1,816		1,469		1,291.2			948.2
West (CA)		573		941		642.0			916.2
Total traditional		8,106		7,234		5,574.5			4,820.5
Percentage of completion*
Undelivered		529		58		429.7			67.4
Revenue recognized						(57.6	)
Net percentage of completion		529		58		372.1			67.4
Total consolidated		8,635		7,292		5,946.6			4,887.9
Unconsolidated entities		32		147		20.8			65.0
		8,667		7,439		5,967.4			4,952.9

* Mid- and High-Rise projects that are accounted for under the percentage of completion method. See detail below.

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PERCENTAGE OF COMPLETION

Revenue	Three months ended January 31,
	2006	2005	2006		2005
Region	Units	Units	$		$
Northeast (CT,MA,NJ,NY,RI)				39.7		N/A
Southeast (FL,NC,SC)				17.9
Total				57.6		N/A

New Contracts	Three months ended January 31,								��
	2006		2005		2006		2005
Region	Units		Units		$		$
Northeast (CT,MA,NJ,NY,RI)		131				116.4
Mid-Atlantic (DE,MD,PA,VA)		13				5.3
Southeast (FL,NC,SC)		—		2		4.7		3.0
Southwest (AZ,CO,NV,TX)		5				4.0
Total		149		2		130.4		3.0

Backlog	At January 31,
	2006		2005		2006			2005
Region	Units		Units		$			$
Northeast (CT,MA,NJ,NY,RI)		402				299.2
Mid-Atlantic (DE,MD,PA,VA)		43				18.3
Southeast (FL,NC,SC)		72		58		102.7			67.4
Southwest (AZ,CO,NV,TX)		12				9.5
Revenue recognized						(57.6	)
Total		529		58		372.1			67.4

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily due to fluctuations in interest rates. We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flow. Conversely, for variable-rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect our earnings and cash flow. We do not have the obligation to prepay fixed-rate debt prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance it.

The table below sets forth, at January 31, 2006, our debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair value (amounts in thousands):

	Fixed-Rate Debt						Variable-Rate Debt
Fiscal Year of Expected Maturity	Amount			Weighted- Average Interest Rate			Amount		Weighted- Average Interest Rate
2006	$	82,942			6.43	%	$	38,406		5.68	%
2007		79,517			6.55	%		105,349		12.27	%
2008		34,211			5.19	%		150		3.07	%
2009		7,678			6.87	%		150		3.07	%
2010		4,622			7.73	%		150		3.07	%
Thereafter		1,570,517			6.43	%		3,560		3.07	%
Discount		(9,687	)
Total	$	1,769,800			6.42	%	$	147,765		10.31	%
Fair value at
January 31, 2006	$	1,762,996					$	147,765

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(1) At January 31, 2006, we had a $1.2 billion unsecured revolving credit facility with 30 banks which extends to July 2009. At January 31, 2006, we had no borrowings and approximately $301.1 million of letters of credit outstanding under the facility. At January 31, 2006, interest was payable on borrowings under this facility at .625% (subject to adjustment based upon our debt rating and leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by us from time to time.

(2) One of our subsidiaries has a $125 million line of credit with four banks to fund mortgage originations. The line is due within 90 days of demand by the banks and bears interest at the banks’ overnight rate plus an agreed upon margin. At January 31, 2006, the subsidiary had $38.4 million outstanding under the line at an average interest rate of 5.68%. Borrowing under this line is included in the 2006 fiscal year maturities.

Based upon the amount of variable rate debt outstanding at January 31, 2006 and holding the variable rate debt balance constant, each one percentage point increase in interest rates would increase our interest costs by approximately $1.5 million per year.

ITEM 4. CONTROLS AND PROCEDURES

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

Our chief executive officer and chief financial officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various claims and litigation arising principally in the ordinary course of business. We believe that the disposition of these matters will not have a material adverse effect on our business or our financial condition.

In January 2006, we received a request for information pursuant to Section 308 of the Clean Water Act from Region 3 of the Environmental Protection Agency (the “EPA”) requesting information about storm water discharge practices in connection with our homebuilding projects in the states that comprise EPA Region 3. To the extent the EPA’s review were to lead the EPA to assert violations of state and/or federal regulatory requirements and request injunctive relief and/or civil penalties, we would defend and attempt to resolve any such asserted violations. At this time we cannot predict the outcome of the EPA’s review or estimate the costs that may be involved in resolving any potential claims.

There are no other proceedings required to be disclosed pursuant to Item 103 of Regulation S-K.

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ITEM 1A. RISK FACTORS

There has been no material change in our risk factors as previously disclosed in our Form 10-K for the fiscal year ended October 31, 2005 in response to Item 1A. to Part 1 of such Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended January 31, 2006 we repurchased the following shares of our common stock (amounts in thousands, except per share amounts):

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share (1)		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program (2)		Maximum Number of Shares that May Yet be Purchased Under the Plan or Program (2)
November 1, 2005 to November 30, 2005		223	$	33.79		222		15,514
December 1, 2005 to December 31, 2005		159	$	35.29		156		15,358
January 1, 2006 to January 31, 2006		251	$	34.93		251		15,107
Total		633	$	34.62		629

(1) Pursuant to the provisions of our stock option plans, participants are permitted to use the value of our common stock that they own to pay for the exercise of options. During the three months ended January 31, 2006, we received 4,172 shares with an average fair market value per share of $35.43 for the exercise of stock options. These shares are included in the table above.

(2) On March 26, 2003, we announced that our Board of Directors had authorized the repurchase of up to 20 million shares of our common stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of providing shares for our various employee benefit plans. The Board of Directors did not fix an expiration date for the repurchase program.

Except as set forth above, we have not repurchased any of our equity securities.

We have not paid any cash dividends on our common stock to date and expect that, for the foreseeable future, we will not do so. Rather, we will follow a policy of retaining earnings in order to finance the continued growth of our business and, from time to time, repurchase shares of our common stock.

The payment of dividends is within the discretion of our Board of Directors and any decision to pay dividends in the future will depend upon an evaluation of a number of factors, including our earnings, capital requirements, our operating and financial condition, and any contractual limitations then in effect. In this regard, our senior subordinated notes contain restrictions on the amount of dividends we may pay on our common stock. In addition, our bank revolving credit agreement requires us to maintain a minimum tangible net worth (as defined in the credit agreement), which restricts the amount of dividends we may pay. At January 31, 2006, under the most restrictive of these provisions, we could have paid up to approximately $1.19 billion of cash dividends.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

10.1 Amendment to the Toll Brothers, Inc. Cash Bonus Plan dated as of December 7, 2005 is hereby incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 9, 2005.

10.1 Toll Brothers, Inc. Executive Officer Cash Bonus Plan Fiscal 2006 Performance Goals are hereby incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed with the Securities and Exchange Commission on December 19, 2005.

31.1* Certification of Robert I. Toll pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2* Certification of Joel H. Rassman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1* Certification of Robert I. Toll pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2* Certification of Joel H. Rassman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed electronically herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TOLL BROTHERS, INC. (Registrant)
Date: March 10, 2006	By: Joel H. Rassman
	Joel H. Rassman Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer)
Date: March 10, 2006	By: Joseph R. Sicree
	Joseph R. Sicree Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

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