TOLL BROTHERS INC - 10-Q 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 APRIL 30, 2004

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 (State or other jurisdiction of incorporation or organization)		23-2416878 (I.R.S. Employer Identification No.)

3103 Philmont Avenue, Huntingdon Valley, Pennsylvania (Address of principal executive offices)		19006 (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 an accelerated filer (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:

Common Stock, $.01 par value: 74,322,980 shares at June 2, 2004.

TOLL BROTHERS, INC. AND SUBSIDIARIES
INDEX

				Page No.

Statement on Forward-Looking Information				1

PART I.		Financial Information

		ITEM 1.	Financial Statements

			Condensed Consolidated Balance Sheets at April 30, 2004 (Unaudited) and October 31, 2003	2

			Condensed Consolidated Statements of Income (Unaudited) For the Six Months and Three Months Ended April 30, 2004 and 2003	3

			Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended April 30, 2004 and 2003	4

			Notes to Condensed Consolidated Financial Statements (Unaudited)	5

		ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

		ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	23

		ITEM 4.	Controls and Procedures	24

PART II.	Other Information

	Item 1. Legal Proceedings			25

	Item 2. Changes in Securities and Use of Proceeds			25

	Item 3. Defaults upon Senior Securities			25

	Item 4. Submission of Matters to a Vote of Security Holders			25

	Item 5. Other Information			26

	Item 6. Exhibits and Reports on Form 8-K			26

SIGNATURES				27

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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, anticipated income to be realized from our investments in joint ventures and the Toll Brothers Realty Trust Group, interest expense, growth and expansion, ability to acquire land, ability to sell homes and properties, ability to deliver homes from backlog, ability to gain approvals and to open new communities, ability to secure materials and subcontractors, average delivered prices of homes, 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,” “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 and political conditions, the consequences of any future terrorist attacks such as those that occurred on September 11, 2001, 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, fluctuations in capital and securities markets, 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 under the caption “Factors That May Affect Our Future Results” in Item 1 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2003. 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.

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

	April 30,			October 31,
	2004			2003

	(Unaudited)
ASSETS
Cash and cash equivalents	$	287,505		$	425,251
Inventory		3,578,025			3,080,349
Property, construction and office equipment, net		46,035			43,711
Receivables, prepaid expenses and other assets		132,131			113,633
Mortgage loans receivable		78,044			57,500
Customer deposits held in escrow		49,320			31,547
Investments in and advances to unconsolidated entities		68,486			35,400

	$	4,239,546		$	3,787,391

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Loans payable	$	294,326		$	281,697
Senior notes		845,387			546,669
Senior subordinated notes		450,000			620,000
Mortgage company warehouse loan		69,294			49,939
Customer deposits		253,215			176,710
Accounts payable		175,167			151,730
Accrued expenses		376,094			346,944
Income taxes payable		142,495			137,074

Total liabilities		2,605,978			2,310,763

Stockholders’ equity:
Preferred stock, none issued
Common stock, 77,002 shares issued at April 30, 2004 and October 31, 2003		770			770
Additional paid-in capital		204,227			190,596
Retained earnings		1,484,141			1,361,619
Treasury stock, at cost – 2,431 shares and 3,680 shares at April 30, 2004
and October 31, 2003, respectively		(55,570	)		(76,357	)

Total stockholders’ equity		1,633,568			1,476,628

	$	4,239,546		$	3,787,391

See accompanying notes

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

	Six months ended April 30,				Three months ended April 30,


	2004		2003		2004		2003

Revenues:
Home sales	$	1,403,886	$	1,158,863	$	814,309	$	600,977
Land sales		7,998		13,387		2,011		3,953
Equity earnings (loss) in unconsolidated entities		1,394		145		729		(108	)
Interest and other		4,119		5,797		2,436		3,110

		1,417,397		1,178,192		819,485		607,932

Costs and expenses:
Home sales		1,007,051		842,406		584,623		437,234
Land sales		6,806		10,717		1,503		3,103
Selling, general and administrative		166,547		133,138		89,894		67,515
Interest		35,754		32,505		21,196		16,464
Expenses related to early retirement of debt		7,748		3,890		7,748		—

		1,223,906		1,022,656		704,964		524,316

Income before income taxes		193,491		155,536		114,521		83,616
Income taxes		70,969		57,257		42,083		30,751

Net income	$	122,522	$	98,279	$	72,438	$	52,865

Earnings per share:
Basic	$	1.65	$	1.40	$	0.97	$	0.76

Diluted	$	1.51	$	1.33	$	0.89	$	0.72

Weighted average number of shares:
Basic		74,123		70,133		74,406		69,859
Diluted		81,123		73,955		81,426		73,601

See accompanying notes

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

	Six months ended April 30,


	2004			2003

Cash flow from operating activities:
Net income	$	122,522		$	98,279
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		7,336			5,928
Equity earnings in unconsolidated entities		(1,394	)		(145	)
Deferred tax provision		3,600			2,035
Provision for inventory write-offs		1,225			2,330
Write-off of unamortized debt discount and financing costs		841			973
Changes in operating assets and liabilities:
Increase in inventory		(476,866	)		(165,752	)
Origination of mortgage loans		(313,592	)		(291,613	)
Sale of mortgage loans		293,049			286,098
(Increase) decrease in receivables, prepaid expenses and other assets		(37,418	)		1,154
Increase in customer deposits		76,505			16,094
Increase in accounts payable and accrued expenses		74,176			13,614
Increase (decrease) in current income taxes payable		12,793			(10,697	)

Net cash used in operating activities		(237,223	)		(41,702	)

Cash flow from investing activities:
Purchase of property and equipment, net		(8,067	)		(7,061	)
Investments in and advances to unconsolidated entities		(30,359	)		(7,346	)
Distributions from unconsolidated entities		2,450			1,050

Net cash used in investing activities		(35,976	)		(13,357	)

Cash flow from financing activities:
Proceeds from loans payable		428,608			510,975
Principal payments of loans payable		(422,444	)		(520,980	)
Net proceeds from issuance of public debt		297,432			297,885
Redemption of senior subordinated notes		(170,000	)		(100,000	)
Proceeds from stock based benefit plans		10,820			1,509
Purchase of treasury stock		(8,963	)		(25,347	)

Net cash provided by financing activities		135,453			164,042

Net (decrease) increase in cash and cash equivalents		(137,746	)		108,983
Cash and cash equivalents, beginning of period		425,251			102,337

Cash and cash equivalents, end of period	$	287,505		$	211,320

See accompanying notes

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

1.	Basis of Presentation

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, 2003 balance sheet amounts and disclosures included herein have been derived from our October 31, 2003 audited financial statements. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements, we suggest that they be read in conjunction with the financial statements and notes thereto included in our October 31, 2003 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 April 30, 2004, the results of our operations for the six months and three months ended April 30, 2004 and 2003 and our cash flows for the six months ended April 30, 2004 and 2003. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

In January 2003, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” A Variable Interest Entity (“VIE”) is an entity with insufficient equity investment or in which the equity investors lack some of the characteristics of a controlling financial interest. Pursuant to FIN 46, an enterprise that absorbs a majority of the expected losses of the VIE must consolidate the VIE. The adoption of FIN 46 for VIEs did not have a material effect on our financial position and results of operations.

In March 2004, the SEC released SEC Accounting Bulletin (“SAB”) No. 105, Application of Accounting Principles to Loan Commitments. SAB No. 105 provides the SEC staff position regarding the application of accounting principles generally accepted in the United States to loan commitments that relate to the origination of mortgage loans that will be held for resale. SAB No. 105 contains specific guidance on the inputs to a valuation-recognition model to measure loan commitments accounted for at fair value. Current accounting guidance requires the commitment to be recognized on the balance sheet at fair value from its inception through its expiration or funding. SAB No. 105 requires that fair-value measurement include only the differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan serving. In addition, SAB No. 105 requires the disclosure of loan commitments and any associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The adoption of SAB No. 105 did not have a material impact on our results of operations, financial condition, or cash flows.

2.	Inventory

Inventory consisted of the following (amounts in thousands):

	April 30, 2004		October 31, 2003

Land and land development costs	$	950,757	$	1,115,805
Construction in progress		2,203,424		1,609,314
Sample homes and sales offices		199,895		188,592
Land deposits and costs of future development		211,675		155,649
Other		12,274		10,989

	$	3,578,025	$	3,080,349

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.

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We capitalize certain interest costs to inventory during the development and construction period. Capitalized interest is charged to interest expense when the related inventory is delivered. Interest incurred, capitalized and expensed for the six-month and three-month periods ended April 30, 2004 and 2003 is summarized as follows (amounts in thousands):

	Six months ended						Three months ended
	April 30,						April 30,

	2004			2003			2004			2003

Interest capitalized, beginning of period	$	154,314		$	123,637		$	167,828		$	133,314
Interest incurred		56,505			51,031			28,265			25,249
Interest expensed		(35,754	)		(32,505	)		(21,196	)		(16,464	)
Write-off to cost and expenses		(649	)		(91	)		(481	)		(27	)

Interest capitalized, end of period	$	174,416		$	142,072		$	174,416		$	142,072


3.	Senior Notes and Senior Subordinated Notes

In March 2004, Toll Brothers Finance Corp., one of our wholly-owned subsidiaries, sold $300 million of 4.95% Senior Notes due 2014. The obligations of Toll Brothers Finance Corp. to pay principal, premiums, if any, and interest is guaranteed jointly and severally on a senior basis by us and substantially all of our home building subsidiaries. The guarantees are full and unconditional. Our non-homebuilding subsidiaries did not guarantee the debt. We have filed a registration statement which will allow the holders of the senior notes to exchange the notes for publicly registered notes. We used a portion of the proceeds from the senior note offering to redeem all of our outstanding $170 million 8 1/8% Senior Subordinated Notes due 2009 at 104.0625 % of principal amount. The remainder of the proceeds was used for general corporate purposes. The redemption resulted in a pre-tax charge in our quarter ended April 30, 2004 of $7.7 million which represents the call premium and the write-off of the unamortized issuance costs.

4.	Earnings per Share Information

Information pertaining to the calculation of earnings per share for the six-month and three-month periods ended April 30, 2004 and 2003 are as follows (amounts in thousands):

	Six months ended				Three months ended
	April 30,				April 30,

	2004		2003		2004		2003

Basic weighted average shares		74,123		70,133		74,406		69,859
Common stock equivalents		7,000		3,822		7,020		3,742

Diluted weighted average shares		81,123		73,955		81,426		73,601


5.	Stock Repurchase Program

In March 2003, our Board of Directors authorized the repurchase of up to 10 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. During the six-month period ended April 30, 2004, we repurchased approximately .2 million shares. At April 30, 2004, we had approximately 9.6 million shares remaining under the repurchase authorization.

6.	Warranty Costs

We accrue 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 six-month and three-month periods ended April 30, 2004 and 2003 are as follows (amounts in thousands):

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	Six months ended						Three months ended
	April 30,						April 30,

	2004			2003			2004			2003

Balance, beginning of period	$	33,752		$	29,198		$	34,027		$	29,906
Additions		9,920			8,388			6,035			4,042
Charges incurred		(7,447	)		(6,772	)		(3,837	)		(3,134	)

Balance, end of period	$	36,225		$	30,814		$	36,225		$	30,814


7.	Stock Based Benefit Plans

SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, requires the disclosure of the estimated value of employee option grants and their impact on net income using option pricing models that are designed to estimate the value of options that, unlike employee stock options, can be traded at any time and are transferable. In addition to restrictions on trading, employee stock options may include other restrictions such as vesting periods and periods of time when they cannot be exercised. Further, such models require the input of highly subjective assumptions, including the expected volatility of the stock price. Therefore, in management’s opinion, the existing models do not provide a reliable single measure of the value of employee stock options.

For the purposes of providing the pro forma disclosures, the fair value of options granted was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in each of the six-month and three-month periods ended April 30, 2004 and 2003.

	2004		2003

Risk-free interest rate		3.73%		3.53%
Expected life (years)		6.99		7.10
Volatility		42.97%		43.37%
Dividends		None		None

Net income and net income per share as reported in these condensed consolidated financial statements and on a pro forma basis, as if the fair-value-based method described in SFAS No. 123 had been adopted, for the six-month and three-month periods ended April 30, 2004 and 2003 were as follows (amounts in thousands, except per share amounts):

		Six months ended April 30,				Three months ended April 30,

		2004		2003		2004		2003

Net income	As reported	$	122,522	$	98,279	$	72,438	$	52,865
	Pro forma	$	114,322	$	90,994	$	67,932	$	49,177
Basic net income per share	As reported	$	1.65	$	1.40	$	0.97	$	0.76
	Pro forma	$	1.54	$	1.30	$	0.91	$	0.70
Diluted net income per share	As reported	$	1.51	$	1.33	$	0.89	$	0.72
	Pro forma	$	1.41	$	1.23	$	0.83	$	0.67
Weighted-average grant date fair value per share of options granted		$	19.47	$	10.24	$	19.47	$	10.24


8.	Commitments and Contingencies

At April 30, 2004, we had agreements to purchase land for future development with an aggregate purchase price of approximately $1.96 billion, of which $116.5 million had been paid or deposited. Purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers.

At April 30, 2004, we had outstanding surety bonds amounting to approximately $678.0 million related primarily to our obligations to various governmental entities to construct improvements in our various communities. We estimate that approximately $289.8 million of work remains to be performed on these improvements. We have an additional $68.6 million of surety bonds outstanding which guarantee other of our obligations. We do not believe that any outstanding bonds will likely be drawn upon.

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At April 30, 2004, we had agreements of sale outstanding to deliver 6,225 homes with an aggregate sales value of approximately $3.74 billion.

At April 30, 2004, we were committed to provide approximately $559.3 million of mortgage loans to our home buyers and to others. All loans with committed interest rates are covered by take-out commitments from third-party lenders, which minimizes our interest rate risk. We also arrange a variety of mortgage programs that are offered to our home buyers through outside mortgage lenders.

We have a $575 million unsecured revolving credit facility with 17 banks that extends through March 2006. Interest is payable on borrowings under the facility at 0.90% (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. At April 30, 2004, we had no outstanding borrowings against the facility and approximately $155.2 million of letters of credit outstanding under it. Under the terms of the revolving credit agreement, we are not permitted to allow our maximum leverage ratio (as defined in the agreement) to exceed 2.00 to 1.00 and, at April 30, 2004, we were required to maintain a minimum tangible net worth (as defined in the agreement) of approximately $989 million. At April 30, 2004, our leverage ratio was approximately .76 to 1.00 and our tangible net worth was approximately $1.59 billion. Based upon the minimum tangible net worth requirement of the revolving credit facility, our ability to pay dividends and repurchase our common stock was limited to approximately $597 million at April 30, 2004.

We have an unsecured term loan of $222.5 million from 11 banks at a weighted-average interest rate of 7.43% repayable in July 2005. Under the terms of the term loan agreement, we are not permitted to allow our maximum leverage ratio (as defined in the agreement) to exceed 2.25 to 1.00 and, at April 30, 2004, we were required to maintain a minimum tangible net worth (as defined in the agreement) of approximately $811 million. At April 30, 2004, our leverage ratio was approximately .76 to 1.00 and our tangible net worth was approximately $1.6 billion. Based upon the minimum tangible net worth requirement of the term loan, our ability to pay dividends and repurchase our common stock was limited to approximately $785 million at April 30, 2004.

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

9.	Supplemental Disclosure to Statements of Cash Flows

The following are supplemental disclosures to the statements of cash flows for the six months ended April 30, 2004 and 2003 (amounts in thousands):

	2004		2003

Cash flow information:
Interest paid, net of amount capitalized	$	6,948	$	7,695

Income taxes paid	$	54,584	$	64,368


Non-cash activity:
Cost of inventory acquired through seller financing	$	25,820	$	22,857

Income tax benefit related to exercise of employee stock options	$	10,971	$	312

Stock bonus awards	$	20,288	$	9,643

Contribution to employee retirement plan	$	1,301	$	1,180


10.	Supplemental Guarantor Information

Toll Brothers Finance Corp., a wholly-owned, indirect subsidiary (the “Subsidiary Issuer”), is the issuer of three series of senior notes aggregating $850 million. The obligations of the Subsidiary Issuer to pay principal, premiums, if any, and interest is guaranteed jointly and severally on a senior basis by Toll Brothers, Inc. and substantially all of our wholly-owned homebuilding subsidiaries (the “Guarantor

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Subsidiaries”). The guarantees are full and unconditional. Our non-homebuilding subsidiaries and certain homebuilding subsidiaries (the “Non-Guarantor Subsidiaries”) did 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 three series of senior notes and the lending of the proceeds from the senior notes to subsidiaries of Toll Brothers, Inc. Supplemental consolidating financial information of Toll Brothers, Inc., the Subsidiary Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the eliminations to arrive at Toll Brothers, Inc. on a consolidated basis are as follows:

Condensed Consolidating Balance Sheet at April 30, 2004 ($ in thousands)

	Toll Brothers, Inc.			Subsidiary Issuer		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated

ASSETS
Cash & cash equivalents							277,438			10,067						287,505
Inventory							3,577,597			428						3,578,025
Property, construction & office equipment, net							36,259			9,776						46,035
Receivables, prepaid expenses and other assets					4,955		86,515			58,058			(17,397	)		132,131
Mortgage loans receivable										78,044						78,044
Customer deposits held in escrow							49,320									49,320
Investments in & advances to unconsolidated entities							68,486									68,486
Investments in & advances to consolidated entities		1,777,462			854,584		(1,034,160	)		(4,878	)		(1,593,008	)		—

		1,777,462			859,539		3,061,455			151,495			(1,610,405	)		4,239,546


LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities:
Loans payable							289,866			4,460						294,326
Senior notes					845,387											845,387
Senior subordinated notes							450,000									450,000
Mortgage company warehouse loan										69,294						69,294
Customer deposits							253,215									253,215
Accounts payable							175,159			8						175,167
Accrued expenses					14,152		320,042			59,409			(17,509	)		376,094
Income taxes payable		143,894								(1,399	)					142,495

Total liabilities		143,894			859,539		1,488,282			131,772			(17,509	)		2,605,978

Stockholders’ equity:
Common stock		770								2,003			(2,003	)		770
Additional paid-in capital		204,227					3,420			2,734			(6,154	)		204,227
Retained earnings		1,484,141					1,569,753			14,986			(1,584,739	)		1,484,141
Treasury stock		(55,570	)													(55,570	)

Total equity		1,633,568			—		1,573,173			19,723			(1,592,896	)		1,633,568

		1,777,462			859,539		3,061,455			151,495			(1,610,405	)		4,239,546

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Condensed Consolidating Balance Sheet at October 31, 2003 ($ in thousands)

	Toll Brothers, Inc.			Subsidiary Issuer		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated

ASSETS
Cash & cash equivalents							417,076			8,175						425,251
Inventory							3,080,171			178						3,080,349
Property, construction & office equipment, net							33,582			10,129						43,711
Receivables, prepaid expenses and other assets					3,498		77,643			42,890			(10,398	)		113,633
Mortgage loans receivable										57,500						57,500
Customer deposits held in escrow							31,547									31,547
Investments in & advances to unconsolidated entities							35,400									35,400
Investments in & advances to consolidated entities		1,615,110			555,078		(698,225	)		(2,403	)		(1,469,560	)		—

		1,615,110			558,576		2,977,194			116,469			(1,479,958	)		3,787,391


LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities:
Loans payable							277,087			4,610						281,697
Senior notes					546,669											546,669
Senior subordinated notes							620,000									620,000
Mortgage company warehouse loan										49,939						49,939
Customer deposits							176,710									176,710
Accounts payable							151,722			8						151,730
Accrued expenses					11,907		300,028			45,521			(10,512	)		346,944
Income taxes payable		138,482								(1,408	)					137,074

Total liabilities		138,482			558,576		1,525,547			98,670			(10,512	)		2,310,763

Stockholders’ equity:
Common stock		770								3,003			(3,003	)		770
Additional paid-in capital		190,596					4,420			1,734			(6,154	)		190,596
Retained earnings		1,361,619					1,447,227			13,062			(1,460,289	)		1,361,619
Treasury stock		(76,357	)													(76,357	)

Total equity		1,476,628			—		1,451,647			17,799			(1,469,446	)		1,476,628

		1,615,110			558,576		2,977,194			116,469			(1,479,958	)		3,787,391

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Condensed Consolidating Statement of Income for the Six Months ended April 30, 2004 ($ in thousands)

	Toll Brothers, Inc.		Subsidiary Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated

Revenues:
Home sales						1,403,886							1,403,886
Land sales						7,998							7,998
Equity earnings						1,394							1,394
Earnings from subsidiaries		193,494								(193,494	)		—
Other				20,872		3,502		15,042		(35,297	)		4,119

		193,494		20,872		1,416,780		15,042		(228,791	)		1,417,397

Costs and expenses:
Cost of sales						1,012,757		1,781		(681	)		1,013,857
Selling, general and administrative		3		214		167,069		9,627		(10,366	)		166,547
Interest				20,658		35,712		579		(21,195	)		35,754
Expenses related to early retirement of debt						7,748							7,748

		3		20,872		1,223,286		11,987		(32,242	)		1,223,906

Income before income taxes		193,491		—		193,494		3,055		(196,549	)		193,491
Income taxes		70,969				70,970		1,129		(72,099	)		70,969

Net income		122,522		—		122,524		1,926		(124,450	)		122,522

Condensed Consolidating Statement of Income for the Six Months ended April 30, 2003 ($ in thousands)

	Toll Brothers, Inc.			Subsidiary Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated

Revenues:
Home sales							1,158,863							1,158,863
Land sales							13,387							13,387
Equity earnings							145							145
Earnings from subsidiaries		155,543									(155,543	)		—
Other		(4	)		9,171		5,386		14,139		(22,895	)		5,797

		155,539			9,171		1,177,781		14,139		(178,438	)		1,178,192

Costs and expenses:
Cost of sales							851,784		1,376		(37	)		853,123
Selling, general and administrative		3			34		134,107		8,260		(9,266	)		133,138
Interest					9,137		32,457		707		(9,796	)		32,505
Expenses related to early retirement of debt							3,890							3,890

		3			9,171		1,022,238		10,343		(19,099	)		1,022,656

Income before income taxes		155,536			—		155,543		3,796		(159,339	)		155,536
Income taxes		57,257					57,259		1,403		(58,662	)		57,257

Net income		98,279			—		98,284		2,393		(100,677	)		98,279

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Condensed Consolidating Statement of Income for the Three Months ended April 30, 2004
($ in thousands)

	Toll Brothers, Inc.		Subsidiary Issuer		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated

Revenues:
Home sales						814,309							814,309
Land sales						2,011							2,011
Equity earnings						729							729
Earnings from subsidiaries		114,524								(114,524	)		—
Other				11,025		2,112		8,695		(19,396	)		2,436

		114,524		11,025		819,161		8,695		(133,920	)		819,485

Costs and expenses:
Cost of sales						585,575		932		(381	)		586,126
Selling, general and administrative		3		118		90,138		5,191		(5,556	)		89,894
Interest				10,907		21,176		364		(11,251	)		21,196
Expenses related to early retirement of debt						7,748							7,748

		3		11,025		704,637		6,487		(17,188	)		704,964

Income before income taxes		114,521		—		114,524		2,208		(116,732	)		114,521
Income taxes		42,083				42,084		816		(42,900	)		42,083

Net income		72,438		—		72,440		1,392		(73,832	)		72,438

Condensed Consolidating Statement of Income for the Three Months ended April 30, 2003
($ in thousands)

	Toll Brothers, Inc.			Subsidiary Issuer		Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminations			Consolidated

Revenues:
Home sales							600,977								600,977
Land sales							3,953								3,953
Equity earnings							(108	)							(108	)
Earnings from subsidiaries		83,623										(83,623	)		—
Other		(4	)		5,224		2,925			7,273		(12,308	)		3,110

		83,619			5,224		607,747			7,273		(95,931	)		607,932

Costs and expenses:
Cost of sales							439,811			622		(96	)		440,337
Selling, general and administrative		3			20		67,871			4,368		(4,747	)		67,515
Interest					5,204		16,442			361		(5,543	)		16,464

		3			5,224		524,124			5,351		(10,386	)		524,316

Income before income taxes		83,616			—		83,623			1,922		(85,545	)		83,616
Income taxes		30,751					30,753			711		(31,464	)		30,751

Net income		52,865			—		52,870			1,211		(54,081	)		52,865

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Condensed Consolidating Statement of Cash Flows for the Six Months ended April 30, 2004
($ in thousands)

	Toll Brothers, Inc.			Subsidiary Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated

Cash flows from operating activities
Net income		122,522						122,524			1,926			(124,450	)		122,522
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation & amortization					167			6,311			858						7,336
Equity earnings								(1,394	)								(1,394	)
Deferred tax provision		3,600															3,600
Provision for inventory write-offs								1,225									1,225
Write-off of unamortized debt discount and financing costs								841									841
Changes in operating assets and liabilities:
Increase in inventory								(476,616	)		(250	)					(476,866	)
Origination of mortgage loans											(313,592	)					(313,592	)
Sale of mortgage loans											293,049						293,049
(Increase) decrease in receivables, prepaid expense and other		(162,353	)		(299,844	)		306,027			(12,848	)		131,600			(37,418	)
Increase in customer deposits								76,505									76,505
Increase in accounts payable and accrued expenses		21,590			2,245			43,452			14,039			(7,150	)		74,176
Increase in current taxes payable		12,784									9						12,793

Net cash (used in) provided by operating activities		(1,857	)		(297,432	)		78,875			(16,809	)		—			(237,223	)

Cash flows from investing activities
Purchase of property and equipment, net								(7,563	)		(504	)					(8,067	)
Investments in unconsolidated entities								(30,359	)								(30,359	)
Distributions from unconsolidated entities								2,450									2,450

Net cash used in investing activities		—			—			(35,472	)		(504	)		—			(35,976	)

Cash flows from financing activities
Proceeds from loans payable								160,542			268,066						428,608
Principal payments of loans payable								(173,583	)		(248,861	)					(422,444	)
Net proceeds from public debt					297,432												297,432
Redemption of subordinated debt								(170,000	)								(170,000	)
Proceeds from stock-based benefit plans		10,820															10,820
Purchase of treasury stock		(8,963	)														(8,963	)

Net cash provided by financing activities		1,857			297,432			(183,041	)		19,205			—			135,453
Increase (decrease) in cash & equivalents		—			—			(139,638	)		1,892			—			(137,746	)
Cash & equivalents, beginning of period								417,076			8,175						425,251

Cash & equivalents, end of period		—			—			277,438			10,067			—			287,505

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Condensed Consolidating Statement of Cash Flows for the Six Months ended April 30, 2003
(amounts in thousands $)

	Toll Brothers, Inc.			Subsidiary Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated

Cash flows from operating activities
Net income		98,279						98,284			2,393			(100,677	)		98,279
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Depreciation & amortization					85			5,004			839						5,928
Equity earnings								(145	)								(145	)
Deferred tax provision		3,417									(1,382	)					2,035
Provision for inventory write-offs								2,330									2,330
Write-off of unamortized debt discount and financing costs								973									973
Changes in operating assets and liabilities
(Increase) decrease in inventory								(165,780	)		28						(165,752	)
Origination of mortgage loans											(291,613	)					(291,613	)
Sale of mortgage loans											286,098						286,098
Increase (decrease) in receivables, prepaid expense and other		(78,156	)		(307,023	)		290,693			(5,037	)		100,677			1,154
Increase in customer deposits								16,094									16,094
Increase (decrease) in accounts payable and accrued expenses		10,823			9,053			(14,692	)		8,430						13,614
Decrease in current taxes payable		(10,525	)								(172	)					(10,697	)

Net cash (used in) provided by operating activities		23,838			(297,885	)		232,761			(416	)		—			(41,702	)

Cash flows from investing activities
Purchase of property and equipment, net								(5,725	)		(1,336	)					(7,061	)
Investments in unconsolidated entities								(7,346	)								(7,346	)
Distributions from unconsolidated entities								1,050									1,050

Net cash used in investing activities		—			—			(12,021	)		(1,336	)		—			(13,357	)

Cash flows from financing activities
Proceeds from loans payable								240,670			270,305						510,975
Principal payments of loans payable								(254,254	)		(266,726	)					(520,980	)
Net proceeds from public debt					297,885												297,885
Redemption of subordinated debt								(100,000	)								(100,000	)
Proceeds from stock-based benefit plans		1,509															1,509
Purchase of treasury stock		(25,347	)														(25,347	)

Net cash provided by (used in) financing activities		(23,838	)		297,885			(113,584	)		3,579			—			164,042

Increase in cash & equivalents		—			—			107,156			1,827			—			108,983
Cash & equivalents, beginning of period								99,815			2,522						102,337

Cash & equivalents, end of period		—			—			206,971			4,349			—			211,320

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

OVERVIEW

Home sales revenue of $1.40 billion in the six-month period ended April 30, 2004 represents an increase of 21% over the $1.16 billion recognized in the comparable period of fiscal 2003. Home sales revenue of $814 million in the three-month period ended April 30, 2004 represents an increase of 35% over the $601 million recognized in the comparable period of fiscal 2003. Net income earned of $122.5 million and $72.4 million in the six-month and three-month periods ended April 30, 2004, respectively, represent increases of 25% and 37%, respectively, over net income of $98.3 million and $52.9 million in the comparable periods of fiscal 2003. Contracts signed of $2.51 billion (4,117 homes) for the six months ended April 30, 2004 represents a 66% increase over the $1.51 billion (2,733 homes) of contracts signed in the comparable period of fiscal 2003. Contracts signed of $1.60 billion (2,600 homes) in the three months ended April 30, 2004 represent a 73% increase over the $926.5 million (1,667 homes) of contracts signed in the comparable period of fiscal 2003.

In addition, the $3.74 billion sales value of homes under contract but not yet delivered to home buyers (“backlog”) at April 30, 2004 was 69% higher than our $2.21 billion backlog at April 30, 2003 and 42% higher than our $2.64 billion backlog at October 31, 2003. Since many of these homes will be delivered over the next twelve months, we believe the size of the backlog gives us excellent visibility into our potential home sales revenues during that period.

Based on our strong backlog, the expected increase in the number of our selling communities and the current strength of the luxury new home market, we believe that we are on track to produce revenue and net income growth of 20% or more in both fiscal 2004 and fiscal 2005.

We currently own or control nearly 58,000 home sites in 44 affluent markets, 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 will allow us to continue to grow for a number of years to come. Because of the strong demand for our homes, we have been able to increase the base selling prices in many of our communities during the past several years.

Because of the length of time that it takes to obtain the necessary approvals on a property, complete the land improvements on it, and build and deliver a home after a home buyer signs an agreement of sale, we and other home builders are subject to many risks. We attempt to reduce risks 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 with a buyer; and generally 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 April 30, 2004, we had $287.5 million of cash and cash equivalents and approximately $420 million available under our bank revolving credit facility. During the second quarter of 2004, we issued $300 million of 4.95% senior notes due 2014. We used $170 million of the proceeds from these notes to prepay our 8 1/8% senior subordinated notes due 2009. With these resources, our strong cash flow from operations before inventory growth and our history of success in accessing the public debt markets, we believe we have the resources available to continue to grow in fiscal 2005 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 SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In addition to direct acquisition, land development and

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home construction costs, costs include interest, real estate taxes and direct overhead costs 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.

It takes approximately 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 accounting principles generally accepted in the United States, we are required to 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 No. 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 planned. 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.

Income Recognition

Revenue and cost of sales are recorded at the time each home, or lot, is closed, title and possession are transferred to the buyer and the proceeds are received by us.

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 to 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 change in the estimated cost is allocated to the remaining lots in each of the communities of the master planned community.

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 three joint ventures with independent third parties to develop and sell land that was owned or is currently owned by our venture partners. We recognize our share of earnings from the sale of lots to other builders. We do not recognize earnings from lots we purchase from the joint ventures, but instead reduce our cost basis in these lots by our share of the earnings on the lots.

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We are obligated to purchase 180 lots from one of the joint ventures in which we have an interest (45 of which we have purchased to date), and have the right to purchase an additional 45 lots. We are also obligated to purchase several land parcels, containing approximately 385 lots, from the second venture, of which we purchased 106 lots as of April 30, 2004. The third venture has sold all the land that it owned and is currently in the process of completing the final land improvements on the site, which could take 12 months or more to complete. Two of the joint ventures participate in the profits earned from home sales on lots sold by the ventures above certain agreed upon levels. At April 30, 2004, we had approximately $28.7 million invested in or advanced to the three joint ventures and were committed to contribute additional capital in an aggregate amount of approximately $16.9 million if the joint ventures require it.

In addition, we have a minority interest in a joint venture with unrelated third parties which is building The Sky Club, a 326-unit, 17-story two-tower structure, located in Hoboken, New Jersey. At April 30, 2004, our investment in this joint venture was $4.0 million. We do not have any commitment to contribute additional capital to this joint venture.

In January 2004, we entered into a joint venture, in which we have a 50% interest, with another unrelated third party builder to develop an 832-home luxury condominium community on the Hoboken, New Jersey waterfront. At April 30, 2004, we had investments and advances to the venture of $28.6 million and are committed to make up to $1.9 million of additional investments and advances to it. In addition, we and our joint venture partner each have guaranteed $7.5 million of principal amount of one of the loans obtained by this joint venture.

We also own 50% of a joint venture with an unrelated third party that is currently building and selling an active-adult, age-qualified community. At April 30, 2004, our investment in this joint venture was $1.4 million. We do not have any commitment to contribute additional capital to this joint venture.

To take advantage of commercial real estate opportunities, Toll Brothers Realty Trust Group (the “Trust”) was formed in 1998. The Trust is effectively owned one-third by us, 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 our senior management, and one-third by the Pennsylvania State Employees Retirement System. We provide development, finance and management services to the Trust and receive fees for our services. The Trust currently owns and operates several office buildings and an 806-unit apartment complex which it developed in Virginia, and is currently building a 635-unit apartment complex in New Jersey. At April 30, 2004, our investment in the Trust was $5.8 million. The Trust has a $25 million revolving credit facility that extends through June 2005. As collateral for this facility, we and the other groups of investors each entered into a subscription agreement whereby each group of investors agreed to invest up to an additional $9.3 million if required by the Trust. The subscription agreements expire in August 2005.

Other than the guarantee discussed above, we do not currently guarantee any indebtedness of the joint ventures or the Trust. Our total commitment to these entities is not material to our financial condition. These investments are accounted for using the equity method.

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RESULTS OF OPERATIONS

The following table sets forth, for the six-month and three-month periods ended April 30, 2004 and 2003, a comparison of certain income statement items related to our operations (amounts in millions):

	Six months ended April 30,										Three months ended April 30,

	2004					2003					2004					2003

	$		%			$		%			$		%			$			%

Home sales
Revenue		1,403.9					1,158.9					814.3					601.0
Cost of sales		1,007.1		71.7	%		842.4		72.7	%		584.6		71.8	%		437.2			72.8	%
Land sales
Revenue		8.0					13.4					2.0					4.0
Cost of sales		6.8		85.1	%		10.7		80.1	%		1.5		74.7	%		3.1			78.5	%
Equity earnings in
unconsolidated entities		1.4					0.1					0.7					(0.1	)
Interest and other		4.1					5.8					2.4					3.1
Total revenues		1,417.4					1,178.2					819.5					607.9
Selling, general and
administrative expenses*		166.5		11.8	%		133.1		11.3	%		89.9		11.0	%		67.5			11.1	%
Interest expense*		35.8		2.5	%		32.5		2.8	%		21.2		2.6	%		16.5			2.7	%
Expenses related to early
retirement of debt*		7.7		.5	%		3.9		0.3	%		7.7		.9	%		—
Total costs and expenses*		1,223.9		86.3	%		1,022.7		86.8	%		705.0		86.0	%		524.3			86.2	%
Income before income taxes*		193.5		13.7	%		155.5		13.2	%		114.5		14.0	%		83.6			13.8	%
Income taxes		71.0					57.3					42.1					30.8
Net income*		122.5		8.6	%		98.3		8.3	%		72.4		8.8	%		52.9			8.7	%

*	Percentages are based on total revenues.

HOME SALES

Home sales revenue for the six-month and three-month periods ended April 30, 2004 was higher than those for the comparable period of 2003 by approximately $245 million, or 21%, and $213 million, or 35%, respectively. The increase in the six-month period was attributable to a 2% increase in the average price of the homes delivered and a 19% increase in the number of homes delivered. The increase in the three-month period was attributable to a 3% increase in the average price of the homes delivered and a 32% increase in the number of homes delivered. The increases in the average price of homes delivered in the fiscal 2004 periods were the result of increased base selling prices, offset in part by a shift in the location of homes delivered to less expensive areas and an increase in the number of deliveries of smaller, lower priced attached and age-qualified product. The increases in the number of homes delivered in the fiscal 2004 periods were primarily due to the higher backlog of homes at October 31, 2003 as compared to October 31, 2002 which was primarily the result of a 20% increase in the number of new contracts signed in fiscal 2003 over fiscal 2002.

The value of new sales contracts signed in the six months ended April 30, 2004, was $2.51 billion (4,117 homes), a 66% increase over the $1.51 billion (2,733 homes) value of new sales contracts signed in the comparable period of fiscal 2003. The value of new sales contracts signed in the three months ended April 30, 2004 was $1.60 billion (2,600 homes), a 73% increase over the $926.5 million (1,667 homes) value of new sales contracts signed in the comparable period of fiscal 2003. The increase in the six-month period was attributable to a 10% increase in the average selling price of the homes (due primarily to the location and size of homes sold and increases in base selling prices) and a 51% increase in the number of units sold. The increase in the three-month period was attributable to an 11% increase in the average selling price of the homes (due primarily to the location and size of homes sold and increases in base selling prices) and a 56%

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increase in the number of units sold. The increase in the number of units sold in the six-month and three-month periods was attributable to the continued demand for our product and the increase in the number of communities from which we are selling. We were selling from 205 communities at April 30, 2004 compared to 176 communities at April 30, 2003 and 200 communities at October 31, 2003. We expect to be selling from approximately 220 communities at October 31, 2004.

We believe that the demand for our product is attributable to an increase in the number of affluent households, the maturation of the baby boom generation, a constricted supply of available new home sites, attractive mortgage rates and the belief held by potential customers that the purchase of a home is a stable investment in the recent period of economic uncertainty. At April 30, 2004, we had nearly 58,000 home sites under our control nationwide in markets we consider to be affluent.

At April 30, 2004, our backlog of homes under contract was $3.74 billion (6,225 homes), 69% higher than the $2.21 billion (3,937 homes) backlog at April 30, 2003. The increase in backlog at April 30, 2004 compared to the backlog at April 30, 2003 is primarily attributable to a higher backlog at October 31, 2003 as compared to the backlog at October 31, 2002 and the increase in the value and number of new contracts signed in the first six months of fiscal 2004 as compared to the first six months of fiscal 2003, offset, in part, by an increase in the number of homes delivered in the first six months of fiscal 2004 compared to the first six months of fiscal 2003. Based on the size of our current backlog, the expected continuation of 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 produce revenue and net income growth of 20% or more in both fiscal 2004 and 2005.

For the full 2004 fiscal year, we expect that we will deliver between 6,050 and 6,250 homes and that the average delivered price of the homes will be between $555,000 and $565,000.

Home costs as a percentage of home sales decreased in both the six-month period and three-month period ended April 30, 2004 as compared to the comparable periods of fiscal 2003. The decreases were primarily the result of selling prices increasing faster than costs, and lower inventory write-offs. We incurred $1.2 million in write-offs in the six months ended April 30, 2004 as compared to $2.3 million in the comparable period of fiscal 2003. For the three months ended April 30, 2004, we incurred $.3 million in write-offs as compared to $2.1 million in the comparable period of fiscal 2003.

For the full 2004 fiscal year, we expect that home costs as a percentage of housing revenues will be between 50 and 60 basis points lower than in fiscal 2003.

LAND SALES

We are developing several communities in which we sell a portion of the land to other builders. The amount of land sales will vary from quarter to quarter depending upon the scheduled timing of the delivery of the land parcels. Land sales were $8.0 million and $2.0 million for the six months and three months ended April 30, 2004, respectively. For the six months and three months ended April 30, 2003, land sales were $13.4 million and $4.0 million, respectively.

For the full 2004 fiscal year, land sales are expected to be approximately $15 million compared to $27.4 million in fiscal 2003. We expect that cost of land as a percentage of land sales revenue will be approximately 85% in fiscal 2004 compared to a 65% cost of land in fiscal 2003.

EQUITY EARNINGS (LOSS) IN UNCONSOLIDATED ENTITIES

We are a participant in several joint ventures and in Toll Brothers Realty Trust Group. We recognize our proportionate share of the earnings from these entities. (See “Off-Balance Sheet Arrangements” for a narrative of our investments in and commitments to these entities.) Earnings from unconsolidated entities will vary significantly from quarter to quarter. Earnings from unconsolidated entities for the six-month and three-month periods ended April 30, 2004 were $1.4 million and $.7 million, respectively compared to $.1 million for the six-month period ended April 30, 2003 and a loss of $.1 million for the three-month period ended April 30, 2003.

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For fiscal 2004, we expect to realize approximately $12 million of income from our investments in the joint ventures and the Trust compared to $1.0 million in fiscal 2003.

INTEREST AND OTHER INCOME

For the six months ended April 30, 2004, interest and other income decreased $1.7 million, as compared to the comparable period of fiscal 2003. This decrease was primarily the result of lower income realized from our ancillary businesses and retained customer deposits, offset, in part, by increases in interest income and management and construction fee income.

For the three months ended April 30, 2004, interest and other income decreased $.7 million, as compared to the comparable period of fiscal 2003. This decrease was primarily the result of decreases in income realized from our ancillary businesses, interest income and retained customer deposits, offset, in part, by higher construction fee income.

For the full 2004 fiscal year, we expect interest and other income to be approximately $13 million compared to $15.8 million in fiscal 2003.

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

In the six-month and three-month periods ended April 30, 2004, SG&A spending increased by approximately $33 million and $22 million, or 25% and 33%, respectively, as compared to the comparable periods of fiscal 2003. This increased spending was principally due to higher sales commissions and higher costs incurred to operate the greater number of selling communities that we had during the fiscal 2004 periods as compared to the comparable periods of fiscal 2003. In addition, in anticipation of the significant growth that is expected in fiscal 2005 and beyond,we have increased the number of personnel to manage this growth.

For the full 2004 fiscal year, we expect that SG&A as a percentage of total revenues will be between 30 and 50 basis points higher than fiscal 2003.

INTEREST EXPENSE

We determine interest expense on a specific lot-by-lot basis for our 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 as a percentage of revenues was lower for the six-month and three-month periods ended April 30, 2004 as compared to the comparable periods of fiscal 2003. For the full 2004 fiscal year, we expect interest expense as a percentage of total revenues to be slightly lower than the fiscal 2003 percentage.

EXPENSES RELATED TO THE EARLY RETIREMENT OF DEBT

We recognized a pre-tax charge of $7.7 million in the quarter ended April 30, 2004 representing the premium paid on redemption of our 8 1/8% Senior Subordinated Notes due 2009 and the write-off of unamortized bond issuance costs related to those notes. No similar charge was incurred in the comparable quarter of fiscal 2003.

We recognized a pretax charge of $3.9 million in the quarter ended January 31, 2003 representing the premium paid on redemption of our 8 3/4% Senior Subordinated Notes due 2006 and the write-off of unamortized bond issuance costs related to those notes.

INCOME BEFORE INCOME TAXES

Income before taxes increased in the six-month and three-month periods ended April 30, 2004 by 24% and 37%, respectively, as compared to the comparable periods of fiscal 2003.

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INCOME TAXES

Income taxes were provided at an effective rate of 36.7% for each of the six-month and three-month periods ended April 30, 2004. Income taxes were provided at an effective rate of 36.8% for each of the six-month and three- month periods ended April 30, 2003, respectively. The difference in rate in the six-month and three-month periods of fiscal 2004 as compared to the comparable periods of fiscal 2003 was due primarily to higher tax-free income in the fiscal 2004 periods as compared to the fiscal 2003 periods.

CAPITAL RESOURCES AND LIQUIDITY

Funding for our operations has been provided principally by cash flow from operating activities, unsecured bank borrowings and the public debt and equity markets.

In general, cash flow from operations 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 immediately buy lots to replace the ones delivered. Accordingly, we believe that cash flow from operating activities before inventory additions is currently a better gauge of liquidity.

Cash flow from operating activities, before inventory additions, has improved as operating results have improved. One of the main factors that determine cash flow from operating activities, before inventory additions, is the level of revenues from the delivery of homes and land sales. We anticipate that cash flow from operating activities, before inventory additions, will continue to be strong in fiscal 2004 due to the expected increase in home deliveries in fiscal 2004 as compared to fiscal 2003. 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 April 30, 2004, we had commitments to acquire land of approximately $1.96 billion, of which approximately $116.5 million had been paid or deposited. We have used our cash flow from operating activities, before inventory additions, 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; repurchase our stock; and repay debt.

We generally do not begin construction of a home until we have a signed contract with the home buyer. Because of the significant amount of time between the time a home buyer enters into a contract to purchase a home and the time that the home is built and delivered, we believe we can estimate with reasonable accuracy the number of homes we will deliver in the next six to nine 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 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 March 2004, Toll Brothers Finance Corp., one of our indirect wholly-owned subsidiaries, sold $300 million of 4.95% Senior Notes due 2014 in a private placement. The obligations of Toll Brothers Finance Corp. to pay principal, premiums, if any, and interest are guaranteed jointly and severally on a senior basis, by us and substantially all of our home building subsidiaries. The guarantees are full and unconditional. Our non-homebuilding subsidiaries did not guarantee the debt. We have filed a registration statement enabling the holders of the senior notes to exchange the notes for publicly registered notes. We used a portion of the proceeds from the senior notes to redeem all of our outstanding $170 million 8 1/8% Senior Subordinated Notes due 2009 at 104.0625% of principal amount. The redemption resulted in a pre-tax charge in our quarter ended April 30, 2004 of approximately $7.7 million which represented the call premium and the write-off of the unamortized issuance costs.

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

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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. Since the sales prices of homes are fixed at the time a buyer enters into a contract to acquire a home and 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 costs, as well as in 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.

HOUSING DATA

(For the six months and three months ended April 30, 2004 and 2003)

Closings	Six months ended April 30,

	2004				2003

Region	Units		$000		Units		$000

Northeast (CT,MA,NH,NJ,NY,RI)		399		229.4		332		195.2
Mid-Atlantic (DE,MD,PA,VA)		939		475.5		768		371.8
Midwest (IL,MI,OH)		171		99.6		166		86.3
Southeast (FL,NC,SC,TN)		313		145.1		345		149.9
Southwest (AZ,CO,NV,TX)		339		189.2		300		153.8
West (CA)		387		265.1		234		201.9

		2,548		1,403.9		2,145		1,158.9

New Contracts (1)	Six months ended April 30,

	2004				2003

Region	Units		$000		Units		$000

Northeast (CT,MA,NH,NJ,NY,RI)		504		300.3		457		265.0
Mid-Atlantic (DE,MD,PA,VA)		1,438		799.6		1,083		534.3
Midwest (IL,MI,OH)		317		187.2		220		116.4
Southeast (FL,NC,SC,TN)		442		216.8		274		139.5
Southwest (AZ,CO,NV,TX)		658		391.8		382		221.7
West (CA)		758		610.3		317		235.8

		4,117		2,506.0		2,733		1,512.7

Backlog (2)	At April 30, 2004				At April 30, 2003

Region	Units		$000		Units		$000

Northeast (CT,MA,NH,NJ,NY,RI)		1,037		590.4		785		454.5
Mid-Atlantic (DE,MD,PA,VA)		2,173		1,161.2		1,449		709.9
Midwest (IL,MI,OH)		444		252.2		327		177.5
Southeast (FL,NC,SC,TN)		540		289.9		313		194.1
Southwest (AZ,CO,NV,TX)		1,028		599.5		618		336.5
West (CA)		1,003		842.2		445		342.3

		6,225		3,735.4		3,937		2,214.8

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HOUSING DATA (continued)

Closings	Three months ended April 30,

	2004				2003

Region	Units		$000		Units		$000

Northeast (CT,MA,NH,NJ,NY,RI)		216		124.8		164		96.0
Mid-Atlantic (DE,MD,PA,VA)		534		274.1		389		189.3
Midwest (IL,MI,OH)		99		58.6		79		42.8
Southeast (FL,NC,SC,TN)		192		91.5		182		76.6
Southwest (AZ,CO,NV,TX)		190		107.4		170		86.4
West (CA)		232		157.9		125		109.9

		1,463		814.3		1,109		601.0

New Contracts (1)	Three months ended April 30,

	2004				2003

Region	Units		$000		Units		$000

Northeast (CT,MA,NH,NJ,NY,RI)		282		162.5		316		176.1
Mid-Atlantic (DE,MD,PA,VA)		911		515.8		648		314.9
Midwest (IL,MI,OH)		192		113.9		126		66.6
Southeast (FL,NC,SC,TN)		268		131.3		159		83.8
Southwest (AZ,CO,NV,TX)		425		248.3		204		125.1
West (CA)		522		429.8		214		160.0

		2,600		1,601.6		1,667		926.5

(1)

Contracts for the six months ended April 30, 2004 and 2003 include $3.2 million (10 homes) and $5.5 million (18 homes), respectively, from an unconsolidated 50% owned joint venture. Contracts for the three months ended April 30, 2004 and 2003 include $1.6 million (5 homes) and $2.4 million (8 homes), respectively, from this joint venture.


(2)	Backlog at April 30, 2004 and 2003 includes $4.5 million (14 homes) and $7.7 million (25 homes), respectively, from the joint venture described in note (1) above.

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 such debt until we are required or elect to refinance such debt.

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The table below sets forth, at April 30, 2004, 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(1)(2)

				Weighted					Weighted
				Average					Average
Fiscal Year of				Interest					Interest
Expected Maturity	Amount			Rate			Amount		Rate

2004		$38,960			5.38	%		$69,294		2.69	%
2005		239,589			7.28	%		150		1.15	%
2006		5,979			6.79	%		150		1.15	%
2007		2,895			5.82	%		150		1.15	%
2008		1,143			8.66	%		150		1.15	%
Thereafter		1,301,300			6.71	%		3,860		1.15	%
Discount		(4,613	)

Total		$1,585,253			6.77	%		$73,754		2.59	%


Fair value at
April 30, 2004		$1,643,613						$73,754

(1)

At April 30, 2004, we had a $575 million unsecured revolving credit facility with 17 banks which extends to March 2006. At April 30, 2004, we had no borrowings and approximately $155.2 million of letters of credit outstanding under the facility. Interest is currently payable on borrowings under this facility at .90% (this rate will vary based upon our corporate 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 $100 million line of credit with three banks to fund mortgage originations. The line is due within 90 days of demand by the banks and bears interest at the bank’s overnight rate plus an agreed upon margin. At April 30, 2004, the subsidiary had $69.3 million outstanding under the line at an average interest rate of 2.69%. Borrowing under this line is included in the 2004 fiscal year maturities.

Based upon the amount of variable rate debt outstanding at April 30, 2004 and holding the variable rate debt balance constant, each one percentage point increase in interest rates would increase our interest costs by approximately $.7 million per year.

ITEM 4. CONTROLS AND PROCEDURES

Management, including our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) (the “Evaluation Date”) and, based on that evaluation, concluded that, as of the Evaluation Date, we had sufficient controls and procedures for recording, processing, summarizing and reporting information that is required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC’s rules and forms.

There has not been any change in our internal control over financial reporting during our quarter ended April 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the three months ended April 30, 2004, we repurchased the following shares under our repurchase program (amounts in thousands, except per share amounts):

	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program (1)		Maximum Number of Shares That May Yet be Purchased Under the Plan or Program (1)






Period

February 1, 2004 to
February 29, 2004		1		40.36		1		9,580
March 1, 2004 to
March 31, 2004		1		45.28		1		9,579
April 1, 2004 to
April 30, 2004		1		40.57		1		9,578

		3		41.74		3

(1)

In March 2003, our Board of Directors authorized the repurchase of up to 10 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.

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 April 30, 2004, we received 2,098 shares with an average fair market value per share of $44.23 for the exercise of stock options.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

Our 2004 Annual Meeting of Stockholders was held on March 18, 2004.

The following proposals were submitted to and approved by security holders at the Annual Meeting. There were 73,533,213 shares of our common stock eligible to vote at the 2004 Annual Meeting.

(1)	The election of four directors to hold office until the 2007 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified.

		Nominee	For	Withheld Authority

		Zvi Barzilay	68,581,276	1,427,844
		Edward G. Boehne	69,339,648	669,472
		Richard J. Braemer	68,594,195	1,414,925
		Carl B. Marbach	69,128,687	880,433

(2)	The approval of the re-appointment of Ernst & Young LLP as our independent auditors for the 2004 fiscal year.

		For	Against	Abstain

		69,589,580	398,721	20,819

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ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


	(a)	Exhibits


	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.


	(b)	Reports on Form 8-K

During the quarter ended April 30, 2004, we furnished or filed the following Current Reports on Form 8-K:

(1)

On February 5, 2004, we furnished a Current Report on Form 8-K for the purpose of filing a press release dated February 5, 2004 announcing preliminary information related to our revenue and contracts signed for our three-month period ended January 31, 2004 and the value of our backlog as of January 31, 2004.


	(2)	On February 26, 2004, we furnished a Current Report on Form 8-K for the purpose of filing a press release dated February 26, 2004 announcing our financial results for the quarter ended January 31, 2004.


	(3)	On February 26, 2004, we furnished a Current Report on Form 8-K for the purpose of filing information related to financial guidance for our fiscal 2004 full year and quarterly periods.


	(4)	On March 16, 2004, we filed a Current Report on Form 8-K for the purpose of filing a press release dated March 16, 2004 announcing the redemption of our 8 1/8% Senior Subordinated Notes due 2009 on April 15, 2004.


	(5)	On April 1, 2004, we filed a Current Report on Form 8-K for the purpose of filing certain exhibits related to the sale of our 4.95% Senior Notes due 2014.

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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: June 9, 2004	By:	Joel H. Rassman

		Joel H. Rassman Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer)

Date: June 9, 2004	By:	Joseph R. Sicree

		Joseph R. Sicree Vice President – Chief Accounting Officer (Principal Accounting Officer)