UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

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.)
250 Gibraltar Road, Horsham, Pennsylvania (Address of principal executive offices)		19044 (Zip 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

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

At August 31, 2011, there were approximately 167,136,000 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 July 31, 2011 (Unaudited) and October 31, 2010			2
Condensed Consolidated Statements of Operations for the Nine Months and Three Months Ended July 31, 2011 and 2010 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2011 and 2010 (Unaudited)			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			49
Item 4. Controls and Procedures			50
PART II. Other Information
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 6. Exhibits			52
SIGNATURES			53
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission ( “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should” and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance. Such statements may include, but are not limited to, information related to: anticipated operating results; home deliveries; financial resources and condition; changes in revenues; changes in profitability; changes in margins; changes in accounting treatment; cost of revenues; selling, general and administrative expenses; interest expense; inventory write-downs; unrecognized tax benefits; anticipated tax refunds; sales paces and prices; effects of home buyer cancellations; growth and expansion; joint ventures in which we are involved; anticipated results from our investments in unconsolidated entities; the ability to acquire land and pursue real estate opportunities; the ability to gain approvals and to open new communities; the ability to sell homes and properties; the ability to deliver homes from backlog; the ability to secure materials and subcontractors; the ability to produce the liquidity and capital necessary to expand and take advantage of opportunities; and legal proceedings and claims.

Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. Consequently, actual results may differ materially from those that might be anticipated from our forward looking statements. Therefore, we caution you not to place undue reliance on our forward-looking statements. The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, among others: local, regional, national, and international economic conditions; demand for homes; changes in consumer confidence; changes in interest rates; unemployment rates; changes in sales conditions, including home prices, in the markets where we build homes; the competitive environment in which we operate; the availability and cost of land for future growth; conditions that could result in inventory write-downs or write-downs associated with investments in unconsolidated entities; the ability to recover our deferred tax assets; the availability of capital; uncertainties in the capital and securities markets; liquidity in the credit markets; changes in tax laws and their interpretation; effects of governmental legislation and regulation; the outcome of various legal proceedings; the availability of adequate insurance at reasonable cost; the impact of construction defect, product liability and home warranty claims, including the adequacy of self-insurance accruals and the applicability and sufficiency of our insurance coverage; the ability of customers to obtain financing for the purchase of homes; the ability of customers to sell their existing homes; the ability of the participants in various joint ventures to honor their commitments; the availability and cost of labor and building and construction materials; the cost of raw materials; construction delays; domestic and international political events; and weather conditions. This statement is provided as permitted by the Private Securities Litigation Reform Act of 1995.

When we use the words “we,” “us,” “our,” and the “Company” in this report, we refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. References herein to “fiscal 2011”, and to “fiscal 2010,” “fiscal 2009,” and “fiscal 2008” refer to our fiscal year ending October 31, 2011, and our fiscal years ended October 31, 2010, October 31, 2009, and October 31, 2008, respectively.

Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

TOLL BROTHERS, INC. AND SUBSIDIARIES

		July 31,				October 31,
		2011				2010
		(unaudited)
ASSETS
Cash and cash equivalents		$	890,067			$	1,039,060
Marketable securities			294,286				197,867
Restricted cash			24,225				60,906
Inventory			3,423,617				3,241,725
Property, construction and office equipment, net			98,902				79,916
Receivables, prepaid expenses and other assets			96,972				97,039
Mortgage loans held for sale			45,320				93,644
Customer deposits held in escrow			16,304				21,366
Investments in and advances to unconsolidated entities and non-performing loan portfolio			186,917				198,442
Income tax refund recoverable							141,590
		$	5,076,610			$	5,171,555
LIABILITIES AND EQUITY
Liabilities
Loans payable		$	104,512			$	94,491
Senior notes			1,500,494				1,544,110
Mortgage company warehouse loan			39,905				72,367
Customer deposits			90,184				77,156
Accounts payable			93,622				91,738
Accrued expenses			524,446				570,321
Income taxes payable			105,831				162,359
Total liabilities			2,458,994				2,612,542
Equity
Stockholders’ equity
Preferred stock, none issued
Common stock, 168,613 and 166,413 shares issued at July 31, 2011 and October 31, 2010, respectively			1,686				1,664
Additional paid-in capital			390,778				360,006
Retained earnings			2,219,208				2,194,456
Treasury stock, at cost — 1 share and 5 shares at July 31, 2011 and October 31, 2010, respectively			(27	)			(96	)
Accumulated other comprehensive loss			(245	)			(577	)
Total stockholders’ equity			2,611,400				2,555,453
Noncontrolling interest			6,216				3,560
Total equity			2,617,616				2,559,013
		$	5,076,610			$	5,171,555

See accompanying notes

TOLL BROTHERS, INC. AND SUBSIDIARIES

		Nine months ended								Three months ended
		July 31,								July 31,
		2011				2010				2011				2010
Revenues		$	1,048,096			$	1,092,171			$	394,305			$	454,202
Cost of revenues			898,266				1,012,575				339,947				389,505
Selling, general and administrative			192,906				193,987				64,605				67,165
Interest expense			1,504				18,588								5,124
			1,092,676				1,225,150				404,552				461,794
Loss from operations			(44,580	)			(132,979	)			(10,247	)			(7,592	)
Other:
(Loss) income from unconsolidated entities and non-performing loan portfolio			(9,817	)			4,817				12,055				3,171
Interest and other			13,168				21,134				5,494				5,902
Expenses related to early retirement of debt			(3,414	)			(692	)			(3,414	)			(658	)
(Loss) income before income tax benefit			(44,643	)			(107,720	)			3,888				823
Income tax benefit			(69,395	)			(53,867	)			(38,220	)			(26,479	)
Net income (loss)		$	24,752			$	(53,853	)		$	42,108			$	27,302
Income (loss) per share:
Basic		$	0.15			$	(0.33	)		$	0.25			$	0.16
Diluted		$	0.15			$	(0.33	)		$	0.25			$	0.16
Weighted average number of shares:
Basic			167,221				165,465				168,075				165,752
Diluted			168,666				165,465				169,338				167,658

See accompanying notes

TOLL BROTHERS, INC. AND SUBSIDIARIES

		Nine months ended July 31,
		2011				2010
Cash flow provided by (used in) operating activities:
Net income (loss)		$	24,752			$	(53,853	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			17,123				13,955
Stock-based compensation			10,419				9,366
Excess tax benefits from stock-based compensation							(3,595	)
Impairments of investments in unconsolidated entities			39,600
Income from unconsolidated entities and non-performing loan portfolio			(29,783	)			(4,817	)
Distributions of earnings from unconsolidated entities			7,417				7,211
Deferred tax benefit			4,329				(14,687	)
Deferred tax valuation allowances			(4,329	)			14,687
Inventory impairments			34,861				88,220
Change in fair value of mortgage loans receivable and derivative instruments			628				(537	)
Expenses related to early retirement of debt			3,414				692
Changes in operating assets and liabilities
Increase in inventory			(208,204	)			(142,109	)
Origination of mortgage loans			(457,383	)			(417,985	)
Sale of mortgage loans			504,724				395,191
Decrease in restricted cash			36,681
(Increase) decrease in receivables, prepaid expenses and other assets			(2,955	)			8,143
Increase (decrease) in customer deposits			18,090				(9,735	)
Decrease in accounts payable and accrued expenses			(38,045	)			(48,404	)
Decrease in income tax refund recoverable			141,590				112,141
Decrease in income taxes payable			(56,461	)			(16,410	)
Net cash provided by (used in) operating activities			46,468				(62,526	)
Cash flow used in investing activities:
Purchase of property and equipment — net			(6,927	)			(1,452	)
Purchase of marketable securities			(420,087	)			(105,450	)
Sale and redemption of marketable securities			318,372
Investment in and advances to unconsolidated entities and non-performing loan portfolio			(42,141	)			(55,628	)
Return of investments in unconsolidated entities			26,285				7,246
Net cash used in investing activities			(124,498	)			(155,284	)
Cash flow used in financing activities:
Proceeds from loans payable			666,659				610,071
Principal payments of loans payable			(715,131	)			(691,776	)
Redemption of senior subordinated notes							(47,872	)
Redemption of senior notes			(48,437	)			(36,064	)
Proceeds from stock-based benefit plans			23,731				7,273
Excess tax benefits from stock-based compensation							3,595
Receipts related to noncontrolling interest			2,678
Purchase of treasury stock			(463	)			(500	)
Net cash used in financing activities			(70,963	)			(155,273	)
Net decrease in cash and cash equivalents			(148,993	)			(373,083	)
Cash and cash equivalents, beginning of period			1,039,060				1,807,718
Cash and cash equivalents, end of period		$	890,067			$	1,434,635

See accompanying notes

TOLL BROTHERS, INC. AND SUBSIDIARIES

1. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Toll Brothers, Inc. (the “Company”), a Delaware corporation, and those majority-owned subsidiaries it controls. 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, 2010 balance sheet amounts and disclosures included herein have been derived from the Company’s October 31, 2010 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 (“GAAP”) for complete financial statements, the Company suggests that they be read in conjunction with the consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended October 31, 2010. 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 the Company’s financial position as of July 31, 2011, the results of its operations for the nine-month and three-month periods ended July 31, 2011 and 2010, and its cash flows for the nine-month periods ended July 31, 2011 and 2010. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

Inventory

Inventory is stated at cost unless an impairment exists, in which case it is written down to fair value in accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment” (“ASC 360”). In addition to direct land acquisition costs, land development costs and home construction costs, costs also include interest, real estate taxes and direct overhead related to development and construction, which are capitalized to inventory during the period beginning with the commencement of development and ending with the completion of construction. For those communities that have been temporarily closed, no additional capitalized interest is allocated to a community’s inventory until it re-opens. While the community remains closed, carrying costs such as real estate taxes are expensed as incurred.

The Company capitalizes certain interest costs to qualified inventory during the development and construction period of its communities in accordance with ASC 835-20, “Capitalization of Interest” (“ASC 835-20”). Capitalized interest is charged to cost of revenues when the related inventory is delivered. Interest incurred on homebuilding indebtedness in excess of qualified inventory, as defined in ASC 835-20, is charged to the statement of operations in the period incurred.

Once a parcel of land has been approved for development and the Company opens one of its typical communities, it may take four to five years to fully develop, sell and deliver all the homes in such community. Longer or shorter time periods are possible depending on the number of home sites in a community and the sales and delivery pace of the homes in a community. The Company’s master planned communities, consisting of several smaller communities, may take up to ten years or more to complete. Because the Company’s inventory is considered a long-lived asset under GAAP, the Company is required, under ASC 360, to regularly review the carrying value of each community and write down the value of those communities for which it believes the values have been impaired.

Current Communities: 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, the asset is reviewed for impairment by comparing the estimated future undiscounted cash flow for the community to its carrying value. If the estimated future undiscounted cash flow is less than the community’s carrying value, the carrying value is written down to its estimated fair value. Estimated fair value is primarily determined by discounting the estimated future cash flow of each community. The impairment is charged to cost of revenues in the period in which the impairment is determined. In estimating the future undiscounted cash flow of a community, the Company uses various estimates such as: (a) the expected sales pace in a community, based upon general economic conditions that will have a short-term or long-term impact on the market in which the community is located and on competition within the market, including the number of home sites available and pricing and incentives being offered in other communities owned by the Company or by other builders; (b) the expected sales prices and sales incentives to be offered in a community; (c) costs expended to date and expected to be incurred in the future, including, but not limited to, land and land development, home construction, interest and overhead costs; (d) alternative product offerings that may be offered in a community that will have an impact on sales pace, sales price, building cost or the number of homes that can be built on a particular site; and (e) alternative uses for the property such as the possibility of a sale of the entire community to another builder or the sale of individual home sites.

Future Communities: The Company evaluates all land held for future communities or future sections of current communities, whether owned or under contract, to determine whether or not it expects to proceed with the development of the land as originally contemplated. This evaluation encompasses the same types of estimates used for current communities described above, as well as an evaluation of the regulatory environment applicable to the land and the estimated probability of obtaining the necessary approvals, the estimated time and cost it will take to obtain the approvals and the possible concessions that will be required to be given in order to obtain them. Concessions may include cash payments to fund improvements to public places such as parks and streets, dedication of a portion of the property for use by the public or as open space or a reduction in the density or size of the homes to be built. Based upon this review, the Company decides (a) as to land under contract to be purchased, whether the contract will likely be terminated or renegotiated, and (b) as to land owned, whether the land will likely be developed as contemplated or in an alternative manner, or should be sold. The Company then further determines whether costs that have been capitalized to the community are recoverable or should be written off. The write-off is charged to cost of revenues in the period in which the need for the write-off is determined.

The estimates used in the determination of the estimated cash flows and fair value of both current and future communities are based on factors known to the Company at the time such estimates are made and its expectations of future operations and economic conditions. Should the estimates or expectations used in determining estimated fair value deteriorate in the future, the Company may be required to recognize additional impairment charges and write-offs related to current and future communities.

Variable Interest Entities: The Company has a significant number of land purchase contracts and several investments in unconsolidated entities which it evaluates in accordance with ASC 810, “Consolidation” (“ASC 810”). The Company analyzes its land purchase contracts and the unconsolidated entities in which it has an investment to determine whether the land sellers and unconsolidated entities are variable interest entities (“VIEs”) and, if so, whether the Company is the primary beneficiary. If the Company is determined to be the primary beneficiary of a VIE, it must consolidate 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. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of or the right to receive benefits from the VIE.

Fair Value Disclosures

The Company uses ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), to measure the fair value of certain assets and liabilities. ASC 820 provides a framework for measuring fair value in accordance with GAAP, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and requires certain disclosures about fair value measurements.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-6, “Improving Disclosure about Fair Value Measurements” (“ASU 2010-6”), which amended ASC 820 to add disclosure requirements regarding recurring and non-recurring fair value measurements. The Company adopted ASU 2010-6 as of February 1, 2010, except for the disclosures about Level 3 fair value disclosures which will be effective for the Company on November 1, 2011. The adoption of ASU 2010-6 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

The fair value hierarchy is summarized below:

		Level 1:		Fair value determined based on quoted prices in active markets for identical assets or liabilities.
		Level 2:		Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
		Level 3:		Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

Recent Accounting Pronouncements

In June 2009, the FASB revised its authoritative guidance in ASC 860, “Transfers and Servicing” (“ASC 860”). The amendment eliminated the concept of a qualifying special-purpose entity, created more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarified other sale-accounting criteria, and changed the initial measurement of a transferor’s interest in transferred financial assets. The amendment was adopted by the Company for its fiscal year beginning November 1, 2010. The adoption has not had a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2009, the FASB revised its authoritative guidance for determining the primary beneficiary of a VIE. In December 2009, the FASB issued Accounting Standards Update No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”), which amended provisions of ASC 810 to reflect the revised guidance for consolidation purposes. The amendments to ASC 810 replace the quantitative-based risk and rewards calculation for determining which reporting entity, if any, has a controlling interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has either the obligation to absorb losses of or the right to receive benefits from the entity. The Company adopted the amended provisions for its fiscal year beginning November 1, 2010. The adoption of the amended provisions of ASC 810 has not had a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” (“ASU 2011-04”) which amends ASC 820 to clarify existing guidance and minimize differences between GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. ASU 2011-04 will be effective for the Company’s fiscal quarter beginning February 1, 2012 and is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Statement of Comprehensive Income” (“ASU 2011-05”), which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The adoption of this guidance, which relates to presentation only, is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows. ASU 2011-05 will be effective for the Company’s fiscal year beginning November 1, 2012.

Reclassification

In order to provide attractive mortgage financing to its home buyers, the Company’s homebuilding operations subsidize the Company’s mortgage subsidiary. In the quarter ended January 31, 2011, the Company determined that the amount of subsidies in fiscal 2010 were in excess of the mortgage company’s costs and reclassified the excess from interest and other income to cost of revenues.

The table below provides information for each fiscal quarter of fiscal 2010 ($ amounts in thousands).

		Cost of revenues												Interest and other income
		As reported				Reclassified				$ change				As reported				Reclassified				$ change
Three months ended:		$				$				(decrease)				$				$				(decrease)
January 31			317,768				317,487				(281	)			8,514				8,233				(281	)
April 30			305,739				305,583				(156	)			7,155				6,999				(156	)
July 31			392,416				389,505				(2,911	)			8,813				5,902				(2,911	)
October 31			367,152				363,983				(3,169	)			10,348				7,179				(3,169	)

The above reclassifications of cost of revenues resulted in a decrease in the Company’s loss from operations.

Certain other prior period amounts have been reclassified to conform to the fiscal 2011 presentation.

2. Inventory

Inventory at July 31, 2011 and October 31, 2010 consisted of the following (amounts in thousands):

		July 31,				October 31,
		2011				2010
Land controlled for future communities		$	43,554			$	31,899
Land owned for future communities			1,031,144				923,972
Operating communities			2,348,919				2,285,854
		$	3,423,617			$	3,241,725

Operating communities include communities offering homes for sale, communities that have sold all available home sites but have not completed delivery of the homes, communities that were previously offering homes for sale but are temporarily closed due to business conditions or non-availability of improved home sites and that are expected to reopen within twelve months of the end of the fiscal period being reported on, and communities preparing to open for sale. Communities that were previously offering homes for sale but are temporarily closed due to business conditions that do not have any remaining backlog and are not expected to reopen within twelve months of the end of the fiscal period being reported on have been classified as land owned for future communities. The carrying value attributable to operating communities includes the cost of homes under construction, land and land development costs, the carrying cost of home sites in current and future phases of these communities and the carrying cost of model homes, less impairment charges recognized against the communities.

Information regarding the classification, number and carrying value of these temporarily closed communities at July 31, 2011 and October 31, 2010 is provided in the table below.

		July 31,				October 31,
		2011				2010
Land owned for future communities:
Number of communities			40				36
Carrying value (in thousands)		$	245,287			$	212,882
Operating communities:
Number of communities			4				13
Carrying value (in thousands)		$	20,958			$	78,100

During the three-month period ended January 31, 2011, the Company reclassified $20.0 million of inventory related to commercial retail space located in one of its high-rise projects to property, construction and office equipment. The $20.0 million was reclassified due to the completion of construction of the facilities and the substantial completion of the high-rise project of which the facilities are a part.

The Company provided for inventory impairment charges and the expensing of costs that it believed not to be recoverable in the nine-month and three-month periods ended July 31, 2011 and 2010 as shown in the table below (amounts in thousands).

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Land controlled for future communities		$	2,486			$	2,250			$	637			$	58
Land owned for future communities			16,000				41,600				16,000				5,850
Operating communities			16,375				44,370				175				6,600
		$	34,861			$	88,220			$	16,812			$	12,508

The Company reviews the profitability of each of its operating communities during each fiscal quarter. For those communities operating below certain profitability thresholds, or where other negative factors, such as a decline in market or economic conditions in the market in which the community is located, high cancellation rates or a significant increase in speculative inventory in the community or in the market in general, exist, and the undiscounted cash flow is less than the carrying value, the Company determines the estimated fair value of those communities and adjusts the carrying value of the communities to their estimated fair values in accordance with ASC 360.

The table below provides, for the periods indicated, the number of operating communities that the Company tested for potential impairment, the number of operating communities for which the Company recognized impairment charges and the amount of impairment charges recognized, and, as of the end of the period indicated, the fair value of those communities, net of impairment charges ($ amounts in thousands).

						Impaired operating communities
										Fair value of
		Number of								communities,
		operating								net of
		communities				Number of				impairment				Impairment
Three months ended:		tested				communities				charges				charges
Fiscal 2011:
January 31			143				6			$	56,105			$	5,475
April 30			142				9			$	40,765				10,725
July 31			129				2			$	867				175
														$	16,375
Fiscal 2010:
January 31			260				14			$	60,519			$	22,750
April 30			161				7			$	53,594				15,020
July 31			155				7			$	21,457				6,600
October 31			144				12			$	39,209				9,120
														$	53,490

At July 31, 2011, the Company evaluated its land purchase contracts to determine if any of the selling entities were VIEs and, if they were, whether the Company was the primary beneficiary of any of them. Under these land purchase contracts, the Company does not possess legal title to the land and its risk is generally limited to deposits paid to the sellers and the creditors of the sellers generally have no recourse against the Company. At July 31, 2011, the Company determined that 38 land purchase contracts, with an aggregate purchase price of $309.6 million, on which it had made aggregate deposits totaling $15.5 million, were VIEs, and that it was not the primary beneficiary of any VIE related to its land purchase contracts.

The Company capitalizes certain interest costs to qualified inventory during the communities’ development and construction periods in accordance with ASC 835-20. Capitalized interest is charged to cost of revenues when the related inventory is delivered. Interest incurred on homebuilding indebtedness in excess of qualified inventory, as defined in ASC 835-20, is charged directly to the statements of operations in the period incurred.

Interest incurred, capitalized and expensed for the nine-month and three-month periods ended July 31, 2011 and 2010 was as follows (amounts in thousands):

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Interest capitalized, beginning of period		$	267,278			$	259,818			$	288,508			$	271,509
Interest incurred			86,820				87,740				28,387				28,879
Interest expensed to cost of revenues			(56,327	)			(55,411	)			(20,946	)			(23,033	)
Interest directly expensed to statement of operations			(1,504	)			(18,588	)							(5,124	)
Write-off against other income			(861	)			(1,786	)			(543	)			(977	)
Interest reclassified to property, construction and office equipment							(519	)
Interest capitalized, end of period		$	295,406			$	271,254			$	295,406			$	271,254

Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. The amounts included in the table directly above reflect the gross amount of capitalized interest without allocation of any impairment charges recognized. The Company estimates that, had inventory impairment charges been allocated on a pro rata basis to the individual components of inventory, capitalized interest at July 31, 2011 and 2010 would have been reduced by approximately $55.3 million and $58.9 million, respectively.

3. Investments in and Advances to Unconsolidated Entities and Non-Performing Loan Portfolio

The Company has investments in and advances to various unconsolidated entities, including Toll Brothers Realty Trust and Toll Brothers Realty Trust II. In fiscal 2010, the Company formed Gibraltar Capital and Asset Management LLC (“Gibraltar”) to invest in distressed real estate opportunities. Through Gibraltar, the Company has invested in a structured asset joint venture and has made an investment in a non-performing loan portfolio.

Development Joint Ventures

The Company has investments in and advances to, a number of joint ventures with unrelated parties to develop land (“Development Joint Ventures”). Some of these Development Joint Ventures develop land for the sole use of the venture participants, including the Company, and others develop land for sale to the joint venture participants and to unrelated builders. The Company recognizes its share of earnings from the sale of home sites by the Development Joint Ventures to other builders. With regard to home sites the Company purchases from the Development Joint Ventures, the Company reduces its cost basis in those home sites by its share of the earnings on the home sites. At July 31, 2011, the Company had approximately $17.0 million, net of impairment charges, invested in or advanced to the Development Joint Ventures. In addition, the Company has a funding commitment of $3.5 million to one Development Joint Venture should an additional investment in that venture be required.

As of July 31, 2011, the Company had recognized cumulative impairment charges in connection with its current Development Joint Ventures of $101.4 million. These impairment charges are attributable to investments in certain Development Joint Ventures where the Company determined there was a loss in value in the investment that was other than temporary. In the nine-month period ended July 31, 2011, the Company recognized impairment charges in connection with one of its Development Joint Ventures of $29.6 million. The Company did not recognize any impairment charges in connection with the Development Joint Ventures in the nine-month period ended July 31, 2010 and the three-month periods ended July 31, 2011 and 2010.

At July 31, 2011, one of the Development Joint Ventures had a loan with a principal balance of $327.9 million subject to litigation discussed below. This loan is non-recourse to the Company; however, the Company executed certain completion guarantees and conditional repayment guarantees against this loan. The obligations under such completion guarantees and conditional repayment guarantees are several and not joint and are limited to the Company’s pro rata share of the loan obligation of this Development Joint Venture.

On June 10, 2011, the Company, together with a majority of the members of one of the Development Joint Ventures, entered into an agreement to resolve disputes regarding a loan made by a syndicate of lenders to the Development Joint Venture. As of July 31, 2011, the principal balance of that loan was $327.9 million. The Company executed certain completion and conditional repayment guaranties in connection with this loan which were limited to the Company’s pro rata share of the loan obligation. In December 2008, the lending syndicate for the Development Joint Venture filed separate lawsuits against the members of the Development Joint Venture and their parent companies, seeking to recover damages under the completion guarantees and damages allegedly caused by the venture’s failure to repay the lenders. In December 2010, three of the lenders in this syndicate filed an involuntary bankruptcy petition against this joint venture entity. In February 2011, the bankruptcy court upheld the involuntary petition and entered an order appointing a bankruptcy trustee. The joint venture appealed the bankruptcy court’s order, but this appeal was denied by the U.S. District Court. The June 10, 2011 agreement, which is subject to bankruptcy court approval, includes a cash settlement to the lenders, the acquisition of land by the Company and the other members of the joint venture which are parties to the agreement, and the resolution of all claims between members of the lending syndicate representing 92.8% of the outstanding amounts due under the loan, the bankruptcy trustee and the members of the joint venture which are parties to the agreement. The bankruptcy order affirming the involuntary petition has been further appealed to the United States Circuit Court, but the appeal is stayed until December 2011, after the date the bankruptcy court is expected to rule on the settlement agreement. This appeal will be rendered moot by the approval of the settlement agreement. The Company believes it had made adequate provision in prior reporting periods, including accruing for its share of the cash payments required under the agreement, any remaining exposure to lenders which are not parties to the agreement and recording impairments to reflect the estimated fair value of land to be acquired. The disposition of the above matter is not expected to have a material adverse effect on the Company’s results of operations and liquidity or on its financial condition.

Planned Community Joint Venture

The Company is a participant in a joint venture with an unrelated party to develop a single master planned community (the “Planned Community Joint Venture”). At July 31, 2011, the Company had an investment of $39.8 million in this Planned Community Joint Venture. At July 31, 2011, each participant had agreed to contribute additional funds up to $8.3 million, if required. If a participant fails to make a required capital contribution, the other participant may make the additional contribution and diminish the non-contributing participant’s ownership interest. At July 31, 2011, this joint venture did not have any indebtedness. The Company recognized an impairment charge in connection with the Planned Community Joint Venture of $10.0 million in the nine-month period ended July 31, 2011. The Company did not recognize any impairment charges in connection with the Planned Community Joint Venture in the nine-month period ended July 31, 2010 and the three-month periods ended July 31, 2011 and 2010.

Condominium Joint Ventures

At July 31, 2011, the Company had an aggregate of $40.5 million of investments in four joint ventures with unrelated parties to develop luxury condominium projects, including for-sale residential units and commercial space (“Condominium Joint Ventures”). At July 31, 2011, the Condominium Joint Ventures had aggregate loan commitments of $69.9 million, against which approximately $65.8 million had been borrowed. Included in the aggregate loan commitments and amount borrowed, was $18.4 million due to the Company.

As of July 31, 2011, the Company had recognized cumulative impairment charges against its investments in the Condominium Joint Ventures and its pro rata share of impairment charges recognized by these Condominium Joint Ventures in the amount of $63.9 million. The Company did not recognize any impairment charges in connection with its Condominium Joint Ventures in the nine-month and three-month periods ended July 31, 2011 and 2010. At July 31, 2011, the Company did not have any commitments to make contributions to any Condominium Joint Venture.

Structured Asset Joint Venture

In July 2010, the Company, through Gibraltar, invested $29.1 million in a joint venture in which it is a 20% participant with two unrelated parties to purchase a 40% interest in an entity that owns and controls a portfolio of loans and real estate (“Structured Asset Joint Venture”). At July 31, 2011, the Company had an investment of $33.9 million in this Structured Asset Joint Venture. At July 31, 2011, the Company did not have any commitments to make additional contributions to the joint venture and has not guaranteed any of the joint venture’s liabilities. If the joint venture needs additional capital and a participant fails to make a requested capital contribution, the other participant may make a contribution in consideration for a preferred return or may make the additional capital contribution and diminish the non-contributing participant’s ownership interest. In the nine-month and three-month periods ended July 31, 2011, the Company recognized $4.7 million and $3.5 million, respectively, of earnings from the Structured Asset Joint Venture.

Loan Participation

In March 2011, the Company, through Gibraltar, acquired a 60% participation in a portfolio of non-performing loans. The portfolio consisted primarily of residential acquisition, development and construction loans secured by properties at various stages of completion. The Company purchased its participation for $42.1 million. At July 31, 2011, the Company’s investment and pro rata share of the portfolio’s earnings amounted to $44.0 million. In the nine-month and three-month periods ended July 31, 2011, the Company recognized $1.2 million and $0.7 million, respectively, of earnings from the portfolio.

Toll Brothers Realty Trust and Trust II

In fiscal 2005, the Company, together with the Pennsylvania State Employees Retirement System (“PASERS”), formed Toll Brothers Realty Trust 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 an affiliate of PASERS. At July 31, 2011, the Company had an investment of $11.1 million in Trust II. Prior to the formation of Trust II, the Company formed Toll Brothers Realty Trust (the “Trust”) in 1998 to take advantage of commercial real estate opportunities. The Trust 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), Douglas C. Yearley, Jr. and former members of the Company’s senior management; and one-third by an affiliate of PASERS (collectively, the “Shareholders”). As of July 31, 2011, the Company had a net investment in the Trust of $0.5 million. The Company provides development, finance and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $1.6 million in each of the nine-month periods ended July 31, 2011 and 2010, and $0.5 million and $0.6 million in the three-month periods ended July 31, 2011 and 2010, 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.

General

At July 31, 2011, the Company had accrued $62.5 million of aggregate exposure with respect to its estimated obligations to unconsolidated entities in which it has an investment. The Company’s investments in these entities are accounted for using the equity method. The Company recognized $39.6 million of impairment charges related to its investments in and advances to unconsolidated entities in the nine-month period ended July 31, 2011. The Company did not recognize any impairment charges related to its investments in and advances to unconsolidated entities in the nine-month period ended July 31, 2010 or in the three-month periods ended July 31, 2011 and 2010. Impairment charges related to these entities are included in “(Loss) income from unconsolidated entities and non-performing loan portfolio” in the Company’s Condensed Consolidated Statements of Operations.

4. Accrued Expenses

Accrued expenses at July 31, 2011 and October 31, 2010 consisted of the following (amounts in thousands):

		July 31,				October 31,
		2011				2010
Land, land development and construction		$	106,174			$	110,301
Compensation and employee benefits			92,546				95,107
Insurance and litigation			131,878				143,421
Commitments to unconsolidated entities			64,532				88,121
Warranty			44,190				45,835
Interest			29,862				26,998
Other			55,264				60,538
		$	524,446			$	570,321

The Company accrues for expected warranty costs at the time each home is closed and title and possession are transferred to the home buyer. Costs are accrued based upon historical experience. Changes in the warranty accrual for the nine-month and three-month periods ended July 31, 2011 and 2010 were as follows (amounts in thousands):

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Balance, beginning of period		$	45,835			$	53,937			$	46,321			$	52,769
Additions — homes closed during the period			6,147				6,758				2,248				2,753
Increase (decrease) in accruals for homes closed in prior periods			18				(2,292	)			(629	)			(2,896	)
Charges incurred			(7,810	)			(8,862	)			(3,750	)			(3,085	)
Balance, end of period		$	44,190			$	49,541			$	44,190			$	49,541

5. Employee Retirement Plans

The Company has two unfunded supplemental retirement plans for certain employees. For the nine-month and three-month periods ended July 31, 2011 and 2010, the Company recognized costs and made payments related to its supplemental retirement plans as follows (amounts in thousands):

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Service cost		$	229			$	182			$	76			$	60
Interest cost			968				1,041				323				347
Amortization of prior service obligation			520				920				173				307
Total costs		$	1,717			$	2,143			$	572			$	714
Benefits paid		$	96			$	96			$	34			$	34

6. Senior Notes and Senior Subordinated Notes

The Company has repurchased, and may from time to time in the future repurchase, its senior notes in the open market or otherwise. In the three-month period ended July 31, 2011, the Company repurchased $45.1 million of its 6.875% Senior Notes due 2012 in the open market at various prices. In the nine-month and three-month periods ended July 31, 2011, the Company expensed $3.4 million related to the premium paid on, and the write-off of unamortized issuance costs of, these Senior Notes.

In the three-month period ended July 31, 2010, the Company repurchased $35.5 million of its 5.95% Senior Notes due 2013 and 4.95% Senior Notes due in 2014 in the open market at various prices. In the nine-month and three-month periods ended July 31, 2010, the Company expensed $0.7 million related to the premium/loss paid on, and other debt redemption costs of, these Senior Notes.

In the three-month period ended January 31, 2010, the Company redeemed the remaining $47.9 million outstanding principal amount of its Toll Corp. 8.25% Senior Subordinated Notes due December 2011 at a cash redemption price of 100.0% of the principal amount plus accrued and unpaid interest on December 1, 2009.

7. Income Taxes

A reconciliation of the Company’s effective tax rate from the federal statutory tax rate for the nine-month and three-month periods ended July 31, 2011 and 2010 is set forth in the tables below (amounts in thousands).

		2011								2010
Nine-month period ended July 31:		$				%*				$				%*
Federal tax benefit at statutory rate			(15,625	)			(35.0	)			(37,701	)			(35.0	)
State taxes, net of federal benefit			(1,451	)			(3.3	)			(3,501	)			(3.3	)
Reversal of tax provisions due to expiration of statutes and settlements			(19,273	)			(43.2	)			(40,460	)			(37.6	)
Reversal of accrual for uncertain tax positions			(30,827	)			(69.0	)
Valuation allowance — recognized			18,791				42.1				52,423				48.7
Valuation allowance — reversed			(23,123	)			(51.8	)			(37,736	)			(35.0	)
Accrued interest on anticipated tax assessments			2,799				6.3				966				0.9
Increase in unrecognized tax benefit											13,000				12.1
Other			(686	)			(1.5	)			(858	)			(0.8	)
Tax benefit			(69,395	)			(155.4	)			(53,867	)			(50.0	)

		2011								2010
Three-month period ended July 31:		$				%*				$				%*
Federal tax provision at statutory rate			1,361				35.0				289				35.0
State taxes, net of federal benefit			126				3.2				(948	)			(114.9	)
Reversal of tax provisions due to expiration of statutes and settlements			(16,933	)			(435.5	)			(40,460	)			(4,904.3	)
Reversal of accrual for uncertain tax positions			(12,873	)			(331.1	)
Valuation allowance — recognized											17,408				2,110.1
Valuation allowance — reversed			(10,846	)			(279.0	)			(13,685	)			(1,658.8	)
Accrued interest on anticipated tax assessments			1,174				30.2				(1,797	)			(217.8	)
Increase in unrecognized tax benefit											13,000				1,575.8
Other			(229	)			(5.9	)			(286	)			(34.7	)
Tax benefit			(38,220	)			(983.0	)			(26,479	)			(3,209.6	)

The Company currently operates in 19 states and is subject to taxation in various state jurisdictions. The Company estimates its state tax liabilities based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction and the Company’s ability to utilize certain tax-saving strategies. Based on the Company’s estimate of the allocation of income or loss, as the case may be, among the various taxing jurisdictions and changes in tax regulations and their impact on the Company’s tax strategies, the Company’s estimated rate for state income taxes is 5.0% for each of fiscal 2011 and fiscal 2010.

The Company recognizes in its tax benefit potential interest and penalties. Information as to the amounts recognized in its tax benefit, before reduction for applicable taxes and reversal of previously accrued interest and penalties, of potential interest and penalties in the nine-month and three-month periods ended July 31, 2011 and 2010, and the amounts accrued for potential interest and penalties at July 31, 2011 and October 31, 2010 is set forth in the table below (amounts in thousands).

Recognized in statements of operations:
Nine-month period ended July 31, 2011		$	2,500
Nine-month period ended July 31, 2010		$	1,500
Three-month period ended July 31, 2011		$	1,806
Three-month period ended July 31, 2010		$	—

Accrued at:
July 31, 2011		$	28,806
October 31, 2010		$	39,209

A reconciliation of the change in the unrecognized tax benefits for the nine-month and three-month periods ended July 31, 2011 and 2010 is set forth in the table below (amounts in thousands).

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Balance, beginning of period		$	160,446			$	171,366			$	141,392			$	177,116
Increase in benefit as a result of tax positions taken in prior years			5,943				4,250				3,443
Increase in benefit as a result of tax positions taken in current year							1,586								86
Decrease in benefit as a result of resolution of uncertain tax positions			(17,954	)			(8,793	)							(8,793	)
Decrease in benefit as a result of lapse of statute of limitation			(8,790	)			(32,053	)			(8,790	)			(32,053	)
Decrease in benefit as a result of completion of tax audits			(35,370	)							(31,770	)
Balance, July 31,		$	104,275			$	136,356			$	104,275			$	136,356

The Company’s unrecognized tax benefits are included in “Income taxes payable” on the Company’s Condensed Consolidated Balance Sheets. If these unrecognized tax benefits reverse in the future, they would have a beneficial impact on the Company’s effective tax rate at that time. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will change. The anticipated changes will be principally due to expiration of tax statutes, settlements with taxing jurisdictions, increases due to new tax positions taken and the accrual of estimated interest and penalties.

The Company is allowed to carry forward tax losses for 20 years and apply such tax losses to future taxable income to realize federal deferred tax assets. As of July 31, 2011, the Company had approximately $10.0 million of tax loss carryforwards, resulting from losses that it recognized on its fiscal 2009 tax return, in excess of the amount it could carry back against its fiscal 2007 federal taxable income. In addition, the Company will be able to reverse its previously recognized valuation allowances during any future period for which it reports book income before income taxes. The Company will continue to review its deferred tax assets in accordance with ASC 740 “Income Taxes”.

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”) was enacted into law. The Act amended Section 172 of the Internal Revenue Code to allow net operating losses realized in a tax year ending after December 31, 2007 and beginning before January 1, 2010 to be carried back for up to five years (such losses were previously limited to a two-year carryback). This change allowed the Company to carry back its fiscal 2010 taxable losses to prior years and to file for a refund of previously paid federal income taxes. The Company received a tax refund in its second quarter of fiscal 2011 of $154.3 million.

At July 31, 2011 and October 31, 2010, the Company had recorded cumulative valuation allowances against its entire net deferred federal tax asset of $359.8 million and $364.2 million, respectively.

For state tax purposes, due to past and projected losses in certain jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company has recognized net cumulative valuation allowances against its state deferred tax assets of $45.0 million as of July 31, 2011 and October 31, 2010. Future valuation allowances in these jurisdictions may continue to be recognized if the Company believes it will not generate sufficient future taxable income to utilize any future state deferred tax assets.

8. Accumulated Other Comprehensive Loss and Total Comprehensive Income (Loss)

Accumulated other comprehensive loss at July 31, 2011 and October 31, 2010 was primarily related to employee retirement plans.

The components of total comprehensive income (loss) in the nine-month and three-month periods ended July 31, 2011 and 2010 were as follows (amounts in thousands):

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Net income (loss) as reported		$	24,752			$	(53,853	)		$	42,108			$	27,302
Changes in pension liability, net of tax provision			520				(811	)			173				(528	)
Change in fair value of available-for-sale securities			(189	)			128				(194	)			65
Comprehensive income (loss)		$	25,083			$	(54,536	)		$	42,087			$	26,839
Tax benefit recognized in total comprehensive loss			—			$	(19	)			—			$	166

9. Stock-Based Benefit Plans

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 model incorporates ranges of assumptions for inputs, which are disclosed in the table below. Expected volatilities were based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected lives of options granted were derived from the historical exercise patterns and anticipated future patterns and represent the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behaviors. 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.

The weighted-average assumptions and the fair value used for stock option grants in fiscal 2011 and 2010 were as follows:

		2011		2010
Expected volatility		45.38% – 49.46%		46.74% – 51.41%
Weighted-average volatility		47.73%		49.51%
Risk-free interest rate		1.64% – 3.09%		2.15% – 3.47%
Expected life (years)		4.29 – 8.75		4.44 – 8.69
Dividends		none		none
Weighted-average grant date fair value per share of options granted		$7.94		$7.63

Stock compensation expense and related income tax benefits related to stock options recognized for the nine-month and three-month periods ended July 31, 2011 and 2010, for the twelve months ended October 31, 2010 and estimated amounts for the twelve months ended October 31, 2011 are as follows (amounts in thousands):

		2011				2010
Nine months ended July 31:
Stock-compensation expense recognized		$	7,307			$	7,683
Income tax benefit related to stock option grants (a)			—			$	2,689
Three months ended July 31:
Stock-compensation expense recognized		$	1,402			$	1,399
Income tax benefit related to stock option grants (a)			—			$	496
Twelve months ended October 31:
Stock-compensation expense recognized		$	8,659	(b)		$	9,332
Income tax benefit related to stock option grants (a)			—	(b)		$	3,266

Performance Based Restricted Stock Units:

In December 2010 and 2009, the Executive Compensation Committee of the Company’s Board of Directors approved awards of performance-based restricted stock units (“Performance-Based RSUs”) relating to shares of the Company’s common stock. The Performance-Based RSUs will vest and the recipients will be entitled to receive the underlying shares if the average closing price of the Company’s common stock on the New York Stock Exchange (“NYSE”), measured over any 20 consecutive trading days ending on or prior to five years from date of issuance of the Performance-Based RSUs increases 30% or more over the closing price of the Company’s common stock on the NYSE on the date of issuance (“Target Price”); provided the recipients continue to be employed by the Company or serve on the board of directors of the Company (as applicable) as stipulated in the award document. The Company determined the aggregate value of the Performance-Based RSUs using a lattice-based option pricing model.

Information regarding the issuance, valuation assumptions, amortization and unamortized balances of the Company’s Performance-Based RSUs in and at the relevant periods and dates in fiscal 2011 and 2010 is as follows:

		2011				2010
Performance-Based RSUs issued:
Number issued			306,000				200,000
Closing price of the Company’s common stock on date of issuance		$	19.32			$	18.38
Target price		$	25.12			$	23.89
Volatility			48.22	%			49.92	%
Risk-free interest rate			1.99	%			2.43	%
Expected life		3.0 years				3.0 years
Aggregate fair value of Performance-Based RSUs issued (in thousands)		$	4,994			$	3,160
Performance-Based RSU expense recognized (in thousands):
Nine months ended July 31,		$	2,718			$	1,554
Three months ended July 31,		$	983			$	567

		2011				2010
At July 31:
Aggregate outstanding Performance-Based RSUs			706,000				400,000
Cumulative unamortized value of Performance-Based RSUs (in thousands)		$	5,912			$	4,202

Non-Performance Based Restricted Stock Units:

In December 2010 and 2009, the Company issued restricted stock units (“RSUs”) relating to shares of the Company’s common stock to several employees. These RSUs generally vest in annual installments over a four-year period. The value of the RSUs was determined to be equal to the number of shares of the Company’s common stock to be issued pursuant to the RSUs, multiplied by the closing price of the Company’s common stock on the NYSE on the date the RSUs were awarded. Information regarding these RSUs is as follows:

		2011				2010
RSUs issued:
Number issued			15,497				19,663
Closing price of the Company’s common stock on date of issuance		$	19.32			$	18.38
Aggregate fair value of RSUs issued (in thousands)		$	299			$	361
RSU expense recognized (in thousands):
Nine months ended July 31,		$	105			$	55
Three months ended July 31,		$	39			$	23
At July 31:
Aggregate outstanding RSUs			30,994				19,663
Cumulative unamortized value of RSUs (in thousands)		$	418			$	306

10. Income (Loss) per Share Information

Information pertaining to the calculation of income (loss) per share, common stock equivalents, weighted average number of anti-dilutive option and shares issued for the nine-month and three-month periods ended July 31, 2011 and 2010 is as follows (amounts in thousands):

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Basic weighted-average shares			167,221				165,465				168,075				165,752
Common stock equivalents (a)			1,445				—				1,263				1,906
Diluted weighted-average shares			168,666				165,465				169,338				167,658
Common stock equivalents excluded from diluted weighted-average shares due to anti-dilutive effect (a)			—				2,121				—				—
Weighted average number of anti-dilutive options (b)			7,118				8,026				6,461				9,243
Shares issued under stock incentive and employee stock purchase plans			2,226				1,174				1,713				454

11. 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. Information about the Company’s share repurchase program for the nine-month and three-month periods ended July 31, 2011 and 2010 is in the table below.

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Number of shares purchased			23,000				26,000				4,000				7,000
Average price per share		$	20.18			$	19.48			$	20.44			$	18.89
Remaining authorization at July 31(in thousands):			11,807				11,836				11,807				11,836

12. Fair Value Disclosures

A summary of assets and (liabilities) at July 31, 2011 and October 31, 2010 related to the Company’s financial instruments, measured at fair value on a recurring basis, is set forth below (amounts in thousands).

				Fair value
		Fair value		July 31,				October 31,
Financial Instrument		hierarchy		2011				2010
U.S. Treasury Securities		Level 1		$	15,020			$	175,370
U.S. Agency Securities		Level 1		$	24,216			$	22,497
Corporate Securities		Level 1		$	237,813
Pre-refunded Municipal Securities		Level 1		$	17,237
Residential Mortgage Loans Held for Sale		Level 2		$	45,320			$	93,644
Forward Loan Commitments — Residential Mortgage Loans Held for Sale		Level 2		$	(107	)		$	(459	)
Interest Rate Lock Commitments (“IRLCs”)		Level 2		$	119			$	130
Forward Loan Commitments — IRLCs		Level 2		$	(119	)		$	(130	)

At July 31, 2011 and October 31, 2010, the carrying value of cash and cash equivalents and restricted cash approximated fair value. Gibraltar’s investment in the portfolio of non-performing loans was recorded at fair value at inception based on the acquisition price as determined by Level 3 inputs. Due to the relatively short period of time since the Company’s acquisition of the investment and the absence of any significant evidence to the contrary, the Company believes the fair value of these financial instruments approximate their carrying values at July 31, 2011.

At the end of the reporting period, the Company determines the fair value of its mortgage loans held for sale and the forward loan commitments it has entered into as a hedge against the interest rate risk of its mortgage loans using the market approach to determine fair value. The evaluation is based on the current market pricing of mortgage loans with similar terms and values as of the reporting date and by applying such pricing to the mortgage loan portfolio. The Company recognizes the difference between the fair value and the unpaid principal balance of mortgage loans held for sale as a gain or loss. In addition, the Company recognizes the fair value of its forward loan commitments as a gain or loss. These gains and losses are included in interest and other income. Interest income on mortgage loans held for sale is calculated based upon the stated interest rate of each loan and is included in “interest and other income”.

The table below provides, for the periods indicated, the aggregate unpaid principal and fair value of mortgage loans held for sale as of the date indicated (amounts in thousands).

		Aggregate unpaid
		principal balance				Fair value				Excess
At July 31, 2011		$	44,742			$	45,320			$	578
At July 31, 2010		$	65,945			$	67,456			$	1,511

IRLCs represent individual borrower agreements that commit the Company to lend at a specified price for a specified period as long as there is no violation of any condition established in the commitment contract. These commitments have varying degrees of interest rate risk. The Company utilizes best-efforts forward loan commitments (“Forward Commitments”) to hedge the interest rate risk of the IRLCs and residential mortgage loans held for sale. Forward Commitments represent contracts with third-party investors for the future delivery of loans whereby the Company agrees to make delivery at a specified future date at a specified price. The IRLCs and Forward Commitments are considered derivative financial instruments under ASC 815, “Derivatives and Hedging”, which requires derivative financial instruments to be recorded at fair value. The Company estimates the fair value of such commitments based on the estimated fair value of the underlying mortgage loan and, in the case of IRLCs, the probability that the mortgage loan will fund within the terms of the IRLC. To manage the risk of nonperformance of investors regarding the Forward Commitments, the Company assesses the credit worthiness of the investors on a periodic basis.

As of July 31, 2011 and October 31, 2010, the amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of marketable securities were as follows (in thousands):

		July 31,				October 31,
		2011				2010
Amortized cost		$	294,373			$	197,699
Gross unrealized holding gains			71				180
Gross unrealized holding losses			(158	)			(12	)
Fair value		$	294,286			$	197,867

The remaining contractual maturities of marketable securities as of July 31, 2011 ranged from less than 1 month to 15 months.

The Company recognizes inventory impairment charges based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. The fair value of the aforementioned inventory was determined using Level 3 criteria. See Note 1, Significant Accounting Policies, “Inventory” for additional information regarding the Company’s methodology on determining fair value.

The table below provides, for the periods indicated, the fair value of inventory whose carrying value was adjusted and the amount of impairment charges recognized (amounts in thousands).

		Fair value of
		communities, net
		of impairment				Impairment
Three months ended:		charges				charges
Fiscal 2011:
January 31		$	56,105			$	5,475
April 30		$	40,765				10,725
July 31		$	4,769				16,175
						$	32,375
Fiscal 2010:
January 31		$	82,509			$	31,750
April 30		$	64,964				41,770
July 31		$	40,071				12,450
						$	85,970

The book value and estimated fair value of the Company’s debt at July 31, 2011 and October 31, 2010 was as follows (amounts in thousands):

		July 31, 2011								October 31, 2010
						Estimated								Estimated
		Book value				fair value				Book value				fair value
Loans payable (a)		$	104,512			$	96,519			$	94,491			$	87,751
Senior notes (b)			1,509,371				1,625,363				1,554,460				1,679,052
Mortgage company warehouse loan (c)			39,905				39,905				72,367				72,367
		$	1,653,788			$	1,761,787			$	1,721,318			$	1,839,170

13. Legal Proceedings

The Company is involved in various claims and litigation arising principally in the ordinary course of business.

In January 2006, the Company received a request for information pursuant to Section 308 of the Clean Water Act from Region 3 of the U.S. Environmental Protection Agency (“EPA”) concerning storm water discharge practices in connection with its homebuilding projects in the states that comprise EPA Region 3. The Company provided information to the EPA pursuant to the request. The U.S. Department of Justice (“DOJ”) has now assumed responsibility for the oversight of this matter and has alleged that the Company has violated regulatory requirements applicable to storm water discharges and that it may seek injunctive relief and/or civil penalties. The Company is now engaged in settlement discussions with representatives from the DOJ and the EPA.

On November 4, 2008, a shareholder derivative action was filed in the Chancery Court of Delaware by Milton Pfeiffer against Robert I. Toll, Zvi Barzilay, Joel H. Rassman, Bruce E. Toll, Paul E. Shapiro, Robert S. Blank, Carl B. Marbach, and Richard J. Braemer. The plaintiff purports to bring his claims on behalf of Toll Brothers, Inc. and alleges that the director and officer defendants breached their fiduciary duties to the Company and its stockholders with respect to their sales of shares of the Company’s common stock during the period beginning on December 9, 2004 and ending on November 8, 2005, as alleged in a securities class action suit that was filed against the Company and certain of its directors and officers and, as disclosed in the Company’s quarterly report on Form 10-Q for the fiscal period ended January 31, 2011, was settled by the parties in March 2011 (“Class Action”). The plaintiff alleges that such stock sales were made while in possession of non-public, material information about the Company. The plaintiff seeks contribution and indemnification from the individual director and officer defendants for any liability found against the Company in the Class Action. In addition, again purportedly on the Company’s behalf, the plaintiff seeks disgorgement of the defendants’ profits from their stock sales.

On March 4, 2009, a second shareholder derivative action was brought by Oliverio Martinez in the U.S. District Court for the Eastern District of Pennsylvania. The case was brought against the eleven then-current members of the Company’s board of directors and its Chief Accounting Officer. This complaint alleges breaches of fiduciary duty, waste of corporate assets, and unjust enrichment during the period from February 2005 to November 2006. The complaint further alleges that certain of the defendants sold the Company’s stock during this period while in possession of the allegedly non-public, material information about the role of speculative investors in the Company’s sales and plaintiff seeks disgorgement of profits from these sales. The complaint also asserts a claim for equitable indemnity for costs and expenses incurred by the Company in connection with defending the Class Action.

On April 1, 2009, a third shareholder derivative action was filed by William Hall, also in the U.S. District Court for the Eastern District of Pennsylvania, against the eleven then-current members of the Company’s board of directors and its Chief Accounting Officer. This complaint is identical to the previous shareholder complaint filed in Philadelphia and, on July 14, 2009, the two cases were consolidated. On April 30, 2010, the plaintiffs filed an amended consolidated complaint. The Company’s Certificate of Incorporation and Bylaws provide for indemnification of its directors and officers. The Company has also entered into individual indemnification agreements with each of its directors.

Due to the high degree of judgment required in determining the amount of potential loss related to the various claims and litigation in which the Company is involved, including those noted above, and the inherent variability in predicting future settlements and judicial decisions, the Company cannot estimate a range of reasonably possible losses in excess of its accruals for these matters. The Company believes that adequate provision for resolution of all claims and pending litigation has been made for probable losses and the disposition of these matters is not expected to have a material adverse effect on the Company’s results of operations and liquidity or on its financial condition.

14. Commitments and Contingencies

Generally, the Company’s option and purchase agreements to acquire land parcels do not require the Company to purchase those land parcels, although the Company may, in some cases, forfeit any deposit balance outstanding if and when it terminates an option or purchase agreement. If market conditions are weak, approvals needed to develop the land are uncertain or other factors exist that make the purchase undesirable, the Company may not expect to acquire the land. Whether an option or purchase agreement is legally terminated or not, the Company reviews the amount recorded for the land parcel subject to the option or purchase agreement to determine if the amount is recoverable. While the Company may not have formally terminated the option and purchase agreements for those land parcels that it does not expect to acquire, it has written off any non-refundable deposits and costs previously capitalized to such land parcels in the periods that it determined such costs were not recoverable.

Information regarding the Company’s purchase commitments at July 31, 2011 and October 31, 2010 is provided in the table below (amounts in thousands).

		July 31,				October 31,
		2011				2010
Aggregate purchase commitments
Unrelated parties		$	438,158			$	419,194
Unconsolidated entities that the Company has investments in			123,804				131,217
Total		$	561,962			$	550,411
Deposits against aggregate purchase commitments		$	45,825			$	47,111
Credits to be received from unconsolidated entities			43,803				37,272
Additional cash required to acquire land			472,334				466,028
Total		$	561,962			$	550,411
Amount of additional cash required to acquire land included in accrued expenses		$	57,012			$	77,618

The Company has additional land parcels under option that have been excluded from the aforementioned aggregate purchase amounts since it does not believe that it will complete the purchase of these land parcels and no additional funds will be required from the Company to terminate these contracts.

At July 31, 2011, the Company had investments in and advances to a number of unconsolidated entities, was committed to invest or advance additional funds and had guaranteed a portion of the indebtedness and/or loan commitments of these entities. In addition, the Company was subject to litigation related to one joint venture in which it had an investment. See Note 3, “Investments in and Advances to Unconsolidated Entities and Non-Performing Loan Portfolio,” for more information regarding the Company’s commitments to these entities.

At July 31, 2011, the Company had $777.5 million available to it under its $885 million revolving credit facility with 12 banks, which extends to October 2014. At July 31, 2011, the Company had no outstanding borrowings under the credit facility but had outstanding letters of credit of approximately $107.5 million. At July 31, 2011, interest would have been payable on borrowings under our credit facility at 2.75% (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. The Company is obligated to pay an undrawn commitment fee of 0.625% (subject to adjustment based upon our debt rating and leverage ratios) based on the average daily unused amount of the credit facility. Under the terms of the credit facility, the Company is not permitted to allow its maximum leverage ratio (as defined in the underlying credit agreement) to exceed 1.75 to 1.00, and is required to maintain a minimum tangible net worth (as defined in the underlying credit agreement) of approximately $1.91 billion at July 31, 2011. At July 31, 2011, the Company’s leverage ratio was approximately 0.16 to 1.00, and its tangible net worth was approximately $2.58 billion. In addition, at July 31, 2011, the Company had $15.0 million of letters of credit outstanding with three banks which were not part of its new credit facility; these letters of credit were collateralized by $16.7 million of cash deposits.

At July 31, 2011, the Company had outstanding surety bonds amounting to $384.8 million, primarily related to its obligations to various governmental entities to construct improvements in the Company’s various communities. The Company estimates that an aggregate of $188.1 million of work remains on these improvements. The Company has an additional $69.6 million of surety bonds outstanding that guarantee other obligations of the Company. The Company does not believe it is probable that any outstanding bonds will be drawn upon.

At July 31, 2011, the Company had agreements of sale outstanding to deliver 1,780 homes with an aggregate sales value of $1.02 billion.

The Company’s mortgage subsidiary provides mortgage financing for a portion of the Company’s home closings. The Company’s mortgage subsidiary funds its commitments through a combination of its own capital, capital provided from the Company, its $50 million repurchase facility and from the sale of mortgage loans to various investors. For those home buyers that obtain mortgages from the Company’s mortgage subsidiary, it determines whether the home buyer qualifies for the mortgage he or she is seeking based upon information provided by the home buyer and other sources. For those home buyers that qualify, the Company’s mortgage subsidiary provides the home buyer with a mortgage commitment that specifies the terms and conditions of a proposed mortgage loan based upon then-current market conditions. Prior to the actual closing of the home and funding of the mortgage, the home buyer will “lock” in an interest rate based upon the terms of the commitment. At the time of rate lock, the Company’s mortgage subsidiary agrees to sell the proposed mortgage loan to one of several outside recognized mortgage financing institutions, which is willing to honor the terms and conditions, including the locked interest rate, committed to the home buyer. The Company believes that these institutions have adequate financial resources to honor their commitments to its mortgage subsidiary.

Information regarding the Company’s mortgage commitments at July 31, 2011 and October 31, 2010 is provided in the table below (amounts in thousands).

		July 31,				October 31,
		2011				2010
Aggregate mortgage loan commitments
IRLCs		$	153,590			$	169,525
Non-IRLCs			314,291				263,477
Total		$	467,881			$	433,002
Investor commitments to purchase:
IRLCs		$	153,590			$	169,525
Mortgage loans receivable			41,537				91,689
Total		$	195,127			$	261,214
Amount of commitments with unlocked interest rates by home buyer		$	314,291			$	263,477

15. Interest and Other Income

Interest and other income includes the activity of the Company’s non-core ancillary businesses which include its mortgage, title, landscaping, security monitoring, structured loan and non-performing portfolio group and golf course and country club operations. Revenues and expenses for the nine-month and three-month periods ended July 31, 2011 and 2010 were as follows (amounts in thousands):

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Revenue		$	44,367			$	36,133			$	16,826			$	15,544
Expense		$	43,321			$	32,428			$	15,818			$	14,143

16. Geographic Segments

Revenue and (loss) income before income taxes for each of the Company’s geographic segments for the nine-month and three-month periods ended July 31, 2011 and 2010 were as follows (amounts in millions):

		Nine months ended July 31,								Three months ended July 31,
		2011				2010				2011				2010
Revenue:
North		$	273.6			$	305.7			$	106.4			$	131.2
Mid-Atlantic			351.1				360.5				147.7				156.5
South			197.3				189.0				69.0				70.0
West			226.1				237.0				71.2				96.5
Total		$	1,048.1			$	1,092.2			$	394.3			$	454.2
(Loss) income before income taxes:
North		$	28.7			$	0.5			$	14.3			$	4.7
Mid-Atlantic			33.7				20.7				18.6				18.1
South			(27.1	)			(31.7	)			(13.5	)			(4.1	)
West			(22.5	)			(21.1	)			4.6				5.7
Corporate and other			(57.4	)			(76.1	)			(20.1	)			(23.6	)
Total		$	(44.6	)		$	(107.7	)		$	3.9			$	0.8

Corporate and other is comprised principally of general corporate expenses such as the offices of the Executive Chairman of the Board, Chief Executive Officer, and President, and the corporate finance, accounting, audit, tax, human resources, risk management, marketing and legal groups, directly expensed interest, offset in part by interest income, income from the Company’s ancillary businesses and income from Gibraltar.

Total assets for each of the Company’s geographic segments at July 31, 2011 and October 31, 2010 are shown in the table below (amounts in millions).

		July 31,				October 31,
		2011				2010
North		$	1,051.1			$	961.3
Mid-Atlantic			1,219.3				1,161.5
South			757.6				693.8
West			671.6				712.4
Corporate and other			1,377.0				1,642.6
Total		$	5,076.6			$	5,171.6

Corporate and other is comprised principally of cash and cash equivalents, marketable securities, restricted cash, income tax refund recoverable, the assets of the Company’s manufacturing facilities and mortgage subsidiary, and its Gibraltar investments.

The Company provided for inventory impairment charges and the expensing of costs that it believed not to be recoverable and write-downs of investments in unconsolidated entities that it believes to be other than temporarily impaired for the nine-month and three-month periods ended July 31, 2011 and 2010 as shown in the table below; the carrying value of inventory and investments in and advances to unconsolidated entities and non-performing loan portfolio for each of the Company’s geographic segments at July 31, 2011 and October 31, 2010 are also shown (amounts in millions).

		Net Carrying Value								Impairment Charges Recognized
										Nine months ended								Three months ended
		July 31,				October 31,				July 31,								July 31,
		2011				2010				2011				2010				2011				2010
Inventory:
Land controlled for future communities:
North		$	13.7			$	3.6			$	0.8			$	1.9			$	0.4			$	0.2
Mid-Atlantic			17.5				14.8				0.3				(0.1	)			0.1				(0.3	)
South			9.2				11.0				0.3				(0.3	)			0.1				(0.1	)
West			3.2				2.5				1.1				0.7								0.3
			43.6				31.9				2.5				2.2				0.6				0.1
Land owned for future communities:
North			256.4				208.5								5.3
Mid-Atlantic			457.4				452.9								9.0
South			147.5				119.8				16.0				13.9				16.0				5.8
West			169.8				142.8								13.4
			1,031.1				924.0				16.0				41.6				16.0				5.8
Operating communities:
North			711.3				685.3				2.8				8.3				0.1				3.5
Mid-Atlantic			671.0				662.4				3.7				2.1								0.5
South			493.6				443.3				3.8				17.4								0.1
West			473.0				494.8				6.1				16.6				0.1				2.5
			2,348.9				2,285.8				16.4				44.4				0.2				6.6
Total inventory		$	3,423.6			$	3,241.7			$	34.9			$	88.2			$	16.8			$	12.5
Investments in unconsolidated entities and non-performing loan portfolio:
North		$	40.5			$	47.6
South			39.8				51.7			$	10.0
West			17.0				58.5				29.6
Corporate			89.6				40.6
Total		$	186.9			$	198.4			$	39.6				—				—				—