10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ  Annual Report Pursuant to Section 13 or 15(d) of     

the Securities Exchange Act of 1934

For the Fiscal Year Ended November 30, 2007

or

o  Transition Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the transition period from ­ ­ to ­ ­.

Commission File No. 001-09195

KB HOME

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 95-3666267
(I.R.S. Employer
Identification No.)

10990 Wilshire Boulevard, Los Angeles, California 90024

(Address of principal executive offices)

Registrant’s telephone number, including area code:  (310) 231-4000

Securities Registered Pursuant to Section 12(b) of the Act:

	Name of each exchange
Title of each class	on which registered
Common Stock (par value $1.00 per share)	New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock	New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o  No þ 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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

Large accelerated filer  þ    Accelerated filer  o    Non-accelerated filer  o

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

The aggregate market value of voting stock held by non-affiliates of the registrant on May 31, 2007 was $4,107,806,638, including 12,314,882 shares held by the registrant’s grantor stock ownership trust and excluding 25,358,823 shares held in treasury.

The number of shares outstanding of each of the registrant’s classes of common stock on December 31, 2007 was as follows: Common Stock (par value $1.00 per share) 89,525,178 shares, including 12,192,182 shares held by the registrant’s grantor stock ownership trust and excluding 25,451,107 shares held in treasury.

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of Stockholders (incorporated into Part III).

KB HOME

FORM 10-K

FOR THE YEAR ENDED NOVEMBER 30, 2007

TABLE OF CONTENTS

		Page
		Number
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		11
Item 1B.	Unresolved Staff Comments		18
Item 2.	Properties		18
Item 3.	Legal Proceedings		18
Item 4.	Submission of Matters to a Vote of Security Holders		20
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		22
Item 6.	Selected Financial Data		24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 8.	Financial Statements and Supplementary Data		47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		88
Item 9A.	Controls and Procedures		88
Item 9B.	Other Information		88
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		89
Item 11.	Executive Compensation		89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		89
Item 13.	Certain Relationships and Related Transactions, and Director Independence		90
Item 14.	Principal Accountant Fees and Services		90
PART IV
Item 15.	Exhibits and Financial Statement Schedules		91
Signatures			95
EXHIBIT 10.35
EXHIBIT 10.36
EXHIBIT 10.37
EXHIBIT 10.38
EXHIBIT 12.1
EXHIBIT 21
EXHIBIT 23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I

Item 1. BUSINESS

General

KB Home is a Fortune 500 company listed on the New York Stock Exchange under the ticker symbol “KBH.” We are one of the nation’s largest homebuilders and commemorated our 50th year in the homebuilding industry in 2007. We construct and sell homes through our operating divisions across the United States under the name KB Home. Unless the context indicates otherwise, the terms “the Company,” “we,” “our” and “us” used herein refer to KB Home, a Delaware corporation, and its predecessors and subsidiaries.

Beginning in 1957 and continuing until 1986, our business was operated through various subsidiaries of Kaufman and Broad, Inc. (“KBI”) and its predecessors. In 1986, KBI transferred to us the outstanding capital stock of its subsidiaries conducting KBI’s homebuilding and mortgage banking business. Shortly thereafter, we completed an initial public offering of 8% of our common stock and began operating under the name Kaufman and Broad Home Corporation. In 1989, we were spun-off from KBI, which then changed its name to Broad Inc., and operated as an independent company, primarily in California and France. In 2001, we changed our name to KB Home. Since 1989, we have expanded our business in both our existing markets and into new markets through capital investments and acquisitions of a number of other homebuilders. Today, we operate a geographically diverse homebuilding and financial services business serving homebuyers in markets across the United States. We believe our geographic diversity helps to mitigate the effects of local and regional economic cycles, enhancing our long-term growth potential.

Our four homebuilding segments offer a variety of homes designed primarily for first-time, first move-up and active adult buyers, including attached and detached single-family homes, townhomes and condominiums. We offer homes in development communities, at urban in-fill locations and as part of mixed-use projects. We use the term “home” to refer to a single-family residence, whether it is a single-family home or other type of residential property, and we use the term “community” to refer to a single development in which homes are constructed as part of an integrated plan.

We delivered 23,743 homes in 2007 compared to our record 32,124 homes delivered in 2006. In 2007, our average selling price of $261,600 decreased from $287,700 in 2006. We generated total revenues of $6.42 billion and a loss from continuing operations of $1.41 billion in 2007 compared to total revenues of $9.38 billion and income from continuing operations of $392.9 million in 2006. Our homebuilding revenues, which include revenues from land sales, accounted for 99.8% of our total revenues in both 2007 and 2006. Our results in 2007 reflected the significant market downturn the homebuilding industry experienced throughout the year, and our actions to align our operations with the diminished sales environment and to strengthen our balance sheet.

Our financial services segment derives income from mortgage banking, title and insurance services offered to our homebuyers. Mortgage banking services are provided through Countrywide KB Home Loans, a joint venture operated by Countrywide Financial Corporation (“Countrywide”) that offers a variety of loan programs to serve the needs of our homebuyers. Our financial services segment accounted for .2% of our total revenues in both 2007 and 2006.

On July 10, 2007, we sold our 49% equity interest in our publicly traded French subsidiary, Kaufman & Broad S. A. (“KBSA”). Accordingly, we now operate our homebuilding and financial services business solely in the United States.

Our principal executive offices are located at 10990 Wilshire Boulevard, Los Angeles, California 90024. The telephone number of our corporate headquarters is (310) 231-4000 and our website address is http://www.kbhome.com. Our Spanish-language website is http://www.kbcasa.com. In addition, location and community information is available at (888) KB-HOMES.

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Markets

Our homebuilding operations span the United States from coast to coast. Because of the geographic reach of our homebuilding business, we have four homebuilding segments based on the markets in which we construct homes — West Coast, Southwest, Central and Southeast. We operate in the 13 states and 35 major markets shown below:

Segment	State(s)	Major Market(s)
West Coast	California	Fresno, Los Angeles/Ventura, Oakland, Orange County, Riverside, Sacramento, San Bernardino, San Diego and Stockton
Southwest	Arizona	Phoenix and Tucson
	Nevada	Las Vegas and Reno
	New Mexico	Albuquerque
Central	Colorado	Colorado Springs and Denver
	Illinois	Chicago
	Texas	Austin, Dallas/Fort Worth, Houston and San Antonio
Southeast	Florida	Daytona Beach, Jacksonville, Lakeland, Melbourne, Orlando, Sarasota and Tampa
	Georgia	Atlanta
	Maryland	Washington, D.C.
	North Carolina	Charlotte and Raleigh
	South Carolina	Bluffton/Hilton Head, Charleston and Columbia
	Virginia	Washington, D.C.

Segment Operating Information.  The following table sets forth specific operating information for our homebuilding segments for the years ended November 30, 2007, 2006 and 2005:

	Years Ended November 30,
	2007			2006			2005
West Coast:
Homes delivered		4,957			7,213			6,624
Percent of total homes delivered		21	%		22	%		21	%
Average selling price	$	433,600		$	489,500		$	460,500
Total revenues (in millions) (a)	$	2,203.3		$	3,531.3		$	3,050.5
Southwest:
Homes delivered		4,855			7,011			7,357
Percent of total homes delivered		20	%		22	%		24	%
Average selling price	$	258,500		$	306,900		$	265,600
Total revenues (in millions) (a)	$	1,349.6		$	2,183.8		$	1,964.5
Central:
Homes delivered		6,310			9,613			9,866
Percent of total homes delivered		27	%		30	%		32	%
Average selling price	$	167,800		$	159,800		$	157,600
Total revenues (in millions) (a)	$	1,077.3		$	1,553.3		$	1,559.0
Southeast:
Homes delivered		7,621			8,287			7,162
Percent of total homes delivered		32	%		26	%		23	%
Average selling price	$	229,400		$	244,300		$	215,100
Total revenues (in millions) (a)	$	1,770.4		$	2,091.4		$	1,549.3
Total:
Homes delivered		23,743			32,124			31,009
Average selling price	$	261,600		$	287,700		$	261,200
Total revenues (in millions) (a)	$	6,400.6		$	9,359.8		$	8,123.3

(a)  Total revenues include revenues from housing and land sales.

Unconsolidated Joint Ventures.  The above tables do not include deliveries from unconsolidated joint ventures. From time to time, we participate in the acquisition, development, construction and sale of residential properties through

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unconsolidated joint ventures. Our unconsolidated joint ventures delivered 127 homes in 2007, 4 homes in 2006 and 83 homes in 2005.

Strategy

We expect the difficult conditions we experienced in our served markets in 2007 to continue through 2008. Consistent with the general downturn in housing markets across the United States, most of our served markets have faced a persistent oversupply of new and resale homes available for sale, with some areas reaching historically high levels. In these markets, our business has encountered significant challenges from heightened builder and investor efforts to sell homes and land, increased foreclosure activity, consumer reluctance to purchase homes, tighter lending standards due to turmoil in the mortgage finance and credit markets, and reduced home affordability, particularly in areas that experienced rapid sales price increases in the years leading up to and including 2006. These conditions resulted in both lower overall sales in our homebuilding business compared to prior years and downward pressure on our selling prices and margins in 2007, as competition for sales drove marketing expenses higher and increased the need for sales incentives. We do not expect the present business environment in our served markets or these trends to improve in 2008.

We believe our continued adherence to the disciplines of our core built-to-order operational business model, KBnxt, will enable us to manage through the current and expected near-term business environment. We believe it will also position us to capitalize on long-term growth opportunities that we expect will arise as housing supply and demand conditions in our served markets begin to stabilize.

KBnxt Operational Business Model.  We began operating under the principles of our KBnxt operational business model in 1997. The KBnxt operational business model seeks to generate greater operating efficiencies and return on investment through a disciplined, fact-based and process-driven approach to homebuilding that is founded on a constant and systematic assessment of consumer preferences and market opportunities. The key principles of our KBnxt operational business model include:

•  gaining a detailed understanding of consumer location and product preferences through regular surveys;

•  managing our working capital and reducing our operating risks by acquiring developed and entitled land at reasonable prices in markets with high growth potential, and by disposing of land and interests in land that no longer meet our strategic or investment goals;

•  using our knowledge of consumer preferences to design, construct and deliver the products homebuyers desire;

•  in general, commencing construction of a home only after a purchase contract has been signed;

•  building a backlog of net orders and reducing the time from initial construction to final delivery of homes to customers;

•  establishing an even flow of production of high quality homes at the lowest possible cost; and

•  offering customers affordable base prices and the opportunity to customize their homes through choice of location, floor plans and interior design options.

Our KBnxt operational business model is designed to help us achieve a leading position in our existing markets, expand our business into attractive new markets, exit investments that no longer meet our return standards or marketing strategy and calibrate our product lines to consumer preferences in both our existing and new markets. Historically, this focus has allowed us to achieve lower costs and economies of scale with respect to acquiring and developing land, purchasing building materials, subcontracting labor and providing options to customers.

Our expansion into new markets will depend on our assessment of a potential new market’s viability and our ability to develop operations in that new market. We will also continue to consider appropriate acquisitions, as market conditions may produce attractive opportunities. However, expansion into new markets and large acquisitions are not a priority for us in the near term.

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Strategic Objectives.  Based on our KBnxt operational business model, and building on initiatives we implemented in 2006 and 2007 as conditions in our served markets became increasingly challenging, our primary strategic objectives include:

•  Maintaining our balanced geographic footprint and focusing on growth opportunities in our existing served markets. We believe this will allow us to efficiently capitalize on the different rates at which our served markets are expected to stabilize. We also believe that our existing served markets offer the most attractive long-term growth prospects.

•  Providing the best value and choice in homes and options for the first-time, first move-up and active adult homebuyer. By promoting value and choice through an affordable base price and product customization, we believe we can stand out from other homebuilders among our core customer base.

•  Generating high levels of customer satisfaction and producing high quality homes. Achieving high customer satisfaction levels is a key driver to our long-term success and delivering quality homes is critical to achieving high customer satisfaction.

•  Maintaining ownership and control over a three-to-four year supply of developable land. Keeping our inventory in line with our future sales expectations maximizes the use of our working capital, enhances our liquidity and helps maintain a strong balance sheet to support long-term strategic investments.

•  Improving the affordability of our homes and lowering our production costs by redesigning and reengineering our products, building smaller homes, reducing production cycle times and direct construction costs, and targeting our pricing to median income levels in our served markets. We believe making our homes more affordable to our core customer base, with corresponding decreases in our production costs, will help us generate revenues and maintain our margins during the current housing market downturn and position us for longer-term profit growth.

•  Continuing to align our cost structure with the expected size and growth of our business, generating free cash flow and maximizing the performance of our invested capital.

Marketing Strategy.  Our marketing strategy aims to generate traffic to our communities by promoting our distinct customized homebuying experience. We believe this approach, supported with unique marketing partnerships and consistently applied companywide under one brand, generates a high perceived value for our products and our company among our target customers nationwide.

Reflecting this approach, in 2007 we launched a “Built to Order” consumer brand messaging initiative to provide potential homebuyers with a clearer understanding of how our homebuying experience differs from that of other homebuilders and resale homes. The “Built to Order” campaign emphasizes the choices our homebuyers can make in community location, floor plan, exterior architectural style, and interior design options and amenities to create a home built to their individual preferences. In highlighting the choices we make available to our homebuyers and reinforcing our general approach to build homes only after we receive a qualified order, the “Built to Order” campaign serves as the consumer face to core elements of our KBnxt operational business model.

During 2007, we also saw the expansion of our successful partnership with Martha Stewart, a leading lifestyle expert. Under this partnership, we offer our homebuyers in selected communities an opportunity to build homes inspired by Martha Stewart’s own residences and to customize them using interior designs that reflect her style. We opened six additional Martha Stewart communities in 2007, bringing the total number to nine. The new Martha Stewart communities included the first in California, Texas, Colorado and Florida, as well as the second in North Carolina and Georgia. Our Martha Stewart communities have generated significant consumer and media interest and traffic, and we expect to open more of them in the future.

In September 2007, we announced a high-profile collaboration with The Walt Disney Company to develop exclusive Disney Home product options to be offered to our homebuyers. Options include elements that would normally be built into a home such as lighting fixtures and window coverings and feature some of Disney’s most recognized characters. The first options in the collaboration will be available to our homebuyers in 2008.

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During 2007, we also maintained our focus on the Internet as a key vehicle for reaching homebuyers. We redesigned our primary consumer website, kbhome.com, to be easier to navigate, to better reflect current technologies, and to make “Built to Order” a central message throughout the site.

We renewed our emphasis on the first-time, first move-up and active adult homebuyer in 2007. These homebuyers historically have been our core customers and are the buyers we anticipate to have the greatest potential for future home sales. In the present mortgage financing environment, focusing on these types of homebuyers also allows us to offer more homes that fall within conforming loan limits for Fannie Mae, Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) programs.

In 2008, we will continue to implement our “Built to Order” marketing strategy, building on our efforts in 2007.

Sales Strategy.  To ensure the consistency of our message and adherence to our KBnxt operational business model, sales of our homes are carried out by in-house teams of sales representatives. Our sales representatives are trained to provide prospective customers with floor plan and design choices, pricing information and tours of fully furnished and landscaped model homes that are decorated to emphasize the distinctive options we offer. We also have Countrywide KB Home Loans representatives available in many of our communities to assist prospective customers with financing questions.

To help our homebuyers customize their homes, we operate KB Home Studios in the vast majority of our markets. KB Home Studios are large showrooms where our customers may select from thousands of options to purchase conveniently as part of the original construction of their homes. The coordinated efforts of sales representatives, KB Home Studio consultants and other personnel involved in the customer’s homebuying experience are intended to provide high levels of customer satisfaction and lead to enhanced customer retention and referrals.

Customer Service and Quality Control

Customer satisfaction is a high priority for us and we are committed to building and delivering quality homes. Our on-site construction supervisors perform regular pre-closing quality checks during the construction process to ensure our homes meet our quality standards and our homebuyers’ expectations. We have customer service personnel who are responsible for responding to homebuyers’ post-closing needs, including warranty claims. We believe prompt and courteous responses to homebuyers’ needs throughout the homebuying process reduces post-closing repair costs, enhances our reputation for quality and service, and may help encourage repeat and referral business from homebuyers and the real estate community. Our goal is for our customers to be 100% satisfied with their new homes. We provide a limited warranty on all of our homes. The specific terms and conditions vary depending on the market where we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home such as appliances.

Local Expertise

To maximize our KBnxt operational business model’s effectiveness and help ensure its consistent execution, our employees are continuously trained on KBnxt operational principles and evaluated based on their achieving KBnxt operational objectives relevant to their particular job duties. We also believe that our business requires in-depth knowledge of local markets in order to acquire land in desirable locations and on favorable terms, to engage subcontractors, to plan communities based on local demand, to anticipate consumer tastes in specific markets and to assess the local regulatory environments. Accordingly, we operate through local divisions with local market expertise. We have experienced management teams in each of our divisions. Although we have centralized certain functions (such as marketing, advertising, legal, materials purchasing, product development, architecture and accounting) to benefit from economies of scale, our local management exercises considerable autonomy in identifying land acquisition opportunities, developing product and sales strategies, conducting product operations and controlling costs.

Community Development and Land Inventory Management

Our community development process generally consists of four phases: land acquisition, land development, home construction and sale. Historically, our community development process has ranged from six to 24 months in our

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West Coast segment to a somewhat shorter duration in our other homebuilding segments. The length of the community development process varies based on, among other things, the extent of government approvals required, the overall size of the community, necessary site preparation activities, weather conditions and marketing results.

Although they vary significantly, our communities typically consist of 50 to 250 lots ranging in size from 2,000 to 20,000 square feet. Depending on the community, we offer from two to five model home designs with premium lots often containing more square footage, better views or location benefits. Our goal is to own or control enough lots to meet our forecasted production goals over the next three to four years.

Land Acquisition and Land Development.  Our current focus is on creating a strong balance sheet and positioning ourselves for future growth. Significant land acquisitions are not currently a priority, but we will consider attractive opportunities as they arise. When we do acquire and develop land, we do so consistent with our KBnxt operational business model, which focuses on obtaining land containing fewer than 250 lots that are entitled and either physically developed (referred to as “finished lots”) or partially finished. Acquiring finished or partially finished lots enables us to construct and deliver homes shortly after the land is acquired with minimal additional development expenditures. This is a more efficient way to use our working capital and reduces the operating risks associated with having to develop and/or entitle land, such as unforeseen improvement costs and/or changes in market conditions. However, depending on market conditions, we may acquire undeveloped and/or unentitled land. We expect that the overall balance of undeveloped, unentitled, entitled and finished lots in our inventory will vary over time.

Consistent with our KBnxt operational business model, we target geographic areas for potential land acquisitions and assess the viability of our current inventory based on the results of periodic surveys of both new and resale homebuyers in particular markets. Local, in-house land acquisition specialists conduct site selection research and analysis in targeted geographic areas to identify desirable land or to evaluate whether an existing interest we hold is consistent with our marketing strategy. We also use studies performed by third-party marketing specialists. Some of the factors we consider in evaluating land acquisition targets and assessing current inventory are: consumer preferences; general economic conditions; specific market conditions, with an emphasis on the prices of comparable new and resale homes in the market; expected sales rates; proximity to metropolitan areas and employment centers; population and commercial growth patterns; estimated costs of completing lot development; and environmental matters.

We generally structure our land purchases and development activities to minimize, or to defer the timing of cash and capital expenditures, which enhances returns associated with new land investments. While we use a variety of techniques to accomplish this, as further described below, we typically use agreements that give us an option right to purchase land at a future date at a fixed price for a small or no initial deposit payment. Our decision to exercise a particular option right is based on the results of due diligence we conduct after entering into an agreement. In some cases our decision to exercise an option may be conditioned on the land seller obtaining necessary entitlements, such as zoning rights and environmental approvals, and/or physically developing the land by a pre-determined date to allow us to build homes relatively quickly. Depending on the circumstances, our initial deposit payment for an option right may or may not be refundable to us if we do not purchase the underlying land.

In addition to acquiring land under option agreements, we may acquire land under agreements that condition our purchase obligation on our satisfaction with the feasibility of developing the land and selling homes on the land by a certain future date. Our option and other purchase agreements may also allow us to phase our land purchases and/or lot development over a period of time and/or upon the satisfaction of certain conditions. We may also acquire land with seller financing that is non-recourse to us, or by working in conjunction with third-party land developers. Our land option contracts generally do not contain provisions requiring our specific performance.

As previously noted, under our KBnxt operational business model, we generally attempt to minimize our land development costs by focusing on acquiring finished or partially finished lots. Where we purchase unentitled and unimproved land, we typically use option agreements as described above and during an applicable option period perform technical, environmental, engineering and entitlement feasibility studies, while we seek to obtain necessary governmental approvals and permits. These activities are sometimes done with the seller’s assistance or at the seller’s cost. The use of option arrangements in this context allows us to conduct these development-related activities while minimizing our inventory levels and overall financial commitments, including interest and other carrying costs. It also improves our ability to accurately estimate development costs, an important element in planning communities and pricing homes, prior to incurring them.

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Before we commit to any land purchase or dispose of any interest in land we hold, our senior corporate management carefully evaluates each asset based on the results of our local specialists’ due diligence and a set of strict financial measures, including, but not limited to, gross margin analyses and specific discounted, after-tax cash flow internal rate of return requirements. Potential land acquisition or disposal transactions are subject to review and approval by our corporate land committee, which is composed of senior corporate and regional management. The stringent criteria guiding our land acquisition and disposition decisions have resulted in our maintaining inventory in areas that we believe generally offer better returns for lower risk and lower cash and capital investment.

In light of difficult market conditions, we have sold some of our land and interests in land and have abandoned a portion of our options to acquire land. Consistent with our KBnxt operational business model, we determined that these sold or abandoned properties no longer met our strategic needs or our internal investment standards. If market conditions remain challenging, we may sell more of our land and interests in land, and we may abandon or try to sell our options to acquire land.

The following table shows the number of lots we owned in various stages of development and under option contracts in our homebuilding segments as of November 30, 2007 and 2006. The table does not include approximately 376 acres optioned as of November 30, 2007 and 393 acres optioned as of November 30, 2006 that have not yet been approved for subdivision into lots.

													Total Lots
	Homes/Lots in				Land Under				Lots Under				Owned or
	Production				Development				Option				Under Option
	2007		2006		2007		2006		2007		2006		2007		2006
West Coast		8,174		10,957		2,961		4,387		3,598		11,762		14,733		27,106
Southwest		7,059		9,773		2,866		2,338		5,743		11,101		15,668		23,212
Central		9,944		12,799		3,257		6,856		2,472		5,448		15,673		25,103
Southeast		7,916		10,576		2,888		6,034		8,830		19,436		19,634		36,046
Total		33,093		44,105		11,972		19,615		20,643		47,747		65,708		111,467

Reflecting our geographic diversity and balanced operations, as of November 30, 2007, 22% of the lots we owned or controlled were located in the West Coast reporting segment, 24% were in the Southwest reporting segment, 24% were in the Central reporting segment, and 30% were in the Southeast reporting segment.

The following table shows the dollar value of inventory we owned in various stages of development and under option contracts in our homebuilding segments as of November 30, 2007 and 2006 (in thousands):

													Total Lots
	Homes/Lots in				Land Under				Lots Under				Owned or
	Production				Development				Option				Under Option
	2007		2006		2007		2006		2007		2006		2007		2006
West Coast	$	1,020,637	$	1,794,320	$	192,790	$	432,103	$	199,396	$	454,720	$	1,412,823	$	2,681,143
Southwest		491,098		688,942		161,820		222,011		34,357		202,821		687,275		1,113,774
Central		420,811		531,048		59,802		119,649		53,248		85,808		533,861		736,505
Southeast		464,922		714,955		131,009		293,891		82,530		211,375		678,461		1,220,221
Total	$	2,397,468	$	3,729,265	$	545,421	$	1,067,654	$	369,531	$	954,724	$	3,312,420	$	5,751,643

Home Construction and Sale.  Following the purchase of land and, if necessary, the completion of the entitlement process, we typically begin marketing homes and constructing model homes. The time required for construction of our homes depends on the weather, time of year, local labor supply, availability of materials and supplies and other factors. To minimize the costs and risks of standing inventory, we generally begin construction of a home only when we have contracted with a homebuyer. However, cancellations of home purchase contracts prior to the delivery of the underlying homes may cause us to have standing inventory of completed or partially completed homes.

We act as the general contractor for the majority of our communities and hire subcontractors for all production activities. The use of subcontractors enables us to reduce our investment in direct labor costs, equipment and facilities. Where practical, we use mass production techniques, and pre-made, standardized components and materials to

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streamline the on-site production process. We have also developed systems for national and regional purchasing of certain building materials, appliances and other items to take advantage of economies of scale and to reduce costs through improved pricing and, where available, participation in manufacturers’ rebate programs. At all stages of production, our administrative and on-site supervisory personnel coordinate the activities of subcontractors and subject their work to quality and cost controls. As part of our KBnxt operational business model, we have also emphasized even-flow production methods to enhance the quality of our homes, minimize production costs and improve the predictability of our revenues and earnings.

Backlog

We sell our homes under standard purchase contracts, which generally require a customer deposit at the time of signing. The amount of deposit required varies among markets and communities. Homebuyers are also generally required to pay additional deposits when they select options or upgrades for their homes. Most of our sales contracts stipulate that if a homebuyer cancels a contract with us, we have the right to retain the homebuyer’s earnest money and option or upgrade deposits. However, we generally permit customers to cancel their obligations and obtain refunds of all or a portion of their deposit in the event mortgage financing cannot be obtained within a period of time, as specified in their contract.

“Backlog” consists of homes that are under contract but have not yet been delivered. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) taken during the current period minus the number of homes delivered during the current period. The backlog at any given time will be affected by cancellations. In addition, deliveries of new homes typically increase from the first to the fourth quarter in any year.

Our backlog at November 30, 2007, excluding unconsolidated joint ventures, consisted of 6,322 homes, down 40% from the 10,575 homes in backlog at year-end 2006. Our backlog ratio was 68% for the fourth quarter of 2007 and 60% for the fourth quarter of 2006. (Backlog ratio is defined as homes delivered as a percentage of beginning backlog in the quarter.)

The significant decrease in backlog levels in 2007 reflected an overall decrease in net orders and lower average selling prices compared to prior years, reflecting the persistently challenging conditions in the housing market that began in 2006. Our net orders declined 13% to 19,490 in 2007 from 22,459 in 2006. Our average cancellation rate in 2007 was 42%, improving from an average of 47% in 2006. During the fourth quarter of 2007, our net orders decreased 32% from the fourth quarter of 2006, reflecting decreases in each of our reporting segments. The fourth quarter 2007 cancellation rate of 58% was the same as the cancellation rate we experienced in the year-earlier quarter, and 8 percentage points higher than the 50% cancellation rate we experienced in the third quarter of 2007.

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The following table sets forth homes delivered, net orders and ending backlog for each quarter during the years ended November 30, 2007 and 2006:

											Unconsolidated
	West Coast		Southwest		Central		Southeast		Total		Joint Ventures
Homes delivered
2007
First		895		1,185		1,427		1,629		5,136		8
Second		950		1,061		1,236		1,529		4,776		11
Third		1,252		1,133		1,433		1,881		5,699		13
Fourth		1,860		1,476		2,214		2,582		8,132		95
Total		4,957		4,855		6,310		7,621		23,743		127
2006
First		1,446		1,552		1,835		1,610		6,443		—
Second		1,579		1,813		2,183		1,827		7,402		—
Third		1,683		1,798		2,489		1,923		7,893		4
Fourth		2,505		1,848		3,106		2,927		10,386		—
Total		7,213		7,011		9,613		8,287		32,124		4
Net orders
2007
First		1,467		1,108		1,333		1,836		5,744		85
Second		1,673		1,437		1,903		2,252		7,265		109
Third		713		604		1,370		1,220		3,907		79
Fourth		679		482		660		753		2,574		9
Total		4,532		3,631		5,266		6,061		19,490		282
2006
First		1,399		1,492		2,295		1,854		7,040		—
Second		1,628		1,239		2,723		1,899		7,489		—
Third		775		806		1,549		1,037		4,167		24
Fourth		772		576		1,156		1,259		3,763		34
Total		4,574		4,113		7,723		6,049		22,459		58
Ending backlog — homes
2007
First		2,187		2,453		2,961		3,582		11,183		131
Second		2,910		2,829		3,628		4,305		13,672		229
Third		2,371		2,300		3,565		3,644		11,880		295
Fourth		1,190		1,306		2,011		1,815		6,322		209
2006
First		4,207		5,368		5,405		5,857		20,837		—
Second		4,256		4,794		5,945		5,929		20,924		—
Third		3,348		3,802		5,005		5,043		17,198		20
Fourth		1,615		2,530		3,055		3,375		10,575		54
Ending backlog — value, in thousands
2007
First	$	1,054,825	$	640,856	$	494,429	$	846,070	$	3,036,180	$	42,401
Second		1,357,973		733,211		633,775		1,012,098		3,737,057		84,773
Third		1,042,194		590,711		599,400		834,588		3,066,893		108,821
Fourth		466,726		313,120		312,952		406,037		1,498,835		80,523
2006
First	$	2,059,191	$	1,690,266	$	841,504	$	1,455,301	$	6,046,262	$	—
Second		2,200,413		1,473,792		947,562		1,499,091		6,120,858		—
Third		1,726,232		1,129,899		802,950		1,295,886		4,954,967		7,748
Fourth		819,795		708,206		487,223		811,533		2,826,757		20,292

Land and Raw Materials

We currently own or control enough land to meet our forecasted production goals for approximately the next three to four years, and we believe that we will be able to acquire land on acceptable terms for future communities as needed. In

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fact, as discussed above, we have recently sold some of our land and abandoned options to purchase land in order to balance our holdings with diminished current and forecasted market conditions. In 2007, our land sales generated $189.0 million of revenues and $74.3 million of pretax losses, including $74.8 million of impairments. Our land option contract abandonments resulted in pretax, non-cash charges of $144.0 million in 2007.

The principal raw materials used in the construction of our homes are concrete and forest products. In addition, we use a variety of other construction materials in the homebuilding process, including sheetrock, plumbing and electrical items. We attempt to maintain efficient operations by using standardized materials that are commercially available on competitive terms from a variety of sources. In addition, our centralized or regionalized purchasing of certain building materials, appliances and fixtures allows us to benefit from large quantity purchase discounts and, in some cases, supplier rebates. When possible, we make bulk purchases of these products at favorable prices from suppliers and often instruct subcontractors to submit bids based on these prices.

Customer Financing

On-site representatives at our communities facilitate sales by offering to arrange financing for prospective customers through Countrywide KB Home Loans. Countrywide KB Home Loans is a retail mortgage banking joint venture that we established with Countrywide in 2005. Although our customers have the choice of obtaining financing elsewhere, we believe that the ability of Countrywide KB Home Loans to offer customers a variety of financing options on competitive terms as a part of the on-site sales process is an important factor in completing sales.

Countrywide KB Home Loans provides mortgage banking services to our homebuyers. Leveraging the resources of Countrywide, the joint venture operates with decentralized teams of employees located in all of our markets. Through its relationship with Countrywide, the joint venture offers virtually every loan program in the industry, as well as some products not offered by other lenders. This includes fixed and adjustable rate, conventional, privately-insured mortgages, FHA-insured or VA-guaranteed mortgages and mortgages funded by revenue bond programs of states and municipalities. Countrywide KB Home Loans originated loans for 72% of our customers who obtained mortgage financing in 2007 and 57% in 2006.

Discontinued Operations

In July 2007, we sold our 49% interest in our French operations. The disposition of the French operations enables us to invest additional resources in our U.S. homebuilding operations. The sale generated total gross proceeds of $807.2 million and a pretax gain of $706.7 million ($438.1 million net of income taxes). As a result of the sale, the French operations, which had previously been presented as a separate reporting segment, are presented as discontinued operations in our consolidated financial statements. All prior period information has been reclassified to be consistent with the current period presentation.

Employees

We employ a trained staff of land acquisition specialists, architects, planners, engineers, construction supervisors, marketing and sales personnel, and finance and accounting personnel, supplemented as necessary by outside consultants, who guide the development of our communities from their conception through the marketing and sale of completed homes.

At December 31, 2007, we had approximately 3,100 full-time employees in our operations, compared to approximately 5,100 at December 31, 2006. None of our employees are represented by a collective bargaining agreement.

Competition and Other Factors

We believe the use of our KBnxt operational business model, particularly the aspects that involve gaining a deeper understanding of customer interests and needs and offering a wide range of choices to homebuyers, provides us with long-term competitive advantages. The housing industry is highly competitive, and we compete with numerous homebuilders ranging from regional and national firms to small local builders primarily on the basis of price, location, financing, design, reputation, quality and amenities. In addition, we compete with housing alternatives other than new homes,

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including resale homes and rental housing. In certain markets and at times when housing demand is high, we also compete with other builders to hire subcontractors.

Financing

We do not generally finance the development of our communities with project financing. By “project financing,” we mean proceeds of loans specifically obtained for, or secured by, particular communities. Instead, our operations have been primarily funded by results of operations, public debt and equity financing, and borrowings under our unsecured revolving credit facility with various banks (the “Credit Facility”).

Regulation and Environmental Matters

As part of our due diligence process for all land acquisitions, our policy is to use third-party environmental consultants to investigate for environmental risks and to require disclosure from land sellers of known environmental risks. Despite these precautions, there can be no assurance that we will avoid material liabilities relating to the removal of toxic wastes, site restoration, monitoring or other environmental matters affecting properties currently or previously owned by us. No estimate of any potential liabilities can be made although we may, from time to time, purchase property that requires modest environmental clean-up costs after appropriate due diligence. In such instances, we take steps prior to acquisition to gain assurance as to the precise scope of work required and the costs associated with removal, site restoration and/or monitoring, using detailed investigations performed by environmental consultants. To the extent contamination or other environmental issues have occurred in the past, we believe we may be able to recover restoration costs from third parties, such as the generators of hazardous waste, land sellers or others in the prior chain of title and/or insurers. Based on these practices, we anticipate that it is unlikely that environmental clean-up costs will have a material effect on our future consolidated financial position or results of operations. We have not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by us are identified by the U.S. Environmental Protection Agency (“EPA”) as being a “Superfund” clean-up site requiring remediation, which could have a material effect on our future consolidated financial position or results of operations. Costs associated with the use of environmental consultants are not material to our consolidated financial position or results of operations.

Access to Our Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. The public may also read and copy any document we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.

We encourage the public to read our periodic and current reports. Copies of these filings, as well as any future filings, may be obtained, at no cost, through our website http://www.kbhome.com or by writing to our investor relations department at investorrelations@kbhome.com or at our principal executive offices.

Item 1A.  RISK FACTORS  

In addition to the risks and the challenging market conditions previously mentioned, the following important factors could adversely impact our business. These factors could cause our actual results to differ materially from the forward-looking and other statements that we make in registration statements, periodic reports and other filings with the SEC, and that we make from time to time in our news releases, annual reports and other written communications, as well as oral forward-looking and other statements made from time to time by our representatives.

The homebuilding industry is experiencing a severe downturn that may continue for an indefinite period and adversely affect our business and results of operations compared to prior periods.

In 2007, many of our served markets and the U.S. homebuilding industry as a whole continued to experience a significant and sustained decrease in demand for new homes and an oversupply of new and existing homes available for sale, conditions that generally began in 2006. In many markets, a rapid increase in new and existing home prices in the years leading up to and including 2006 reduced housing affordability relative to consumer incomes and tempered buyer

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demand. At the same time, investors and speculators reduced their purchasing activity and instead stepped up their efforts to sell residential property they had earlier acquired. These trends, which were more pronounced in markets that had experienced the greatest levels of price appreciation, resulted in overall fewer home sales, greater cancellations of home purchase agreements by buyers, higher inventories of unsold homes and the increased use by homebuilders, speculators, investors and others of discounts, incentives, price concessions and other marketing efforts to close home sales in 2007 compared to the past several years.

Reflecting these demand and supply trends, we, like many other homebuilders, experienced a large drop in net orders, a decline in the selling price of new homes sold and a reduction in our margins in 2007 relative to prior years. We can provide no assurances that the homebuilding market will improve in the near future. In fact, we expect the weakness to continue at least through 2008 and have an adverse effect on our business and our results of operations.

Our strategies in responding to the adverse conditions in the homebuilding industry have had limited success, and the continued implementation of these and other strategies may not be successful.

While we have been successful in generating positive operating cash flow and reducing our inventories in 2007, we have done so at significantly reduced gross profit levels and have incurred significant asset impairment charges. These contributed to the net loss we recognized in 2007. Also, in 2007, notwithstanding our sales strategies, we continued to experience an elevated rate of sales contract cancellations. We believe that the elevated cancellation rate largely reflects a decrease in homebuyer confidence, with continued price declines and increases in the level of sales incentives for both new and existing homes prompting homebuyers to forgo or delay home purchases. A more restrictive mortgage lending environment and the inability of some buyers to sell their existing homes have also led to cancellations. Many of the factors that affect new orders and cancellation rates are beyond our control. It is uncertain how long the reduced sales levels and the increased level of cancellations will continue.

Our business is cyclical and is significantly affected by changes in general and local economic conditions.

Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in:

•  short- and long-term interest rates;

•  the availability of financing for homebuyers;

•  consumer confidence generally and the confidence of potential homebuyers in particular;

•  federal mortgage financing programs and federal and state regulation of lending practices;

•  federal and state income tax provisions, including provisions for the deduction of mortgage interest payments;

•  housing demand from population growth and demographic changes, among other factors;

•  the supply of available new or existing homes and other housing alternatives, such as apartments and other residential rental property;

•  employment levels and job and personal income growth; and

•  real estate taxes.

Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular regions or localities in which we operate. In 2007, adverse changes in many of these factors affected all of our markets, and we expect the widespread nature of the downturn in the housing market to continue at least through 2008. A downturn in the economy would likely exacerbate the adverse trends the housing market experienced in 2007.

Weather conditions and natural disasters, such as earthquakes, hurricanes, tornadoes, floods, droughts, fires and other environmental conditions, can also harm our homebuilding business on a local or regional basis. Civil unrest or acts of terrorism can also have an adverse effect on our business.

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Fluctuating lumber prices and shortages, as well as shortages or price fluctuations in other building materials or commodities, can have an adverse effect on our business. Similarly, labor shortages or unrest among key trades, such as carpenters, roofers, electricians and plumbers, can delay the delivery of our homes and increase our costs.

The potential difficulties described above can cause demand and prices for our homes to diminish or cause us to take longer and incur more costs to build our homes. We may not be able to recover these increased costs by raising prices because of market conditions and because the price of each home is usually set several months before the home is delivered, as our customers typically sign their home purchase contracts before construction begins. The potential difficulties described above could cause some homebuyers to cancel or refuse to honor their home purchase contracts altogether. In fact, reflecting the difficult conditions in our served markets, we continued to experience elevated cancellation rates in 2007 and we may experience similar cancellation rates in 2008.

Supply shortages and other risks related to demand for building materials and/or skilled labor could increase costs and delay deliveries.

The homebuilding industry is highly competitive for skilled labor and building materials. Increased costs or shortages in building materials or skilled labor could cause increases in construction costs and construction delays. We generally are unable to pass on increases in construction costs to customers who have already entered into sales contracts, as the sales contracts generally fix the price of the home at the time the contract is signed, and may be signed well in advance of when construction commences. Sustained increases in construction costs may, over time, erode our margins, and pricing competition for materials and labor may restrict our ability to pass on any additional costs, thereby decreasing our margins.

Inflation may adversely affect us by increasing costs that we may not be able to recover, particularly if sales prices decrease.

Inflation can have a long-term impact on us because increasing costs of land, materials and labor may call for us to increase sales prices of homes in order to maintain satisfactory margins. However, if the current challenging and highly competitive conditions in the homebuilding market persist, we may be required to decrease prices in an attempt to stimulate sales volume. This potential lowering of sales prices, in addition to impacting our margins on new homes, may also reduce the value of our land inventory and make it more difficult for us to recover the full cost of previously purchased land in new home sales prices or, if we choose, in the disposition of land assets. In addition, depressed land values may cause us to forfeit deposits on land option contracts if we cannot satisfactorily renegotiate the purchase price of the optioned land. We may incur non-cash charges for inventory impairments or land option contract abandonments if the value of our inventory is so reduced or if we choose not to exercise land option contracts.

Reduced home sales may impair our ability to recoup development costs or force us to absorb additional costs.

We incur many costs even before we begin to build homes in a community. Depending on the stage of development, these include costs of preparing land and installing roads, sewage and other utilities, as well as taxes and other costs related to ownership of the land on which we plan to build homes. Reducing the rate at which we build homes extends the length of time it takes us to recover these costs. Also, we frequently acquire options to purchase land and make deposits that will be forfeited if we do not exercise the options within specified periods. Because of current market conditions, we have had to terminate some of these options, resulting in the forfeiture of deposits and unrecoverable development costs.

The value of the land and housing inventory we own or control may fall significantly and our profits may decrease.

The value of the land and housing inventory we currently own or control depends on market conditions, including estimates of future demand for, and the revenues that can be generated from, such inventory. The market value of our land inventory can vary considerably because there is often a significant amount of time between our initial acquisition of land and the delivery of homes on that land. The downturn in the housing market has caused the fair market value of certain of our inventory to fall, in some cases well below the estimated fair market value at the time we acquired it. Depending on our assessment of fair market value, we may need to write down the carrying value of certain of our inventory and take corresponding non-cash charges against our earnings to reflect the impaired value. We may also abandon our interests in certain land inventory that no longer meets our internal investment standards, which would also require us to take non-cash charges. If the current downturn in the housing market continues, we may need to take additional charges against

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our earnings for abandonments or inventory impairments, or both. Any such non-cash charges would have an adverse effect on our consolidated results of operations.

If new home prices decline, interest rates increase or there is a downturn in the economy, some homebuyers may cancel their home purchases because the required deposits are small and generally refundable.

Our backlog numbers reflect the number of homes for which we have entered into a purchase contract with a customer but not yet delivered the home. Our home purchase contracts typically require only a small deposit, and in many states, the deposit is fully refundable at any time prior to closing. If the prices for new homes decline, competitors increase their use of sales incentives, interest rates increase, the availability of mortgage financing diminishes or there is a downturn in local or regional economies or the national economy, homebuyers may terminate their existing home purchase contracts with us in order to negotiate for a lower price or to explore other options. In 2007 and 2006, we experienced elevated cancellation rates, in part because of these reasons. Additional cancellations could have an adverse effect on our business and our results of operations.

Our long-term success depends on the availability of improved lots and undeveloped land that meet our land investment criteria.

The availability of finished and partially developed lots and undeveloped land for purchase that meet our internal investment criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, zoning, allowable housing density and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could increase, perhaps substantially, which could adversely impact our results of operations.

Home prices and sales activity in the particular markets and regions in which we do business affect our results of operations because our business is concentrated in these markets.

Home prices and sales activity in some of our key markets have declined from time to time for market-specific reasons, including adverse weather, lack of affordability or economic contraction due to, among other things, the failure or decline of key industries and employers. If home prices or sales activity decline in one or more of the key markets in which we operate, particularly in Arizona, California, Florida, Nevada or Texas, our costs may not decline at all or at the same rate and, as a result, our overall results of operations may be adversely affected.

Market conditions in the mortgage lending and mortgage finance industries deteriorated significantly in 2007, which adversely affected the availability of credit for some purchasers of our homes, reduced the population of potential mortgage customers and reduced mortgage liquidity. Further tightening of mortgage lending or mortgage financing requirements or further reduced mortgage liquidity could adversely affect the availability of credit for some purchasers of our homes and thereby reduce our sales.

During 2007, the mortgage lending and mortgage finance industries experienced significant instability due to, among other things, defaults on subprime loans and a resulting decline in the market value of such loans. In light of these developments, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led to reduced investor demand for mortgage loans and mortgage-backed securities, tightened credit requirements, reduced liquidity, increased credit risk premiums and regulatory actions. Deterioration in credit quality among subprime and other nonconforming loans has caused most lenders to eliminate subprime mortgages and most other loan products that do not conform to Fannie Mae, Freddie Mac, FHA or VA standards. Fewer loan products and tighter loan qualifications in turn make it more difficult for some categories of borrowers to finance the purchase of our homes or the purchase of existing homes from potential move-up buyers who wish to purchase one of our homes. In general, these developments have resulted in a reduction in demand for the homes we sell and have delayed any general improvement in the housing market. Furthermore, they have resulted in a reduction in demand for the mortgage loans that we originate through Countrywide KB Home Loans, our joint venture with Countrywide. These reductions in demand have had, and are expected to continue to have, a materially adverse effect on our business and results of operations in 2008.

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Many of our homebuyers obtain financing for their home purchases from Countrywide KB Home Loans. Countrywide provides the loan products that the joint venture offers to our homebuyers. If Countrywide refuses or is unable to make loan products available to the joint venture to provide to our homebuyers, our results of operations may be adversely affected.

Interest rate increases or changes in federal lending programs could lower demand for our homes.

Nearly all of our customers finance the purchase of their homes. In recent years, historically low interest rates and the increased availability of specialized mortgage products, including mortgage products requiring no or low down payments, and interest-only and adjustable rate mortgages, had made homebuying more affordable for a number of customers. Increases in interest rates or decreases in the availability of mortgage financing or of certain mortgage programs, as discussed above, may lead to higher down payment requirements or monthly mortgage costs, or both, and could therefore reduce demand for our homes.

Increased interest rates can also hinder our ability to realize our backlog because our home purchase contracts provide our customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event they cannot arrange for financing.

Because the availability of Fannie Mae, Freddie Mac, FHA and VA mortgage financing is an important factor in marketing and selling many of our homes, any limitations or restrictions in the availability of such government-backed financing could reduce our home sales.

Tax law changes could make home ownership more expensive or less attractive.

Significant expenses of owning a home, including mortgage interest expense and real estate taxes, generally are deductible expenses for the purpose of calculating an individual’s federal, and in some cases state, taxable income, subject to various limitations, under current tax law and policy. If the federal government or a state government changes income tax laws, as some policy makers have discussed recently, eliminating or substantially reducing these income tax deductions, the after-tax cost of owning a new home would increase substantially. This could adversely impact demand for and/or sales prices of new homes.

We are subject to substantial legal and regulatory requirements regarding the development of land, the homebuilding process and protection of the environment, which can cause us to suffer delays and incur costs associated with compliance and which can prohibit or restrict homebuilding activity in some regions or areas.

Our homebuilding business is heavily regulated and subject to an increasing amount of local, state and federal regulation concerning zoning, resource protection and other environmental impacts, building design, construction and similar matters. These regulations often provide broad discretion to governmental authorities that oversee these matters, which can result in unanticipated delays or increases in the cost of a specified project or a number of projects in particular markets. We may also experience periodic delays in homebuilding projects due to building moratoria in any of the areas in which we operate.

We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the environment. These laws and regulations may cause delays in construction and delivery of new homes, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. In addition, environmental laws may impose liability for the costs of removal or remediation of hazardous or toxic substances whether or not the developer or owner of the property knew of, or was responsible for, the presence of those substances. The presence of those substances on our properties may prevent us from selling our homes and we may also be liable, under applicable laws and regulations or lawsuits brought by private parties, for hazardous or toxic substances on properties and lots that we have sold in the past.

Further, a significant portion of our business is conducted in California, which is one of the most highly regulated and litigious states in the country. Therefore, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than other homebuilders with a less significant California presence.

The mortgage banking operations of Countrywide KB Home Loans are heavily regulated and subject to the rules and regulations promulgated by a number of governmental and quasi-governmental agencies. There are a number of

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federal and state statutes and regulations which, among other things, prohibit discrimination, establish underwriting guidelines that include obtaining inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts. A finding that we or Countrywide KB Home Loans materially violated any of the foregoing laws could have an adverse effect on our results of operations.

We are subject to a Consent Order that we entered into with the Federal Trade Commission in 1979 and related Consent Decrees that were entered into in 1991 and 2005. Pursuant to the Consent Order and the related Consent Decrees, we provide explicit warranties on the quality of our homes, follow certain guidelines in advertising and provide certain disclosures to prospective purchasers of our homes. A finding that we have significantly violated the Consent Order and/or the related Consent Decrees could result in substantial liabilities or penalties and could limit our ability to sell homes in certain markets.

Homebuilding and financial services are very competitive, and competitive conditions could adversely affect our business or our financial results.

The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but also for desirable land, financing, building materials, skilled management and trade labor. We compete in each of our served markets with other local, regional and national homebuilders, including those with a sales presence on the Internet, often within larger subdivisions containing portions designed, planned and developed by such homebuilders. These homebuilders may also have long-standing relationships with local labor, materials suppliers or land sellers, which may provide an advantage in their respective regions or local markets. We also compete with other housing alternatives, such as existing home sales and rental housing. The competitive conditions in the homebuilding industry can result in:

•  fewer homes delivered;

•  lower selling prices;

•  our offering or increasing sales incentives, discounts or price concessions;

•  lower profit margins;

•  declining new home sales or increasing cancellations by homebuyers of their home purchase contracts with us;

•  impairments in the value of our inventory, goodwill and other assets;

•  difficulty in acquiring desirable land that meets our land buying criteria, and in selling our interests in land that no longer meet our investment return criteria on favorable terms;

•  difficulty in acquiring raw materials and skilled management and labor at acceptable prices; or

•  delays in construction of our homes.

Our financial services business competes with other mortgage lenders, including national, regional and local mortgage banks and other financial institutions. Mortgage lenders with greater access to capital or different lending criteria may be able to offer more attractive financing to potential customers.

When we are affected by these competitive conditions, our business and financial results can be adversely affected by decreased revenues, increased costs and/or diminished growth in our local or regional homebuilding business. In the current downturn in the homebuilding industry, the reactions of our competitors may be reducing the effectiveness of our efforts to achieve pricing stability and reduce our inventory levels.

Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.

In the ordinary course of our homebuilding business, we are subject to home warranty and construction defect claims. We record warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes we build. We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensation and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. Through our captive insurance subsidiary, we reserve for costs to cover our self-

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insured and deductible amounts under these policies and for any costs of claims and lawsuits, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. Because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all our warranty and construction defect claims in the future. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly. There can be no assurance that coverage will not be further restricted and become more costly.

Because of the seasonal nature of our business, our quarterly operating results fluctuate.

We have experienced seasonal fluctuations in quarterly operating results. We typically do not commence significant construction on a home before a home purchase contract has been signed with a homebuyer. Historically, a significant percentage of our home purchase contracts are entered into in the spring and summer months, and a corresponding significant percentage of our deliveries occur in the fall and winter months. Construction of our homes typically requires approximately four months and weather delays that often occur in late winter and early spring may extend this period. As a result of these combined factors, we historically have experienced uneven quarterly results, with lower revenues and operating income generally during the first and second quarters of the year. However, the increasingly challenging market conditions we experienced in 2007 resulted in lower sales in the spring and summer months and correspondingly lower deliveries in the fall and winter months as compared to 2006. With the current difficult market conditions expected to continue through at least 2008, we can make no assurances that our normal seasonal patterns will occur in the near future.

Failure to comply with the covenants and conditions imposed by the agreements governing our indebtedness could restrict future borrowing or cause our debt to become immediately due and payable.

Our Credit Facility and the indentures governing our outstanding senior and senior subordinated public notes impose restrictions on our operations and activities. The most significant restrictions relate to limits on investments, cash dividends, stock repurchases and other restricted payments, incurrence of indebtedness, creation of liens and asset dispositions, and require maintenance of a maximum debt to equity (or leverage) ratio, a minimum interest coverage ratio, and a minimum level of tangible net worth. If we fail to comply with these restrictions or covenants, the holders of those debt instruments or the banks, as appropriate, could cause our debt to become due and payable prior to maturity or could demand that we compensate them for waiving instances of noncompliance. In addition, a default under the indenture for any of our notes or our Credit Facility could cause a default with respect to our other notes or the Credit Facility, as the case may be, and result in the acceleration of the maturity of all such defaulted indebtedness and our inability to borrow under the Credit Facility. Moreover, we may curtail our investment activities and other uses of cash to maintain compliance with these restrictions and covenants.

Our leverage may place burdens on our ability to comply with the terms of our indebtedness, may restrict our ability to operate and may prevent us from fulfilling our obligations.

The amount of our debt could have important consequences. For example, it could:

•  limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements;

•  require us to dedicate a substantial portion of our cash flow from operations to the payment of our debt and reduce our ability to use our cash flow for other purposes;

•  impact our flexibility in planning for, or reacting to, changes in our business;

•  place us at a competitive disadvantage because we have more debt than some of our competitors; and

•  make us more vulnerable in the event of a downturn in our business or in general economic conditions.

Our ability to meet our debt service and other obligations will depend upon our future performance. Our business is substantially affected by changes in economic cycles. Our revenues, earnings and cash flows vary with the level of general economic activity and competition in the markets in which we operate. Our business could also be affected by financial, political and other factors, many of which are beyond our control. Changes in prevailing interest rates may also affect our ability to meet our debt service obligations because borrowings under our Credit Facility bear interest at floating rates. A higher interest rate on our debt could adversely affect our operating results.

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Our business may not generate sufficient cash flow from operations and borrowings may not be available to us under our Credit Facility in an amount sufficient to pay our debt service obligations, fulfill financial or operational guarantees we have provided for certain unconsolidated joint venture transactions, or to fund our other liquidity needs. Should this occur, we may need to refinance all or a portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all.

We may have difficulty in continuing to obtain the additional financing required to operate and develop our business.

Our homebuilding operations require significant amounts of cash and/or available credit. It is not possible to predict the future terms or availability of additional capital. Moreover, our outstanding public debt and the Credit Facility contain provisions that may restrict the amount and nature of debt we may incur in the future. The Credit Facility limits our ability to borrow additional funds by placing a maximum cap on our leverage ratio. Under the most restrictive of these provisions, at November 30, 2007, we would have been permitted to incur up to $3.56 billion of total consolidated indebtedness, as defined in the Credit Facility. This maximum amount exceeded our actual total consolidated indebtedness at November 30, 2007 by $2.68 billion. In addition, the Credit Facility limits our ability to borrow senior indebtedness, as defined in the Credit Facility, subject to a specified borrowing base. At November 30, 2007, we would have been permitted to incur up to $3.32 billion of senior indebtedness under the Credit Facility. This maximum amount exceeded our actual total senior indebtedness at November 30, 2007 by $1.66 billion. There can be no assurance that we can actually borrow up to these maximum amounts of total consolidated indebtedness or senior indebtedness at any time, as our ability to borrow additional funds, and to raise additional capital through other means, also depends on conditions in the capital markets and our credit worthiness. If conditions in the capital markets change significantly, it could reduce our ability to generate sales and may hinder our future growth and results of operations.

We are involved in government investigations and litigation relating to our past stock option grant practices.

The SEC and the U.S. Department of Justice (“DOJ”) are conducting investigations into our stock option grant practices. In addition, shareholder derivative lawsuits have been filed in California state and federal courts relating to our stock option grant practices. It is possible that additional lawsuits may be filed. The investigations and lawsuits have resulted in, and will continue to result in, substantial legal and professional fees, and will continue to occupy our time and attention. An adverse outcome to the investigations or one or more of the lawsuits may have a negative effect on our business and our results of operations.

Item 1B.  UNRESOLVED STAFF COMMENTS  

None.

Item 2.  PROPERTIES  

We lease our corporate headquarters in Los Angeles, California. Our homebuilding division offices, except for our San Antonio, Texas office, and our KB Home Studios are located in leased space in the markets where we conduct business. Our homebuilding operations in San Antonio, Texas are principally conducted from premises that we own.

We believe that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of our businesses.

Item 3.  LEGAL PROCEEDINGS  

Derivative Litigation

On July 10, 2006, a shareholder derivative action, Wildt v. Karatz, et al., was filed in Los Angeles Superior Court. On August 8, 2006, a virtually identical shareholder derivative lawsuit, Davidson v. Karatz, et al., was also filed in Los Angeles Superior Court. These actions, which ostensibly are brought on our behalf, allege, among other things, that defendants (various of our current and former directors and officers) breached their fiduciary duties to us by, among other things, backdating grants of stock options to various current and former executives in violation of our shareholder-approved stock option plans. Defendants have not yet responded to the complaints. On January 22, 2007, the Court entered an order, pursuant to an agreement among the parties and us, providing, among other things, that, to preserve the

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status quo without prejudicing any party’s substantive rights, our former Chairman and Chief Executive Officer shall not exercise any of his outstanding options, at any price, during the period in which the order is in effect. Pursuant to further stipulated orders, these terms remain in effect and are now scheduled to expire on February 1, 2008, unless otherwise agreed in writing. The plaintiffs have agreed to stay their cases while the parallel federal court derivative lawsuits discussed below are pursued. A stipulation and order effectuating the parties’ agreement to stay the state court actions was entered by the court on February 7, 2007. The parties may extend the agreement that options will not be exercised by our former Chairman and Chief Executive Officer beyond the current February 1, 2008 expiration date.

On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in the United States District Court for the Central District of California. On August 31, 2006, a virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in the United States District Court for the Central District of California. These actions, which ostensibly are brought on our behalf, allege, among other things, that defendants (various of our current and former directors and officers) breached their fiduciary duties to us by, among other things, backdating grants of stock options to various current and former executives in violation of our shareholder-approved stock option plans. Unlike Wildt and Davidson, however, these lawsuits also include substantive claims under the federal securities laws. On January 9, 2007, plaintiffs filed a consolidated complaint. All defendants filed motions to dismiss the complaint on April 2, 2007. Subsequently, plaintiffs filed a motion for partial summary judgment against certain of the defendants. Pursuant to stipulated orders, the motions to dismiss and the motion for partial summary judgment have been taken off calendar to permit the parties to explore settlement via mediation. The latest order provides that unless otherwise agreed to by the parties or order by the court, the motions shall be back on calendar as of late March 2008. Discovery has not commenced.

Government Investigations

In August 2006, we announced that we had received an informal inquiry from the SEC relating to our stock option grant practices. In January 2007, we were informed that the SEC is conducting a formal investigation of this matter. The DOJ is also looking into these practices but has informed KB Home that it is not a target of this investigation. We have cooperated with these government agencies and intend to continue to do so.

ERISA Litigation

A complaint dated March 14, 2007 in an action brought under Section 502 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1132, Bagley et al., v. KB Home, et al., was filed in the United States District Court for the Central District of California. The action is brought against us, our directors, and certain of our current and former officers. Plaintiffs allege that they are bringing the action on behalf of all participants in the KB Home 401(k) Savings Plan (the “401(k) Plan”). Plaintiffs allege that the defendants breached fiduciary duties owed to members of the 401(k) Plan by virtue of issuing backdated option grants and failing to disclose this information to the 401(k) Plan participants. Plaintiffs claim that this conduct unjustly enriched certain defendants to the detriment of the 401(k) Plan and its participants, and caused the 401(k) Plan to invest in our securities at allegedly artificially inflated prices. The action purports to assert three causes of action for various alleged breaches of fiduciary duty. We have filed a motion to dismiss all claims alleged against us. The Court heard oral argument on the motion on November 19, 2007, after which the Court took the motion under submission. The Court has not yet ruled on the motion, and because of the pendency of the motion, no discovery has been taken in the action.

Storm Water Matter

In January 2003, we received a request for information from the EPA pursuant to Section 308 of the Clean Water Act. Several other public homebuilders have received similar requests. The request sought information about storm water pollution control program implementation at certain of our construction sites, and we provided information pursuant to the request. In May 2004, on behalf of the EPA, the DOJ tentatively asserted that certain regulatory requirements applicable to storm water discharges had been violated on certain occasions at certain of our construction sites, and civil penalties and injunctive relief might be warranted. The DOJ has also proposed certain steps it would expect us to take in the future relating to compliance with the EPA’s requirements applicable to storm water discharges. We have defenses to the claims that have been asserted and are exploring with the EPA, DOJ and other homebuilders methods of resolving the matter. To resolve the matter, the DOJ will want us to pay civil penalties and sign a consent decree affecting our storm water pollution practices at construction sites.

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Other Matters

We are also involved in litigation and governmental proceedings incidental to our business. These cases are in various procedural stages and, based on reports of counsel, we believe that provisions or reserves made for potential losses are adequate and any liabilities or costs arising out of currently pending litigation should not have a materially adverse effect on our consolidated financial position or results of operations.

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

No matters were submitted during the fourth quarter of 2007 to a vote of security holders, through the solicitation of proxies or otherwise.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information regarding our executive officers as of December 31, 2007:  

				Year		Years
				Assumed		at		Other Positions and Other
			Present Position at	Present		KB		Business Experience within the
Name	Age		December 31, 2007	Position		Home		Last Five Years (a)	From – To
Jeffrey T. Mezger		52	President and Chief Executive Officer (b)		2006		14	Executive Vice President and Chief Operating Officer	1999-2006
Domenico Cecere		58	Executive Vice President and Chief Financial Officer		2007		6	Senior Vice President and Chief Financial Officer	2002-2006
Wendy C. Shiba		57	Executive Vice President, General Counsel and Secretary		2007		1	Senior Vice President, Chief Legal Officer and Secretary, Polyone Corporation (specialized polymer materials, services and solutions)	2006-2007
								Vice President, Chief Legal Officer and Secretary, Polyone Corporation	2001-2006
Glen Barnard		63	Senior Vice President, KBnxt Group		2006		9	Regional General Manager (c)	2004-2006
								Chief Executive Officer, Constellation Real Technologies (real estate consortium)	2001-2003
William R. Hollinger		49	Senior Vice President and		2007		20	Senior Vice President and Controller	2001-2006
			Chief Accounting Officer
Kelly Masuda		40	Senior Vice President and Treasurer		2005		4	Senior Vice President, Capital Markets and Treasurer	2005
								Vice President, Capital Markets and Treasurer	2003-2005
								Director, Credit Suisse First Boston (investment bank)	2000-2002
John Staines		45	Senior Vice President, Human Resources		2007		1	Senior Vice President, Human Resources, DaVita, Inc. (kidney dialysis center operator)	2006
								Vice President, Human Resources, Global Supply Chain, The Gap Inc. (clothing retailer)	2004-2006
								Vice President, Human Resources, Mattel, Inc. (toy manufacturer)	2001-2004

(a)   All positions described were with us, unless otherwise indicated.

(b)   Mr. Mezger has served as a director since 2006.

(c)   Mr. Barnard was a senior executive with us from 1996-2001, and rejoined us in 2004.

There is no family relationship between any of our executive officers or between any of our executive officers and any of our directors.

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PART II

Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of December 31, 2007, there were 880 holders of record of our common stock. Our common stock is traded on the New York Stock Exchange under the ticker symbol “KBH.” The following table sets forth, for the periods indicated, the price ranges of our common stock:

	2007				2006
	High		Low		High		Low
First Quarter	$	56.08	$	47.69	$	81.99	$	64.80
Second Quarter		50.90		40.89		69.10		50.40
Third Quarter		47.57		28.00		52.65		37.89
Fourth Quarter		31.69		18.44		52.18		38.66

We paid quarterly cash dividends of $.25 per common share in 2007 and 2006.

The declaration and payment of cash dividends on shares of our common stock, whether at current levels or at all, are at the discretion of our board of directors, and depend upon, among other things, our future earnings, cash flows, capital requirements, operational investment strategy, and our general financial condition and general business conditions. In addition, debt instruments to which we are a party contain restrictions on the payment of cash dividends. Based on the most restrictive of these provisions, $283.2 million was available for payment of cash dividends at November 30, 2007.

The description of our equity compensation plans required by Item 201(d) of Regulation S-K is incorporated herein by reference to Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Form 10-K.

The following table summarizes our purchases of our own equity securities during the three months ended November 30, 2007:

							Maximum
							Number of Shares
					Total Number of		That May Yet be
					Shares Purchased as		Purchased
	Total Number		Average		Part of Publicly		Under the
	of Shares		Price Paid		Announced		Plans or
Period	Purchased		per Share		Plans or Programs		Programs
September 1 - 30		—	$	—		—		4,000,000
October 1 - 31		73,049		27.19		—		4,000,000
November 1 - 30		—		—		—		4,000,000
Total		73,049	$	27.19		—

On December 8, 2005, our board of directors authorized a share repurchase program under which we may repurchase up to 10 million shares of our common stock. Acquisitions under the share repurchase program may be made in open market or private transactions and will be made strategically from time to time at management’s discretion based on its assessment of market conditions and buying opportunities. At November 30, 2007, we were authorized to repurchase four million shares under this share repurchase program. During the three months ended November 30, 2007, no shares were repurchased pursuant to this share repurchase program. The 73,049 shares purchased during the three months ended November 30, 2007 were previously issued shares delivered to us by employees to satisfy withholding taxes on the vesting of restricted stock awards. These transactions are not considered repurchases pursuant to the share repurchase program.

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Stock Performance Graph

The graph below compares the cumulative total return of KB Home common stock, the S&P Homebuilding Index, the Dow Jones Home Construction Index and the S&P 500 Index for the last five year-end periods ended November 30.

Comparison of Five-Year Cumulative Total Return
Among KB Home, S&P Homebuilding
Index, Dow Jones Home Construction Index and S&P 500 Index

The above graph is based on the KB Home common stock and index prices calculated as of the last trading day before December 1^st of the year-end periods presented. Our November 30, 2007 closing common stock price on the New York Stock Exchange was $20.89 per share. On December 31, 2007, our common stock closed at $21.60 per share. The performance of our common stock depicted in the graphs above represents past performance only and is not indicative of future performance. Total return assumes $100 invested at market close on November 30, 2002 in KB Home common stock, the S&P Homebuilding Index, the Dow Jones Home Construction Index and the S&P 500 Index including reinvestment of dividends.

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Item 6.  SELECTED FINANCIAL DATA

The data in this table should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and Notes thereto included later in this report.

KB HOME

SELECTED FINANCIAL INFORMATION

(In Thousands, Except Per Share Amounts)

	Years Ended November 30,
	2007			2006		2005		2004		2003
Homebuilding:
Revenues	$	6,400,591		$	9,359,843	$	8,123,313	$	5,974,496	$	4,870,522
Operating income (loss)		(1,358,335	)		570,316		1,188,935		637,229		469,426
Total assets		5,661,564			7,825,339		6,881,486		4,760,288		3,307,164
Mortgages and notes payable		2,161,794			2,920,334		2,211,935		1,771,962		1,049,442
Financial services:
Revenues	$	15,935		$	20,240	$	31,368	$	44,417	$	75,125
Operating income		11,139			14,317		10,968		8,688		35,777
Total assets		44,392			44,024		29,933		210,460		253,113
Notes payable		—			—		—		71,629		132,225
Discontinued operations:
Total assets	$	—		$	1,394,375	$	1,102,898	$	1,020,082	$	810,661
Consolidated:
Revenues	$	6,416,526		$	9,380,083	$	8,154,681	$	6,018,913	$	4,945,647
Operating income (loss)		(1,347,196	)		584,633		1,199,903		645,917		505,203
Income (loss) from continuing operations		(1,414,770	)		392,947		754,534		430,384		332,610
Income from discontinued operations, net of income taxes (a)		485,356			89,404		69,178		43,652		35,311
Net income (loss)		(929,414	)		482,351		823,712		474,036		367,921
Total assets		5,705,956			9,263,738		8,014,317		5,990,830		4,370,938
Mortgages and notes payable		2,161,794			2,920,334		2,211,935		1,843,591		1,181,667
Stockholders’ equity		1,850,687			2,922,748		2,773,797		2,039,390		1,592,162
Basic earnings (loss) per share:
Continuing operations	$	(18.33	)	$	4.99	$	9.21	$	5.49	$	4.22
Discontinued operations		6.29			1.13		.85		.56		.45
Basic earnings (loss) per share	$	(12.04	)	$	6.12	$	10.06	$	6.05	$	4.67
Diluted earnings (loss) per share:
Continuing operations	$	(18.33	)	$	4.74	$	8.54	$	5.10	$	3.95
Discontinued operations		6.29			1.08		.78		.52		.42
Diluted earnings (loss) per share	$	(12.04	)	$	5.82	$	9.32	$	5.62	$	4.37
Cash dividends per common share	$	1.00		$	1.00	$	.75	$	.50	$	.15

(a)  Discontinued operations are comprised of our French operations, which have been presented as discontinued operations for all periods presented. Income from discontinued operations, net of income taxes, in 2007 includes a gain of $438.1 million realized on the sale of our French operations.

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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview.  Revenues are generated from our homebuilding operations and our financial services operations. On July 10, 2007, we sold our 49% equity interest in our publicly traded French subsidiary, KBSA. Accordingly, our French operations are presented as discontinued operations in this report and the financial results of prior periods have been reclassified to conform to the current year presentation. The following table presents a summary of our consolidated results of operations for the years ended November 30, 2007, 2006 and 2005 (in thousands, except per share amounts):

	Years ended November 30,
	2007			2006			2005
Revenues:
Homebuilding	$	6,400,591		$	9,359,843		$	8,123,313
Financial services		15,935			20,240			31,368
Total	$	6,416,526		$	9,380,083		$	8,154,681
Pretax income (loss):
Homebuilding	$	(1,494,606	)	$	538,311		$	1,190,336
Financial services		33,836			33,536			11,198
Income (loss) from continuing operations before income taxes		(1,460,770	)		571,847			1,201,534
Income tax benefit (expense)		46,000			(178,900	)		(447,000	)
Income (loss) from continuing operations		(1,414,770	)		392,947			754,534
Income from discontinued operations, net of income taxes		47,252			89,404			69,178
Gain on sale of discontinued operations, net of income taxes		438,104			—			—
Net income (loss)	$	(929,414	)	$	482,351		$	823,712
Basic earnings (loss) per share:
Continuing operations	$	(18.33	)	$	4.99		$	9.21
Discontinued operations		6.29			1.13			.85
Basic earnings (loss) per share	$	(12.04	)	$	6.12		$	10.06
Diluted earnings (loss) per share:
Continuing operations	$	(18.33	)	$	4.74		$	8.54
Discontinued operations		6.29			1.08			.78
Diluted earnings (loss) per share	$	(12.04	)	$	5.82		$	9.32

Continuing the downward trends that began in 2006, conditions in the overall housing market were challenging throughout 2007 and became increasingly difficult as the year progressed. Several factors weighed on the housing industry during the year, including a persistent oversupply of new and resale homes available for sale that reached historically high levels; rising foreclosure activity; heightened competition for home sales; reduced home affordability due largely to a record increase in average home prices during the first half of this decade; turmoil in the mortgage finance and credit markets; diminished real estate speculation; and decreased consumer confidence in purchasing homes. Our results for 2007 reflect the impact of these difficult conditions. They also reflect our efforts to reduce inventory investments and community counts to better align our operations with a housing market experiencing significantly reduced activity from the peak levels of a few years ago.

With the prolonged market downturn, we have experienced successive negative year-over-year comparisons in our net orders (new orders for homes less cancellations) for the past several quarters. As a result, our current backlog levels are significantly below year-earlier levels and we delivered fewer homes and generated less revenue in 2007 than in 2006. Our revenues in 2007 were also negatively affected by decreases in our average selling prices in three of our four homebuilding segments compared to year-earlier levels due to competitive pressures and changes in our product mix.

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At the same time, intensified competition and pricing pressures, slowing sales rates, and sustained high cancellation rates in many of our markets during 2007 lowered the fair value of certain of our assets and led us to reassess our land positions. This caused us to incur non-cash charges during the year for impairments in the value of our inventory, joint ventures and goodwill and for the abandonment of certain land option contracts. These non-cash charges and lower revenues in 2007 compressed our gross margins compared to the prior year.

Further impacting our results for 2007 was a substantial valuation allowance we established in the fourth quarter against certain deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). The deferred tax assets were produced largely from the inventory impairments we took during the year, and the valuation allowance was established in light of the continued downturn of the housing market and uncertainty as to its length and magnitude. To the extent that we generate sufficient taxable income in the future to utilize the tax benefits of the related deferred tax assets, we expect to experience a reduction in our effective income tax rate as the valuation allowance is reversed.

We reported a loss from continuing operations in 2007 resulting from the combination of fewer deliveries, lower average selling prices, compressed gross margins, non-cash charges for inventory and joint venture impairments, land option contract abandonments, goodwill impairments and the valuation allowance for deferred tax assets. We do not expect the business climate in most of the markets we serve and the overall housing market to improve in 2008.

Our total revenues of $6.42 billion for the year ended November 30, 2007 declined 32% from $9.38 billion in 2006, which had increased 15% from $8.15 billion in 2005. The decrease in total revenues in 2007 was primarily due to a decrease in housing revenues, reflecting fewer homes delivered and lower average selling prices compared to 2006. The increase in our revenues in 2006 was driven by an increase in housing revenues stemming from an increase in homes delivered and higher average selling prices compared to the prior year. Included in our total revenues were financial services revenues of $15.9 million in 2007, $20.2 million in 2006 and $31.4 million in 2005. The decline in financial services revenues in 2007 compared to 2006 was mainly due to fewer homes delivered from our homebuilding operations and the termination of our escrow coordination business in 2007. The decrease in financial services revenues in 2006 compared to 2005 was primarily due to the change in the mortgage banking operations of KB Home Mortgage Company (“KBHMC”) in the fourth quarter of 2005 to an unconsolidated joint venture. On September 1, 2005, we sold substantially all the mortgage banking assets of KBHMC to Countrywide and in a separate transaction established Countrywide KB Home Loans. We and Countrywide each have a 50% ownership interest in Countrywide KB Home Loans, which is accounted for as an unconsolidated joint venture in the financial services reporting segment of our consolidated financial statements.

Our continuing operations generated an after-tax loss of $1.41 billion in 2007 due to pretax, non-cash charges of $1.41 billion for inventory and joint venture impairments and the abandonment of land option contracts, and $107.9 million for goodwill impairment recognized during the year. The majority of the inventory and joint venture impairments related to our West Coast and Southwest reporting segments, and the goodwill impairment related solely to our Southwest reporting segment. Our 2007 loss from continuing operations also reflected a non-cash charge of $514.2 million to establish a valuation allowance for certain deferred tax assets. In 2006, we reported after-tax income from continuing operations of $392.9 million, down from $754.5 million in 2005 primarily due to a decrease in the operating margin in our homebuilding operations. Our 2006 results included charges of $431.2 million associated with inventory and joint venture impairments and land option contract abandonments, and a gain of $27.6 million related to the sale of our ownership interest in an unconsolidated joint venture. In 2007, we posted a loss per diluted share from continuing operations of $18.33 compared to earnings per diluted share from continuing operations of $4.74 in 2006 and $8.54 in 2005.

Income from discontinued operations, net of income taxes, totaled $485.4 million in 2007, including a $438.1 million after-tax gain on the sale of our French operations. Income from discontinued operations, net of income taxes, totaled $89.4 million in 2006 and $69.2 million in 2005. Discontinued operations are comprised solely of our French operations.

Overall, we posted a net loss of $929.4 million, or $12.04 per diluted share (including the French discontinued operations) in 2007. This compares to net income of $482.4 million, or $5.82 per diluted share, in 2006 and $823.7 million, or $9.32 per diluted share, in 2005.

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Our backlog at November 30, 2007 consisted of 6,322 homes, representing future housing revenues of approximately $1.50 billion. These backlog levels decreased 40% and 47%, respectively, from the 10,575 homes in backlog, representing approximately $2.83 billion in future revenues, at November 30, 2006. These decreases were due to the effects of several successive quarters of negative year-over-year net order comparisons and lower average selling prices, reflecting persistently deteriorating housing market conditions. Our homebuilding operations generated 2,574 net orders in the fourth quarter of 2007, down 32% from 3,763 net orders in the fourth quarter of 2006. Net orders in the fourth quarter of 2007 decreased year-over-year in each of our reporting segments. The fourth quarter 2007 cancellation rate of 58% was the same as the cancellation rate we experienced in the fourth quarter of 2006, but was higher than the 50% cancellation rate we experienced in the third quarter of 2007.

HOMEBUILDING

We have grouped our homebuilding activities into four reportable segments, which we refer to as West Coast, Southwest, Central and Southeast. As of November 30, 2007, our reportable homebuilding segments consisted of operations located in the following states: West Coast — California; Southwest — Arizona, Nevada and New Mexico; Central — Colorado, Illinois and Texas; Southeast — Florida, Georgia, Maryland, North Carolina, South Carolina and Virginia.

The following table presents a summary of selected financial and operational data for our homebuilding operations (dollars in thousands, except average selling price):

	Years ended November 30,
	2007			2006			2005
Revenues:
Housing	$	6,211,563		$	9,243,236		$	8,099,771
Land		189,028			116,607			23,542
Total		6,400,591			9,359,843			8,123,313
Costs and expenses:
Construction and land costs
Housing		(6,563,082	)		(7,456,003	)		(5,934,948	)
Land		(263,297	)		(210,016	)		(19,820	)
Total		(6,826,379	)		(7,666,019	)		(5,954,768	)
Selling, general and administrative expenses		(824,621	)		(1,123,508	)		(979,610	)
Goodwill impairment		(107,926	)		—			—
Total		(7,758,926	)		(8,789,527	)		(6,934,378	)
Operating income (loss)	$	(1,358,335	)	$	570,316		$	1,188,935
Homes delivered		23,743			32,124			31,009
Average selling price	$	261,600		$	287,700		$	261,200
Housing gross margin		(5.7	)%		19.3	%		26.7	%
Selling, general and administrative expenses as a percent of housing revenues		13.3	%		12.2	%		12.1	%
Operating income (loss) as a percent of homebuilding revenues		(21.2	)%		6.1	%		14.6	%

Revenues.  Homebuilding revenues totaled $6.40 billion in 2007, decreasing 32% from $9.36 billion in 2006, which had increased 15% from $8.12 billion in 2005. The decrease in 2007 compared to 2006 reflected lower housing revenues due to fewer homes delivered and a lower average selling price. The increase in 2006 compared to 2005 resulted primarily from higher housing revenues driven by an increase in homes delivered and a higher average selling price.

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Housing revenues totaled $6.21 billion in 2007, $9.24 billion in 2006 and $8.10 billion in 2005. In 2007, housing revenues decreased 33% from the previous year due to a 26% decline in homes delivered and a 9% decrease in the average selling price. In 2006, housing revenues increased 14% from 2005 due to a 4% increase in homes delivered and a 10% increase in the average selling price.

We delivered 23,743 homes in 2007, down from 32,124 homes in 2006, reflecting year-over-year decreases in each of our reporting segments. The lower delivery volume in 2007 was due, in part, to our reducing our community count to better align our operations with reduced housing market activity.

In 2006, we delivered 32,124 homes, up from 31,009 homes delivered in 2005. The growth in homes delivered in 2006 reflected year-over-year increases of 9% and 16% in our West Coast and Southeast segments, respectively, partially offset by decreases of 5% and 3% in homes delivered from our Southwest and Central segments, respectively.

Our average new home selling price decreased 9% in 2007 to $261,600 from $287,700 in 2006. Year-over-year average selling prices declined 11% in our West Coast segment, 16% in our Southwest segment and 6% in our Southeast segment due to weak consumer demand and heightened competition from homebuilders and other sellers, which put downward pressure on home prices. The average selling price in our Central segment increased 5% in 2007 from the previous year, solely due to changes in product mix.

Our 2006 average new home price had increased 10% from $261,200 in 2005, primarily due to the delivery in 2006 of homes purchased in the latter half of 2005, when market conditions were more favorable. Increases in our average selling prices in 2006 were more significant in the West Coast, Southwest and Southeast segments, with a slight increase in the Central segment.

Land sale revenues totaled $189.0 million in 2007, $116.6 million in 2006 and $23.5 million in 2005. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets we serve and prevailing market conditions. Land sale revenues were more significant in 2007 and 2006 compared to 2005 as deteriorating market conditions caused us to reassess our future sales expectations which resulted in our selling land that no longer fit our marketing strategy rather than holding it for future development.

Operating Income.  Our homebuilding operations posted an operating loss of $1.36 billion in 2007, a decrease of $1.93 billion from operating income of $570.3 million in 2006, reflecting losses from both housing operations and land sales. The operating loss in 2007 represented a negative 21.2% of homebuilding revenues. In 2006, operating income as a percent of homebuilding revenues was 6.1%. The 2007 operating loss was due to a decrease in our housing gross margin, which fell to a negative 5.7% in 2007 from a positive 19.3% for the same period of 2006. The change in our housing gross margin was largely the result of pretax non-cash charges of $1.18 billion for inventory impairments and land option contract abandonments in 2007 primarily in our West Coast and Southwest segments. These impairment and abandonment charges resulted from declining market conditions, which depressed new home values and sales rates in certain housing markets across the country. Poor market conditions also depressed land values and led us to terminate our options on projects that no longer met our internal investment standards. Excluding inventory impairment and abandonment charges ($1.18 billion in 2007 and $309.5 million in 2006), our housing gross margin would have been 13.3% in 2007 and 22.7% in 2006.

Operating income decreased to $570.3 million in 2006, down from $1.19 billion in 2005. As a percentage of homebuilding revenues, operating income decreased to 6.1% in 2006 from 14.6% in 2005, mainly due to a lower housing gross margin, which decreased to 19.3% in 2006 from 26.7% in 2005. The decrease in housing gross margin was primarily due to a greater use of price concessions and sales incentives to meet competitive conditions and to aggregate charges of $309.5 million associated with inventory impairments and the abandonment of land option contracts we no longer planned to pursue.

In 2007, our land sales generated losses of $74.3 million, including impairment charges of $74.8 million relating to future land sales. Our land sales generated losses of $93.4 million in 2006, including impairment charges of $63.1 million relating to future land sales. In 2005, land sales generated profits of $3.7 million, including $9.6 million of impairment charges.

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We evaluate our land and housing inventory for recoverability in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) whenever indicators of potential impairment exist. Based on our evaluations, we recognized non-cash charges for the impairment of inventory of $1.11 billion in 2007, $228.7 million in 2006 and $26.7 million in 2005.

The higher impairment charge in 2007 reflects the increasingly challenging housing market conditions that we experienced during the year that lowered the value of certain assets compared to prior periods. These conditions included a significant oversupply of homes available for sale, reduced housing affordability and tighter credit conditions that are keeping prospective buyers from trading up or entering the market, higher foreclosure activity, and heightened competition. As a result, our sales rates, sales prices and gross margins declined in 2007, lowering the fair value of certain inventory positions and resulting in the impairment of inventory. Further deterioration in housing market conditions may lead to additional non-cash impairment charges in the future or cause us to reevaluate our strategy concerning certain assets that could result in future charges associated with the abandonment of land option contracts. In 2006, most of our inventory impairment and abandonment charges were incurred in the fourth quarter, as conditions became more challenging in certain markets, mainly as a result of a growing imbalance between new home supply and demand. These market dynamics caused a decline in the fair value of certain inventory positions and led us to reassess our strategy concerning certain inventory positions.

When we determine that we no longer plan to exercise land purchase option contracts due to market conditions and/or changes in market strategy, we write off the costs, including non-refundable deposits and pre-acquisition costs, related to the abandoned projects. We recognized abandonment charges associated with land option contracts of $144.0 million in 2007, $143.9 million in 2006 and $16.2 million in 2005. The inventory impairment charges and land option contract abandonments are included in construction and land costs in our consolidated statements of operations.

Selling, general and administrative expenses totaled $824.6 million in 2007 compared with $1.12 billion in 2006 and $979.6 million in 2005. As a percentage of housing revenues, to which these expenses are most closely correlated, selling, general and administrative expenses were 13.3% in 2007, 12.2% in 2006 and 12.1% in 2005.

Goodwill Impairment.  We have recorded goodwill in connection with various acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), we test goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the third quarter of 2007, we determined that it was necessary to evaluate goodwill for impairment due to deteriorating conditions in certain housing markets, the significant inventory impairments we identified and recognized during the quarter in accordance with SFAS No. 144, and the decline in the market price of our common stock to a level below our per share book value. We evaluated goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment. Our goodwill evaluations utilized discounted cash flow analyses and market multiple analyses of historical and forecasted operating results of our reporting units. Inherent in our fair value determinations are certain judgments and estimates relating to future cash flows, including the interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. A change in such assumptions may cause a change in the results of the analyses performed. In addition, to the extent significant changes occur in market conditions, overall economic conditions or our strategic operational plans, it is possible that goodwill not currently impaired may become impaired in the future. Based on the results of our evaluation, we recorded an impairment charge of $107.9 million in the third quarter of 2007 related to our Southwest reporting segment, where the goodwill previously recorded was determined to be impaired. We recorded the charge at our corporate level since all goodwill is carried at that level. The annual impairment test we performed as of November 30, 2007 indicated no additional impairments. The impairment tests we performed as of November 30, 2006 and 2005 indicated no goodwill impairment.

Interest Income.  Interest income, which is generated from short-term investments and mortgages and notes receivable, amounted to $28.6 million in 2007, $5.5 million in 2006 and $3.5 million in 2005. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of our short-term

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investments and our mortgages and notes receivable, as well as fluctuations in interest rates. The increase in interest income in 2007 compared to 2006 reflects a substantial increase in short-term investments due to the higher level of cash generated in 2007.

Loss on Early Redemption/Interest Expense, Net of Amounts Capitalized.  In 2007, we completed the early redemption of $650.0 million of debt. On July 27, 2007, we redeemed all $250.0 million of our 91/2% senior subordinated notes due in 2011 at a price of 103.167% of the principal amount of the notes, plus accrued interest to the date of redemption. On July 31, 2007, we repaid in full an unsecured $400.0 million term loan (the “$400 Million Term Loan”), together with accrued interest to the date of repayment. The $400 Million Term Loan was scheduled to mature on April 11, 2011. We incurred a loss of $13.0 million associated with the early extinguishment of this debt, primarily due to a call premium on the senior subordinated notes and the write-off of unamortized debt issuance costs.

Interest expense results principally from borrowings to finance land purchases, housing inventory and other operating and capital needs. During 2007, all of our interest was capitalized and, consequently, we had no interest expense, net of amounts capitalized. In 2006, interest expense, net of amounts capitalized, totaled $16.7 million. Gross interest incurred during 2007 decreased by $38.2 million, to $199.6 million, from $237.8 million incurred in 2006, mainly due to lower debt levels in 2007. The percentage of interest capitalized in 2007 increased to 100% from 93% in 2006 due to an increase in inventory qualifying for interest capitalization compared to 2006.

In 2006, interest expense, net of amounts capitalized, increased to $16.7 million from $16.3 million in 2005. Gross interest incurred in 2006 was $78.7 million higher than the amount incurred in 2005, reflecting higher debt levels in 2006. The percentage of interest capitalized in 2005 was 90%.

Equity in Income (Loss) of Unconsolidated Joint Ventures.  Our unconsolidated joint ventures operate in certain markets where our consolidated homebuilding operations are located. These unconsolidated joint ventures posted combined revenues of $662.7 million in 2007, $167.5 million in 2006 and $212.3 million in 2005. The increase in revenues in 2007 over the prior year was primarily due to an increase in the number of lots sold by these unconsolidated joint ventures. The decrease in unconsolidated joint venture revenues in 2006 from 2005 reflected a change in product mix. Activities performed by our unconsolidated joint ventures generally include buying, developing and selling land, and, in some cases, constructing and delivering homes. Our unconsolidated joint ventures delivered 127 homes in 2007, 4 homes in 2006 and 83 homes in 2005. Unconsolidated joint ventures generated combined losses of $51.6 million in 2007 and $48.6 million in 2006, and combined income of $34.7 million in 2005. In 2007, our equity in loss of unconsolidated joint ventures of $151.9 million included a charge of $156.4 million to recognize the impairment of certain unconsolidated joint ventures mainly in our West Coast, Southwest and Southeast segments. In 2006, our equity in loss of unconsolidated joint ventures of $20.8 million included a charge of $58.6 million to recognize the impairment of certain unconsolidated joint ventures in our West Coast and Southeast segments and a gain of $27.6 million related to the sale of our ownership interest in an unconsolidated joint venture. In 2005, our equity in income from unconsolidated joint ventures totaled $14.2 million.

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HOMEBUILDING SEGMENTS

The following table sets forth financial information related to our homebuilding reporting segments for the years indicated (in thousands):

	Years Ended November 30,
	2007			2006			2005
West Coast:
Revenues	$	2,203,303		$	3,531,279		$	3,050,486
Operating costs and expenses		(2,848,548	)		(3,178,973	)		(2,383,112	)
Other, net		(20,600	)		7,558			13,929
Pretax income (loss)	$	(665,845	)	$	359,864		$	681,303
Southwest:
Revenues	$	1,349,570		$	2,183,830		$	1,964,483
Operating costs and expenses		(1,617,395	)		(1,809,930	)		(1,452,272	)
Other, net		(19,514	)		(8,802	)		1,635
Pretax income (loss)	$	(287,339	)	$	365,098		$	513,846
Central:
Revenues	$	1,077,304		$	1,553,309		$	1,559,067
Operating costs and expenses		(1,134,601	)		(1,591,982	)		(1,512,831	)
Other, net		(6,913	)		(16,076	)		(18,084	)
Pretax income (loss)	$	(64,210	)	$	(54,749	)	$	28,152
Southeast:
Revenues	$	1,770,414		$	2,091,425		$	1,549,277
Operating costs and expenses		(1,932,084	)		(2,036,000	)		(1,392,825	)
Other, net		(68,750	)		(16,492	)		(3,944	)
Pretax income (loss)	$	(230,420	)	$	38,933		$	152,508

The following table presents information concerning our housing revenues and homes delivered by homebuilding reporting segment:

			Percent					Percent
			of					of
			Total					Total			Average
	Housing		Housing			Homes		Homes			Selling
Years Ended November 30,	Revenues		Revenues			Delivered		Delivered			Price
	(in thousands)
2007
West Coast	$	2,149,547		35	%		4,957		21	%	$	433,600
Southwest		1,254,932		20			4,855		20			258,500
Central		1,058,985		17			6,310		27			167,800
Southeast		1,748,099		28			7,621		32			229,400
Total	$	6,211,563		100	%		23,743		100	%	$	261,600
2006
West Coast	$	3,530,679		38	%		7,213		22	%	$	489,500
Southwest		2,151,908		23			7,011		22			306,900
Central		1,536,075		17			9,613		30			159,800
Southeast		2,024,574		22			8,287		26			244,300
Total	$	9,243,236		100	%		32,124		100	%	$	287,700

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			Percent					Percent
			of					of
			Total					Total			Average
	Housing		Housing			Homes		Homes			Selling
Years Ended November 30,	Revenues		Revenues			Delivered		Delivered			Price
	(in thousands)
2005
West Coast	$	3,050,486		38	%		6,624		21	%	$	460,500
Southwest		1,954,196		24			7,357		24			265,600
Central		1,554,863		19			9,866		32			157,600
Southeast		1,540,226		19			7,162		23			215,100
Total	$	8,099,771		100	%		31,009		100	%	$	261,200

West Coast — Housing revenues in our West Coast segment decreased 39% to $2.15 billion in 2007 from $3.53 billion in 2006 due to a 31% decrease in homes delivered and an 11% decrease in the average selling price. Homes delivered in this segment decreased to 4,957 in 2007 from 7,213 in 2006 primarily due to a 10% decrease in active communities. We have decreased our active communities to match reduced levels of demand in this segment compared to prior periods. The average selling price fell to $433,600 in 2007 from $489,500 in 2006 due to pricing pressure stemming from highly competitive conditions and weak demand. Our lower average selling price in 2007 also reflects our efforts to redesign and reengineer our products to improve their affordability, particularly in light of tighter mortgage financing requirements applicable to loans above conforming limits. The West Coast segment generated a pretax loss of $665.8 million in 2007, down from pretax income of $359.9 million in 2006. This decrease was principally due to charges of $716.4 million for inventory and joint venture impairments and the abandonment of land option contracts in 2007, and a lower housing gross margin stemming from lower sales prices and more frequent use of price concessions and sales incentives.

In 2006, West Coast segment housing revenues increased 16%, from $3.05 billion in 2005, due to a 9% increase in homes delivered and a 6% increase in the average selling price. We delivered 7,213 homes with an average selling price of $489,500 in 2006, up from 6,624 homes with an average selling price of $460,500 in 2005. Pretax income decreased to $359.9 million in 2006 from $681.3 million in 2005. As a percentage of total revenues, pretax income decreased to 10.2% in 2006 from 22.3% in 2005. This decrease was principally due to $213.1 million of inventory and joint venture impairment charges and land option contract abandonments in 2006, and a lower housing gross margin stemming from greater use of price concessions and sales incentives as a result of increasing competition.

Southwest — Housing revenues in the Southwest segment decreased 42% to $1.25 billion in 2007, from $2.15 billion in 2006, due to a 16% decrease in the average selling price, and a 31% decrease in homes delivered. The average selling price decreased to $258,500 in 2007 from $306,900 in 2006 due to pricing pressure stemming from a persistent oversupply of new and resale homes in certain markets within this segment coupled with declining demand. We delivered 4,855 homes in the Southwest segment in 2007, down from 7,011 homes in 2006 primarily due to a 24% decrease in active communities, principally in Las Vegas, reflecting our efforts to align our operations with relatively lower levels of demand. The Southwest segment generated a pretax loss of $287.3 million in 2007 compared to pretax income of $365.1 million in 2006. The decrease was primarily due to $385.4 million of inventory and joint venture impairment charges and land option contract abandonments in 2007, and a lower housing gross margin resulting from ongoing weakness in market conditions, greater competition, and the increased use of price concessions and sales incentives to stimulate sales.

In 2006, Southwest segment housing revenues increased 10% from $1.95 billion in 2005, due to a 16% increase in the average selling price, partly offset by a 5% decrease in homes delivered. We delivered 7,011 homes in this segment in 2006 at an average selling price of $306,900 compared to 7,357 homes delivered in 2005 at an average selling price of $265,600. Pretax income decreased to $365.1 million in 2006 from $513.8 million in 2005. As a percentage of total revenues, pretax income decreased to 16.7% in 2006 from 26.2% in 2005. The decrease was primarily due to a lower housing gross margin, reflecting moderating market conditions, greater competition, and the increased use of price concessions and sales incentives.

Central — Housing revenues in the Central segment of $1.06 billion in 2007 decreased 31% from $1.54 billion in 2006, reflecting a year-over-year decrease of 34% in homes delivered, partially offset by a 5% increase in the average

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selling price. In this segment, homes delivered decreased to 6,310 in 2007 from 9,613 in 2006 primarily due to a 26% decrease in active communities, principally in Texas and Indiana, due to our exiting smaller submarkets and realigning our operations with our reduced sales expectations in these states. The average selling price increased to $167,800 in 2007 from $159,800 in 2006 due to a change in product mix. This segment generated a pretax loss of $64.2 million in 2007, down from a pretax loss of $54.7 million in 2006. The 2007 loss included $38.9 million of inventory and joint venture impairment and land option contract abandonment charges.

In 2006, Central segment housing revenues were essentially flat with 2005, reflecting a 3% decrease in homes delivered offset by a slight increase in the average selling price. Homes delivered in this segment decreased to 9,613 in 2006 from 9,866 in 2005 while the average selling price increased to $159,800 in 2006 from $157,600 in 2005. This segment generated a pretax loss of $54.7 million in 2006, down from pretax income of $28.2 million in 2005 primarily due to $48.8 million of inventory impairments and land option contract abandonments in 2006 and a slightly lower housing gross margin.

Southeast — Housing revenues in the Southeast segment decreased 14% to $1.75 billion in 2007 from $2.02 billion in 2006 due to decreases of 8% in homes delivered and 6% in the average selling price. Homes delivered decreased to 7,621 in 2007 from 8,287 in 2006 reflecting the difficult conditions in many Southeast markets. The average selling price decreased to $229,400 in 2007 from $244,300 in 2006 as highly competitive conditions exerted downward pressure on home prices, primarily in Florida. The Southeast segment generated a pretax loss of $230.4 million in 2007, including charges of $269.6 million for inventory and joint venture impairments and the abandonment of land option contracts, compared to pretax income of $38.9 million in 2006. The Southeast segment impairment and abandonment charges were principally in Florida.

In 2006, Southeast segment housing revenues rose 31% to $2.02 billion from $1.54 billion in 2005 as a result of a 16% increase in homes delivered and a 14% increase in the average selling price. Homes delivered in this segment increased to 8,287 in 2006 from 7,162 in 2005, while the average selling price increased to $244,300 in 2006 from $215,100 in 2005. Pretax income decreased to $38.9 million in 2006 from $152.5 million in 2005. As a percentage of total revenues, pretax income decreased to 1.9% in 2006 from 9.8% in 2005 principally due to $129.9 million of inventory impairment charges and land option contract abandonments in 2006.

FINANCIAL SERVICES SEGMENT

Our financial services segment provides title and insurance services to our homebuyers and provided escrow coordination services until 2007, when we terminated our escrow coordination business. This segment also provides mortgage banking services to our homebuyers indirectly through Countrywide KB Home Loans. On September 1, 2005, we completed the sale of substantially all the mortgage banking assets of KBHMC to Countrywide and in a separate transaction established Countrywide KB Home Loans, a joint venture with Countrywide. Countrywide KB Home Loans began making loans to our homebuyers on September 1, 2005 and essentially replaced the mortgage banking operations of KBHMC, our wholly owned financial services subsidiary which had provided mortgage banking services to our homebuyers in the past. We and Countrywide each have a 50% ownership interest in the joint venture with Countrywide providing management oversight of the joint venture’s operations. Countrywide KB Home Loans is accounted for as an unconsolidated joint venture in the financial services reporting segment of our consolidated financial statements.

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The following table presents a summary of selected financial and operational data for our financial services segment (dollars in thousands):

	Years Ended November 30,
	2007			2006			2005
Revenues	$	15,935		$	20,240		$	31,368
Expenses		(4,796	)		(5,923	)		(20,400	)
Equity in income of unconsolidated joint venture		22,697			19,219			230
Pretax income	$	33,836		$	33,536		$	11,198
Total originations (a):
Loans		16,869			15,740			15,325
Principal	$	3,934,336		$	3,843,793		$	2,789,818
Retention rate		72	%		57	%		48	%
Loans sold to third parties (a):
Loans		16,909			15,613			12,045
Principal	$	3,969,827		$	3,787,597		$	1,910,153

(a)  Includes combined Countrywide KB Home Loans and KBHMC results for 2005.

Revenues.  Our financial services operations generated revenues primarily from the following sources: interest income; title services; insurance commissions; escrow coordination fees; and sales of mortgage loans and servicing rights. Financial services revenues included interest income of $.2 million in 2007, $.2 million in 2006 and $8.2 million in 2005, which was earned primarily from first mortgages and mortgage-backed securities held for long-term investment as collateral. Interest income decreased in 2007 and 2006 mainly due to the wind-down of the mortgage banking operations of KBHMC. Financial services revenues also included revenues from title services, insurance commissions and escrow coordination fees of $15.7 million in 2007, $20.0 million in 2006, and $17.3 million in 2005. The decrease in financial services revenues in 2007 compared to 2006 was due to the lower number of homes delivered by our homebuilding operations and the termination of our escrow coordination business in 2007. The increases in revenues related to these services in 2006 correlated with the increase in the number of homes delivered from our homebuilding operations. Financial services revenues included mortgage and servicing rights income of $5.9 million in 2005. Due to the sale of KBHMC’s mortgage banking operations in the fourth quarter of 2005, the financial services segment did not generate any mortgages and servicing rights income in 2006 or 2007.

Expenses.  Financial services expenses in 2007, 2006 and 2005 were comprised of interest expense, general and administrative expenses, and other income and expense items. Interest expense decreased to a nominal amount in 2007 and 2006 from $5.2 million in 2005 due to the wind-down of KBHMC’s mortgage banking operations in late 2005. General and administrative expenses totaled $4.8 million in 2007, $5.9 million in 2006 and $22.0 million in 2005. The decrease in general and administrative expenses in 2007 was primarily due to the termination of our escrow coordination business in 2007. In 2006, the decrease in general and administrative expenses was primarily due to the wind-down of KBHMC’s mortgage banking operations in the fourth quarter of 2005 and the change in the mortgage banking operations of KBHMC to an unconsolidated joint venture structure. In 2005, financial services expenses included other items aggregating to income of $6.8 million. These other items included a $26.6 million gain recorded in connection with the sale of assets to Countrywide. The gain represented the cash received over the sum of the book value of the assets sold and certain nominal costs associated with the disposal. In addition, financial services expenses in 2005 included $19.8 million of expenses accrued for various regulatory and other contingencies.

Equity in income of unconsolidated joint venture.  The equity in income of unconsolidated joint venture of $22.7 million in 2007, $19.2 million in 2006 and $.2 million in 2005 relates to our 50% interest in the Countrywide KB Home Loans joint venture. The increase in unconsolidated joint venture income in 2007 compared to 2006 reflected a 7% increase in the number of loans originated by the Countrywide KB Home Loans joint venture, reflecting a higher retention rate (the percentage of our homebuyers using Countrywide KB Home Loans as their loan originator). The overall retention rate increase during 2007 reflected the continuing maturation of the joint venture, which began in late 2005. In 2006, the increase in unconsolidated joint venture income reflected the joint venture’s first full year of operation.

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INCOME TAXES

We recognized an income tax benefit from continuing operations of $46.0 million in 2007 and income tax expense from continuing operations of $178.9 million in 2006 and $447.0 million in 2005. These amounts represent an effective tax rate on the pretax loss from continuing operations for 2007 of 3% and effective tax rates on pretax income from continuing operations of 31% for 2006 and 37% for 2005. The decrease in our effective tax rate in 2007 from 2006 was primarily due to a non-cash valuation allowance recorded as a reserve against deferred tax assets. Excluding the impact of the valuation allowance, our effective tax rate for 2007 would have been 38%. The decrease in our effective tax rate in 2006 from 2005 was primarily due to the release of excess state tax accruals, tax benefits from the manufacturing deduction created by the American Jobs Creation Act of 2004, and a reduction in the disallowance of stock-based compensation deductions and related expenses, partially offset by a reduction in available tax credits and a 25% phase-out of these credits.

We generated significant deferred tax assets in 2007 largely due to the inventory impairments we incurred during the year. We evaluate our deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with SFAS No. 109, we assess whether a valuation allowance should be established based on our determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In light of the continued downturn in the housing market and the uncertainty as to its length and magnitude, we anticipate being in a three-year cumulative loss position during fiscal year 2008. According to SFAS No. 109, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable, and also generally precludes relying on projections of future taxable income to support the recovery of deferred tax assets. Therefore, during the fourth quarter of 2007, we recorded a valuation allowance totaling approximately $522.9 million against our deferred tax assets. The valuation allowance was reflected as a non-cash charge of $514.2 million to income tax expense and $8.7 million to accumulated other comprehensive loss (as a result of an adjustment made in accordance with Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statement No. 87, 88, 106 and 132(R)” (“SFAS No. 158”)). The deferred tax assets, for which there is no valuation allowance, relate to amounts that can be realized through future reversals of existing taxable temporary differences or through carrybacks to the 2006 and 2007 years. The majority of the tax benefits associated with our deferred tax assets can be carried forward for 20 years. To the extent we generate sufficient taxable income in the future to fully utilize the tax benefits of the related deferred tax assets, we expect our effective tax rate to decrease as the valuation allowance is reversed.

During 2007, 2006 and 2005, we made investments that resulted in benefits in the form of synthetic fuel tax credits. During 2005, a small portion of these tax credits were forfeited as part of an Internal Revenue Service (“IRS”) settlement. Additionally, these tax credits are subject to a phase-out provision that gradually reduces the tax credits if the annual average price of domestic crude oil increases to a stated phase-out range. We currently estimate the phase-out percentage for 2007 to be 65%. In 2006, there was a 25% reduction in tax credits and in 2005 there was no reduction in tax credits.

DISCONTINUED OPERATIONS

Discontinued operations are comprised solely of our French operations, which were sold on July 10, 2007. We sold our 49% equity interest in KBSA for total gross proceeds of $807.2 million, and a pretax gain of $706.7 million ($438.1 million, net of income taxes) was recognized in the third quarter of 2007 related to the transaction. The sale was made pursuant to a share purchase agreement dated May 22, 2007 (the “Share Purchase Agreement”), among us, Financière Gaillon 8 SAS (the “Purchaser”), an affiliate of PAI partners, a European private equity firm, and three of our wholly owned subsidiaries: Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, and Kaufman and Broad International, Inc. (collectively, the “Selling Subsidiaries”). Under the Share Purchase Agreement, the Purchaser agreed to acquire our 49% equity interest (representing 10,921,954 shares held collectively by the Selling Subsidiaries) at a price of 55.00 euros per share. The purchase price consisted of 50.17 euros per share paid by the Purchaser in cash, and a cash dividend of 4.83 euros per share paid by KBSA.

In 2007, income from discontinued operations, net of income taxes, totaled $485.4 million, or $6.29 per diluted share, including the gain realized on the sale of these operations. Income from discontinued operations, net of income taxes, totaled $89.4 million, or $1.08 per diluted share, in 2006 and $69.2 million, or $.78 per diluted share, in 2005.

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LIQUIDITY AND CAPITAL RESOURCES

Overview.  We historically have funded our homebuilding and financial services operations with internally generated cash flows and external sources of debt and equity financing. We also have the Credit Facility under which we may borrow funds from time to time as needed.

In light of the deteriorating market conditions in 2007, we took several decisive actions during the year to generate cash flow, reduce debt levels and strengthen our balance sheet. These actions included reducing inventory and community counts, trimming our workforce, consolidating or exiting underperforming markets and selling our French operations. Due to the strategies we employed, we reduced our debt by $758.5 million and increased our cash balance by $625.2 million in 2007.

In 2007, we completed the early redemption of $650.0 million of debt. On July 27, 2007, we completed the redemption of all $250.0 million of our 91/2% senior subordinated notes due in 2011 at a price of 103.167% of the principal amount of the notes, plus accrued interest to the date of redemption. On July 31, 2007, we repaid in full our $400 Million Term Loan, together with accrued interest to the date of repayment. The $400 Million Term Loan was scheduled to mature on April 11, 2011. We incurred a loss of $13.0 million associated with the early extinguishment of this debt, primarily due to a call premium on the senior subordinated notes and the write-off of unamortized debt issuance costs.

Our financial leverage, as measured by the ratio of debt to total capital, was 53.9% at the end of 2007 and 50.0% at the end of 2006. The year-over-year increase in this ratio reflected lower retained earnings in 2007 primarily due to substantial non-cash charges recorded during the year for the impairment of inventory, joint ventures and goodwill; the abandonment of land option contracts; and the valuation allowance recorded on certain deferred tax assets. Our ratio of net debt to net total capital at November 30, 2007 was 31.1%, representing an improvement of 12.1 percentage points from our 43.2% ratio at November 30, 2006. Net debt to net total capital is calculated by dividing mortgages and notes payable, net of homebuilding cash, by net total capital (mortgages and notes payable, net of homebuilding cash, plus stockholders’ equity). We believe the ratio of net debt to net total capital is useful in understanding the leverage employed in our operations and comparing us with others in the homebuilding industry.

Capital Resources.  External sources of financing for our homebuilding activities include our Credit Facility, third-party secured financings, and the public debt and equity markets. Substantial unused lines of credit remain available for our future use, if required, principally through our Credit Facility. Interest on the Credit Facility is payable monthly at the London Interbank Offered Rate plus an applicable spread on amounts borrowed. At November 30, 2007, we had $296.8 million of outstanding letters of credit and no outstanding borrowings, leaving approximately $1.20 billion available for our future use under the Credit Facility. (This amount is based on the $1.50 billion aggregate commitment under the Credit Facility at November 30, 2007. On January 25, 2008, the Credit Facility was amended and the aggregate commitment was reduced to $1.30 billion as disclosed in Note 22. Subsequent Event in the Notes to Consolidated Financial Statements in this Form 10-K. If the $1.30 billion had been in effect at November 30, 2007, approximately $1.00 billion would have been available for our future use at that date.)

On August 17, 2007, we entered into a third amendment (the “Revolver Amendment”) to the Credit Facility. The Revolver Amendment allows for a reduction of the minimum interest coverage ratio (the “Coverage Ratio”) otherwise required under the Credit Facility for a period of up to nine consecutive quarters (the “Reduction Period”). The Coverage Ratio is the ratio of our consolidated EBITDA to consolidated interest expense (as defined under the Credit Facility). During the Reduction Period, the interest rates applied to borrowings and the unused line fee under the Credit Facility, and the maximum ratio of our consolidated total indebtedness to consolidated tangible net worth, are subject to adjustment. The Revolver Amendment also permits us to eliminate any minimum Coverage Ratio requirement during the Reduction Period, for a period of up to four quarters, if certain financial criteria are met, and makes permanent amendments to certain other provisions of the Credit Facility. Consenting lenders to the Revolver Amendment received a fee in connection with this amendment.

The Credit Facility, as amended, contains covenants that require us to stay within certain specified financial ratios. The non-cash charges associated with inventory and joint venture impairments, land option contract abandonments, goodwill impairment and the valuation allowance on deferred tax assets in 2007 negatively affected our ability to comply at November 30, 2007 with a covenant in the Credit Facility that requires us to maintain a certain consolidated tangible

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net worth. As a result, on January 7, 2008, we obtained a waiver of compliance under this covenant. To address our covenant compliance for future periods, we entered into a fourth amendment to the Credit Facility on January 25, 2008 that amended the minimum consolidated tangible net worth we are required to maintain.

Depending on available terms and our negotiating leverage related to specific market conditions, we also finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At November 30, 2007, we had outstanding seller-financed notes payable of $19.1 million secured primarily by the underlying property, which had a carrying value of $48.0 million.

Consolidated Cash Flows.  Operating, investing and financing activities provided net cash of $539.6 million in 2007 and $479.2 million in 2006. These activities used net cash of $66.0 million in 2005.

Operating Activities.   Continuing operations provided net operating cash of $896.9 million during 2007 and $480.2 million during 2006. The year-over-year change in operating cash flow primarily reflected a net decrease in inventories stemming from our curtailment of inventory investments in light of challenging housing market conditions and our diminished future sales expectations. Our sources of operating cash in 2007 included a net decrease in inventories of $779.9 million (excluding inventory impairments and land option contract abandonments, $4.1 million of inventories acquired through seller financing and a decrease of $409.5 million in consolidated inventories not owned), other operating sources of $17.4 million, and various non-cash items added to the loss from continuing operations. Partially offsetting the cash provided was a loss from continuing operations of $929.4 million and a decrease in accounts payable, accrued expenses and other liabilities of $340.6 million. Our French discontinued operations provided net cash from operating activities of $297.4 million in 2007.

In 2006, sources of operating cash from our continuing operations included earnings of $482.4 million, an increase in accounts payable, accrued expenses and other liabilities of $205.7 million, other operating sources of $7.2 million and various non-cash items deducted from net income. Our sources of operating cash in 2006 were partially offset by an increase in inventories of $356.3 million (excluding inventory impairments and land option contract abandonments, $128.7 million of inventories acquired through seller financing and a decrease of $18.1 million in consolidated inventories not owned) and an increase in receivables of $23.5 million. Our French discontinued operations provided net cash from operating activities of $229.5 million in 2006.

In 2005, uses of operating cash by our continuing operations included net investments in inventories of $1.81 billion (excluding inventory impairments and land option contract abandonments, $36.8 million of inventories acquired through seller financing and an increase of $120.7 million in consolidated inventories not owned). The cash used was partially offset by earnings of $823.7 million, an increase in accounts payable, accrued expenses and other liabilities of $697.5 million, a decrease in receivables of $50.1 million, other operating sources of $55.7 million and various non-cash items deducted from net income. Our French discontinued operations provided net cash from operating activities of $86.7 million in 2005.

Investing Activities.   Continuing operations provided net cash from investing activities of $498.9 million in 2007 and used $196.9 million in the year-earlier period. In 2007, $739.8 million was provided from the sale of our French discontinued operations, net of cash divested and $.7 million was provided from net sales of property and equipment. Partially offsetting the cash provided was $241.6 million used for investments in unconsolidated joint ventures. Our French discontinued operations used net cash for investing activities of $12.1 million in 2007.

In 2006, $237.8 million was used by continuing operations for investments in unconsolidated joint ventures and $17.6 million was used for net purchases of property and equipment. The cash used was partially offset by proceeds of $57.8 million from the sale of our investment in an unconsolidated joint venture and $.7 million from other investing activities. In 2006, our French discontinued operations used net cash of $4.5 million for investing activities.

In 2005, $117.6 million was used by continuing operations for investments in unconsolidated joint ventures and $22.1 million was used for net purchases of property and equipment. The cash used was partially offset by proceeds of $42.4 million from the sale of substantially all of the mortgage banking assets of KBHMC and $1.3 million provided from other investing activities. Our French discontinued operations used net cash of $1.9 million for investing activities in 2005.

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Financing Activities.  Continuing operations used net cash of $835.0 million for financing activities in 2007 and provided net cash of $185.9 million for financing activities in 2006. In 2007, cash was used for the redemption of the $400 Million Term Loan, which was scheduled to mature on April 11, 2011, and $250.0 million of 91/2% senior subordinated notes due in 2011, net payments on short-term borrowings of $114.1 million, dividend payments of $77.2 million and repurchases of common stock of $6.9 million in connection with the satisfaction of employee withholding taxes on vested restricted stock. These uses of cash were partly offset by $12.3 million from the issuance of common stock under employee stock plans and $.9 million of excess tax benefit associated with the exercise of stock options. Our French discontinued operations used net cash of $306.5 million for financing activities in 2007.

In 2006, sources of cash from our continuing operations included proceeds from the $400 Million Term Loan, $298.5 million in total proceeds from the issuance of $300.0 million of 71/4% senior notes due 2018 (the “$300 Million 71/4% Senior Notes”), $65.1 million from the issuance of common stock under employee stock plans and $15.4 million of excess tax benefits associated with the exercise of stock options. Partially offsetting the sources of cash were $394.1 million used for repurchases of common stock, net payments of $120.7 million on short-term borrowings and dividend payments of $78.3 million. On December 8, 2005, our board of directors increased the annual cash dividend on our common stock to $1.00 per share from $.75 per share. In 2006, our French discontinued operations used net cash of $215.0 million for financing activities.

In 2005, financing activities provided $747.6 million in total proceeds from the issuance of $300.0 million of 57/8% senior notes due 2015 (the “$300 Million 57/8% Senior Notes”) and $450.0 million of 61/4% senior notes due 2015 (the “$450 Million Senior Notes”), and $101.8 million from the issuance of common stock under employee stock plans. Partially offsetting the cash provided were $417.7 million of net payments on short-term borrowings, $134.7 million used for repurchases of common stock and $61.6 million for cash dividend payments. On December 2, 2004, our board of directors increased the annual cash dividend on our common stock to $.75 per share from $.50 per share. Our French discontinued operations used net cash of $119.2 million for financing activities in 2005.

Shelf Registration Statement.  At November 30, 2007, $450.0 million of capacity remained available under our universal shelf registration statement filed with the SEC on November 12, 2004 (the “2004 Shelf Registration”).

Changes in Capital Structure.  At November 30, 2007, we were authorized to repurchase four million shares of our common stock under a board-approved share repurchase program. We did not repurchase any shares of our common stock under this program in 2007.

We continually consider various options for the use of our cash, including internal capital investments, investments to grow our business and additional debt reductions. Based on our current capital position, we believe we have adequate resources and sufficient credit facilities to satisfy our current and reasonably anticipated future requirements for funds to acquire capital assets and land, to construct homes, to finance our financial services operations, and to meet any other needs in the ordinary course of our business, both on a short- and long-term basis.

OFF-BALANCE SHEET ARRANGEMENTS

We conduct a portion of our land acquisition, development and other homebuilding activities through participation in unconsolidated joint ventures in which we hold less than a controlling interest. These unconsolidated joint ventures operate in certain markets where our consolidated homebuilding operations are located. Through unconsolidated joint ventures, we reduce and share our risk and also reduce the amount invested in land, while increasing our access to potential future homesites. The use of unconsolidated joint ventures also, in some instances, enables us to acquire land which we might not otherwise obtain or have access to on as favorable terms without the participation of a strategic partner. Our partners in these unconsolidated joint ventures are unrelated homebuilders, land developers and other real estate entities, or other commercial enterprises. While we view our participation in unconsolidated joint ventures as beneficial to our homebuilding activities, we do not view them as essential to those activities.

We and/or our joint venture partners sometimes obtain certain options or enter into other arrangements to purchase portions of the land held by the unconsolidated joint ventures. These land option prices are generally negotiated prices that approximate fair value. We do not include in our income from unconsolidated joint ventures our pro rata share of unconsolidated joint venture earnings resulting from land sales to our homebuilding operations. We defer recognition of our share of such unconsolidated joint venture earnings until a home sale is closed and title passes to a homebuyer, at which time we account for those earnings as a reduction of the cost of purchasing the land from the unconsolidated joint ventures.

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Our investments in unconsolidated joint ventures totaled $297.0 million at November 30, 2007 and $381.2 million at November 30, 2006. These unconsolidated joint ventures had total assets of $2.51 billion at November 30, 2007 and $2.40 billion at November 30, 2006 and outstanding secured construction debt of approximately $1.54 billion at November 30, 2007 and $1.45 billion at November 30, 2006. In certain instances, we provide varying levels of guarantees on the debt of unconsolidated joint ventures. When we provide a guarantee, the unconsolidated joint venture generally receives more favorable terms from lenders than would otherwise be available to it. At November 30, 2007, we had payment guarantees related to the third-party debt of two of our unconsolidated joint ventures. One of these unconsolidated joint ventures had aggregate third-party debt of $320.4 million at November 30, 2007, of which each of the joint venture partners guaranteed its pro rata share. Our share of the payment guarantee, which is triggered only in the event of bankruptcy of the joint venture, was 49% or $155.2 million. The other unconsolidated joint venture had total third-party debt of $6.2 million at November 30, 2007, of which each of the joint venture partners guaranteed its pro rata share. Our share of this guarantee was 50% or $3.1 million. Our pro rata share of limited maintenance guarantees of unconsolidated entity debt totaled $103.8 million at November 30, 2007. The limited maintenance guarantees apply only if the value of the collateral (generally land and improvements) is less than a specific percentage of the loan balance. If we are required to make a payment under a limited maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution and/or loan to the affected unconsolidated joint venture.

In the ordinary course of business, we enter into land option contracts in order to procure land for the construction of homes. The use of such option agreements allows us to reduce the risks associated with land ownership and development, reduce our financial commitments, including interest and other carrying costs, and minimize land inventories. Under such land option contracts, we will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46(R)”), certain of our land option contracts may create a variable interest for us, with the land seller being identified as a variable interest entity (“VIE”).

In compliance with FASB Interpretation No. 46(R), we analyze our land option contracts and other contractual arrangements when they are entered into or upon a reconsideration event, and have consolidated the fair value of certain VIEs from which we are purchasing land under option contracts. Although we do not have legal title to the optioned land, FASB Interpretation No. 46(R) requires us to consolidate the VIE if we are determined to be the primary beneficiary. The consolidation of these VIEs, where we were determined to be the primary beneficiary, increased our inventories, with a corresponding increase to accrued expenses and other liabilities, on our consolidated balance sheets by $19.0 million at November 30, 2007 and $215.4 million at November 30, 2006. The significant decrease in 2007 from the previous year resulted from our abandonment of certain land option contracts due to challenging market conditions in 2007 and exercising options to purchase land from VIEs that were previously consolidated. The liabilities related to our consolidation of VIEs from which we are purchasing land under option contracts represent the difference between the purchase price of optioned land not yet purchased and our cash deposits. Our cash deposits related to these land option contracts totaled $4.7 million at November 30, 2007 and $41.9 million at November 30, 2006. Creditors, if any, of these VIEs have no recourse against us. As of November 30, 2007, excluding consolidated VIEs, we had cash deposits totaling $54.6 million that were associated with land option contracts having an aggregate purchase price of $979.1 million.

We also evaluate land option contracts in accordance with Statement of Financial Accounting Standards No. 49, “Accounting for Product Financing Arrangements” (“SFAS No. 49”), and increased inventories, with a corresponding increase to accrued expenses and other liabilities, on our consolidated balance sheets by $221.1 million at November 30, 2007 and $434.2 million at November 30, 2006, as a result of our evaluations. The decrease in the 2007 amount compared to the previous year is due to the exercise of land option contracts and the abandonment of certain land option contracts.

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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes our future cash requirements under contractual obligations as of November 30, 2007 (in thousands):

	Payments due by Period
	Total		2008		2009-2010		2011-2012		Thereafter
Contractual obligations:
Long-term debt	$	2,161,794	$	1,909	$	515,504	$	348,549	$	1,295,832
Interest		815,262		144,688		243,996		179,554		247,024
Operating lease obligations		79,603		21,926		34,696		14,689		8,292
Total	$	3,056,659	$	168,523	$	794,196	$	542,792	$	1,551,148

We are often required to obtain bonds and letters of credit in support of our obligations to various municipalities and other government agencies in connection with subdivision improvements such as roads, sewers and water. At November 30, 2007, we had approximately $1.08 billion of performance bonds and $296.8 million of letters of credit outstanding. At November 30, 2006, we had approximately $1.24 billion of performance bonds and $464.2 million of letters of credit outstanding. We do not believe that any currently outstanding bonds or letters of credit will be called. The expiration dates of letters of credit coincide with the expected completion dates of the related projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. Performance bonds do not have stated expiration dates. Rather, we are released from the bonds as the contractual performance is completed.

We have, and require the majority of the subcontractors we use to have, general liability insurance (including construction defect coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. We self-insure a portion of our overall risk through the use of a captive insurance subsidiary.

We record expenses and liabilities related to the costs to cover our self-insured and deductible amounts under our insurance policies and for any estimated costs of potential claims and lawsuits (including expected legal costs) in excess of our coverage limits or not covered by our policies, based on an analysis of our historical claims, which includes an estimate of construction defect claims incurred but not yet reported. We engage a third-party actuary that uses our historical claim data to estimate our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability. Projection of losses related to these liabilities is subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others. Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs could differ significantly from our currently estimated amounts.

CRITICAL ACCOUNTING POLICIES

Listed below are accounting policies that we believe are critical because of the significance of the activity or because they require the use of significant judgment in their application.

Homebuilding Revenue Recognition.  As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, revenues from housing and other real estate sales are recognized in accordance with Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), when sales are closed and title passes to the buyer. Sales are closed when all of the following conditions are met: a sale is consummated, a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured.

Inventories and Cost of Sales.  As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, inventories are stated at cost, unless the carrying amount of the parcel or community is determined not to be recoverable, in which case the inventories are written down to fair value in accordance with SFAS No. 144. Fair value is determined based on estimated future cash flows discounted for inherent risks associated

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with the real estate assets, or other valuation techniques. Due to uncertainties in the estimation process, it is possible that actual results could differ from those estimates. Our inventories typically do not consist of completed projects.

We rely on certain estimates to determine construction and land costs and resulting gross margins associated with revenues recognized. Our construction and land costs are comprised of direct and allocated costs, including estimated future costs for warranties and amenities. Land, land improvements and other common costs are generally allocated on a relative fair value basis to homes within a parcel or community. Land and land development costs include related interest and real estate taxes.

In determining a portion of the construction and land costs for each period, we rely on project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. It is possible that actual results could differ from budgeted amounts for various reasons, including construction delays, labor or materials shortages, increases in costs that have not yet been committed, changes in governmental requirements, unforeseen environmental hazard discoveries or other unanticipated issues encountered during construction that fall outside the scope of contracts obtained. While the actual results for a particular construction project are accurately reported over time, variances between the budgeted and actual costs of a project could result in the understatement or overstatement of construction and land costs and homebuilding gross margins in a specific reporting period. To reduce the potential for such distortion, we have set forth procedures that collectively comprise a “critical accounting policy.” These procedures, which we have applied on a consistent basis, include updating, assessing and revising project budgets on a monthly basis, obtaining commitments from subcontractors and vendors for future costs to be incurred, reviewing the adequacy of warranty accruals and historical warranty claims experience, and utilizing the most recent information available to estimate construction and land costs to be charged to expense. The variances between budgeted and actual amounts identified by us have historically not had a material impact on our consolidated results of operations. We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of construction and land costs.

Warranty Costs.  As discussed in Note 12. Commitments and Contingencies in the Notes to Consolidated Financial Statements in this Form 10-K, we provide a limited warranty on all of our homes. The specific terms and conditions of warranties vary depending upon the market in which we do business. We generally provide a structural warranty of 10 years, a warranty on electrical, heating, cooling and plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home such as appliances. We estimate the costs that may be incurred under each limited warranty and record a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Factors that affect our warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. While we believe the warranty accrual reflected in the consolidated balance sheets to be adequate, actual warranty costs in the future could differ from our current estimates.

Stock-Based Compensation.  As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, effective December 1, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. We provide compensation benefits by issuing stock options, restricted stock, phantom shares and stock appreciation rights (“SARs”). Determining the fair value of share-based awards at the grant date requires judgment to identify the appropriate valuation model and develop the assumptions, including the expected term of the stock options, expected stock-price volatility and dividend yield, to be used in the calculation. Judgment is also required in estimating the percentage of share-based awards that are expected to be forfeited. We estimated the fair value of stock options granted using the Black-Scholes option-pricing model with assumptions based primarily on historical data. In addition, we estimated the fair value of certain restricted common stock that is subject to a market condition (“Performance Shares”) using a Monte Carlo simulation model. If actual results differ significantly from these estimates, stock-based compensation expense and our consolidated results of operations could be materially impacted. Prior to December 1, 2005, we accounted for stock option grants under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”) and related interpretations.

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Goodwill.  As disclosed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, we have recorded goodwill in connection with various acquisitions in prior years. In accordance with SFAS No. 142, we test goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including the interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that our conclusion regarding goodwill impairment could change and result in a material effect on our consolidated financial position or results of operations.

Income Taxes.  As discussed in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this Form 10-K, income taxes are accounted for in accordance with SFAS No. 109. The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We evaluate our deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with SFAS No. 109, we assess whether a valuation allowance should be established based on our determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which those temporary differences become deductible. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations. Further discussion of the valuation allowance recorded in 2007 is included in Note 17. Income Taxes in the Notes to Consolidated Financial Statements in this Form 10-K.

SUBSEQUENT EVENT

On January 25, 2008, we entered into the fourth amendment to the Credit Facility. The fourth amendment amends the minimum consolidated tangible net worth we are required to maintain under the Credit Facility and reduces the aggregate commitment under the Credit Facility from $1.50 billion to $1.30 billion.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (“FASB Interpretation No. 48”). FASB Interpretation No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FASB Interpretation No. 48 are effective for our first quarter ending February 29, 2008. We are in the process of evaluating the potential impact of adopting FASB Interpretation No. 48, but do not expect the interpretation to have a material impact on our consolidated financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. We are currently evaluating the potential impact of adopting SFAS No. 157 on our consolidated financial position and results of operations.

In November 2006, the Emerging Issues Task Force (“EITF”) ratified EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under SFAS No. 66 for Sales of Condominiums” (“EITF 06-8”). EITF 06-8 states that adequacy of the buyer’s investment under SFAS No. 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. EITF 06-8 could require that additional deposits be collected by developers of condominium projects that wish to recognize profit during the construction period under the percentage-of-completion method. EITF 06-8 is effective for

42

fiscal years beginning after March 15, 2007. We are currently evaluating the potential impact of adopting EITF 06-8 on our consolidated financial position and results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure certain financial assets and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are currently evaluating the potential impact of the adoption of SFAS No. 159; however, we do not expect it to have a material impact on our consolidated financial position or results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) amends Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively. We are currently evaluating the potential impact of adopting SFAS No. 141(R) on our consolidated financial position and results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the potential impact of adopting SFAS No. 160 on our consolidated financial position and results of operations.

OUTLOOK

At November 30, 2007, we had 6,322 homes in backlog, a decrease of 40% from the 10,575 homes in backlog at November 30, 2006. Our backlog at November 30, 2007 represented future housing revenues of approximately $1.50 billion, down 47% from approximately $2.83 billion at November 30, 2006. The reduction in our backlog reflects several successive quarters of year-over-year decreases in net orders. In the fourth quarter of 2007, our homebuilding operations generated 2,574 net orders, down 32% from the 3,763 net orders generated in the final quarter of 2006. The year-over-year decline in our fourth quarter net orders was due, in part, to a 22% decrease in the number of active communities, consistent with our efforts to adjust our homebuilding operations to the market environment. Our fourth quarter 2007 cancellation rate of 58% was unchanged from the cancellation rate we experienced in the fourth quarter of 2006, but was higher than the 50% rate reported in the third quarter of 2007.

We expect the negative operational and financial pressures the homebuilding industry and our business experienced in 2007 to continue and possibly even intensify in 2008 as the housing market contraction, which gained momentum throughout 2007, looks to extend well into the year ahead. While affordability constraints and declining buyer confidence were key factors driving the downturn in the housing market in 2006, they were joined in 2007 by tighter credit standards and disrupted mortgage markets. These factors are causing many potential homebuyers to forgo or defer home purchases because they are unable to obtain adequate financing, are concerned that they cannot sell their existing home at a fair price or at a price that covers their existing mortgage, and/or are expecting home prices to fall further. This demand-side dynamic is a key reason there were in 2007, and there continues to be, a considerable number of new and existing homes available for sale in housing markets across the country. The oversupply of homes available for sale relative to demand created the extremely challenging conditions we experienced in 2007 and its persistence and depth suggest there will be little, if any, improvement in the near-term future.

As housing industry conditions became increasingly difficult in 2007, we continued to execute on a number of strategies that we adopted in 2006 to solidify our financial position and to reposition our business with the present market environment and our future expectations. We made strengthening our balance sheet one of our highest priorities

43

during the year and focused on reducing our debt levels and generating cash through greater conversion of our backlog into revenue and strategically converting operating assets into cash, including the sale of our interest in our French operations. From our efforts in 2007, we enter 2008 with a cash balance of $1.33 billion, no borrowings outstanding under our Credit Facility and a debt balance that is $758.5 million lower than at the beginning of 2007. We believe our substantial cash position and reduced leverage provide us with an opportunity to strategically reload our land pipeline for higher margin deliveries in future periods.

We also reviewed our market positions, community counts and overhead requirements during the year, and curtailed our investments where it made financial or strategic sense to do so. Based in part on this review and the conversion of our backlog, we have reduced the number of lots we own or control by 65% since February 28, 2006 from approximately 186,000 to 66,000 at November 30, 2007. We also reduced our community counts in weaker markets, and exited certain underperforming markets altogether. We anticipate further reducing our active communities in 2008, which will likely have a negative impact on our year-over-year net order results compared to 2007.

In positioning our business for the future, we intensified our focus in 2007 on our core customer base — the first-time, first move-up and active adult homebuyer — and further refined our “Built to Order” operating disciplines. During 2007, we introduced newly designed, smaller, more affordable homes in our active communities at price points calibrated to median income levels to attract our core customers. We also reengineered our home designs to lower production costs and cycle times, while continuing to invest in our KB Home Studios to provide our customers with a customized choice/value proposition that we believe uniquely differentiates us from other builders in the marketplace.

Based on our efforts in 2007, we believe we are well positioned financially and strategically to navigate through the current housing market downturn and have set a foundation for future growth. However, we believe 2008 will be another tough year for the homebuilding industry and see no indication that housing markets struggling with a significant oversupply of homes available for sale are stabilizing. We believe the moderating sales activity and significant pricing and margin pressures that affected the homebuilding industry throughout 2007 will continue, and may deepen, until current new and resale home inventory levels are in better balance with demand, and it is not clear when this may occur. As a result, we do not expect our delivery volume and related revenues to improve in 2008, and we may need to take additional charges for inventory impairments in the future. In addition, our 2008, and possibly 2009, results may be negatively affected if there is a downturn in the general economy, a decrease in job growth and/or a decline in overall consumer confidence that further prolongs the recovery of the housing markets.

As we move ahead, we expect to continue our efforts from the past year to maintain a strong financial position, sharpen our focus on our core customer base and our “Built to Order” business model, and to align our cost structure and operations with market conditions. Longer term, we expect favorable demographics and continuing population growth in our served markets to drive demand for new homes, and believe that our operating approach and financial resources will allow us to capitalize on improvements in these housing markets as they occur.

FORWARD-LOOKING STATEMENTS

Investors are cautioned that certain statements contained in this document, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts and stockholders during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “hopes,” and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial or operating performance (including future revenues, homes delivered, selling prices, expenses, expense ratios, margins, earnings or earnings per share, or growth or growth rates), future market conditions, future interest rates, and other economic conditions, ongoing business strategies or prospects, future dividends and changes in dividend levels, the value of backlog (including amounts that we expect to realize upon delivery of homes included in backlog and the timing of those deliveries), potential future acquisitions and the impact of completed acquisitions, future share repurchases and possible future actions, which may be provided by us, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations, economic and market factors, and the homebuilding industry, among other things. These statements are not guarantees of future performance, and we have no specific policy or intention to update these statements.

44

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to: general economic and business conditions; material prices and availability; labor costs and availability; changes in interest rates; our debt level; declines in consumer confidence; increases in competition; weather conditions, significant natural disasters and other environmental factors; government regulations; the availability and cost of land in desirable areas; government investigations and shareholder lawsuits regarding our past stock option grant practices and the restatement of certain of our financial statements; other legal or regulatory proceedings or claims; conditions in the capital, credit (including consumer mortgage lending standards) and homebuilding markets; and the other risks discussed above in Item 1A. Risk Factors.

45

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We primarily enter into debt obligations to support general corporate purposes, including the operations of our subsidiaries. We are subject to interest rate risk on our senior and senior subordinated notes. For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flows. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes.

The following table sets forth principal cash flows by scheduled maturity, weighted average interest rates and the estimated fair market value of our long-term debt obligations as of November 30, 2007 (dollars in thousands):

																					Fair Value at
	Years Ended November 30,																				November 30,
	2008			2009			2010			2011			2012			Thereafter			Total		2007
Long-term debt (a)
Fixed Rate	$	—		$	200,000		$	298,273		$	348,549		$	—		$	1,295,832		$	2,142,654		$1,921,042
Weighted Average Interest Rate		—	%		8.6	%		7.8	%		6.4	%		—	%		6.3	%

(a) Includes senior subordinated and senior notes.

46

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

KB HOME

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
	Number
Consolidated Statements of Operations for the Years Ended November 30, 2007, 2006 and 2005		48
Consolidated Balance Sheets as of November 30, 2007 and 2006		49
Consolidated Statements of Stockholders’ Equity for the Years Ended November 30, 2007, 2006 and 2005		50
Consolidated Statements of Cash Flows for the Years Ended November 30, 2007, 2006 and 2005		51
Notes to Consolidated Financial Statements		52-85
Reports of Independent Registered Public Accounting Firm		86-87

Separate combined financial statements of our unconsolidated joint venture activities have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary as defined by Rule 3-09 of Regulation S-X.

47

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

	Years Ended November 30,
	2007			2006			2005
Total revenues	$	6,416,526		$	9,380,083		$	8,154,681
Homebuilding:
Revenues	$	6,400,591		$	9,359,843		$	8,123,313
Construction and land costs		(6,826,379	)		(7,666,019	)		(5,954,768	)
Selling, general and administrative expenses		(824,621	)		(1,123,508	)		(979,610	)
Goodwill impairment		(107,926	)		—			—
Operating income (loss)		(1,358,335	)		570,316			1,188,935
Interest income		28,636			5,503			3,529
Loss on early redemption/interest expense, net of amounts capitalized		(12,990	)		(16,678	)		(16,343	)
Equity in income (loss) of unconsolidated joint ventures		(151,917	)		(20,830	)		14,215
Homebuilding pretax income (loss)		(1,494,606	)		538,311			1,190,336
Financial services:
Revenues		15,935			20,240			31,368
Expenses		(4,796	)		(5,923	)		(20,400	)
Equity in income of unconsolidated joint venture		22,697			19,219			230
Financial services pretax income		33,836			33,536			11,198
Income (loss) from continuing operations before income taxes		(1,460,770	)		571,847			1,201,534
Income tax benefit (expense)		46,000			(178,900	)		(447,000	)
Income (loss) from continuing operations		(1,414,770	)		392,947			754,534
Income from discontinued operations, net of income taxes		47,252			89,404			69,178
Gain on sale of discontinued operations, net of income taxes		438,104			—			—
Net income (loss)	$	(929,414	)	$	482,351		$	823,712
Basic earnings (loss) per share:
Continuing operations	$	(18.33	)	$	4.99		$	9.21
Discontinued operations		6.29			1.13			.85
Basic earnings (loss) per share	$	(12.04	)	$	6.12		$	10.06
Diluted earnings (loss) per share:
Continuing operations	$	(18.33	)	$	4.74		$	8.54
Discontinued operations		6.29			1.08			.78
Diluted earnings (loss) per share	$	(12.04	)	$	5.82		$	9.32

See accompanying notes.

48

KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Shares)

	November 30,
	2007			2006
Assets
Homebuilding:
Cash and cash equivalents	$	1,325,255		$	700,041
Receivables		295,739			224,077
Inventories		3,312,420			5,751,643
Investments in unconsolidated joint ventures		297,010			381,242
Deferred income taxes		222,458			430,806
Goodwill		67,970			177,333
Other assets		140,712			160,197
		5,661,564			7,825,339
Financial services		44,392			44,024
Assets of discontinued operations		—			1,394,375
Total assets	$	5,705,956		$	9,263,738
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable	$	699,851		$	626,243
Accrued expenses and other liabilities		975,828			1,600,617
Mortgages and notes payable		2,161,794			2,920,334
		3,837,473			5,147,194
Financial services		17,796			26,276
Liabilities of discontinued operations		—			1,167,520
Stockholders’ equity:
Preferred stock — $1.00 par value; authorized, 10,000,000 shares; none issued		—			—
Common stock — $1.00 par value; authorized, 290,000,000 shares at November 30, 2007 and 2006; 114,976,285 and 114,648,604 shares issued at November 30, 2007 and 2006, respectively		114,976			114,649
Paid-in capital		851,628			825,958
Retained earnings		1,968,881			2,975,465
Accumulated other comprehensive income (loss)		(22,923	)		63,197
Grantor stock ownership trust, at cost: 12,203,282 and 12,345,182 shares at November 30, 2007 and 2006, respectively		(132,608	)		(134,150	)
Treasury stock, at cost: 25,451,107 and 25,274,482 shares at November 30, 2007 and 2006, respectively		(929,267	)		(922,371	)
Total stockholders’ equity		1,850,687			2,922,748
Total liabilities and stockholders’ equity	$	5,705,956		$	9,263,738

See accompanying notes.

49

KB HOME

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands)

	Years Ended November 30, 2007, 2006 and 2005
	Number of Shares																Accumulated
			Grantor														Other						Grantor
			Stock														Comprehensive						Stock						Total
	Common		Ownership			Treasury			Common		Paid-in			Retained			Income			Deferred			Ownership			Treasury			Stockholders’
	Stock		Trust			Stock			Stock		Capital			Earnings			(Loss)			Compensation			Trust			Stock			Equity
Balance at November 30, 2004		110,273		(14,755	)		(16,896	)	$	110,273	$	610,333		$	1,818,774		$	59,968		$	(6,046	)	$	(160,334	)	$	(393,578	)	$	2,039,390
Comprehensive income:
Net income		—		—			—			—		—			823,712			—			—			—			—			823,712
Foreign currency translation		—		—			—			—		—			—			(31,264	)		—			—			—			(31,264	)
Total comprehensive income		—		—			—			—		—			—			—			—			—			—			792,448
Dividends on common stock		—		—			—			—		—			(61,577	)		—			—			—			—			(61,577	)
Exercise of employee stock options		3,632		950			—			3,632		91,072			(1,301	)		—			—			10,323			—			103,726
Restricted stock awards		—		149			—			—		7,940			—			—			(9,555	)		1,615			—			—
Restricted stock amortization		—		—			—			—		—			—			—			1,996			—			—			1,996
Stock-based compensation		—		—			—			—		5,809			—			—			—			—			—			5,809
Grantor stock ownership trust		—		656			—			—		27,824			—			—			—			7,130			—			34,954
Treasury stock		—		—			(2,125	)		—		—			—			—			—			—			(134,713	)		(134,713	)
French share transfer		—		—			—			—		—			(8,236	)		—			—			—			—			(8,236	)
Balance at November 30, 2005		113,905		(13,000	)		(19,021	)		113,905		742,978			2,571,372			28,704			(13,605	)		(141,266	)		(528,291	)		2,773,797
Comprehensive income:
Net income		—		—			—			—		—			482,351			—			—			—			—			482,351
Foreign currency translation		—		—			—			—		—			—			34,493			—			—			—			34,493
Total comprehensive income		—		—			—			—		—			—			—			—			—			—			516,844
Dividends on common stock		—		—			—			—		—			(78,258	)		—			—			—			—			(78,258	)
Exercise of employee stock options		744		—			—			744		34,723			—			—			—			—			—			35,467
Restricted stock awards		—		537			—			—		32,726			—			—			—			5,839			—			38,565
Restricted stock amortization		—		—			—			—		4,649			—			—			—			—			—			4,649
Stock-based compensation		—		—			—			—		19,358			—			—			—			—			—			19,358
Grantor stock ownership trust		—		118			—			—		5,129			—			—			—			1,277			—			6,406
Treasury stock		—		—			(6,253	)		—		—			—			—			—			—			(394,080	)		(394,080	)
Reclass due to SFAS No. 123(R) implementation		—		—			—			—		(13,605	)		—			—			13,605			—			—			—
Balance at November 30, 2006		114,649		(12,345	)		(25,274	)		114,649		825,958			2,975,465			63,197			—			(134,150	)		(922,371	)		2,922,748
Comprehensive loss:
Net loss		—		—			—			—		—			(929,414	)		—			—			—			—			(929,414	)
Foreign currency translation		—		—			—			—		—			—			(63,197	)		—			—			—			(63,197	)
Total comprehensive loss		—		—			—			—		—			—			—			—			—			—			(992,611	)
Postretirement benefits adjustment		—		—			—			—		—			—			(22,923	)		—			—			—			(22,923	)
Dividends on common stock		—		—			—			—		—			(77,170	)		—			—			—			—			(77,170	)
Exercise of employee stock options		327		—			—			327		9,718			—			—			—			—			—			10,045
Restricted stock amortization		—		—			—			—		4,993			—			—			—			—			—			4,993
Stock-based compensation		—		—			—			—		9,354			—			—			—			—			—			9,354
Grantor stock ownership trust		—		142			—			—		1,605			—			—			—			1,542			—			3,147
Treasury stock		—		—			(177	)		—		—			—			—			—			—			(6,896	)		(6,896	)
Balance at November 30, 2007		114,976		(12,203	)		(25,451	)	$	114,976	$	851,628		$	1,968,881		$	(22,923	)	$	—		$	(132,608	)	$	(929,267	)	$	1,850,687

See accompanying notes.

50

KB HOME

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Years Ended November 30,
	2007			2006			2005
Cash flows from operating activities:
Net income (loss)	$	(929,414	)	$	482,351		$	823,712
Income from discontinued operations, net of income taxes		(47,252	)		(89,404	)		(69,178	)
Gain on sale of discontinued operations, net of income taxes		(438,104	)		—			—
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Equity in (income) loss of unconsolidated joint ventures		129,220			1,611			(14,445	)
Distributions of earnings from unconsolidated joint ventures		42,356			13,553			11,973
Gain on sale of investment in unconsolidated joint venture		—			(27,612	)		—
Gain on sale of mortgage banking assets		—			—			(26,647	)
Amortization of discounts and issuance costs		2,478			2,441			1,550
Depreciation and amortization		17,274			18,091			17,546
Provision for deferred income taxes		208,348			(189,047	)		3,150
Excess tax benefit associated with exercise of stock options		(882	)		(15,384	)		—
Stock option income tax benefits		—			—			36,930
Stock-based compensation expense		9,354			19,358			5,809
Inventory and joint venture impairments and land option contract abandonments		1,410,345			431,239			42,922
Goodwill impairment		107,926			—			—
Changes in assets and liabilities:
Receivables		(71,406	)		(23,529	)		50,146
Inventories		779,875			(356,342	)		(1,807,593	)
Accounts payable, accrued expenses and other liabilities		(340,630	)		205,707			697,484
Other, net		17,409			7,182			55,679
Net cash provided (used) by operating activities — continuing operations		896,897			480,215			(170,962	)
Net cash provided by operating activities — discontinued operations		297,397			229,505			86,715
Net cash provided (used) by operating activities		1,194,294			709,720			(84,247	)
Cash flows from investing activities:
Sale of discontinued operations, net of cash divested		739,764			—			—
Sale of investment in unconsolidated joint venture		—			57,767			—
Sale of mortgage banking assets		—			—			42,396
Investments in unconsolidated joint ventures		(241,551	)		(237,786	)		(117,633	)
Purchases of property and equipment, net		685			(17,638	)		(22,059	)
Other, net		—			772			1,260
Net cash provided (used) by investing activities — continuing operations		498,898			(196,885	)		(96,036	)
Net cash used by investing activities — discontinued operations		(12,112	)		(4,477	)		(1,938	)
Net cash provided (used) by investing activities		486,786			(201,362	)		(97,974	)
Cash flows from financing activities:
Net payments on credit agreements and other short-term borrowings		—			(84,100	)		(378,529	)
Proceeds from (redemption of) term loan		(400,000	)		400,000			—
Redemption of senior subordinated notes		(250,000	)		—			—
Proceeds from issuance of senior notes		—			298,458			747,591
Payments on mortgages, land contracts and other loans		(114,119	)		(36,595	)		(39,119	)
Issuance of common stock under employee stock plans		12,310			65,052			101,749
Excess tax benefit associated with exercise of stock options		882			15,384			—
Payments of cash dividends		(77,170	)		(78,258	)		(61,577	)
Repurchases of common stock		(6,896	)		(394,080	)		(134,713	)
Net cash provided (used) by financing activities — continuing operations		(834,993	)		185,861			235,402
Net cash used by financing activities — discontinued operations		(306,527	)		(215,010	)		(119,213	)
Net cash provided (used) by financing activities		(1,141,520	)		(29,149	)		116,189
Net increase (decrease) in cash and cash equivalents		539,560			479,209			(66,032	)
Cash and cash equivalents at beginning of year		804,182			324,973			391,005
Cash and cash equivalents at end of year	$	1,343,742		$	804,182		$	324,973

See accompanying notes.

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KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   Summary of Significant Accounting Policies

Operations.  KB Home is a builder of single-family homes, townhomes and condominiums. The Company operates in Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, Nevada, New Mexico, North Carolina, South Carolina, Texas and Virginia. The Company also offers mortgage services through Countrywide KB Home Loans, a joint venture with Countrywide. Countrywide KB Home Loans, which is accounted for as an unconsolidated joint venture within the Company’s financial services reporting segment, began offering loans to the Company’s homebuyers on September 1, 2005. Through its financial services subsidiary, KBHMC, the Company provides title and insurance services to its homebuyers. The Company previously offered mortgage banking services directly through KBHMC until September 1, 2005 when substantially all of KBHMC’s mortgage banking assets were sold to Countrywide.

Basis of Presentation.  The consolidated financial statements include the accounts of the Company and all significant subsidiaries and joint ventures in which a controlling interest is held, as well as certain VIEs required to be consolidated pursuant to FASB Interpretation No. 46(R). All intercompany transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company has less than a controlling interest are accounted for using the equity method.

In July 2007, the Company sold its 49% equity interest in its publicly traded French subsidiary, KBSA. Therefore, for the years ended November 30, 2007, 2006 and 2005, the French operations have been presented as discontinued operations in the consolidated financial statements.

Use of Estimates.  The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management. Actual results could differ from these estimates.

Cash and Cash Equivalents.  The Company considers all highly liquid debt instruments and other short-term investments, purchased with a maturity of three months or less, to be cash equivalents. The Company’s cash equivalents totaled $1.11 billion at November 30, 2007 and $371.0 million at November 30, 2006.

Goodwill.  The Company has recorded goodwill in connection with various acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with SFAS No. 142, the Company tests goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company evaluates goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment.

Property and Equipment and Depreciation.  Property and equipment are recorded at cost and are depreciated over their estimated useful lives, which generally range from two to 10 years, using the straight-line method. Repair and maintenance costs are charged to earnings as incurred. Property and equipment are included in other assets on the consolidated balance sheets and totaled $32.7 million, net of accumulated depreciation of $61.3 million, at November 30, 2007 and $50.7 million, net of accumulated depreciation of $55.2 million, at November 30, 2006. Depreciation expense totaled $17.3 million in 2007, $17.2 million in 2006, and $17.4 million in 2005.

Foreign Currency Translation.  Results of operations for KBSA were translated to U.S. dollars using the average exchange rates during the period. Assets and liabilities were translated using the exchange rates in effect at the balance sheet date. Resulting translation adjustments were recorded in stockholders’ equity as foreign currency translation adjustments. Cumulative translation adjustments of $63.2 million related to the Company’s French operations were recognized in 2007 in connection with the sale of those operations.

Homebuilding Operations.  Revenues from housing and other real estate sales are recognized in accordance with SFAS No. 66 when sales are closed and title passes to the buyer. Sales are closed when all of the following conditions are met: a sale is consummated, a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured.

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Construction and land costs are comprised of direct and allocated costs, including estimated future costs for warranties and amenities. Land, land improvements and other common costs are generally allocated on a relative fair value basis to homes within a parcel or community. Land and land development costs include related interest and real estate taxes.

Inventories are stated at cost unless the carrying amount of the parcel or community is determined not to be recoverable, in which case the inventories are written down to fair value in accordance with SFAS No. 144. SFAS No. 144 requires that real estate assets be tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses, and other factors. If real estate assets are considered to be impaired, the impairment to be recognized is measured by the amount which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined based on estimated future cash flows discounted for inherent risks associated with the real estate assets, or other valuation techniques.

Financial Services Operations.  Revenues are generated primarily from the following sources: interest income; title services; and insurance commissions. Interest income is accrued as earned. Title services revenues are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously at the time each home is closed. Insurance commissions are recognized when policies are issued. The financial services segment also generated revenues from escrow coordination services until the escrow coordination business was terminated in 2007. Escrow coordination fees were recognized at the time the home was closed.

Prior to September 1, 2005, the Company also directly generated revenues from loan originations and sales of mortgage loans and servicing rights through KBHMC. Since September 1, 2005, these mortgage banking activities have been performed by Countrywide KB Home Loans, an unconsolidated joint venture.

Stock-Based Compensation.  Effective December 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R), which requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. The Company provides compensation benefits by issuing stock options, restricted stock, phantom shares and SARs. Prior to December 1, 2005, the Company accounted for its stock option grants under the recognition and measurement provisions of APB Opinion No. 25 and related interpretations.

The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under that transition method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. In addition, compensation expense must be recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period. The fair value of stock options is estimated on the date of grant using the Black-Scholes option-pricing model. In addition, SFAS No. 123(R) requires the tax benefit resulting from tax deductions in excess of the compensation expense recognized for those options to be reported in the statement of cash flows as an operating cash outflow and a financing cash inflow rather than as an operating cash inflow as previously reported.

SFAS No. 123(R) requires disclosure of pro forma financial information for periods prior to adoption. The following table sets forth the effect on net income and earnings per share as if the fair value recognition provisions of SFAS

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No. 123(R) had been applied to all outstanding and unvested awards in the year ended November 30, 2005 (in thousands, except per share amounts):

Net income, as reported	$	823,712
Add: Stock-based compensation expense included in net income, net of related tax effects		4,309
Deduct: Stock-based compensation expense determined using the fair value method, net of related tax effects		(19,462	)
Pro forma net income	$	808,559
Earnings per share:
Basic — as reported	$	10.06
Basic — pro forma		9.87
Diluted — as reported		9.32
Diluted — pro forma		9.21

Advertising Costs.  The Company expenses advertising costs as incurred. The Company incurred advertising costs of $68.0 million in 2007, $107.0 million in 2006 and $78.6 million in 2005.

Insurance.  The Company has, and requires the majority of its subcontractors to have, general liability insurance (including construction defect coverage) and workers compensation insurance. These insurance policies protect the Company against a portion of its risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. The Company records expenses and liabilities for self-insured and deductible amounts, based on an analysis of its historical claims, which includes an estimate of claims incurred but not yet reported. The Company self-insures a portion of its overall risk through a captive insurance subsidiary.

Income Taxes.  Income taxes are accounted for in accordance with SFAS No. 109. The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are evaluated on a quarterly basis to determine whether a valuation allowance is required. In accordance with SFAS No. 109, the Company assesses whether a valuation allowance should be established based on its determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which those temporary differences become deductible. Judgment is required in determining the future tax consequences of events that have been recognized in the Company’s consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated financial position or results of operations.

Other Comprehensive Income (Loss).  The accumulated balance of other comprehensive loss in the consolidated balance sheet as of November 30, 2007 is comprised solely of an adjustment of $22.9 million recorded directly to accumulated other comprehensive loss at the end of 2007 to initially apply SFAS No. 158, which requires an employer to recognize the funded status of a defined postretirement benefit plan as an asset or liability on the balance sheet and requires any unrecognized prior service costs and actuarial gains/losses to be recognized in accumulated other comprehensive income (loss). The accumulated balance of other comprehensive income in the consolidated balance sheet as of November 30, 2006 is comprised solely of cumulative foreign currency translation adjustments of $63.2 million related to the Company’s French operations, which were sold in 2007.

Earnings (Loss) Per Share.  Basic earnings (loss) per share is calculated by dividing net income (loss) by the average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the average number of shares outstanding including all potentially dilutive shares issuable under outstanding stock options. All outstanding stock options were excluded from the diluted earnings (loss) per share calculations for the year ended November 30, 2007 because they were antidilutive due to the loss from continuing operations. For the years ended November 30, 2006 and 2005, options to purchase 597,100 shares and 5,700 shares, respectively, were excluded from the computations of diluted earnings per share because the exercise price was greater

54

than the average market price of the common stock and their effect would have been antidilutive. The following table presents a reconciliation of average shares outstanding (in thousands):

	Years Ended November 30,
	2007		2006		2005
Basic average shares outstanding		77,172		78,829		81,888
Net effect of stock options assumed to be exercised		—		4,027		6,537
Diluted average shares outstanding		77,172		82,856		88,425

Recent Accounting Pronouncements.  In July 2006, the FASB issued FASB Interpretation No. 48, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FASB Interpretation No. 48 are effective for the Company’s first quarter ending February 29, 2008. The Company is in the process of evaluating the potential impact of adopting FASB Interpretation No. 48, but does not expect the interpretation to have a material impact on its consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, which provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The Company is currently evaluating the potential impact of adopting SFAS No. 157 on its consolidated financial position and results of operations.

In November 2006, the EITF ratified EITF 06-8, which states that adequacy of the buyer’s investment under SFAS No. 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. EITF 06-8 could require that additional deposits be collected by developers of condominium projects that wish to recognize profit during the construction period under the percentage-of-completion method. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. The Company is currently evaluating the potential impact of adopting EITF 06-8 on its consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, which permits entities to choose to measure certain financial assets and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the potential impact of the adoption of SFAS No. 159; however, it is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), which amends SFAS No. 141, and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively. The Company is currently evaluating the potential impact of adopting SFAS No. 141(R) on its consolidated financial position and results of operations.

In December 2007, the FASB issued SFAS No. 160, which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the potential impact of adopting SFAS No. 160 on its consolidated financial position and results of operations.

Reclassifications.  Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 2007 presentation.

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Note 2.   Segment Information

As of November 30, 2007, the Company has identified five reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment, within its consolidated operations in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The homebuilding reporting segments have operations in the following states:

West Coast: California

Southwest: Arizona, Nevada and New Mexico

Central: Colorado, Illinois and Texas

Southeast: Florida, Georgia, Maryland, North Carolina, South Carolina and Virginia

The Company’s homebuilding reporting segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, first move-up and active adult buyers.

The Company’s homebuilding reporting segments were identified based primarily on similarities in economic and geographic characteristics, as well as similar product type, regulatory environments, methods used to sell and construct homes and land acquisition characteristics. The Company evaluates segment performance primarily based on segment pretax income.

The Company’s financial services reporting segment provides mortgage banking, title and insurance services to the Company’s homebuyers. This segment also provided escrow coordination services to the Company’s homebuyers until the escrow coordination business was terminated in 2007. Mortgage banking services were provided directly by KBHMC prior to September 1, 2005. From and after that date, mortgage banking services have been provided through Countrywide KB Home Loans. The Company’s financial services segment operates in the same markets as the Company’s homebuilding reporting segments.

The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements as described in Note 1. Summary of Significant Accounting Policies. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.

The following tables present financial information relating to the Company’s reporting segments (in thousands):

	Years Ended November 30,
	2007			2006			2005
Revenues:
West Coast	$	2,203,303		$	3,531,279		$	3,050,486
Southwest		1,349,570			2,183,830			1,964,483
Central		1,077,304			1,553,309			1,559,067
Southeast		1,770,414			2,091,425			1,549,277
Total homebuilding revenues		6,400,591			9,359,843			8,123,313
Financial services		15,935			20,240			31,368
Total revenues	$	6,416,526		$	9,380,083		$	8,154,681
Income (loss) from continuing operations before income taxes:
West Coast	$	(665,845	)	$	359,864		$	681,303
Southwest		(287,339	)		365,098			513,846
Central		(64,210	)		(54,749	)		28,152
Southeast		(230,420	)		38,933			152,508
Corporate and other (a)		(246,792	)		(170,835	)		(185,473	)
Total homebuilding income (loss) from continuing operations before income taxes		(1,494,606	)		538,311			1,190,336
Financial services		33,836			33,536			11,198
Total income (loss) from continuing operations before income taxes	$	(1,460,770	)	$	571,847		$	1,201,534

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	Years Ended November 30,
	2007			2006			2005
Interest cost:
West Coast	$	63,902		$	20,160		$	16,970
Southwest		45,827			49,622			27,912
Central		21,184			37,518			41,046
Southeast		44,364			31,850			14,150
Corporate and other		9,209			20,777			17,236
Total (b)	$	184,486		$	159,927		$	117,314
Equity in income (loss) of unconsolidated joint ventures:
West Coast	$	(64,886	)	$	(25,732	)	$	13,287
Southwest		(15,734	)		(26	)		112
Central		(6,916	)		(3,829	)		(2	)
Southeast		(64,381	)		(12,290	)		(319	)
Corporate and other		—			21,047			1,137
Total	$	(151,917	)	$	(20,830	)	$	14,215
Inventory impairments:
West Coast	$	631,399		$	113,022		$	—
Southwest		337,889			17,343			—
Central		24,662			30,592			23,743
Southeast		116,023			67,808			2,981
Total	$	1,109,973		$	228,765		$	26,724
Inventory abandonments:
West Coast	$	28,011		$	65,740		$	6,083
Southwest		16,479			22,069			1,521
Central		9,783			18,198			4,026
Southeast		89,736			37,865			4,568
Total	$	144,009		$	143,872		$	16,198
Joint venture impairments:
West Coast	$	57,030		$	34,401		$	——
Southwest		31,049			—			—
Central		4,483			—			—
Southeast		63,801			24,201			—
Total	$	156,363		$	58,602		$	—

(a)

Corporate and other includes corporate general and administrative expenses and goodwill impairment.

(b)

Interest cost includes interest amortized in construction and land costs, interest expense, and, in 2007, the loss on early redemption of debt. Interest included in construction and land costs totaled $171.5 million in 2007, $143.2 million in 2006 and $101.0 million in 2005. The loss on early redemption of debt in 2007 totaled $13.0 million. Interest expense totaled $0 million in 2007, $16.7 million in 2006 and $16.3 million in 2005.

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	November 30,
	2007		2006
Assets:
West Coast	$	1,542,948	$	2,910,764
Southwest		887,361		1,324,239
Central		643,599		879,134
Southeast		845,679		1,504,333
Corporate and other		1,741,977		1,206,869
Total homebuilding assets		5,661,564		7,825,339
Financial services		44,392		44,024
Discontinued operations		—		1,394,375
Total assets	$	5,705,956	$	9,263,738
Investments in unconsolidated joint ventures:
West Coast	$	63,450	$	48,013
Southwest		134,082		174,168
Central		7,230		14,344
Southeast		92,248		144,717
Total	$	297,010	$	381,242

Note 3.  Financial Services

Financial information related to the Company’s financial services segment is as follows (in thousands):

	Years Ended November 30,
	2007			2006			2005
Revenues
Interest income	$	158		$	230		$	8,167
Title services		5,977			7,205			6,053
Insurance commissions		9,193			9,410			8,256
Escrow coordination fees		607			3,395			3,037
Mortgage and servicing rights income		—			—			5,855
Total		15,935			20,240			31,368
Expenses
Interest		—			(49	)		(5,164	)
General and administrative		(4,796	)		(5,874	)		(22,077	)
Other, net		—			—			6,841
Operating income		11,139			14,317			10,968
Equity in income of unconsolidated joint venture		22,697			19,219			230
Pretax income	$	33,836		$	33,536		$	11,198

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	November 30,
	2007		2006
Assets
Cash and cash equivalents	$	18,487	$	15,417
Receivables		2,655		2,911
Investment in unconsolidated joint venture		23,140		25,296
Other assets		110		400
Total assets	$	44,392	$	44,024
Liabilities
Accounts payable and accrued expenses	$	17,796	$	26,276
Total liabilities	$	17,796	$	26,276

On September 1, 2005, the Company completed the sale of substantially all the mortgage banking assets of KBHMC to Countrywide and in a separate transaction established a joint venture, Countrywide KB Home Loans. In the first transaction, the Company received $42.4 million of cash as full consideration for the assets sold. The Company recognized a gain of $26.6 million on the sale, which represented the cash received over the sum of the book value of the assets sold and certain nominal costs associated with the disposal. The gain is included in other financial services expenses of $6.8 million in 2005 along with $19.8 million of expenses accrued for various regulatory and other contingencies.

In the second transaction, the Company contributed $15.0 million of cash for a 50% interest in the Countrywide KB Home Loans joint venture. The Countrywide KB Home Loans joint venture replaced the mortgage banking operations of KBHMC. Countrywide KB Home Loans makes loans to many of the Company’s homebuyers. The Company and Countrywide each have a 50% ownership interest in the joint venture with Countrywide providing management oversight of the joint venture’s operations. The results of operations of the financial services segment in 2005 reflect the wind-down of KBHMC’s mortgage banking operations, which were consolidated in the Company’s financial statements, and the commencement of operations of the Countrywide KB Home Loans joint venture, which is accounted for as an unconsolidated joint venture.

KBHMC may be required to repurchase an individual loan sold to an investor if the representations or warranties that it made in connection with the sale of the loan are breached, in the event of an early payment default, or if the loan does not comply with the underwriting standards or other requirements of the ultimate investor.

Note 4.   Receivables

Mortgages and notes receivable totaled $46.8 million at November 30, 2007 and $6.8 million at November 30, 2006. Mortgages receivable are primarily related to land sales. Interest rates on mortgages and notes receivable ranged from 5% to 81/4% at November 30, 2007. The interest rate on mortgages and notes receivable at November 30, 2006 was 5%. Principal amounts at November 30, 2007 are due during the following years: 2008 — $2.8 million; 2009 — $1.7 million; 2010 — $1.9 million; 2011 — $0; 2012 — $.4 million; and thereafter — $40.0 million. Other receivables of $248.9 million at November 30, 2007 and $217.3 million at November 30, 2006 included federal and state income taxes receivable, amounts due from municipalities and utility companies, and escrow deposits. Other receivables were net of allowances for doubtful accounts of $76.9 million in 2007 and $39.4 million in 2006.

Note 5.   Inventories

Inventories consisted of the following (in thousands):

	November 30,
	2007		2006
Homes, lots and improvements in production	$	2,473,980	$	3,834,969
Land under development		838,440		1,916,674
Total	$	3,312,420	$	5,751,643

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Inventories include land and land development costs, direct construction costs, capitalized interest and real estate taxes. Land under development primarily consists of parcels on which 50% or less of estimated development costs have been incurred.

Interest is capitalized to inventories while the related communities are being actively developed. Capitalized interest is amortized in construction and land costs as the related inventories are delivered to homebuyers. The Company’s interest costs are as follows (in thousands):

	Years Ended November 30,
	2007			2006			2005
Capitalized interest at beginning of year	$	333,020		$	255,195		$	213,428
Interest incurred		199,550			237,752			159,081
Loss on early redemption/interest expensed		(12,990	)		(16,678	)		(16,343	)
Interest amortized		(171,496	)		(143,249	)		(100,971	)
Capitalized interest at end of year	$	348,084		$	333,020		$	255,195

Note 6.   Inventory Impairments and Abandonments

The Company evaluates its inventory for recoverability in accordance with SFAS No. 144 whenever indicators of potential impairment exist. Impairment indicators are assessed separately for each parcel or community and include, but are not limited to: significant decreases in sales rates, average selling prices, home delivery volume or gross margins; significant increases in budgeted land development and construction costs or cancellation rates; or projected losses on expected future housing or land sales. When an indicator of potential impairment is identified, the Company tests the asset for recoverability by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset.

Impaired assets are written down to fair value, which is primarily based on estimated future cash flows discounted for inherent risk associated with each asset. These cash flows are impacted by the Company’s expectations related to market supply and demand, including its estimates concerning average selling prices; sales incentives; and sales and cancellation rates. These cash flows also reflect the Company’s expected land development construction timelines and anticipated land development, construction, and overhead costs to be incurred. The Company’s estimates are specific to each community and may vary among communities. Generally, the assumptions used reflect the Company’s expectation that the challenging conditions in the homebuilding industry will continue in 2008. Due to the judgment and assumptions applied in the estimation process, it is possible that actual results could differ from those estimated.

Based on the results of its evaluations, the Company recognized non-cash inventory impairment charges of $1.11 billion in 2007, $228.7 million in 2006 and $26.7 million in 2005. The carrying value of inventories impacted by non-cash impairment charges totaled $1.35 billion at November 30, 2007 and $497.8 million at November 30, 2006.

When the Company determines that it no longer plans to exercise land option contracts due to market conditions and/or changes in market strategy, it writes off the costs, including non-refundable deposits and pre-acquisition costs, related to the abandoned projects. The Company recognized abandonment charges associated with land option contracts of $144.0 million in 2007, $143.9 million in 2006 and $16.2 million in 2005.

The inventory impairment charges and land option contract abandonment charges are included in construction and land costs in the Company’s consolidated statements of operations.

Note 7.   Consolidation of Variable Interest Entities

In December 2003, FASB Interpretation No. 46(R) was issued by the FASB to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to certain entities, VIEs, in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. Under FASB Interpretation No. 46(R), an enterprise that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, is considered to be the primary beneficiary of the VIE and must consolidate the entity in its financial statements.

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The Company enters into joint ventures from time to time for the purpose of conducting land acquisition, development and other homebuilding activities. Its investments in these joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. The Company analyzes its joint ventures in accordance with FASB Interpretation No. 46(R) when they are entered into or upon a reconsideration event. All of the Company’s joint ventures at November 30, 2007 and 2006 were determined to be unconsolidated joint ventures because either they were not VIEs, or, if they were VIEs, the Company was not the primary beneficiary of the VIEs.

In the ordinary course of its business, the Company enters into land option contracts in order to procure land for the construction of homes. Under such land option contracts, the Company will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46(R), certain of the Company’s land option contracts may create a variable interest for the Company, with the land seller being identified as a VIE.

In compliance with FASB Interpretation No. 46(R), the Company analyzes its land option contracts and other contractual arrangements when they are entered into or upon a reconsideration event, and has consolidated the fair value of certain VIEs from which the Company is purchasing land under option contracts. Although the Company does not have legal title to the optioned land, FASB Interpretation No. 46(R) requires the Company to consolidate the VIE if it is determined to be the primary beneficiary. The consolidation of these VIEs where the Company was determined to be the primary beneficiary increased inventories, with a corresponding increase to accrued expenses and other liabilities, on the Company’s consolidated balance sheets by $19.0 million at November 30, 2007 and $215.4 million at November 30, 2006. The liabilities related to the Company’s consolidation of VIEs from which it is purchasing land under option contracts represent the difference between the purchase price of optioned land not yet purchased and the Company’s cash deposits. The Company’s cash deposits related to these land option contracts totaled $4.7 million at November 30, 2007 and $41.9 million at November 30, 2006. Creditors, if any, of these VIEs have no recourse against the Company. As of November 30, 2007, excluding consolidated VIEs, the Company had cash deposits totaling $54.6 million that were associated with land option contracts having an aggregate purchase price of $979.1 million.

The Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities consisted of its non-refundable option deposits totaling $59.3 million at November 30, 2007 and $132.7 million at November 30, 2006. In addition, the Company posted letters of credit of $103.7 million at November 30, 2007 and $197.6 million at November 30, 2006 in lieu of cash deposits under certain option contracts.

The Company also evaluates land option contracts in accordance with SFAS No. 49 and increased inventories, with a corresponding increase to accrued expenses and other liabilities, on its consolidated balance sheets by $221.1 million at November 30, 2007 and $434.2 million at November 30, 2006, as a result of its evaluations.

Note 8.   Investments in Unconsolidated Joint Ventures

The Company conducts a portion of its land acquisition, development and other homebuilding activities through participation in unconsolidated joint ventures in which the Company holds less than a controlling interest. These unconsolidated joint ventures operate in certain markets where the Company’s consolidated homebuilding operations are located. Through unconsolidated joint ventures, the Company reduces and shares its risk and also reduces the amount invested in land, while increasing its access to potential future homesites. The use of unconsolidated joint ventures also, in some instances, enables the Company to acquire land which it may not otherwise obtain or access on as favorable terms without the participation of a strategic partner. The Company’s partners in these unconsolidated joint ventures are unrelated homebuilders, land developers and other real estate entities, or other commercial enterprises. The unconsolidated joint ventures follow U.S. generally accepted accounting principles. The Company shares in profits and losses of these unconsolidated joint ventures generally in accordance with its ownership interests.

The Company and/or its joint venture partners sometimes obtain certain options or enter into other arrangements to purchase portions of the land held by the unconsolidated joint ventures. These land option prices are generally negotiated prices that approximate fair value. The Company does not include in its income from unconsolidated joint ventures its pro rata share of unconsolidated joint venture earnings resulting from land sales to its homebuilding operations. The Company defers recognition of its share of such unconsolidated joint venture earnings until a home sale is closed and title passes to a homebuyer, at which time the Company accounts for those earnings as a reduction of the cost of purchasing the

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land from the unconsolidated joint ventures. Combined condensed statement of operations information concerning the Company’s unconsolidated joint venture activities follows (in thousands):

	Years Ended November 30,
	2007			2006			2005
Revenues	$	662,705		$	167,536		$	212,270
Construction and land costs		(670,133	)		(189,507	)		(172,002	)
Other expenses, net		(44,126	)		(26,598	)		(5,548	)
Income (loss)	$	(51,554	)	$	(48,569	)	$	34,720

The Company’s equity in loss of unconsolidated joint ventures reflects non-cash impairment charges of $156.4 million in 2007, including $123.4 million of valuation adjustments related to the Company’s investments in certain unconsolidated joint ventures. In 2006, the Company’s equity in loss of unconsolidated joint ventures included non-cash impairment charges of $58.6 million associated with certain unconsolidated joint ventures and a gain of $27.6 million related to the sale of the Company’s ownership interest in an unconsolidated joint venture.

Combined condensed balance sheet information concerning the Company’s unconsolidated joint venture activities follows (in thousands):

	November 30,
	2007		2006
Assets
Cash	$	51,249	$	61,745
Receivables		234,265		6,704
Inventories		2,209,907		2,305,423
Other assets		15,513		23,100
Total assets	$	2,510,934	$	2,396,972
Liabilities and equity
Accounts payable and other liabilities	$	68,217	$	55,144
Mortgages and notes payable		1,540,931		1,450,369
Equity		901,786		891,459
Total liabilities and equity	$	2,510,934	$	2,396,972

The joint ventures finance land and inventory investments through a variety of borrowing arrangements. In certain instances, the Company provides varying levels of guarantees on the debt of unconsolidated joint ventures.

Note 9.   Goodwill

During the third quarter of 2007, the Company determined that it was necessary to evaluate goodwill for impairment in accordance with SFAS No. 142 due to the deteriorating conditions in certain housing markets, the significant inventory impairments the Company identified and recognized during the quarter in accordance with SFAS No. 144, and the decline in the market price of the Company’s common stock to a level below its per share book value. Based on the results of its evaluation, the Company recorded an impairment charge of $107.9 million in the third quarter of 2007 related to its Southwest reporting segment, where the goodwill previously recorded was determined to be impaired. The charge was recorded at the Company’s corporate level since all goodwill is carried at that level. The annual impairment test performed by the Company as of November 30, 2007 indicated no additional impairments. The impairment test performed by the Company as of November 30, 2006 indicated no goodwill impairment.

The Company’s goodwill evaluations utilized discounted cash flow analyses and market multiple analyses of historical and forecasted operating results of its reporting units. Inherent in the Company’s fair value determinations are certain judgments and estimates relating to future cash flows, current economic indicators and market valuations, and the Company’s strategic operational plans. A change in such assumptions may cause a change in the results of the analyses performed. In addition, to the extent significant changes occur in market conditions, overall economic conditions or the

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Company’s strategic operational plans, it is possible that goodwill not currently impaired may become impaired in the future.

The changes in the carrying amount of goodwill are as follows (in thousands):

	Years Ended November 30,
	2007			2006
Balance at beginning of year	$	177,333		$	182,062
Impairments		(107,926	)		—
Other		(1,437	)		(4,729	)
Balance at end of year	$	67,970		$	177,333

The Company’s goodwill balance at November 30, 2007 was comprised of $24.6 million and $43.4 million related to the Central and Southeast segments, respectively. At November 30, 2006, goodwill consisted of $107.9 million, $25.0 million and $44.4 million related to the Southwest, Central and Southeast segments, respectively.

Note 10.   Mortgages and Notes Payable

Mortgages and notes payable consisted of the following (in thousands, interest rates are as of November 30):

	November 30,
	2007		2006
Mortgages and land contracts due to land sellers and other loans (4% to 10% in 2007 and 5% to 8% in 2006)	$	19,140	$	129,121
Term loan due 2011 (61/8% in 2006)		—		400,000
Senior subordinated notes due 2008 at 85/8%		200,000		200,000
Senior subordinated notes due 2010 at 73/4%		298,273		297,569
Senior subordinated notes due 2011 at 91/2%		—		250,000
Senior notes due 2011 at 63/8%		348,549		348,213
Senior notes due 2014 at 53/4%		249,102		248,984
Senior notes due 2015 at 57/8%		298,521		298,362
Senior notes due 2015 at 61/4%		449,612		449,573
Senior notes due 2018 at 71/4%		298,597		298,512
Total	$	2,161,794	$	2,920,334

The Company entered into the five-year Credit Facility with a consortium of lenders on November 22, 2005. Interest on the Credit Facility is payable monthly at the London Interbank Offered Rate plus an applicable spread on amounts borrowed. At November 30, 2007 and 2006, the Company had no borrowings under the Credit Facility and there were $296.8 million and $464.2 million, respectively, in letters of credit outstanding.

On August 17, 2007, the Company entered into the Revolver Amendment to the Credit Facility. The Revolver Amendment allows for a reduction of the Coverage Ratio otherwise required under the Credit Facility for the Reduction Period. The Coverage Ratio is the ratio of the Company’s consolidated EBITDA to consolidated interest expense (as defined under the Credit Facility). During the Reduction Period, the interest rates applied to borrowings and the unused line fee under the Credit Facility, and the maximum ratio of the Company’s consolidated total indebtedness to consolidated tangible net worth, are subject to adjustment. The Revolver Amendment also permits the Company to eliminate any minimum Coverage Ratio requirement during the Reduction Period, for a period of up to four quarters, if certain financial criteria are met, and makes certain permanent amendments to certain other provisions of the Credit Facility. Consenting lenders to the Revolver Amendment received a fee in connection with this amendment.

In 2007, the Company completed the early redemption of $650.0 million of debt. On July 27, 2007, the Company redeemed all $250.0 million of its 91/2% senior subordinated notes due in 2011 at a price of 103.167% of the principal amount of the notes, plus accrued interest to the date of redemption. On July 31, 2007, the Company repaid in full the $400 Million Term Loan, together with accrued interest to the date of repayment. The $400 Million Term Loan was

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scheduled to mature on April 11, 2011. The Company incurred a loss of $13.0 million associated with the early extinguishment of debt, primarily due to a call premium on the senior subordinated notes and the write-off of unamortized debt issuance costs.

The weighted average annual interest rate on aggregate unsecured borrowings, excluding the senior subordinated and senior notes, was 61/8% at November 30, 2006. The Company had no unsecured borrowings, excluding the senior subordinated and senior notes, at November 30, 2007.

On December 14, 2001, pursuant to its universal shelf registration statement filed with the SEC on December 5, 1997 (the “1997 Shelf Registration”), the Company issued $200.0 million of 85/8% senior subordinated notes at 100% of the principal amount of the notes. The notes, which are due December 15, 2008, with interest payable semi-annually, represent unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company. The notes are not redeemable at the option of the Company. The Company used $175.0 million of the net proceeds from the issuance of the notes to redeem all of its then-outstanding $175.0 million 93/8% senior subordinated notes, which were due in 2003. The remaining net proceeds were used for general corporate purposes.

Pursuant to its universal shelf registration statement filed with the SEC on October 15, 2001 (as subsequently amended, the “2001 Shelf Registration”), on January 27, 2003, the Company issued $250.0 million of 73/4% senior subordinated notes at 98.444% of the principal amount of the notes and on February 7, 2003, the Company issued an additional $50.0 million of notes in the same series (collectively, the “$300 Million Senior Subordinated Notes”). The $300 Million Senior Subordinated Notes, which are due February 1, 2010, with interest payable semi-annually, represent unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company. The $300 Million Senior Subordinated Notes were redeemable at the option of the Company at 103.875% of their principal amount beginning February 1, 2007 and are redeemable thereafter at prices declining annually to 100% on and after February 1, 2009. The Company used $129.0 million of the net proceeds from the issuance of the notes to redeem all of its then-outstanding $125.0 million 95/8% senior subordinated notes, which were due in 2006.

The Company issued $350.0 million of 63/8% senior notes due 2011 (the “$350 Million Senior Notes”) on June 30, 2004 at 99.3% of the principal amount of the notes in a private placement. The notes, which are due August 15, 2011, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $350 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to 100% of their principal amount, plus a premium, plus accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by certain of the Company’s subsidiaries (“Guarantor Subsidiaries”) on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $350 Million Senior Notes to repay bank borrowings. On December 3, 2004, the Company exchanged all of the privately placed $350 Million Senior Notes for notes that are substantially identical except that the new notes are registered under the Securities Act of 1933.

On January 28, 2004, the Company issued $250.0 million of 53/4% senior notes due 2014 (the “$250 Million Senior Notes”) at 99.474% of the principal amount of the notes in a private placement. The notes, which are due February 1, 2014, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $250 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to 100% of their principal amount, plus a premium, plus accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $250 Million Senior Notes to repay bank borrowings. On June 16, 2004, the Company exchanged all of the privately placed $250 Million Senior Notes for notes that are substantially identical except that the new notes are registered under the Securities Act of 1933.

On November 12, 2004, the Company filed the 2004 Shelf Registration with the SEC. The 2004 Shelf Registration, which provided the Company with a total public debt and equity issuance capacity of $1.50 billion, was declared effective on November 29, 2004. The Company’s previously outstanding 2001 Shelf Registration in the amount of $450.0 million was subsumed within the 2004 Shelf Registration. The 2004 Shelf Registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subordinated or subordinated debt, guarantees of debt securities, preferred stock, common stock, stock purchase contracts, stock purchase units, depositary shares and/or warrants to purchase such securities.

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On December 15, 2004, pursuant to the 2004 Shelf Registration, the Company issued the $300 Million 57/8% Senior Notes at 99.357% of the principal amount of the notes. The $300 Million 57/8% Senior Notes, which are due January 15, 2015, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $300 Million 57/8% Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to the greater of (a) 100% of their principal amount and (b) the sum of the present values of the remaining scheduled payments discounted to the date of redemption at a defined rate, plus, in each case accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $300 Million 57/8% Senior Notes to pay down bank borrowings.

Pursuant to the 2004 Shelf Registration, on June 2, 2005, the Company issued the $450 Million Senior Notes at 100.614% of the principal amount of the notes plus accrued interest from June 2, 2005. The $450 Million Senior Notes, which are due June 15, 2015, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $450 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to the greater of (a) 100% of their principal amount and (b) the sum of the present values of the remaining scheduled payments discounted to the date of redemption at a defined rate, plus, in each case, accrued and unpaid interest to the applicable redemption date. The notes are unconditionally guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $450 Million Senior Notes to pay down bank borrowings.

On April 3, 2006, pursuant to the 2004 Shelf Registration, the Company issued the $300 Million 71/4% Senior Notes. The notes, which are due June 15, 2018 with interest payable semi-annually, represent senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness and are guaranteed jointly and severally by the Guarantor Subsidiaries on a senior unsecured basis. The $300 Million 71/4% Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to the greater of (a) 100% of their principal amount and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed discounted at a defined rate, plus, in each case, accrued and unpaid interest to the applicable redemption date. The Company used all of the proceeds from the $300 Million 71/4% Senior Notes to repay borrowings under its Credit Facility. At November 30, 2007, $450.0 million of capacity remained available under the 2004 Shelf Registration.

The senior and senior subordinated notes contain certain restrictive covenants that, among other things, limit the ability of the Company to incur additional indebtedness, pay dividends, make certain investments, create certain liens, engage in mergers, consolidations, or sales of assets, or engage in certain transactions with officers, directors and employees. Under the terms of the Credit Facility, the Company is required, among other things, to maintain certain financial statement ratios and a minimum net worth and is subject to limitations on acquisitions, inventories and indebtedness. Based on the terms of the Credit Facility, senior subordinated and senior notes, $283.2 million was available for payment of cash dividends or stock repurchases at November 30, 2007.

The non-cash charges associated with inventory and joint venture impairments, land option contract abandonments, goodwill impairment and the valuation allowance on deferred tax assets in 2007 negatively affected the Company’s ability to comply at November 30, 2007 with a covenant in the Credit Facility that requires the Company to maintain a certain consolidated tangible net worth. As a result, on January 7, 2008, the Company obtained a waiver of compliance under this covenant. To address its covenant compliance for future periods, the Company entered into a fourth amendment to its Credit Facility on January 25, 2008 that amended the minimum consolidated tangible net worth the Company is required to maintain.

Principal payments on senior subordinated and senior notes, mortgages, land contracts and other loans are due as follows: 2008 — $1.9 million; 2009 — $200.4 million; 2010 — $315.1 million; 2011 — $348.5 million; 2012 — $0; and thereafter — $1.30 billion.

Assets (primarily inventories) having a carrying value of approximately $48.0 million as of November 30, 2007 are pledged to collateralize mortgages, land contracts and other secured loans.

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Note 11.   Fair Values of Financial Instruments

The estimated fair values of financial instruments have been determined based on available market information and appropriate valuation methodologies. However, judgment is required in interpreting market data to develop the estimates of fair value. In that regard, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

The carrying values and estimated fair values of the Company’s financial instruments, except for those for which the carrying values approximate fair values, are summarized as follows (in thousands):

	November 30,
	2007				2006
			Estimated Fair				Estimated Fair
	Carrying Value		Value		Carrying Value		Value
Financial liabilities
85/8% Senior subordinated notes	$	200,000	$	194,750	$	200,000	$	208,500
73/4% Senior subordinated notes		298,273		277,394		297,569		302,776
91/2% Senior subordinated notes		—		—		250,000		258,658
63/8% Senior notes		348,549		319,358		348,213		342,398
53/4% Senior notes		249,102		216,096		248,984		229,573
57/8% Senior notes		298,521		256,728		298,362		274,493
61/4% Senior notes		449,612		388,352		449,573		426,532
71/4% Senior notes		298,597		268,364		298,512		298,906

The Company used the following methods and assumptions in estimating fair values:

The fair values of the Company’s senior subordinated and senior notes are estimated based on quoted market prices.

The carrying amounts reported for cash and cash equivalents and the $400 Million Term Loan approximate fair values.

Note 12.   Commitments and Contingencies

Commitments and contingencies include the usual obligations of homebuilders for the completion of contracts and those incurred in the ordinary course of business.

The Company provides a limited warranty on all of its homes. The specific terms and conditions of warranties vary depending upon the market in which the Company does business. The Company generally provides a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home such as appliances. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Factors that affect the Company’s warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities, which are included in accrued expenses and other liabilities in the consolidated balance sheets, and adjusts the amounts as necessary.

The changes in the Company’s warranty liability are as follows (in thousands):

	Years Ended November 30,
	2007			2006
Balance at beginning of year	$	141,060		$	122,503
Warranties issued		40,380			78,527
Payments and adjustments		(38,282	)		(59,970	)
Balance at end of year	$	143,158		$	141,060

In the normal course of its business, the Company issues certain representations, warranties and guarantees related to its home sales and land sales that may be affected by FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure

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Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Based on historical evidence, the Company does not believe any of these representations, warranties or guarantees would result in a material effect on its consolidated financial position or results of operations.

The Company has, and requires the majority of its subcontractors to have, general liability insurance (including construction defect coverage) and workers compensation insurance. These insurance policies protect the Company against a portion of its risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. The Company records expenses and liabilities for self-insured and deductible amounts, based on an analysis of its historical claims, which includes an estimate of claims incurred but not yet reported. The Company self-insures a portion of its overall risk through a captive insurance subsidiary. The Company’s estimated liabilities for such items were $95.6 million at November 30, 2007 and $85.8 million at November 30, 2006, and are included in the consolidated balance sheets as accrued expenses and other liabilities.

The Company is often required to obtain bonds and letters of credit in support of its obligations to various municipalities and other government agencies in connection with subdivision improvements such as roads, sewers and water. At November 30, 2007, the Company had approximately $1.08 billion of performance bonds and $296.8 million of letters of credit outstanding. At November 30, 2006, the Company had approximately $1.24 billion of performance bonds and $464.2 million of letters of credit outstanding. In the event any such bonds or letters of credit are called, the Company would be obligated to reimburse the issuer of the bond or letter of credit. However, the Company does not believe that any currently outstanding bonds or letters of credit will be called.

Borrowings outstanding and letters of credit issued under the Credit Facility are guaranteed by the Guarantor Subsidiaries.

In the ordinary course of business, the Company enters into land option contracts to procure land for the construction of homes. At November 30, 2007, the Company had total deposits of $163.0 million, comprised of cash deposits of $59.3 million, and letters of credit of $103.7 million, to purchase land with a total remaining purchase price of $998.1 million. The Company’s land option contracts generally do not contain provisions requiring its specific performance.

The Company conducts a portion of its land acquisition, development and other residential activities through unconsolidated joint ventures. These unconsolidated joint ventures had outstanding secured construction debt of approximately $1.54 billion at November 30, 2007 and $1.45 billion at November 30, 2006. In certain instances, the Company provides varying levels of guarantees on the debt of unconsolidated joint ventures. When the Company provides a guarantee, the unconsolidated joint venture generally receives more favorable terms from lenders than would otherwise be available to it. At November 30, 2007, the Company had payment guarantees related to the third-party debt of two of its unconsolidated joint ventures. One of these unconsolidated joint ventures had aggregate third-party debt of $320.4 million at November 30, 2007, of which each of the joint venture partners guaranteed its pro rata share. The Company’s share of the payment guarantee, which is triggered only in the event of bankruptcy of the joint venture, was 49% or $155.2 million. The other unconsolidated joint venture had total third-party debt of $6.2 million at November 30, 2007, of which each of the joint venture partners guaranteed its pro rata share. The Company’s share of this payment guarantee was 50% or $3.1 million. The Company’s pro rata share of limited maintenance guarantees of unconsolidated entity debt totaled $103.8 million at November 30, 2007. The limited maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specific percentage of the loan balance. If the Company is required to make a payment under a limited maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution and/or loan to the affected unconsolidated joint venture.

The Company leases certain property and equipment under noncancelable operating leases. Office and equipment leases are typically for terms of three to five years and generally provide renewal options for terms up to an additional five years. In most cases, the Company expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. The future minimum rental payments under operating leases, which primarily consist of office leases having initial or remaining noncancelable lease terms in excess of one year are as follows: 2008 — $21.9 million; 2009 — $19.8 million; 2010 — $14.9 million; 2011 — $8.5 million; 2012 — $6.2 million; and thereafter — $8.3 million. Rental expense on these operating leases was $21.7 million in 2007, $22.8 million in 2006 and $18.7 million in 2005.

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On November 12, 2006, the Company entered into a Tolling Agreement with its former Chairman and Chief Executive Officer in connection with the termination of his service with the Company. The Company and its former Chairman and Chief Executive Officer reserved all rights under his employment agreement and under any stock option, restricted stock, retirement and other benefit plans to which he was a party. The Company agreed to pay him the dollar value of all accrued and unpaid vacation benefits and sick pay based on his base salary and unreimbursed business expenses through the date of his departure. The Company retained and suspended the payment of any other compensation and benefits to him that may be payable under his employment agreement or the Company’s compensation programs in which he participated.

The Tolling Agreement provides that neither the Company nor its former Chairman and Chief Executive Officer has made an admission as to the characterization of his termination of service, including whether such termination constituted a “retirement” or other form of termination. This characterization can be expected to affect his rights to receive severance payments and other benefits under his employment agreement and the Company’s compensation programs in which he participated.

The Tolling Agreement remains in effect and no resolution has been reached as to the matters reserved under its terms.

Note 13.   Legal Matters

Derivative Litigation.  On July 10, 2006, a shareholder derivative action, Wildt v. Karatz, et al., was filed in Los Angeles Superior Court. On August 8, 2006, a virtually identical shareholder derivative lawsuit, Davidson v. Karatz, et al., was also filed in Los Angeles Superior Court. These actions, which ostensibly are brought on behalf of the Company, allege, among other things, that defendants (various of the Company’s current and former directors and officers) breached their fiduciary duties to the Company by, among other things, backdating grants of stock options to various current and former executives in violation of the Company’s shareholder-approved stock option plans. Defendants have not yet responded to the complaints. On January 22, 2007, the Court entered an order, pursuant to an agreement among the parties and the Company, providing, among other things, that, to preserve the status quo without prejudicing any party’s substantive rights, the Company’s former Chairman and Chief Executive Officer shall not exercise any of his outstanding options, at any price, during the period in which the order is in effect. Pursuant to further stipulated orders, these terms remain in effect and are now scheduled to expire on February 1, 2008, unless otherwise agreed in writing. The plaintiffs have agreed to stay their cases while the parallel federal court derivative lawsuits discussed below are pursued. A stipulation and order effectuating the parties’ agreement to stay the state court actions was entered by the court on February 7, 2007. The parties may extend the agreement that options will not be exercised by the Company’s former Chairman and Chief Executive Officer beyond the current February 1, 2008 expiration date.

On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in the United States District Court for the Central District of California. On August 31, 2006, a virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in the United States District Court for the Central District of California. These actions, which ostensibly are brought on behalf of the Company, allege, among other things, that defendants (various of the Company’s current and former directors and officers) breached their fiduciary duties to the Company by, among other things, backdating grants of stock options to various current and former executives in violation of the Company’s shareholder-approved stock option plans. Unlike Wildt and Davidson, however, these lawsuits also include substantive claims under the federal securities laws. On January 9, 2007, plaintiffs filed a consolidated complaint. All defendants filed motions to dismiss the complaint on April 2, 2007. Subsequently, plaintiffs filed a motion for partial summary judgment against certain of the defendants. Pursuant to stipulated orders, the motions to dismiss and the motion for partial summary judgment have been taken off calendar to permit the parties to explore settlement via mediation. The latest order provides that unless otherwise agreed to by the parties or ordered by the court, the motions shall be back on calendar as of late March 2008. Discovery has not commenced. At this time, the Company has not concluded whether any potential outcome of the derivative litigation is likely to be material to its consolidated financial position or results of operations.

Government Investigations.  In August 2006, the Company announced that it had received an informal inquiry from the SEC relating to its stock option grant practices. In January 2007, the Company was informed that the SEC is conducting a formal investigation of this matter. The DOJ is also looking into these practices but has informed the Company that it is not a target of this investigation. The Company has cooperated with these government agencies and

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intends to continue to do so. At this time, the Company has not concluded whether an unfavorable outcome of one or both of the government investigations is likely to be material to its consolidated financial position or results of operations.

ERISA Litigation.  A complaint dated March 14, 2007 in an action brought under Section 502 of ERISA, 29 U.S.C. § 1132, Bagley et al., v. KB Home, et al., was filed in the United States District Court for the Central District of California. The action is brought against the Company, its directors, and certain of its current and former officers. Plaintiffs allege that they are bringing the action on behalf of all participants in the 401(k) Plan. Plaintiffs allege that the defendants breached fiduciary duties owed to members of the 401(k) Plan by virtue of issuing backdated option grants and failing to disclose this information to the 401(k) Plan participants. Plaintiffs claim that this conduct unjustly enriched certain defendants to the detriment of the 401(k) Plan and its participants, and caused the 401(k) Plan to invest in the Company’s securities at allegedly artificially inflated prices. The action purports to assert three causes of action for various alleged breaches of fiduciary duty. The Company has filed a motion to dismiss all claims alleged against it. The Court heard oral argument on the motion on November 19, 2007, after which the Court took the motion under submission. The Court has not yet ruled on the motion, and because of the pendency of the motion, no discovery has been taken in the action. While the Company believes it has strong defenses to the ERISA claims, it has not concluded whether an unfavorable outcome is likely to be material to its consolidated financial position or results of operations.

Storm Water Matter.  In January 2003, the Company received a request for information from the EPA pursuant to Section 308 of the Clean Water Act. Several other public homebuilders have received similar requests. The request sought information about storm water pollution control program implementation at certain of the Company’s construction sites, and the Company provided information pursuant to the request. In May 2004, on behalf of the EPA, the DOJ tentatively asserted that certain regulatory requirements applicable to storm water discharges had been violated on certain occasions at certain of the Company’s construction sites, and civil penalties and injunctive relief might be warranted. The DOJ has also proposed certain steps it would expect the Company to take in the future relating to compliance with the EPA’s requirements applicable to storm water discharges. The Company has defenses to the claims that have been asserted and is exploring with the EPA, DOJ and other homebuilders methods of resolving the matter. To resolve the matter, the DOJ will want the Company to pay civil penalties and sign a consent decree affecting the Company’s storm water pollution practices at construction sites. The Company believes that the costs associated with any resolution of the matter are not likely to be material to its consolidated financial position or results of operations.

Other Matters.  The Company is also involved in litigation and governmental proceedings incidental to its business. These cases are in various procedural stages and, based on reports of counsel, the Company believes that provisions or reserves made for potential losses are adequate and any liabilities or costs arising out of currently pending litigation should not have a materially adverse effect on its consolidated financial position or results of operations.

Note 14.   Stockholders’ Equity

Preferred Stock.  On February 4, 1999, the Company adopted a new Stockholder Rights Plan to replace its preexisting shareholder rights plan adopted in 1989 (the “1989 Rights Plan”) and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock; such rights were issued on March 7, 1999, simultaneously with the expiration of the rights issued under the 1989 Rights Plan. Under certain circumstances, each right entitles the holder to purchase 1/100th of a share of the Company’s Series A Participating Cumulative Preferred Stock at a price of $270.00, subject to certain anti-dilution provisions. The rights are not exercisable until the earlier to occur of (a) 10 days following a public announcement that a person or group has acquired Company stock representing 15% or more of the aggregate votes entitled to be cast by all shares of common stock, or (b) 10 days following the commencement of a tender offer for Company stock representing 15% or more of the aggregate votes entitled to be cast by all shares of common stock. If, without approval of the board of directors, the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company’s assets or earning power is sold, each right will entitle its holder to receive, upon exercise, common stock of the acquiring company having a market value of twice the exercise price of the right; and if, without approval of the board of directors, any person or group acquires Company stock representing 15% or more of the aggregate votes entitled to be cast by all shares of common stock, each right will entitle its holder to receive, upon exercise, common stock of the Company having a market value of twice the exercise price of the right. At the option of the Company, the rights are redeemable prior to becoming exercisable at $.005 per right. Unless previously redeemed, the rights will expire on March 7, 2009. Until a right is exercised, the holder will have no rights as a stockholder of the Company, including the right to vote or receive dividends.

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Common Stock.  As of November 30, 2007, the Company was authorized to repurchase four million shares under its board-approved stock repurchase program. The Company did not repurchase any of its common stock under this program in 2007. The Company repurchased six million shares of its common stock in 2006 at an aggregate price of $377.4 million and two million shares of its common stock in 2005 at an aggregate price of $129.4 million under stock repurchase programs authorized by its board of directors. In addition to the repurchases in 2006 and 2005, which consisted of open market transactions, the Company acquired $6.9 million in 2007, $16.7 million in 2006 and $5.3 million in 2005, of common stock in connection with the satisfaction of employee withholding taxes on vested restricted stock.

On April 7, 2005, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation increasing the number of authorized shares of the Company’s common stock from 100 million to 300 million. On April 6, 2006, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation reducing the number of authorized shares of the Company’s common stock from 300 million to 290 million.

On December 8, 2005, the Company’s board of directors increased the annual cash dividend on the Company’s common stock to $1.00 per share from $.75 per share.

Note 15.   Employee Benefit and Stock Plans

Most employees are eligible to participate in the Company’s 401(k) Savings Plan under which contributions by employees are partially matched by the Company. The aggregate cost of this plan to the Company was $6.2 million in 2007, $10.8 million in 2006 and $10.6 million in 2005. The assets of the Company’s 401(k) Savings Plan are held by a third-party trustee. Plan participants may direct the investment of their funds among one or more of the several fund options offered by the plan. A fund consisting of the Company’s common stock is one of the investment choices available to participants. As of November 30, 2007, 2006 and 2005, approximately 5%, 11% and 18%, respectively, of the plan’s net assets were invested in the fund consisting of the Company’s common stock.

The Company’s Amended and Restated 1999 Incentive Plan (the “1999 Plan”) provides that stock options, performance stock, restricted stock and stock units may be awarded to any employee of the Company for periods of up to 10 years. The 1999 Plan also enables the Company to grant cash bonuses, SARs and other stock-based awards. The Company also has awards outstanding under its 2001 Stock Incentive Plan, 1998 Stock Incentive Plan, 1988 Employee Stock Plan and its Performance-Based Incentive Plan for Senior Management, each of which provides for generally the same types of awards as the 1999 Plan, but with periods of up to 15 years. The 1999 Plan and the 2001 Stock Incentive Plan are the Company’s primary employee stock plans.

Stock Options.  Stock option transactions are summarized as follows:

	Years Ended November 30,
	2007					2006					2005
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Options			Price		Options			Price		Options			Price
Options outstanding at beginning of year		8,354,276		$	28.71		9,176,253		$	28.16		13,425,306		$	22.20
Granted		787,600			34.78		85,569			67.53		556,088			62.19
Exercised		(327,681	)		24.27		(743,481	)		24.19		(4,582,497	)		14.64
Cancelled		(640,731	)		37.04		(164,065	)		38.63		(222,644	)		34.97
Options outstanding at end of year		8,173,464		$	30.17		8,354,276		$	28.71		9,176,253		$	28.16
Options exercisable at end of year		7,238,598		$	28.98		7,428,952		$	26.46		6,631,515		$	23.17
Options available for grant at end of year		501,892					1,016,199					4,394,024

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The total intrinsic value of options exercised during the years ended November 30, 2007, 2006 and 2005 was $5.5 million, $29.5 million and $223.1 million, respectively. The aggregate intrinsic value of options outstanding was $9.9 million, $199.1 million and $381.9 million at November 30, 2007, 2006 and 2005, respectively. The aggregate intrinsic value of options exercisable at November 30, 2007, 2006 and 2005 was $9.9 million, $190.8 million and $309.1 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the price of the option. The total amount of options cancelled in 2007 includes 371,399 options that were cancelled as a result of the irrevocable election of each of the Company’s non-employee directors to receive payouts in cash of all outstanding stock-based awards granted to them under the Company’s Non-Employee Directors Stock Plan.

In 2007, the Company performed a review of past equity grants under its employee stock plans in compliance with an Equity-Based Award Grant Policy that was adopted on February 1, 2007 by the management development and compensation committee of the Company’s board of directors. Based on that review, the Company determined that as of November 30, 2006, the Company should have counted 2,890,260 shares of restricted stock against the limits stated in its employee stock plans based on the terms of those plans and recent changes in New York Stock Exchange rules. In addition, because of the irrevocable cash payout election of each of the Company’s non-employee directors, the Company has no intention of issuing any shares under the Non-Employee Directors Stock Plan. Therefore, the Company is treating the plan as having no available capacity to issue shares of common stock, rather than the 566,061 shares of available capacity previously reported as of November 30, 2006. The options available for grant at November 30, 2006 have been adjusted to reflect the results of the review and the exclusion of the Non-Employee Directors Stock Plan’s capacity.

Stock options outstanding at November 30, 2007 are as follows:

	Options Outstanding						Options Exercisable
					Weighted						Weighted
			Weighted		Average				Weighted		Average
			Average		Remaining				Average		Remaining
			Exercise		Contractual				Exercise		Contractual
Range of Exercise Price	Options		Price		Life		Options		Price		Life
$ 6.56 to $13.95		749,650	$	13.59		8.68		749,650	$	13.59
$13.96 to $20.07		989,286		16.37		8.91		989,286		16.37
$20.08 to $28.71		2,286,472		22.44		9.83		2,148,972		22.08
$28.72 to $36.19		2,167,169		34.49		10.46		1,517,069		33.76
$36.20 to $69.63		1,980,887		47.55		10.97		1,833,621		46.21
$ 6.56 to $69.63		8,173,464	$	30.17		10.06		7,238,598	$	28.98		10.17

The weighted average fair value of options granted in 2007, 2006 and 2005 was $11.42, $24.76 and $26.84, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2007, 2006 and 2005, respectively: a risk-free interest rate of 4.8%, 4.8% and 4.3%; an expected volatility factor for the market price of the Company’s common stock of 41.1%, 41.0% and 42.8%; a dividend yield of 2.9%, 1.9% and 1.4%; and an expected life of 5 years, 5 years and 6 years.

The Company’s stock-based compensation expense related to stock option grants was $9.4 million in 2007, $19.4 million in 2006 and $5.8 million in 2005. As of November 30, 2007, there was $7.7 million of total unrecognized stock-based compensation expense related to unvested stock option awards. This expense is expected to be recognized over a weighted average period of 1.5 years.

The Company records proceeds from the exercise of stock options as additions to common stock and paid-in capital. Actual tax benefits realized for the tax deduction from stock option exercises of $2.1 million, $17.5 million and $36.9 million were recorded as paid-in capital in 2007, 2006, and 2005, respectively. In 2007 and 2006, the consolidated statement of cash flows reflects $.9 million and $15.4 million, respectively, of excess tax benefit associated with the exercise of stock options since December 1, 2005, in accordance with the cash flow classification requirements of SFAS No. 123(R).

Other Stock-Based Awards.  From time to time, the Company grants restricted common stock to key executives. During the restriction periods, the executives are entitled to vote and receive dividends on such shares. The restrictions imposed with respect to the shares granted lapse over periods of three or eight years if certain conditions are met. The shares of restricted stock outstanding totaled 830,750 at November 30, 2007 and 957,550 at November 30, 2006.

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On July 12, 2007, the Company awarded 54,000 Performance Shares to its President and Chief Executive Officer subject to the terms of the 1999 Plan, the President and Chief Executive Officer’s Performance Stock Agreement dated July 12, 2007 and his Employment Agreement dated February 28, 2007. Depending on the Company’s total shareholder return over the three-year period ending on November 30, 2009 relative to a group of peer companies, zero to 150% of the Performance Shares will vest and become unrestricted. In accordance with SFAS No. 123(R), the Company used a Monte Carlo simulation model to estimate the grant-date fair value of the Performance Shares. The total grant-date fair value of $2.0 million will be recognized over the requisite service period.

During 2007, the Company granted phantom shares and SARs to various employees. These awards are accounted for as liabilities in the Company’s consolidated financial statements because such awards provide for settlement in cash. Each phantom share represents the right to receive a cash payment equal to the closing price of the Company’s common stock on the applicable vesting date. Each SAR represents a right to receive a cash payment equal to the positive difference, if any, between the grant price and the market value of a share of the Company’s common stock on the date of exercise, up to a maximum payout of four times the grant price. The phantom shares vest in full at the end of three years while the SARs vest in equal annual installments over three years. Phantom shares granted to senior management and all of the SARs require the achievement of a performance goal related to the Company’s cash flow as an additional condition to vesting. There were 892,926 phantom shares and 1,100,519 SARs outstanding as of November 30, 2007.

The Company recognized total compensation expense of $7.4 million in 2007, $4.7 million in 2006 and $2.0 million in 2005 related to restricted stock, Performance Shares, phantom shares and SARs.

Grantor Stock Ownership Trust.  In connection with a share repurchase program, on August 27, 1999, the Company established a grantor stock ownership trust (the “Trust”) into which certain shares repurchased in 2000 and 1999 were transferred. The Trust, administered by a third-party trustee, holds and distributes the shares of common stock acquired for the purpose of funding certain employee compensation and employee benefit obligations of the Company under its existing stock option, 401(k) Savings Plan and other employee benefit plans. The existence of the Trust has no impact on the amount of benefits or compensation that is paid under these plans.

For financial reporting purposes, the Trust is consolidated with the Company. Any dividend transactions between the Company and the Trust are eliminated. Acquired shares held by the Trust remain valued at the market price at the date of purchase and are shown as a reduction to stockholders’ equity in the consolidated balance sheets. The difference between the Trust share value and the market value on the date shares are released from the Trust, for the benefit of employees, is included in paid-in capital. Common stock held in the Trust is not considered outstanding in the computations of earnings (loss) per share. The Trust held 12,203,282 and 12,345,182 shares of common stock at November 30, 2007 and 2006, respectively. The trustee votes shares held by the Trust in accordance with voting directions from eligible employees, as specified in a trust agreement with the trustee.

Note 16.   Postretirement Benefits

The Company has two supplemental non-qualified, unfunded retirement plans, the KB Home Supplemental Executive Retirement Plan, restated effective as of July 12, 2001, and the KB Home Retirement Plan, effective as of July 11, 2002, pursuant to which the Company pays supplemental pension benefits to certain key employees upon retirement. In connection with the plans, the Company has purchased cost recovery life insurance on the lives of certain employees. Insurance contracts associated with each plan are held by a trust, established as part of the plans to implement and carry out the provisions of the plans and to finance the benefits offered under the plans. The trust is the owner and beneficiary of such contracts. The amount of the insurance coverage is designed to provide sufficient revenues to cover all costs of the plans if assumptions made as to employment term, mortality experience, policy earnings and other factors are realized. The cash surrender value of these insurance contracts was $53.6 million at November 30, 2007 and $43.1 million at November 30, 2006.

On November 1, 2001, the Company implemented an unfunded death benefit plan, the KB Home Death Benefit Only Plan, for certain key management employees. In connection with the plan, the Company has purchased cost recovery life insurance on the lives of certain employees. Insurance contracts associated with the plan are held by a trust, established as part of the plan to implement and carry out the provisions of the plan and to finance the benefits offered under the plan. The trust is the owner and beneficiary of such contracts. The amount of the coverage is designed to provide sufficient revenues to cover all costs of the plan if assumptions made as to employment term, mortality

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experience, policy earnings and other factors are realized. The cash surrender value of these insurance contracts was $19.6 million at November 30, 2007 and $17.1 million at November 30, 2006.

The net periodic benefit cost of the Company’s post-retirement benefit plans for the year ended November 30, 2007 was $5.6 million, which included service costs of $1.4 million, interest costs of $2.6 million and amortization of prior service costs of $1.6 million. The net periodic benefit cost of these plans for the year ended November 30, 2006 was $6.8 million, which included service costs of $2.7 million, interest costs of $2.5 million and amortization of prior service costs of $1.6 million. The liability in the Company’s consolidated balance sheets related to the post-retirement benefit plans was $49.1 million at November 30, 2007 and $20.6 million at November 30, 2006. For the years ended November 30, 2007 and 2006, the discount rate used for the plans was 6% and the rate of compensation increase was 4%.

Effective November 30, 2007, the Company adopted SFAS No. 158, which requires an employer to recognize the funded status of defined postretirement benefit plans as an asset or liability on the balance sheet and requires any unrecognized prior service cost and actuarial gains/losses to be recognized in other comprehensive income (loss). The post-retirement benefit liability at November 30, 2007 reflects the Company’s adoption of SFAS No. 158, which increased the liability by $22.9 million with a corresponding charge to accumulated other comprehensive income (loss) in stockholders’ equity in the consolidated balance sheet. The $8.7 million deferred tax asset resulting from the adoption of SFAS No. 158 was offset by a valuation allowance established in accordance with SFAS No. 109. The adoption of SFAS No. 158 did not affect the Company’s consolidated results of operations or cash flows. The Company uses November 30 as the measurement date for its postretirement benefit plans.

Note 17.   Income Taxes

The components of income tax benefit (expense) in the consolidated statements of operations are as follows (in thousands):

	Federal			State			Total
2007
Current	$	236,961		$	27,195		$	264,156
Deferred		(156,772	)		(61,384	)		(218,156	)
Income tax benefit (expense)	$	80,189		$	(34,189	)	$	46,000
2006
Current	$	(277,960	)	$	(9,476	)	$	(287,436	)
Deferred		80,555			27,981			108,536
Income tax benefit (expense)	$	(197,405	)	$	18,505		$	(178,900	)
2005
Current	$	(372,352	)	$	(60,000	)	$	(432,352	)
Deferred		(14,648	)		—			(14,648	)
Income tax expense	$	(387,000	)	$	(60,000	)	$	(447,000	)

Deferred income taxes result from temporary differences in the financial and tax basis of assets and liabilities. Significant components of the Company’s deferred tax liabilities and assets are as follows (in thousands):

	November 30,
	2007		2006
Deferred tax liabilities:
Capitalized expenses	$	131,147	$	90,817
State taxes		56,751		—
Repatriation of French subsidiaries		—		60,793
Depreciation and amortization		—		10,727
Other		647		708
Total	$	188,545	$	163,045

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	November 30,
	2007			2006
Deferred tax assets:
Inventory impairments and land option contract abandonments	$	479,716		$	116,126
Warranty, legal and other accruals		198,118			134,213
Employee benefits		103,525			93,213
Partnerships and joint ventures		59,035			53,256
Depreciation and amortization		41,558			3,760
Capitalized expenses		19,530			54,456
Deferred income		9,411			23,367
Tax credits		18,823			—
Foreign tax credits		—			71,700
French royalty		—			40,633
State taxes		—			1,087
Other		4,140			2,040
Total		933,856			593,851
Valuation allowance		(522,853	)		—
Total		411,003			593,851
Net deferred tax assets	$	222,458		$	430,806

Income tax benefit (expense) computed at the statutory U.S. federal income tax rate and income tax benefit (expense) provided in the consolidated statements of operations differ as follows (in thousands):

	Years Ended November 30,
	2007			2006			2005
Income tax benefit (expense) computed at statutory rate	$	511,270		$	(200,148	)	$	(420,537	)
Increase (decrease) resulting from:
State taxes, net of federal income tax benefit		46,116			12,028			(39,000	)
Non-deductible stock-based and other compensation and related expenses		(3,574	)		(3,871	)		(11,013	)
Internal Revenue Code Section 199 manufacturing deduction		—			6,265			—
Tax credits		(3,594	)		4,625			35,143
Valuation allowance for deferred tax assets		(514,234	)		—			—
Other, net		10,016			2,201			(11,593	)
Income tax benefit (expense)	$	46,000		$	(178,900	)	$	(447,000	)

The Company generated significant deferred tax assets in 2007 largely due to the inventory impairments the Company incurred during the year. The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with SFAS No. 109, the Company assesses whether a valuation allowance should be established based on its determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In light of the continued downturn in the housing market and the uncertainty as to its length and magnitude, the Company anticipates being in a three-year cumulative loss position during fiscal year 2008. According to SFAS No. 109, a three-year cumulative loss is significant negative evidence in considering whether deferred tax assets are realizable, and also generally precludes relying on projections of future taxable income to support the recovery of deferred tax assets. Therefore, during the fourth quarter of 2007, the Company recorded a valuation allowance totaling approximately $522.9 million against its deferred tax assets. The valuation allowance was reflected as a non-cash charge of $514.2 million to income tax expense and $8.7 million to accumulated other comprehensive loss (as a result of an adjustment made in accordance with SFAS No. 158). The Company’s deferred tax assets, for which there is no valuation allowance, relate to amounts that can be realized through future reversals of existing taxable temporary differences or through carrybacks to the 2006 and 2007 years. The majority of the tax benefits associated with the Company’s deferred tax assets can be carried forward for 20 years.

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During 2007, 2006 and 2005, the Company made investments that resulted in benefits in the form of synthetic fuel tax credits. During 2005, a small portion of these credits were forfeited as part of an IRS settlement. Additionally, these tax credits are subject to a phase-out provision that gradually reduces the tax credits if the annual average price of domestic crude oil increases to a stated phase-out range. The Company currently estimates the phase-out percentage for 2007 to be 65%. In 2006, there was a 25% reduction in tax credits and in 2005 there was no reduction in tax credits.

Note 18.   Supplemental Disclosure to Consolidated Statements of Cash Flows

The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):

	Years Ended November 30,
	2007			2006			2005
Summary of cash and cash equivalents:
Homebuilding	$	1,325,255		$	700,041		$	237,060
Financial services		18,487			15,417			9,207
Discontinued operations		—			88,724			78,706
Total	$	1,343,742		$	804,182		$	324,973
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	29,572		$	—		$	—
Income taxes paid		140,852			322,983			292,996
Supplemental disclosures of non-cash activities:
Cost of inventories acquired through seller financing	$	4,139		$	128,726		$	36,817
Increase (decrease) in consolidated inventories not owned		(409,505	)		(18,130	)		120,674

Note 19.   Discontinued Operations

On July 10, 2007, the Company sold its 49% equity interest in its publicly traded French subsidiary, KBSA. The sale generated total gross proceeds of $807.2 million and a pretax gain of $706.7 million ($438.1 million, net of income taxes), which was recognized in the third quarter of 2007. The sale was made pursuant to the Share Purchase Agreement among the Company, the Purchaser and the Selling Subsidiaries. Under the Share Purchase Agreement, the Purchaser agreed to acquire the 49% equity interest (representing 10,921,954 shares held collectively by the Selling Subsidiaries) at a price of 55.00 euros per share. The purchase price consisted of 50.17 euros per share paid by the Purchaser in cash, and a cash dividend of 4.83 euros per share paid by KBSA.

As a result of the sale, the results of the French operations, which had previously been presented as a separate reporting segment, are included in discontinued operations in the Company’s consolidated statements of operations. In addition, any assets and liabilities related to these discontinued operations are presented separately on the consolidated balance sheets, and any cash flows related to these discontinued operations are presented separately in the consolidated statements of cash flows. All prior period information has been reclassified to be consistent with the current period presentation.

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The following amounts related to the French operations were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations (in thousands):

	Years Ended November 30,
	2007			2006			2005
Revenues	$	911,841		$	1,623,709		$	1,286,969
Construction and land costs		(680,234	)		(1,187,484	)		(933,371	)
Selling, general and administrative expenses		(129,407	)		(251,104	)		(215,121	)
Operating income		102,200			185,121			138,477
Interest income		1,199			643			681
Interest expense, net of amounts capitalized		—			(2,045	)		(2,529	)
Minority interests		(38,665	)		(68,020	)		(54,052	)
Equity in income of unconsolidated joint ventures		4,118			10,505			6,101
Income from discontinued operations before income taxes		68,852			126,204			88,678
Income tax expense		(21,600	)		(36,800	)		(19,500	)
Income from discontinued operations, net of income taxes	$	47,252		$	89,404		$	69,178

The following is a summary of the assets and liabilities of the French discontinued operations. The amounts presented below were derived from historical financial information and adjusted to exclude intercompany receivables and payables between the French discontinued operations and the Company (in thousands):

	November 30,
	2006
Assets
Cash	$	88,724
Receivables		435,520
Inventories		703,120
Investments in unconsolidated joint ventures		16,489
Goodwill		56,482
Other assets		94,040
Total assets	$	1,394,375
Liabilities
Accounts payable	$	594,576
Accrued expenses and other liabilities		183,580
Mortgages and notes payable		205,469
Minority interests		183,895
Total liabilities	$	1,167,520

The Company also had cumulative foreign currency translation adjustments of $63.2 million related to the French discontinued operations as of November 30, 2006 that were included in stockholders’ equity.

76

Note 20.   Quarterly Results (unaudited)

Consolidated quarterly results for the Company for the years ended November 30, 2007 and 2006 follow (in thousands, except per share amounts):

	First		Second			Third			Fourth
2007
Revenues	$	1,388,838	$	1,413,208		$	1,543,900		$	2,070,580
Gross profit (loss)		208,370		(69,419	)		(461,774	)		(102,965	)
Income (loss) from continuing operations		10,655		(174,152	)		(478,620	)		(772,653	)
Income from discontinued operations, net of income taxes (a)		16,882		25,466			443,008			—
Net income (loss)		27,537		(148,686	)		(35,612	)		(772,653	)
Basic earnings (loss) per share:
Continuing operations	$	.14	$	(2.26	)	$	(6.19	)	$	(9.99	)
Discontinued operations		.22		.33			5.73			—
Basic earnings (loss) per share	$	.36	$	(1.93	)	$	(.46	)	$	(9.99	)
Diluted earnings (loss) per share:
Continuing operations	$	.13	$	(2.26	)	$	(6.19	)	$	(9.99	)
Discontinued operations		.21		.33			5.73			—
Diluted earnings (loss) per share	$	.34	$	(1.93	)	$	(.46	)	$	(9.99	)
2006
Revenues	$	1,882,271	$	2,202,275		$	2,283,865		$	3,011,672
Gross profit		482,566		561,086			479,129			171,043
Income (loss) from continuing operations		159,118		184,429			129,342			(79,942	)
Income from discontinued operations, net of income taxes (a)		14,216		21,016			23,872			30,300
Net income (loss)		173,334		205,445			153,214			(49,642	)
Basic earnings (loss) per share:
Continuing operations	$	1.96	$	2.33		$	1.66		$	(1.04	)
Discontinued operations		.18		.26			.31			.40
Basic earnings (loss) per share	$	2.14	$	2.59		$	1.97		$	(.64	)
Diluted earnings (loss) per share:
Continuing operations	$	1.85	$	2.20		$	1.60		$	(1.04	)
Discontinued operations		.16		.25			.30			.40
Diluted earnings (loss) per share	$	2.01	$	2.45		$	1.90		$	(.64	)

(a) Discontinued operations are comprised of the Company’s French operations, which have been presented as discontinued operations for all periods presented. Income from discontinued operations, net of income taxes, in 2007 includes a gain of $438.1 million realized on the sale of the French operations.

Included in gross profit (loss) in the second, third and fourth quarters of 2007 were inventory impairment charges of $261.2 million, $610.3 million and $233.5 million, respectively, and pretax charges for land option contract abandonments of $5.7 million, $62.7 million and $72.0 million, respectively. The loss from continuing operations in the second, third and fourth quarters of 2007 also included pretax charges for joint venture impairments of $41.3 million, $17.1 million and $97.9 million, respectively. In the fourth quarter of 2006, the gross profit reflected pretax charges of $215.7 million for inventory impairments and $88.3 million for land option contract abandonments. The loss from continuing operations in the fourth quarter of 2006 also included a pretax charge of $39.3 million for joint venture impairments.

77

The loss from continuing operations in the third quarter of 2007 included a pretax charge of $107.9 million for goodwill impairment recorded in accordance with SFAS No. 142.

In the fourth quarter of 2007, the loss from continuing operations, net of income taxes, included a charge of $514.2 million to record a valuation allowance on deferred taxes in accordance with SFAS No. 109.

Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year.

Note 21.   Supplemental Guarantor Information

The Company’s obligations to pay principal, premium, if any, and interest under certain debt instruments are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by the Company. The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

78

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(In Thousands)

	Year Ended November 30, 2007
	KB Home			Guarantor			Non-Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total
Revenues	$	—		$	4,752,649		$	1,663,877		$	—		$	6,416,526
Homebuilding:
Revenues	$	—		$	4,752,649		$	1,647,942		$	—		$	6,400,591
Construction and land costs		—			(5,299,357	)		(1,527,022	)		—			(6,826,379	)
Selling, general and administrative expenses		(104,646	)		(518,912	)		(201,063	)		—			(824,621	)
Goodwill impairment		(107,926	)		—			—			—			(107,926	)
Operating loss		(212,572	)		(1,065,620	)		(80,143	)		—			(1,358,335	)
Loss on early redemption/interest expense, net of amounts capitalized		179,100			(146,204	)		(45,886	)		—			(12,990	)
Other, net		21,869			(19,912	)		(125,238	)		—			(123,281	)
Homebuilding pretax loss		(11,603	)		(1,231,736	)		(251,267	)		—			(1,494,606	)
Financial services pretax income		—			—			33,836			—			33,836
Loss from continuing operations before income taxes		(11,603	)		(1,231,736	)		(217,431	)		—			(1,460,770	)
Income tax benefit		400			38,800			6,800			—			46,000
Loss from continuing operations before equity in net loss of subsidiaries		(11,203	)		(1,192,936	)		(210,631	)		—			(1,414,770	)
Income from discontinued operations, net of income taxes		—			—			485,356			—			485,356
Income (loss) before equity in net income (loss) of subsidiaries		(11,203	)		(1,192,936	)		274,725			—			(929,414	)
Equity in net income (loss) of subsidiaries:
Continuing operations		(1,403,567	)		—			—			1,403,567			—
Discontinued operations		485,356			—			—			(485,356	)		—
Net income (loss)	$	(929,414	)	$	(1,192,936	)	$	274,725		$	918,211		$	(929,414	)
	Year Ended November 30, 2006
	KB Home			Guarantor			Non-Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total
Revenues	$	—		$	7,386,128		$	1,993,955		$	—		$	9,380,083
Homebuilding:
Revenues	$	—		$	7,386,128		$	1,973,715		$	—		$	9,359,843
Construction and land costs		—			(5,875,431	)		(1,790,588	)		—			(7,666,019	)
Selling, general and administrative expenses		(156,099	)		(713,519	)		(253,890	)		—			(1,123,508	)
Operating income (loss)		(156,099	)		797,178			(70,763	)		—			570,316
Interest expense, net of amounts capitalized		201,837			(153,141	)		(65,374	)		—			(16,678	)
Other, net		28,909			(21,787	)		(22,449	)		—			(15,327	)
Homebuilding pretax income (loss)		74,647			622,250			(158,586	)		—			538,311
Financial services pretax income		—			—			33,536			—			33,536
Income (loss) from continuing operations before income taxes		74,647			622,250			(125,050	)		—			571,847
Income tax benefit (expense)		(23,400	)		(194,600	)		39,100			—			(178,900	)
Income (loss) from continuing operations before equity in net income of subsidiaries		51,247			427,650			(85,950	)		—			392,947
Income from discontinued operations, net of income taxes		—			—			89,404			—			89,404
Income before equity in net income of subsidiaries		51,247			427,650			3,454			—			482,351
Equity in net income of subsidiaries:
Continuing operations		341,700			—			—			(341,700	)		—
Discontinued operations		89,404			—			—			(89,404	)		—
Net income	$	482,351		$	427,650		$	3,454		$	(431,104	)	$	482,351

79

	Year Ended November 30, 2005
	KB Home			Guarantor			Non-Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total
Revenues	$	—		$	6,560,610		$	1,594,071		$	—		$	8,154,681
Homebuilding:
Revenues	$	—		$	6,560,610		$	1,562,703		$	—		$	8,123,313
Construction and land costs		—			(4,677,411	)		(1,277,357	)		—			(5,954,768	)
Selling, general and administrative expenses		(151,675	)		(634,240	)		(193,695	)		—			(979,610	)
Operating income (loss)		(151,675	)		1,248,959			91,651			—			1,188,935
Interest expense, net of amounts capitalized		179,743			(152,283	)		(43,803	)		—			(16,343	)
Other, net		1,322			16,325			97			—			17,744
Homebuilding pretax income		29,390			1,113,001			47,945			—			1,190,336
Financial services pretax income		—			—			11,198			—			11,198
Income from continuing operations before income taxes		29,390			1,113,001			59,143			—			1,201,534
Income tax expense		(10,900	)		(414,100	)		(22,000	)		—			(447,000	)
Income from continuing operations before equity in net income of subsidiaries		18,490			698,901			37,143			—			754,534
Income from discontinued operations, net of income taxes		—			—			69,178			—			69,178
Income before equity in net income of subsidiaries		18,490			698,901			106,321			—			823,712
Equity in net income of subsidiaries:
Continuing operations		736,044			—			—			(736,044	)		—
Discontinued operations		69,178			—			—			(69,178	)		—
Net income	$	823,712		$	698,901		$	106,321		$	(805,222	)	$	823,712

80

CONDENSED CONSOLIDATING BALANCE SHEETS

(In Thousands)

	November 30, 2007
	KB Home			Guarantor		Non-Guarantor		Consolidating
	Corporate			Subsidiaries		Subsidiaries		Adjustments			Total
Assets
Homebuilding:
Cash and cash equivalents	$	1,104,429		$	71,519	$	149,307	$	—		$	1,325,255
Receivables		126,531			151,089		18,119		—			295,739
Inventories		—			2,670,155		642,265		—			3,312,420
Other assets		405,306			219,146		103,698		—			728,150
		1,636,266			3,111,909		913,389		—			5,661,564
Financial services		—			—		44,392		—			44,392
Investments in subsidiaries		64,148			—		—		(64,148	)		—
Total assets	$	1,700,414		$	3,111,909	$	957,781	$	(64,148	)	$	5,705,956
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities	$	210,697		$	1,130,047	$	334,935	$	—		$	1,675,679
Mortgages and notes payable		2,142,654			19,140		—		—			2,161,794
		2,353,351			1,149,187		334,935		—			3,837,473
Financial services		—			—		17,796		—			17,796
Intercompany		(2,503,624	)		1,962,722		540,902		—			—
Stockholders’ equity		1,850,687			—		64,148		(64,148	)		1,850,687
Total liabilities and stockholders’ equity	$	1,700,414		$	3,111,909	$	957,781	$	(64,148	)	$	5,705,956

81

	November 30, 2006
	KB Home			Guarantor		Non-Guarantor		Consolidating
	Corporate			Subsidiaries		Subsidiaries		Adjustments			Total
Assets
Homebuilding:
Cash and cash equivalents	$	447,221		$	150,829	$	101,991	$	—		$	700,041
Receivables		5,306			192,815		25,956		—			224,077
Inventories		—			4,589,308		1,162,335		—			5,751,643
Other assets		727,754			237,248		184,576		—			1,149,578
		1,180,281			5,170,200		1,474,858		—			7,825,339
Financial services		—			—		44,024		—			44,024
Assets of discontinued operations		—			—		1,394,375		—			1,394,375
Investments in subsidiaries		400,691			—		—		(400,691	)		—
Total assets	$	1,580,972		$	5,170,200	$	2,913,257	$	(400,691	)	$	9,263,738
Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities	$	436,279		$	1,450,342	$	340,239	$	—		$	2,226,860
Mortgages and notes payable		2,791,213			102,567		26,554		—			2,920,334
		3,227,492			1,552,909		366,793		—			5,147,194
Financial services		—			—		26,276		—			26,276
Liabilities of discontinued operations		—			—		1,167,520		—			1,167,520
Intercompany		(4,569,268	)		3,617,291		951,977		—			—
Stockholders’ equity		2,922,748			—		400,691		(400,691	)		2,922,748
Total liabilities and stockholders’ equity	$	1,580,972		$	5,170,200	$	2,913,257	$	(400,691	)	$	9,263,738

82

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(In Thousands)

	Year Ended November 30, 2007
	KB Home			Guarantor			Non-Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total
Cash flows from operating activities:
Net loss	$	(929,414	)	$	(1,192,936	)	$	(210,631	)	$	1,403,567		$	(929,414	)
Income from discontinued operations, net of income taxes		—			—			(47,252	)		—			(47,252	)
Gain on sale of discontinued operations, net of income taxes		(438,104	)		—			—			—			(438,104	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Inventory and joint venture impairments and land option contract abandonments		—			1,209,775			200,570			—			1,410,345
Goodwill impairment		107,926			—			—			—			107,926
Changes in assets and liabilities:
Inventories		—			367,142			412,733			—			779,875
Other, net		(272,193	)		161,717			123,997			—			13,521
Net cash provided (used) by operating activities — continuing operations		(1,531,785	)		545,698			479,417			1,403,567			896,897
Net cash provided by operating activities — discontinued operations		—			—			297,397			—			297,397
Net cash provided (used) by operating activities		(1,531,785	)		545,698			776,814			1,403,567			1,194,294
Cash flows from investing activities:
Sale of discontinued operations, net of cash divested		739,764			—			—			—			739,764
Investments in unconsolidated joint ventures		—			(71,147	)		(170,404	)		—			(241,551	)
Other, net		(558	)		(201	)		1,444			—			685
Net cash provided (used) by investing activities — continuing operations		739,206			(71,348	)		(168,960	)		—			498,898
Net cash used by investing activities — discontinued operations		—			—			(12,112	)		—			(12,112	)
Net cash provided (used) by investing activities		739,206			(71,348	)		(181,072	)		—			486,786
Cash flows from financing activities:
Redemption of term loan		(400,000	)		—			—			—			(400,000	)
Redemption of senior subordinated notes		(250,000	)		—			—			—			(250,000	)
Payments on mortgages, land contracts and other loans		—			(87,566	)		(26,553	)		—			(114,119	)
Other, net		(70,874	)		(4,463	)		4,463			—			(70,874	)
Intercompany		2,170,661			(461,631	)		(305,463	)		(1,403,567	)		—
Net cash provided (used) by financing activities — continuing operations		1,449,787			(553,660	)		(327,553	)		(1,403,567	)		(834,993	)
Net cash used by financing activities — discontinued operations		—			—			(306,527	)		—			(306,527	)
Net cash provided (used) by financing activities		1,449,787			(553,660	)		(634,080	)		(1,403,567	)		(1,141,520	)
Net increase (decrease) in cash and cash equivalents		657,208			(79,310	)		(38,338	)		—			539,560
Cash and cash equivalents at beginning of year		447,221			150,829			206,132			—			804,182
Cash and cash equivalents at end of year	$	1,104,429		$	71,519		$	167,794		$	—		$	1,343,742

83

	Year Ended November 30, 2006
	KB Home			Guarantor			Non-Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total
Cash flows from operating activities:
Net income (loss)	$	482,351		$	427,650		$	(85,950	)	$	(341,700	)	$	482,351
Income from discontinued operations, net of income taxes		—			—			(89,404	)		—			(89,404	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Inventory and joint venture impairments and land option contract abandonments		—			280,437			150,802			—			431,239
Changes in assets and liabilities:
Inventories		—			(156,135	)		(200,207	)		—			(356,342	)
Other, net		(154,187	)		150,525			16,033			—			12,371
Net cash provided (used) by operating activities — continuing operations		328,164			702,477			(208,726	)		(341,700	)		480,215
Net cash provided by operating activities — discontinued operations		—			—			229,505			—			229,505
Net cash provided by operating activities		328,164			702,477			20,779			(341,700	)		709,720
Cash flows from investing activities:
Sale of investment in unconsolidated joint venture		57,767			—			—			—			57,767
Investments in unconsolidated joint ventures		22,587			(126,300	)		(134,073	)		—			(237,786	)
Other, net		(3,146	)		(8,674	)		(5,046	)		—			(16,866	)
Net cash provided (used) by investing activities — continuing operations		77,208			(134,974	)		(139,119	)		—			(196,885	)
Net cash used by investing activities — discontinued operations		—			—			(4,477	)		—			(4,477	)
Net cash provided (used) by investing activities		77,208			(134,974	)		(143,596	)		—			(201,362	)
Cash flows from financing activities:
Net payments on credit agreements and other short-term borrowings		(84,100	)		—			—			—			(84,100	)
Proceeds from issuance of senior notes and term loan		698,458			—			—			—			698,458
Repurchases of common stock		(394,080	)		—			—			—			(394,080	)
Other, net		11,313			(33,494	)		(12,236	)		—			(34,417	)
Intercompany		(244,421	)		(519,129	)		421,850			341,700			—
Net cash provided (used) by financing activities — continuing operations		(12,830	)		(552,623	)		409,614			341,700			185,861
Net cash used by financing activities — discontinued operations		—			—			(215,010	)		—			(215,010	)
Net cash provided (used) by financing activities		(12,830	)		(552,623	)		194,604			341,700			(29,149	)
Net increase in cash and cash equivalents		392,542			14,880			71,787			—			479,209
Cash and cash equivalents at beginning of year		54,679			135,949			134,345			—			324,973
Cash and cash equivalents at end of year	$	447,221		$	150,829		$	206,132		$	—		$	804,182

84

	Year Ended November 30, 2005
	KB Home			Guarantor			Non-Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total
Cash flows from operating activities:
Net income	$	823,712		$	698,901		$	37,143		$	(736,044	)	$	823,712
Income from discontinued operations, net of income taxes		—			—			(69,178	)		—			(69,178	)
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Changes in assets and liabilities:
Inventories		—			(1,459,530	)		(348,063	)		—			(1,807,593	)
Other, net		283,120			399,531			199,446			—			882,097
Net cash provided (used) by operating activities — continuing operations		1,106,832			(361,098	)		(180,652	)		(736,044	)		(170,962	)
Net cash provided by operating activities — discontinued operations		—			—			86,715			—			86,715
Net cash provided (used) by operating activities		1,106,832			(361,098	)		(93,937	)		(736,044	)		(84,247	)
Cash flows from investing activities:
Sale of mortgage banking assets		—			—			42,396			—			42,396
Other, net		(8,439	)		(83,107	)		(46,886	)		—			(138,432	)
Net cash used by investing activities — continuing operations		(8,439	)		(83,107	)		(4,490	)		—			(96,036	)
Net cash used by investing activities — discontinued operations		—			—			(1,938	)		—			(1,938	)
Net cash used by investing activities		(8,439	)		(83,107	)		(6,428	)		—			(97,974	)
Cash flows from financing activities:
Net payments on credit agreements and other short-term borrowings		(306,900	)		—			(71,629	)		—			(378,529	)
Proceeds from issuance of senior notes		747,591			—			—			—			747,591
Repurchases of common stock		(134,713	)		—			—			—			(134,713	)
Other, net		54,290			(60,037	)		6,800			—			1,053
Intercompany		(1,501,912	)		531,222			234,646			736,044			—
Net cash provided (used) by financing activities — continuing operations		(1,141,644	)		471,185			169,817			736,044			235,402
Net cash used by financing activities — discontinued operations		—			—			(119,213	)		—			(119,213	)
Net cash provided (used) by financing activities		(1,141,644	)		471,185			50,604			736,044			116,189
Net increase (decrease) in cash and cash equivalents		(43,251	)		26,980			(49,761	)		—			(66,032	)
Cash and cash equivalents at beginning of year		97,930			108,969			184,106			—			391,005
Cash and cash equivalents at end of year	$	54,679		$	135,949		$	134,345		$	—		$	324,973

Note 22.  Subsequent Event

On January 25, 2008, the Company entered into the fourth amendment to the Credit Facility. The fourth amendment amends the minimum consolidated tangible net worth the Company is required to maintain under the Credit Facility and reduces the aggregate commitment under the Credit Facility from $1.50 billion to $1.30 billion. Consenting lenders to the fourth amendment received a fee in connection with this amendment.

85

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of KB Home:

We have audited the accompanying consolidated balance sheets of KB Home as of November 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended November 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KB Home at November 30, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation.

As discussed in Note 16 to the consolidated financial statements, in 2007 the Company changed its method of accounting for defined postretirement benefit plans.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of KB Home’s internal control over financial reporting as of November 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 25, 2008 expressed an unqualified opinion thereon.

Los Angeles, California

January 25, 2008

86

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of KB Home:

We have audited KB Home’s internal control over financial reporting as of November 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). KB Home’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, KB Home maintained, in all material respects, effective internal control over financial reporting as of November 30, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of KB Home as of November 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended November 30, 2007 and our report dated January 25, 2008 expressed an unqualified opinion thereon.

Los Angeles, California

January 25, 2008

87

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that information we are required to disclose in the reports we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of senior management, including our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures as of November 30, 2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of November 30, 2007.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended November 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the participation of senior management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of November 30, 2007.

Item 9B.   OTHER INFORMATION

None.

88

PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item for executive officers is set forth under the heading “Executive Officers of Registrant” in Part I. Except as set forth below, the other information called for by this item is incorporated by reference to the “Corporate Governance and Board Matters” and the “Proposal 1: Election of Directors” sections of our Proxy Statement for the 2008 Annual Meeting of Stockholders, which will be filed with the SEC not later than March 29, 2008 (120 days after the end of our fiscal year).

Ethics Policy

We have adopted an Ethics Policy for our directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees. The Ethics Policy is available on our website at http://www.kbhome.com/investor. Stockholders may request a free copy of the Ethics Policy from:

KB Home

Attention: Investor Relations

10990 Wilshire Boulevard

Los Angeles, California 90024

(310) 231-4000

investorrelations@kbhome.com

Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to our Ethics Policy and any waiver applicable to our principal executive officer, principal financial officer or principal accounting officer, or persons performing similar functions, and our executive officers or directors.

Corporate Governance Principles

We have adopted Corporate Governance Principles, which are available on our website at http://www.kbhome.com/investor. Stockholders may request a free copy of the Corporate Governance Principles from the address, phone number and email address set forth under “Ethics Policy.”

New York Stock Exchange Annual Certification

On May 4, 2007, we submitted to the New York Stock Exchange a certification of our President and Chief Executive Officer that he was not aware of any violation by KB Home of the New York Stock Exchange’s corporate governance listing standards as of the date of the certification.

Item 11.  EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the “Corporate Governance and Board Matters” and the “Executive Compensation” sections of our Proxy Statement for the 2008 Annual Meeting of Stockholders, which will be filed with the SEC not later than March 29, 2008 (120 days after the end of our fiscal year).

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the “Ownership of KB Home Securities” section of our Proxy Statement for the 2008 Annual Meeting of Stockholders, which will be filed with the SEC not later than March 29, 2008 (120 days after the end of our fiscal year), except for the information required by Item 201(d) of Regulation S-K, which is provided below.

89

The following table provides information as of November 30, 2007 with respect to shares of our common stock that may be issued under our existing compensation plans:

Equity Compensation Plan Information
					Number of common
	Number of				shares remaining
	common shares to				available for future
	be issued upon				issuance under equity
	exercise of		Weighted-average		compensation plans
	outstanding options,		exercise price of		(excluding common
	warrants and		outstanding options,		shares reflected in
	rights		warrants and rights		column(a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by stockholders		8,173,464	$	30.17		501,892
Equity compensation plans not approved by stockholders		—		—		—	(d)
Total		8,173,464	$	30.17		501,892

(d)  Represents the Non-Employee Directors Stock Plan. The Non-Employee Directors Stock Plan provides for an unlimited number of grants of deferred common stock units or stock options to our non-employee directors. The terms of the stock units and options granted under the Non-Employee Directors Stock Plan are described in our Proxy Statement for the 2008 Annual Meeting of Stockholders, which is incorporated herein. Although we may purchase shares of our common stock on the open market to satisfy the payment of stock awards under the Non-Employee Directors Stock Plan, to date, all stock awards under the Non-Employee Directors Stock Plan have been settled in cash. In addition, because of the irrevocable election of each of our non-employee directors to receive payouts in cash of all outstanding stock-based awards granted to them under the Non-Employee Directors Stock Plan, we do not intend to issue any shares of common stock under the plan. Therefore, we are treating the Non-Employee Directors Stock Plan as having no available capacity to issue shares of our common stock.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the “Corporate Governance and Board Matters” and the “Other Matters” sections of our Proxy Statement for the 2008 Annual Meeting of Stockholders, which will be filed with the SEC not later than March 29, 2008 (120 days after the end of our fiscal year).

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the “Independent Auditor Fees and Services” section of our Proxy Statement for the 2008 Annual Meeting of Stockholders, which will be filed with the SEC not later than March 29, 2008 (120 days after the end of our fiscal year).

90

PART IV

Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     Financial Statements

Reference is made to the index set forth on page 47 of this Annual Report on Form 10-K.

    Exhibits

Exhibit
Number			Description
	2	.1	Share Purchase Agreement, dated May 22, 2007, by and between KB Home, Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, Kaufman and Broad International, Inc. and Financière Gaillon 8 S.A.S., filed as an exhibit to the Company’s Current Report on Form 8-K dated May 22, 2007, is incorporated by reference herein.
	3	.1	Restated Certificate of Incorporation, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.
	3	.2	By-Laws, as amended and restated on April 5, 2007, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.
	4	.1	Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated February 4, 1999, filed as an exhibit to the Company’s Current Report on Form 8-K dated February 4, 1999, is incorporated by reference herein.
	4	.2	Indenture relating to 85/8% Senior Subordinated Notes due 2008, and 73/4% Senior Subordinated Notes due 2010 between the Company and Sun Trust Bank, Atlanta, dated November 19, 1996 filed as an exhibit to the Company’s Current Report on Form 8-K dated November 19, 1996, is incorporated by reference herein.
	4	.3	Specimen of 85/8% Senior Subordinated Notes due 2008, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 13, 2001, is incorporated by reference herein.
	4	.4	Form of officer’s certificate establishing the terms of the 85/8% Senior Subordinated Notes due 2008, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 13, 2001, is incorporated by reference herein.
	4	.5	Specimen of 73/4% Senior Subordinated Notes due 2010, filed as an exhibit to the Company’s Current Report on Form 8-K dated January 27, 2003, is incorporated by reference herein.
	4	.6	Form of officer’s certificate establishing the terms of the 73/4% Senior Subordinated Notes due 2010, filed as an exhibit to the Company’s Current Report on Form 8-K dated January 27, 2003, is incorporated by reference herein.
	4	.7	Indenture and Supplemental Indenture relating to 53/4% Senior Notes due 2014 among the Company, the Guarantors and Sun Trust Bank, Atlanta, each dated January 28, 2004, filed as exhibits to the Company’s Registration Statement No. 333-114761 on Form S-4, are incorporated by reference herein.
	4	.8	Specimen of 53/4% Senior Notes due 2014, filed as an exhibit to the Company’s Registration Statement No. 333-114761 on Form S-4, is incorporated by reference herein.
	4	.9	Second Supplemental Indenture relating to 63/8% Senior Notes due 2011 among the Company, the Guarantors and Sun Trust Bank, Atlanta, dated June 30, 2004, filed as an exhibit to the Company’s registration statement No. 333-119228 on Form S-4, is incorporated by reference herein.
	4	.10	Specimen of 57/8% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.
	4	.11	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 57/8% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.
	4	.12	Specimen of 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.

91

Exhibit
Number			Description
	4	.13	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.
	4	.14	Specimen of 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.
	4	.15	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.
	4	.16	Specimen of 71/4% Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.
	4	.17	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 71/4% Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.
	4	.18	Second Supplemental Indenture relating to the Company’s Senior Subordinated Notes by and between the Company, the Guarantors named therein, and SunTrust Bank, dated as of May 1, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated May 3, 2006, is incorporated by reference herein.
	4	.19	Third Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein, the Subsidiary Guarantor named therein and SunTrust Bank, dated as of May 1, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated May 3, 2006, is incorporated by reference herein.
	4	.20	Fourth Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein and U.S. Bank National Association, dated as of November 9, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.
	4	.21	Fifth Supplemental Indenture, dated August 17, 2007, relating to the Company’s Senior Notes by and between the Company, the Guarantors, and the Trustee, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
	4	.22	Third Supplemental Indenture, dated August 17, 2007, relating to the Company’s Senior Subordinated Notes by and between the Company, the Guarantors, and the Trustee, and the Guaranties, each dated August 17, 2007, of the Senior Subordinated Notes, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
	10	.1	Consent Order, Federal Trade Commission Docket No. C-2954, dated February 12, 1979, filed as an exhibit to the Company’s Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein.
	10	.2*	KB Home Performance-Based Incentive Plan for Senior Management, filed as an exhibit to the Company’s 1995 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.3*	Form of Stock Option Agreement under KB Home Performance-Based Incentive Plan for Senior Management, filed as an exhibit to the Company’s 1995 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.4*	KB Home Unit Performance Program, filed as an exhibit to the Company’s 1996 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.5*	KB Home 1998 Stock Incentive Plan, filed as an exhibit to the Company’s 1998 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.6	KB Home Directors’ Legacy Program, as amended January 1, 1999, filed as an exhibit to the Company’s 1998 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.7	Trust Agreement between Kaufman and Broad Home Corporation and Wachovia Bank, N.A. as Trustee, dated as of August 27, 1999, filed as an exhibit to the Company’s 1999 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.8*	Amended and Restated Employment Agreement of Bruce Karatz, dated July 11, 2001, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2001, is incorporated by reference herein.

92

Exhibit
Number			Description
	10	.9*	KB Home Nonqualified Deferred Compensation Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.10*	KB Home 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.11*	KB Home Change in Control Severance Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.12*	KB Home Death Benefit Only Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.13*	KB Home Retirement Plan, filed as an exhibit to the Company’s 2002 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.14*	Amended and Restated KB Home 1999 Incentive Plan, as amended, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.15	KB Home Non-Employee Directors Stock Plan, as amended and restated as of July 10, 2003, filed as an exhibit to the Company’s 2003 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.16	Revolving Loan Agreement, dated as of November 22, 2005, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 23, 2005, is incorporated by reference herein.
	10	.17	Term Loan Agreement, dated as of April 12, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 19, 2006, is incorporated by reference herein.
	10	.18*	Form of Non-Qualified Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
	10	.19*	Form of Incentive Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
	10	.20*	Form of Restricted Stock Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
	10	.21	First Amendment, dated as of October 10, 2006, to the Revolving Loan Agreement dated as of November 22, 2005 among the Company, the lenders party thereto and Bank of America, N.A., filed as an exhibit to the Company’s Current Report on Form 8-K dated October 19, 2006, is incorporated by reference herein.
	10	.22	Tolling Agreement, dated as of November 12, 2006, by and between the Company and Bruce Karatz, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.
	10	.23	Second Amendment to the Revolving Loan Agreement dated as of November 22, 2005 among KB Home, the lenders party thereto, and Bank of America, N.A., as administrative agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 12, 2006, is incorporated by reference herein.
	10	.24*	Form of Stock Option Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.25*	Form of Stock Restriction Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.

93

Exhibit
Number			Description
	10	.26*	Employment Agreement of Jeffrey T. Mezger, dated February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated March 6, 2007, is incorporated by reference herein.
	10	.27*	Amended and Restated 1999 Incentive Plan Performance Stock Agreement between the Company and Jeffrey T. Mezger, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.28*	Form of Stock Option Agreement under the Employment Agreement between the Company and Jeffrey T. Mezger dated as of February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.29*	Form of Amended and Restated 1999 Incentive Plan Stock Appreciation Right Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.30*	Form of Amended and Restated 1999 Incentive Plan Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.31*	Form of Phantom Share Agreement for Non-Senior Management, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.32*	Form of Over Cap Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.33	Third Amendment Agreement, dated August 17, 2007, to Revolving Loan Agreement, dated as of November 22, 2005, between the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
	10	.34*	Form of Stock Option Agreement under the Amended and Restated 1999 Incentive Plan for stock option grant to Jeffrey T. Mezger, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2007, is incorporated by reference herein.
	10	.35*	Kaufman and Broad, Inc. Executive Deferred Compensation Plan, effective as of July 11, 1985.
	10	.36*	Kaufman and Broad Home Corporation Directors’ Deferred Compensation Plan established effective as of July 27, 1989.
	10	.37	Consent decree, dated July 2, 1991, relating to Federal Trade Commission Consent Order.
	10	.38*	Kaufman and Broad Home Corporation 1988 Employee Stock Plan, as amended on January 27, 1994.
	12	.1	Computation of Ratio of Earnings to Fixed Charges.
	21		Subsidiaries of the Registrant.
	23		Consent of Independent Registered Public Accounting Firm.
	31	.1	Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification of Domenico Cecere, Executive Vice President and Chief Financial Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1	Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of Domenico Cecere, Executive Vice President and Chief Financial Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement in which executive officers are eligible to participate.

     Financial Statement Schedules

Financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements and notes thereto.

94

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

KB Home

By:  /s/  WILLIAM R. HOLLINGER

William R. Hollinger

Senior Vice President and Chief Accounting Officer

(Principal Accounting Officer)

Dated: January 25, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature	Title	Date
/s/  JEFFREY T. MEZGER Jeffrey T. Mezger	Director, President and Chief Executive Officer (Principal Executive Officer)	January 25, 2008
/s/  DOMENICO CECERE Domenico Cecere	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	January 25, 2008
/s/  STEPHEN F. BOLLENBACH Stephen F. Bollenbach	Chairman of the Board and Director	January 23, 2008
/s/  RONALD W. BURKLE Ronald W. Burkle	Director	January 23, 2008
/s/  TIMOTHY W. FINCHEM Timothy W. Finchem	Director	January 18, 2008
/s/  KENNETH M. JASTROW, II Kenneth M. Jastrow, II	Director	January 23, 2008
/s/  JAMES A. JOHNSON James A. Johnson	Director	January 23, 2008
/s/  J. TERRENCE LANNI J. Terrence Lanni	Director	January 23, 2008
/s/  MELISSA LORA Melissa Lora	Director	January 23, 2008
/s/  MICHAEL G. MCCAFFERY Michael G. McCaffery	Director	January 18, 2008
/s/  LESLIE MOONVES Leslie Moonves	Director	January 23, 2008
/s/  LUIS G. NOGALES Luis G. Nogales	Director	January 22, 2008

95

LIST OF EXHIBITS FILED

				Sequential
Exhibit				Page
Number			Description	Number
	2	.1	Share Purchase Agreement, dated May 22, 2007, by and between KB Home, Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, Kaufman and Broad International, Inc. and Financière Gaillon 8 S.A.S., filed as an exhibit to the Company’s Current Report on Form 8-K dated May 22, 2007, is incorporated by reference herein.
	3	.1	Restated Certificate of Incorporation, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.
	3	.2	By-Laws, as amended and restated on April 5, 2007, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, is incorporated by reference herein.
	4	.1	Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, dated February 4, 1999, filed as an exhibit to the Company’s Current Report on Form 8-K dated February 4, 1999, is incorporated by reference herein.
	4	.2	Indenture relating to 85/8% Senior Subordinated Notes due 2008, and 73/4% Senior Subordinated Notes due 2010 between the Company and Sun Trust Bank, Atlanta, dated November 19, 1996 filed as an exhibit to the Company’s Current Report on Form 8-K dated November 19, 1996, is incorporated by reference herein.
	4	.3	Specimen of 85/8% Senior Subordinated Notes due 2008, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 13, 2001, is incorporated by reference herein.
	4	.4	Form of officer’s certificate establishing the terms of the 85/8% Senior Subordinated Notes due 2008, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 13, 2001, is incorporated by reference herein.
	4	.5	Specimen of 73/4% Senior Subordinated Notes due 2010, filed as an exhibit to the Company’s Current Report on Form 8-K dated January 27, 2003, is incorporated by reference herein.
	4	.6	Form of officer’s certificate establishing the terms of the 73/4% Senior Subordinated Notes due 2010, filed as an exhibit to the Company’s Current Report on Form 8-K dated January 27, 2003, is incorporated by reference herein.
	4	.7	Indenture and Supplemental Indenture relating to 53/4% Senior Notes due 2014 among the Company, the Guarantors and Sun Trust Bank, Atlanta, each dated January 28, 2004, filed as exhibits to the Company’s Registration Statement No. 333-114761 on Form S-4, are incorporated by reference herein.
	4	.8	Specimen of 53/4% Senior Notes due 2014, filed as an exhibit to the Company’s Registration Statement No. 333-114761 on Form S-4, is incorporated by reference herein.
	4	.9	Second Supplemental Indenture relating to 63/8% Senior Notes due 2011 among the Company, the Guarantors and Sun Trust Bank, Atlanta, dated June 30, 2004, filed as an exhibit to the Company’s registration statement No. 333-119228 on Form S-4, is incorporated by reference herein.
	4	.10	Specimen of 57/8% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.
	4	.11	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 57/8% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 15, 2004, is incorporated by reference herein.
	4	.12	Specimen of 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.

				Sequential
Exhibit				Page
Number			Description	Number
	4	.13	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 2, 2005, is incorporated by reference herein.
	4	.14	Specimen of 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.
	4	.15	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 61/4% Senior Notes due 2015, filed as an exhibit to the Company’s Current Report on Form 8-K dated June 27, 2005, is incorporated by reference herein.
	4	.16	Specimen of 71/4% Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.
	4	.17	Form of officers’ certificates and guarantors’ certificates establishing the terms of the 71/4% Senior Notes due 2018, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 3, 2006, is incorporated by reference herein.
	4	.18	Second Supplemental Indenture relating to the Company’s Senior Subordinated Notes by and between the Company, the Guarantors named therein, and SunTrust Bank, dated as of May 1, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated May 3, 2006, is incorporated by reference herein.
	4	.19	Third Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein, the Subsidiary Guarantor named therein and SunTrust Bank, dated as of May 1, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated May 3, 2006, is incorporated by reference herein.
	4	.20	Fourth Supplemental Indenture relating to the Company’s Senior Notes by and between the Company, the Guarantors named therein and U.S. Bank National Association, dated as of November 9, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.
	4	.21	Fifth Supplemental Indenture, dated August 17, 2007, relating to the Company’s Senior Notes by and between the Company, the Guarantors, and the Trustee, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
	4	.22	Third Supplemental Indenture, dated August 17, 2007, relating to the Company’s Senior Subordinated Notes by and between the Company, the Guarantors, and the Trustee, and the Guaranties, each dated August 17, 2007, of the Senior Subordinated Notes, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
	10	.1	Consent Order, Federal Trade Commission Docket No. C-2954, dated February 12, 1979, filed as an exhibit to the Company’s Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein.
	10	.2*	KB Home Performance-Based Incentive Plan for Senior Management, filed as an exhibit to the Company’s 1995 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.3*	Form of Stock Option Agreement under KB Home Performance-Based Incentive Plan for Senior Management, filed as an exhibit to the Company’s 1995 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.4*	KB Home Unit Performance Program, filed as an exhibit to the Company’s 1996 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.5*	KB Home 1998 Stock Incentive Plan, filed as an exhibit to the Company’s 1998 Annual Report on Form 10-K, is incorporated by reference herein.

				Sequential
Exhibit				Page
Number			Description	Number
	10	.6	KB Home Directors’ Legacy Program, as amended January 1, 1999, filed as an exhibit to the Company’s 1998 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.7	Trust Agreement between Kaufman and Broad Home Corporation and Wachovia Bank, N.A. as Trustee, dated as of August 27, 1999, filed as an exhibit to the Company’s 1999 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.8*	Amended and Restated Employment Agreement of Bruce Karatz, dated July 11, 2001, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2001, is incorporated by reference herein.
	10	.9*	KB Home Nonqualified Deferred Compensation Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.10*	KB Home 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.11*	KB Home Change in Control Severance Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.12*	KB Home Death Benefit Only Plan, filed as an exhibit to the Company’s 2001 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.13*	KB Home Retirement Plan, filed as an exhibit to the Company’s 2002 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.14*	Amended and Restated KB Home 1999 Incentive Plan, as amended, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.15	KB Home Non-Employee Directors Stock Plan, as amended and restated as of July 10, 2003, filed as an exhibit to the Company’s 2003 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.16	Revolving Loan Agreement, dated as of November 22, 2005, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 23, 2005, is incorporated by reference herein.
	10	.17	Term Loan Agreement, dated as of April 12, 2006, filed as an exhibit to the Company’s Current Report on Form 8-K dated April 19, 2006, is incorporated by reference herein.
	10	.18*	Form of Non-Qualified Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
	10	.19*	Form of Incentive Stock Option Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
	10	.20*	Form of Restricted Stock Agreement under the Company’s Amended and Restated 1999 Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference herein.
	10	.21	First Amendment, dated as of October 10, 2006, to the Revolving Loan Agreement dated as of November 22, 2005 among the Company, the lenders party thereto and Bank of America, N.A., filed as an exhibit to the Company’s Current Report on Form 8-K dated October 19, 2006, is incorporated by reference herein.
	10	.22	Tolling Agreement, dated as of November 12, 2006, by and between the Company and Bruce Karatz, filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2006, is incorporated by reference herein.

				Sequential
Exhibit				Page
Number			Description	Number
	10	.23	Second Amendment to the Revolving Loan Agreement dated as of November 22, 2005 among KB Home, the lenders party thereto, and Bank of America, N.A., as administrative agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated December 12, 2006, is incorporated by reference herein.
	10	.24*	Form of Stock Option Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.25*	Form of Stock Restriction Agreement under the Company’s 2001 Stock Incentive Plan, filed as an exhibit to the Company’s 2006 Annual Report on Form 10-K, is incorporated by reference herein.
	10	.26*	Employment Agreement of Jeffrey T. Mezger, dated February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated March 6, 2007, is incorporated by reference herein.
	10	.27*	Amended and Restated 1999 Incentive Plan Performance Stock Agreement between the Company and Jeffrey T. Mezger, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.28*	Form of Stock Option Agreement under the Employment Agreement between the Company and Jeffrey T. Mezger dated as of February 28, 2007, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.29*	Form of Amended and Restated 1999 Incentive Plan Stock Appreciation Right Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.30*	Form of Amended and Restated 1999 Incentive Plan Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.31*	Form of Phantom Share Agreement for Non-Senior Management, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.32*	Form of Over Cap Phantom Share Agreement, filed as an exhibit to the Company’s Current Report on Form 8-K dated July 18, 2007, is incorporated by reference herein.
	10	.33	Third Amendment Agreement, dated August 17, 2007, to Revolving Loan Agreement, dated as of November 22, 2005, between the Company, as Borrower, the banks party thereto, and Bank of America, N.A., as Administrative Agent, filed as an exhibit to the Company’s Current Report on Form 8-K dated August 22, 2007, is incorporated by reference herein.
	10	.34*	Form of Stock Option Agreement under the Amended and Restated 1999 Incentive Plan for stock option grant to Jeffrey T. Mezger, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2007, is incorporated by reference herein.
	10	.35*†	Kaufman and Broad, Inc. Executive Deferred Compensation Plan, effective as of July 11, 1985.
	10	.36*†	Kaufman and Broad Home Corporation Directors’ Deferred Compensation Plan established effective as of July 27, 1989.
	10	.37†	Consent decree, dated July 2, 1991, relating to Federal Trade Commission Consent Order.
	10	.38*†	Kaufman and Broad Home Corporation 1988 Employee Stock Plan, as amended on January 27, 1994.
	12	.1†	Computation of Ratio of Earnings to Fixed Charges.
	21	†	Subsidiaries of the Registrant.

				Sequential
Exhibit				Page
Number			Description	Number
	23	†	Consent of Independent Registered Public Accounting Firm.
	31	.1†	Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2†	Certification of Domenico Cecere, Executive Vice President and Chief Financial Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1†	Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2†	Certification of Domenico Cecere, Executive Vice President and Chief Financial Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement in which executive officers are eligible to participate.

†  Document filed with this Form 10-K.

EX-10.35

EXHIBIT 10.35

KAUFMAN AND BROAD, INC.

Executive Deferred Compensation Plan

This Executive Deferred Compensation Plan (hereinafter referred to as the “Plan”) has been adopted by the Personnel, Compensation and Stock Option Committee of the Board of Directors of Kaufman and Broad, Inc. (hereinafter referred to as the “Employer”), effective as of July 11, 1985.

1. Purpose

The purpose of the Plan is to provide supplemental retirement income and death benefits for certain Executives (hereinafter defined).

2. Definitions

The following definitions, set forth in alphabetical order, are used throughout the Plan. Whenever words or phrases have initial capital letters in the Plan, a special definition for those words or phrases is set forth below.

(a)	“Account” means the record maintained by the Committee of each Participant’s Deferrals, Employer contributions, credited interest and distributions under the Plan.
(b)	“Anniversary Date” means the last day of each Plan Year.
(c)	“Beneficiary” means the person, persons or entity designated in writing by the Participant on forms provided by the Committee to receive distribution of certain death benefits under the Plan in the event of the Participant’s death. A Participant may change the designated Beneficiary from time to time by filing a new written designation with the Committee, and such designation shall be effective upon receipt by the Committee. If a Participant has not designated a Beneficiary, or if a designated Beneficiary is not living or in existence at the time of a Participant’s death, any death benefits payable under the Plan shall be paid to the Participant’s spouse, if then living, and if the Participant’s spouse is not then living, to the Participant’s estate.
(d)	“Benefit Agreement” means a benefit agreement described in Section 8(a) relating to a Total Deferral commitment beginning in a specific Plan Year.

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(e)	“Board of Directors” means the Board of Directors of Kaufman and Broad, Inc.
(f)	“Code” means the Internal Revenue Code of 1986, as amended.
(g)	“Committee” means the Personnel, Compensation and Stock Option Committee of the Board of Directors or any successor thereof.
(h)	“Covered Bonus” means the annual cash bonus earned by the Participant in the current Plan Year and payable in the following Plan Year.
(i)	“Covered Salary” means annual base salary, excluding any bonus or other form of remuneration.
(j)	“Deferral” means the portion of a Participant’s Covered Salary and/or Covered Bonus that has been deferred in accordance with Section 3(d). Deferral amounts are retained by the Employer as part of its general assets.
(k)	“Deferral Period” means the period beginning with the effective date of a particular Benefit Agreement and ending on November 30, 1992.
(l)	“Disability” means “Total Disability.” Total Disability must last continuously at least six months during the Participant’s lifetime. Total Disability of the Participant means his inability, caused by disease or bodily injury, to do substantially all the material duties of his regular job, except that:

(i)	After such inability has continued for two years, a Participant is not totally disabled if he can work for pay or profit at some other job for which he is reasonably fitted by education, training or experience, and
(ii)	A Participant is not totally disabled at any time when he is working for pay or profit.

Total Disability excludes intentional self-inflicted injury, and war or any act incident to war, or service in the armed forces or any auxiliary civilian force of any country at war.

(m) “Disability Plan” means the insured long-term disability plan maintained by the Employer which covers the Participants in this Plan, or any successor disability plan.

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(n) “Early Retirement Date” means the first day of the month coinciding with or next following the later of:

(i)	Attainment of age 50; and
(ii)	Completion of all Total Deferral commitments under the Plan; and
(iii)	Completion of ten (10) years of continuous employment with the Employer.

(o)	“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
(p)	“Executive” means a management or highly-compensated employee of the Employer or any of its subsidiaries who has been specifically designated, by the Board of Directors or the Committee, as eligible to participate in this Plan as either a Tier I or Tier II Executive.
(q)	“Minimum Annual Deferral” means the minimum amount of Deferral that a Participant may make in any Plan Year under Section 3(d)(ii).
(r)	“Normal Retirement Date” means the first day of the month coinciding with or next following the later of:

(i)	Attainment of age 60, if the Executive was less than age 51 when he became a Participant, or attainment of age 65 for all other Participants; and
(ii)	Completion of all Total Deferral commitments under the Plan.

(s)	“Participant” means an Executive who has made a written election to participate in the Plan in accordance with Section 3(a).
(t)	“Plan Interest Rate” means:

(i)	For the period from February 1, 1986, to January 31, 1987, 15% per annum; and
(ii)	For the period February 1, 1987 to November 30, 1987, the average of the Moody’s AAA Seasoned Corporate Bond Yield (which yield is published in Section H.15(519) of the Federal Reserve Statistical Release) for the 12 months ended November 30, 1986, increased by 300 basis points; and

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(iii) For all Plan Years subsequent to that ended November 30, 1987, the average of the Moody’s AAA Seasoned Corporate Bond Yield (which yield is published in Section H.15(519) of the Federal Reserve Statistical Release) for the 12 months preceding such Plan Year, increased by 300 basis points.

(u)	“Plan Year” means a fiscal year beginning December 1 of any year and ending November 30 of the following year, or such other fiscal year as adopted by the Employer.
(v)	“Post-Retirement Death Benefit” means the benefit payable to the Beneficiary of a Participant who dies after the commencement of his Retirement Income Benefit, as described in Section 6.
(w)	“Pre-Retirement Death Benefit” means the benefit payable to the Beneficiary of a Participant who dies prior to commencement of his Retirement Income Benefit, as described in Section 5.
(x)	“Retirement Income Benefit” means the retirement benefit described in Section 4.
(y)	“Total Deferral” means the total amount of Deferrals that a Participant commits to make during the Deferral Period under Section 3(c) with respect to a particular Benefit Agreement.

3. Participation

(a)	Commencement of Deferral Period:
	An Executive shall become a Participant hereunder upon execution by the Participant and the Committee of an initial Benefit Agreement. A Participant (with the consent of the Committee) may enter into additional Benefit Agreements for Deferral Periods commencing in subsequent Plan Years until the Plan Year commencing on December 1, 1991. Each Benefit Agreement shall become effective on the next December 1 after execution, and shall contain the items described in this Section and in Section 8(a). Subject to subsection (b), the elections made in a Benefit Agreement shall be irrevocable.
(b)	Deferrals:
	A Participant may continue to make the Deferrals provided under subsection (d) with respect to a specific Benefit Agreement until his designation as an Executive is revoked by the Board of Directors, he terminates

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	employment with the Employer, he receives a hardship withdrawal or he has made the Total Deferral described in subsection (c).
(c)	Election of Total Deferral:
	The Participant shall elect the Total Deferral that he will make during the Deferral Period in his respective Benefit Agreement. Such Total Deferral shall be either the minimum or maximum as follows:

	Minimum		Maximum
Tier I Executives	$	80,000	$	160,000
Tier II Executives		40,000		80,000

(d)	Annual Election:
	Participants may irrevocably elect in writing with respect to each Benefit Agreement to make a Deferral for a Plan Year in the Deferral Period in accordance with the following rules:

(i)	Each Participant shall make a Deferral for the first Plan Year of the respective Deferral Period equal to 25% of his Total Deferral. The source of such Deferral shall be the Participant’s Covered Bonus payable in such Plan Year and/or the Participant’s Covered Salary for such Plan Year, as requested by the Participant in his Benefit Agreement for such Deferral Period.
(ii)	Each Participant may elect to make an annual Deferral for a subsequent Plan Year of the respective Deferral Period from his Covered Bonus payable in such Plan Year and/or his Covered Salary payable in such Plan Year. Such election must be made on or before November 30 preceding the Plan Year. If the Participant elects to make a Deferral, the amount of the annual Deferral shall be at least $10,000 or $20,000 (the Minimum Annual Deferral for Tier II or Tier I, respectively), and not more than the lesser of: 25% of his Total Deferral or, if the Deferral Period is less than four years, the amount necessary to make such Total Deferral in equal installments over the Deferral Period; or the amount needed to complete his Total Deferral.
(iii)	Deferrals for a Plan Year shall be credited to Participant’s Accounts as of the end of the month in which the Deferral is subtracted from the Participant’s Covered Bonus or Covered Salary.

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(iv) If a Participant fails to make his Total Deferral by the end of the Deferral Period, he shall cease to be a Participant in the Plan with respect to that Benefit Agreement. He shall receive a lump-sum payment within 90 days of the end of the Deferral Period equal to his Account balance as of the end of the Deferral Period attributable to such Benefit Agreement reduced to reflect the crediting of interest at the rate of 3% less than the Plan Interest Rate rather than the Plan Interest Rate throughout the Deferral Period and the elimination of Employer contributions that had been credited to the Account and interest thereon. Neither the Participant, spouse nor Beneficiary shall be entitled to any further benefit hereunder with respect to such Benefit Agreement.

(e)	Employer Contributions:
	For any month in which the Participant’s Account is credited with a Deferral, the Account shall also be credited with an Employer contribution. The Employer contribution shall be equal to 25% of the Participant’s Minimum Annual Deferral as described in Section 3(d)(ii) and the aggregate of all such Employer contributions shall not exceed 25% of the minimum Total Deferral available to the Participant under section 3(c), computed separately with respect to each Benefit Agreement.
(f)	Interest:
	Except as otherwise provided, interest shall be credited to each Participant’s Account quarterly during each Plan Year based upon the Plan Interest Rate in effect for such Plan Year for so long as there remains a balance in the Participant’s Account.

4. Participant Benefits

(a) Normal Retirement:

A Participant who retires on his Normal Retirement Date shall be entitled to a Retirement Income Benefit commencing at Normal Retirement Date consisting of equal monthly payments over 20 years if the Participant was less than age 51 when he commenced participation in the Plan, or 15 years if he had attained age 51 when he commenced participation. The amount of the monthly payments shall be calculated to pay out over the specified period the balance in the Account at the commencement of payments with interest credited monthly on the declining balance at the average Plan Interest

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Rate for the five Plan Years preceding the commencement of payments (“minimum interest rate”). The Participant’s Account shall continue to be credited quarterly with interest at the Plan Interest Rate and charged with the monthly payments to the Participant. At the end of every three years until the payment period has elapsed, the actual amount of interest credited to the Account shall be compared to the interest that would have been generated by the minimum interest rate over the same time period. If the actual interest is greater than the minimum interest, the difference shall be paid to the Participant in a lump-sum payment and subtracted from the Account as a distribution. If it is determined that the minimum interest exceeds the actual interest, the account shall be adjusted for such difference, but the Participant will not have to repay any portion of his distributions.

(b) Early Retirement:

(i)

A Participant who retires prior to his Normal Retirement Date, but on or after his Early Retirement Date, shall be entitled to a Retirement Income Benefit commencing on his Normal Retirement Date, determined in accordance with subsection (a).

(ii)

In lieu of the Retirement Income Benefit described in paragraph (i), a Participant who retires prior to his Normal Retirement Date, but on or after his Early Retirement Date, may elect with the consent of the Committee at any time prior to his Normal Retirement Date to commence to receive on the first day of the month following his early retirement a Retirement Income Benefit determined in the manner set forth in subsection (a), based upon the balance in his Account as of such date.

(c) Deferred Retirement:

A Participant who retires after his Normal Retirement Date shall be entitled to a Retirement Income Benefit commencing on the first day of the month following his actual retirement, determined in accordance with subsection (a) using the balance in his Account as of his actual retirement date in lieu of the balance as of his Normal Retirement Date.

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(d)	Termination of Employment:
	A Participant who terminates employment prior to his Early Retirement Date shall be entitled to a termination benefit. The benefit shall be a lump-sum payment made within 90 days of the end of the Plan Year in which his employment terminates, equal to his Account balance as of the date of distribution including interest prorated to such date. Neither the Participant, spouse nor Beneficiary shall be entitled to any further benefit hereunder.
(e)	Disability:

(i) A Disabled Participant who is:

(A)	Within the initial exclusion period under the Disability Plan and for that reason only is not receiving benefits thereunder; or
(B)	Receiving benefits under the Disability Plan;

shall be deemed to be an Executive during such period and shall continue to be eligible for retirement benefits without reduction for payments under Section 4(e)(ii) and Pre-Retirement and Post-Retirement Death Benefits under Sections 5 and 6. If the period of disability occurs within a Deferral Period, and the Disabled Participant had not completed making his Total Deferrals prior to the period of disability, he shall be excused from making one additional Deferral under each applicable Benefit Agreement for each Plan Year of disability, but no amounts shall be credited to his Account with respect to such excused Deferral(s). However, if he returns to employment within the Deferral Period, he may elect in the normal time period to make the Deferrals that were previously excused.

(ii) A Disabled Participant who is receiving benefits under the Disability Plan shall receive an additional disability benefit under this Plan. The disability benefit shall consist of monthly payments during the period the Participant is receiving payments under the Disability Plan. Such monthly payments shall equal on an annual basis 37.5% of the Total Deferral elected by the Participant under Section 3(c) under all Benefit Agreements.

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(iii) With the approval of the Committee, the Disabled Participant may withdraw his Account balance in a lump sum. Such withdrawal shall make the Disabled Participant, spouse and Beneficiary ineligible for further benefits hereunder except for the benefits provided under paragraph (ii) of this subsection and the death benefits provided under Sections 5 and 6.

(f)

Hardship Withdrawal:

At any time prior to the commencement of Retirement Income Benefits hereunder, a Participant may request the Committee to make a distribution to him from his Account balance in a lump sum within 90 days. Such distribution shall be made only if the Committee determines that the Participant is suffering from a financial hardship that cannot be satisfied by his normal sources of income. In addition, the following rules shall apply separately with respect to each of the Participant’s Benefit Agreements:

(i)	If the hardship withdrawal is to be made within the Deferral Period, the amount to be distributed shall be the entire Account balance, and neither the Participant, spouse nor Beneficiary shall be entitled to any further benefit hereunder.
(ii)	If the hardship withdrawal is to be made after the Deferral Period, the Participant may select the portion of his Account to be withdrawn. The Participant will remain eligible for retirement, death, termination and disability benefits hereunder (based upon his remaining Account balance where applicable).

(g)	Change of Control:
	In the event of a “Change of Control” as defined below, a Participant may elect to withdraw his entire Account balance (including interest accrued to the date of payment) by giving written notice to the Committee. Upon the delivery of such notice, the Participant’s Account balance (together with interest thereon) shall become due and payable as a lump-sum distribution on the date of such Change of Control.
	A Change of Control shall be deemed to have taken place if:

(i) As a result of or in connection with any cash tender or exchange offer, merger or other business combination, sale of assets or contested election,

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or any combination of the foregoing transactions (“Transaction”), the persons who were directors of the Company before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company, or

(ii)

Any person or “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes the beneficial owner of the shares of the Company having 25% or more of the total number of votes that may be cast for the election of directors of the Company, or

(iii)

The shareholders of the Company shall have approved an agreement providing for a transaction in which the Company will cease to be an independent publicly-owned company or for the exchange of at least a majority of the outstanding stock for cash or property or securities (other than common stock of the Company) or for the sale or other disposition of all or substantially all of the assets of the Company.

5. Pre-Retirement Death Benefit

(a)	Regular Benefit — Account Balance:
	The Beneficiary of a Participant who dies:

(i)	While employed by the Employer; or
(ii)	After termination, but prior to commencement of his Retirement Income Benefit

shall be entitled to receive the balance in the Participant’s Account. This will be paid in a lump sum unless the Participant (with the consent of the Committee) elected a different payment period prior to his death. A Participant may change this election annually during the month of December. The benefit shall be paid or shall commence to be paid as soon as practicable after the Participant’s death.

(b)	Enhanced Benefit — Pre-Retirement Survivor Annuity
	The Beneficiary of a Participant who dies:

(i) While employed by the Employer, or

(ii) After termination of employment having qualified for a Retirement Income Benefit, but prior to commencement of his Retirement Income Benefit; and

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(iii) After waiving coverage under the supplemental executive group term life insurance plan provided by the Employer

shall be entitled to the death benefit provided under subsection (a), and shall also be entitled to ten annual payments of $145,000 commencing as soon as practicable after the Participant’s death.

6. Post-Retirement Death Benefit

(a)	Regular Benefit:
	The Beneficiary of a Participant who dies after commencement of his Retirement Income Benefit shall be entitled to continue to receive the Retirement Income Benefit payments being made to the Participant under Section 4 for the period specified in that section.
(b)	Spouse’s Survivor Benefit:
	The spouse of a Participant who dies after commencement of his Retirement Income Benefit on account of early, normal or deferred retirement shall be entitled to receive a spouse’s survivor benefit. The spouse’s survivor benefit shall commence after all benefits have been paid to the Beneficiary under subsection (a), and shall consist of an annuity for the life of the spouse with monthly payments equal to 66.67% of the average monthly payments made to the Participant and Beneficiary under Sections 4 and 6(a), respectively. Notwithstanding the foregoing, if the spouse is more than five years younger than the Participant, the annuity will be determined with reference to the actual age of the spouse and the monthly payments reduced to produce the actuarial equivalent of an annuity for a spouse who is five years younger than the Participant. In addition, a Benefit Agreement for a Benefit Deferral Period commencing after December 1, 1987 may set forth a different Post-Retirement Death Benefit applicable to such Benefit Agreement.

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7. Vesting of Benefits

(a)	Participant’s Account:
	Except as otherwise provided in Section 3(d)(iv), a Participant shall be 100% vested in his Account balance at all times and shall rank as an unsecured creditor of the Company for his entire Account balance.
(b)	Other Benefits:
	Retirement and death benefits, to the extent that they exceed a Participant’s Account balance, shall vest only upon the retirement or death of the Participant, whichever is applicable, and may be modified or eliminated until such vesting in accordance with Section 12.

8. Additional Provisions

(a)	Benefit Agreement:
	The Committee shall provide to each Executive a form of Benefit Agreement with respect to each Deferral Period for which the Committee will permit the Executive to make Deferrals, which shall set forth the Executive’s acceptance of the benefits provided hereunder, his agreement to be bound by the terms of the Plan and such other matters as are set forth in this Plan or deemed advisable by the Committee.
(b)	Exclusion for Suicide or Self-Inflicted Injury:
	Notwithstanding any other provision of the Plan, no Spouse’s Survivor Benefit under Section 6(b) with respect to a specific Benefit Contract shall be paid to the spouse or Beneficiary of any Executive who dies within two years of the effective date of such Benefit Contract as the result of suicide or self-inflicted injury.
(c)	Leave of Absence:
	An Executive who is on an approved leave of absence with salary, or on an approved leave of absence without salary for a period of not more than six months, shall be deemed to be an Executive employed by the Employer during such leave of absence. An Executive who is on an approved leave of absence without salary for a period in excess of six months shall be deemed to have voluntarily

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terminated his employment as of the end of such six-month period and therefore shall be subject to the conditions set forth in
Section 4(d).

(d)	Alternative Forms of Benefit:
	The Board of Directors in its sole discretion, but with the consent of the recipient, may elect to pay the Participant, spouse or Beneficiary an actuarially equivalent lump sum or other form of benefit that it deems appropriate in lieu of the form of benefit otherwise provided.
(e)	Actuarial Equivalence:
	Actuarial equivalence hereunder shall be determined using the interest and mortality factors adopted from time to time by the Board of Directors or the Committee. The initial factors to be used shall be an interest rate of six percent (6%) per year and a mortality assumption based upon the 1970 Group Annuity Table for males (to be used for both males and females).
(f)	Withholding:
	Benefit payments hereunder shall be subject to applicable federal, state or local withholding laws.

9. Funding of Benefits

The Plan shall be unfunded. All benefits payable under the Plan shall be paid from the Employer’s general assets, and nothing contained in the Plan shall require the Employer to set aside or hold in trust any funds for the benefit of a Participant or his Beneficiary, who shall have the status of a general unsecured creditor with respect to the Employer’s obligation to make payments under the Plan. Any funds of the Employer available to pay benefits under the Plan shall be subject to the claims of general creditors of the Employer and may be used for any purpose by the Employer.

10. Administration of the Plan

(a)	The Committee:
	The Committee shall administer the Plan and shall keep a written record of its action and proceedings regarding the Plan and all dates, records and documents relating to its administration of the Plan.

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Subsequent to the close of each Plan Year, the Committee shall apprise in writing each Executive of his Account balance.

The Committee is authorized to interpret the Plan, to make, amend and rescind such rules as it deems necessary for the proper administration of the Plan, to make all other determinations necessary or advisable for the administration of the Plan and to correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent that the Committee deems desirable to carry the Plan into effect. The powers and duties of the Committee shall include, without limitation, the following:

(i)	Resolving all questions relating to the eligibility of Executives to become Participants;
(ii)	Determining the amount of benefits payable to Participants or their Beneficiaries and authorizing and directing the Employer with respect to the payment of benefits under the Plan.
(iii)	Construing and interpreting the Plan whenever necessary to carry out its intention and purpose and making and publishing such rules for the regulation of the Plan as are not inconsistent with the terms of the Plan.
(iv)	Compiling and maintaining all records it determines to be necessary, appropriate or convenient in connection with the administration of the Plan; and
(v)	Engaging any administrative, actuarial, legal, medical, accounting, clerical, or other services it may deem appropriate to effectuate the Plan.

Any action taken or determination made by the Committee shall, except as otherwise provided in Section 12 below, be conclusive on all parties. No members of the Committee shall vote on any matter affecting such member. In determining whether an Executive is Disabled, the Committee may rely on the conclusions reached by any insurance carrier that has issued an insurance policy to the Employer covering the Executive.

(b)	Expenses of the Committee:
	The expenses of the Committee properly and actually incurred in the performance of its duties under the Plan shall be paid by the Employer and shall not decrease Participants’ Account balances.

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(c)	Bonding and Compensation:
	The members of the Committee shall serve without bond, and without compensation for their services as Committee members except as the Employer may provide in its discretion.
(d)	Information to be Submitted to the Committee:
	To enable the Committee to perform its functions, the Employer shall supply full and timely information to the Committee on all matters relating to Executives and Participants as the Committee may require, and shall maintain such other records as the Committee may determine are necessary in order to determine the benefits due or which may become due to Participants or their Beneficiaries under the Plan. The Committee may rely on such records as conclusive with respect to the matters set forth therein.
(e)	Notices, Statements and Reports:
	The Employer shall be the “administrator” of the Plan as defined in Section 3(16)(A) of ERISA for purposes of the reporting and disclosure requirements imposed by ERISA and the Code. The Committee shall assist the Employer, as requested, in complying with such reporting and disclosure requirements.
(f)	Service of Process:
	The Committee may from time to time designate an agent of the Plan for the service of legal process. The Committee shall cause such agent to be identified in materials it distributes or causes to be distributed when such identification is required under applicable law. In the absence of such a designation, the Employer shall be the agent of the Plan for the service of legal process.
(g)	Insurance:
	The Employer, in its discretion, may obtain, pay for and keep current a policy or policies of insurance insuring the Committee members, the members of the Board of Directors and other employees to whom any responsibility with respect to the administration of the Plan has been delegated, against any and all costs, expenses and liabilities (including attorneys’ fees) incurred by such persons as a result of any act, or omission to act, in connection with the performance of their duties, responsibilities, and obligations under the Plan and any applicable law.

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(h)

Indemnity:

If the Employer does not obtain, pay for and keep current the type of insurance policy or policies referred to in subsection (g), or if such insurance is provided but any of the parties referred to in subsection (g) incur any costs or expenses which are not covered under such policies, then the Employer shall indemnify and hold harmless, to the extent permitted by law, such parties against any and all costs, expenses and liabilities (including attorneys’ fees) incurred by such parties in performing their duties and responsibilities under this Plan, provided that such party or parties were not guilty of willful misconduct. In the event that such party is named as a defendant in a lawsuit or proceeding involving the Plan, the party shall be entitled to receive on a current basis the indemnity payments provided for in this subsection, provided however that if the final judgment entered in the lawsuit or proceeding holds that the party is guilty of willful misconduct with respect to the Plan, the party shall be required to refund the indemnity payments that it has received.

11. Claims Procedure

(a)	Filing Claim for Benefits:
	If a Participant or Beneficiary (hereinafter referred to as the “Applicant”) does not receive the timely payment of the benefits which the Applicant believes are due under the Plan, the Applicant may make a claim for benefits in the manner hereinafter provided.
	All claims for benefits under the Plan shall be made in writing and shall be signed by the Applicant. Claims shall be submitted to a representative designated by the Committee and hereinafter referred to as the “Claims Coordinator.” The Claims Coordinator may, but need not, be a member of the Committee. If the Applicant does not furnish sufficient information with the claim for the Claims Coordinator to determine the validity of the claim, the Claims Coordinator shall indicate to the Applicant any additional information which is necessary for the Claims Coordinator to determine the validity of the claim.
	Each claim hereunder shall be acted on and approved or disapproved by the Claims Coordinator within 90 days following the receipt by the Claims Coordinator of the information necessary to process the claim.

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	In the event the Claims Coordinator denies a claim for benefits in whole or in part, the Claims Coordinator shall notify the Applicant in writing of the denial of the claim and notify the Applicant of his right to a review of the Claims Coordinator’s decision by the Committee. Such notice by the Claims Coordinator shall also set forth, in a manner calculated to be understood by the Applicant, the specific denial, the specific provisions of the Plan or Agreement on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of why such material or information is necessary, and an explanation of the Plan’s appeals procedure as set forth in this section.
	If no action is taken by the Claims Coordinator on an Applicant’s claim within 90 days after receipt by the Claims Coordinator, such claim shall be deemed to be denied for purposes of the following appeals procedure.
(b)	Appeals Procedure:
	Any Applicant whose claim for benefits is denied in whole or in part may appeal from such denial to the Committee for a review of the decision by the Committee. Such appeal must be made within three months after the Applicant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must:

(i)	Request a review by the Committee of the claim for benefits under the Plan;
(ii)	Set forth all of the grounds upon which the Applicant’s request for review is based and any facts in support thereof; and
(iii)	Set forth any issues or comments which the Applicant deems pertinent to the appeal.

The Committee shall regularly review appeals by Applicants. The Committee shall act upon each appeal within 60 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Committee as soon as possible but not later than 90 days after the last documentation is received by the Committee.

The Committee shall make full and fair review of each appeal and any written materials submitted by the Applicant in connection therewith. The Committee may require the Applicant to submit such additional facts,

-17-

documents or other evidence as the Committee in its discretion deems necessary or advisable in making its review. The Applicant shall be given the opportunity to review pertinent documents or materials upon submission of a written request to the Committee, provided the Committee finds the requested documents or materials are pertinent to the appeal.

On the basis of its review, the Committee shall make an independent determination of the Applicant’s eligibility for benefits under the Plan. The decision of the Committee on any claim for benefits shall be final and conclusive upon all parties thereto.

In the event the Committee denies an appeal in whole or in part, the Committee shall give written notice of the decision to the Applicant, which notice shall set forth, in a manner calculated to be understood by the Applicant, the specific reasons for such denial and which shall make specific reference to the pertinent provisions of the Plan or Agreement on which the Committee’s decision is based.

12. Amendment, Termination or Suspension

(a)	The Plan may be amended or terminated by the Board of Directors at any time. Such amendment or termination may modify or eliminate any benefit hereunder other than a benefit that is in pay status, or the vested portion of a benefit that is not in pay status.
(b)	If the Board of Directors determines that payments under the Plan would have a material adverse effect on the Employer’s ability to carry on its business, the Board of Directors may suspend such payments temporarily for such time as in its sole discretion it deems advisable, but in no event for a period in excess of one year. The Employer shall pay such suspended payments immediately upon the expiration of the period of suspension.
(c)	The Plan is intended to provide benefits for “a select group of management or highly compensated employees” within the meaning of Sections 201, 301 and 401 of ERISA, and therefore to be exempt from Sections 2, 3 and 4 of Title 1 of ERISA. Accordingly, the Plan shall terminate and, except for existing Account balances and other benefits in pay status (which, at the option of the Board of Directors, may be accelerated and the balance paid in a single, actuarially equivalent lump sum), no further benefits, vested or nonvested, shall be paid hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel

-18-

that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt.

13. Miscellaneous

(a)	Participant Rights:
	Nothing in the Plan shall confer upon a Participant the right to continue in the employ of the Employer or shall limit or restrict the right of the Employer to terminate the employment of a Participant at any time with or without cause.
(b)	Alienation:
	Except as otherwise provided in the Plan, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge such right or benefit shall be void. No such right or benefit shall in any manner be liable for or subject to the debts, liability or torts of a Participant or Beneficiary.
(c)	Partial Invalidity:
	If any provision in the Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue to be in full force and effect without being impaired or invalidated in any way.
(d)	Choice of Law:
	The Plan shall be construed in accordance with ERISA and the laws of the State of California.
(e)	Payment to Minors or Persons Under Legal Disability:
	If any benefit becomes payable to a minor or to a person under a legal disability, payment of such benefit shall be made only to the conservator or the guardian of the estate of such intended recipient appointed by a court of competent jurisdiction or any other individual or institution maintaining or having custody of such intended recipient. A release by such conservator, guardian, individual or institution shall constitute a legal discharge of the Plan’s obligation to the intended recipient.

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Headings of sections and subsections as used herein are inserted solely for convenience and reference and constitute no part of the Plan.

Executed at Los Angeles, California this                      day of                      ,                     

KAUFMAN AND BROAD, INC.
By	/s/ Norman J. Metcalfe
	Norman J. Metcalfe
	Its Executive Vice President

By	/s/ Susan L. Harris
	Susan L. Harris
	Its Secretary

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KAUFMAN AND BROAD, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
BENEFIT AGREEMENT

     This Benefit Agreement is entered into between KAUFMAN AND BROAD, INC. (the “Company”) and                                          (the “Employee”), pursuant to the KAUFMAN AND BROAD, INC. EXECUTIVE DEFERRED COMPENSATION PLAN (the “Plan”).

1. Provisions of the Plan

     The Employee hereby acknowledges receipt of a copy of the Plan. In particular, the Employee acknowledges having read and understood the provisions of the Plan respecting the entitlement to and calculation of benefits, that no assets of the Company are to be segregated to be used to pay benefits under the Plan, and that the Plan may be amended or terminated at any time in accordance with its terms.

2. Status as Executive

     The Company hereby acknowledges that the Employee presently qualifies as a “Tier ___ Executive” as defined in the Plan, and as such is eligible to become a Participant in the Plan. Such qualification may be terminated by the Board of Directors of the Company at any time in its sole discretion.

3. Election to Participate

     The Employee hereby elects to participate in the Plan, and to make the following Total Deferral under the Plan during the seven year Deferral Period:

Tier I Executive (Minimum $80,000; Maximum $160,000) — $                    
Tier II Executive (Minimum $40,000; Maximum $80,000) — $                    

The Employee confirms that he will make a Deferral equal to 25% of his Total Deferral in the 1986 Plan Year, and that he will make the balance of his Total Deferrals during the Deferral Period by filing appropriate annual election forms with the Committee in accordance with the Plan. All Deferral elections are irrevocable. The Deferral for the 1986 Plan Year shall be made from the Employee’s:

Covered Salary       ; or
Covered Bonus       . (check one)

4. Acceptance of Benefits

     The Employee hereby agrees on his own behalf and on behalf of his Beneficiaries to accept those benefits under the Plan to which he or his beneficiaries may become entitled, and to be bound by all of the terms and conditions of the Plan.

5. Designation of Beneficiary

     The Plan provides certain death benefits to the Beneficiary specifically designated by the Employee for that purpose. The Committee which administers the Plan will make appropriate beneficiary designation forms available to the Employee.

6. Plan Document

     All of the terms and conditions of the Plan are contained in the Plan document, and no officer or employee of the Company has been authorized to vary such terms and conditions orally or in writing. The Plan may be modified only by amendment to the Plan adopted by the Board of Directors.

	KAUFMAN AND BROAD, INC.
Date of Signature:	By:
	Title:
Date of Signature:	EMPLOYEE

KAUFMAN AND BROAD, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
DESIGNATION OF BENEFICIARY

Name of Executive:

Check if this is a revised designation

     I hereby revoke any previous Designation of Beneficiary that I may have made with respect to this Plan, and designate the following Beneficiary(ies) to receive any benefit payable under the Plan by reason of my death as to which the Plan permits such designation:

Primary Beneficiary

Name

Relationship

Other

Contingent Beneficiary

     If no Primary Beneficiary is alive when I die, the benefit should be paid to the following Contingent Beneficiary:

Name

Relationship

Other

Signature of Participant	Date
Consent of Participant’s Spouse	Date

Instructions

     You may normally list only one person or entity (such as a testamentary or inter vivos trust) in both the Primary and Contingent Beneficiary sections. However, if you are designating your children or grandchildren in either section and you have more than one such child or grandchild, you may designate any number of such children or grandchildren as Beneficiaries. In that event, they will share in the benefit to be distributed in the percentage shares that you indicate. If you do not indicate percentage shares, each Primary Beneficiary will share equally in the benefit to be distributed. If one or more Primary Beneficiaries dies before you do, their share of the benefit will be divided among the surviving Primary Beneficiary(ies) (in proportion to their relative percentage shares).

     Your Contingent Beneficiary will only receive a distribution of the benefit if no Primary Beneficiary is alive at the time of your death. If you list more than one Contingent Beneficiary under the circumstances permitted above, the rules for dividing the benefit between them are the same as the rules for dividing the benefit between your Primary Beneficiaries.

     If you are married, you are urged to consult your spouse with respect to any designation that you make on this form, and to have your spouse sign the designation. You are also urged to consult with your estate planning counsel.

     This Designation will remain in effect until the Plan’s Administrative Committee has received a revised Designation properly signed by you. You may file a revised Designation at any time.

Return to:

KAUFMAN AND BROAD, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
ANNUAL DEFERRAL ELECTION

Name of Participant:

Plan Year:

     I hereby elect to have the following portion of my Base Salary or Base Bonus payable in the Plan Year deferred and credited to my Account in the Kaufman and Broad, Inc. Executive Deferred Compensation Plan:

Base Salary $

Base Bonus $

I understand that:

     1. The minimum Deferral is $5,000 and the maximum Deferral is 25% of the Total Deferral that I have elected to make over the seven year Deferral Period.

     2. I may not defer more than my Total Deferral.

     3. This Deferral Election is irrevocable.

     4. This Deferral Election is invalid if not submitted to the Plan Administration Committee within the time limits imposed by the Plan. The Committee may reject a Deferral Election that does not conform to the terms of the Plan.

Date of Signature:
	Participant

EX-10.36

EXHIBIT 10.36

KAUFMAN AND BROAD HOME CORPORATION

DIRECTORS’ DEFERRED COMPENSATION PLAN

     SECTION 1. Establishment and Purpose. Kaufman and Broad Home Corporation (the “Company”) hereby establishes effective as of July 27, 1989, a plan known as the Kaufman and Broad Home Corporation Directors’ Deferred Compensation Plan (the “Plan”). The purpose of the Plan is to attract and retain certain individuals of outstanding competence as members of the Board of Directors of the Company by permitting such individuals to elect to defer a portion of their compensation from the Company to a later date or event.

     SECTION 2. Definitions. As used in this Plan, the following terms shall have the indicated meanings:

     (a) Board: The Board of Directors of Kaufman and Broad Home Corporation.

     (b) Committee: The Personnel and Nominating Committee of the Board.

     (c) Company: Kaufman and Broad Home Corporation.

     (d) Compensation: The annual retainer and all fees (excluding any reimbursed expenses) payable to a Director in his capacity as a member of the Board in any calendar year.

     (e) Deferral Year: Each calendar year as to which an election is made to defer Compensation in accordance with the provisions of Section 3 of the Plan.

     (f) Director: Any member of the Board who receives Compensation in his capacity as a member of the Board.

     (g) Participant: Any Director who becomes a Participant in the Plan as provided in Section 3 of the Plan.

     (h) Plan: The Kaufman and Broad Home Corporation Directors’ Deferred Compensation Plan, as it may be amended from time to time.

     (i) Retirement: Any termination from membership of the Board, including any mandatory retirement at age 70.

     SECTION 3. Eligibility and Participation: (a) All Directors shall be eligible to participate in the Plan. A Director may become a Participant for any calendar year by executing an irrevocable deferral election (in the form attached hereto as Exhibit A or on such other form as may be prescribed by the Committee) with respect to his Compensation for such calendar year. Except as provided in Section 3(b), such election shall be executed

on or before the first Monday in December of the preceding calendar year.

     (b) With respect to an individual who first becomes eligible to participate in the Plan after the beginning of a calendar year by reason of an election or appointment to the Board of Directors, such individual may become a Participant for the remainder of such year by executing an irrevocable deferral election (on a form prescribed by the Committee) with respect to his Compensation as soon as practicable, but in any event within thirty (30) days of the date such individual becomes a Director. A Director at the time the Plan becomes effective may become a Participant for the remainder of the calendar year by executing such a form immediately upon approval of the Plan.

     SECTION 4. Deferral Election. (a) As a condition of participation under the Plan, a Director must agree to defer one hundred percent (100%) of Compensation for each calendar year as to which such Director elects to defer Compensation. An election made under this Plan with respect to Compensation shall relate only to Compensation for the succeeding calendar year, or to Compensation for the remainder of a calendar year if Section 3(b) applies, and a separate election must be made in order to defer Compensation during any subsequent year. In the event of a failure to make a timely election to defer Compensation for any year, no portion of the Participant’s Compensation for such year may be deferred under this Plan.

     (b) Each deferral election shall (in accordance with Sections 7(b), 7(c) and 7(d)) also designate:

          (1) the date, or event on which payment is to commence;

          (2) the method of payment; and

          (3) the beneficiary to receive any payments if the Participant dies before receiving all amounts to which he is entitled under the Plan.

     SECTION 5. Participant’s Account. (a) The Company shall establish bookkeeping accounts to record the deferrals and additions under this Plan. Each Participant shall have a separate account for each Deferral Year, and each account shall be increased and decreased as provided in this Section.

     (b) During the Deferral Year, each Participant’s account shall be credited with the amount of Compensation deferred by each Participant by a quarterly crediting at the end of each March, June, September and December of the amount of Compensation which would have been payable to such Participant in such quarter

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(determined without regard to such Participant’s deferral election under Section 3).

     (c) The amount determined in Section 5(a) shall be increased as of the last day of each calendar quarter during the Deferral Year by the amount obtained by multiplying the account balance as of the first day of such quarter by one-fourth the rate equivalent to the prime rate at Security Pacific National Bank in effect as of the first day of such quarter.

     (d) In all years following the Deferral Year, the Participant’s account will be increased as of the last day of each calendar quarter by an amount equal to the account balance as of the first day of such calendar quarter multiplied by one-fourth the prime rate at Security Pacific National Bank in effect as of the first day of such calendar quarter. A Participant’s account (reduced in accordance with Section 5(f)) shall continue to be increased in accordance with this paragraph during any installment payment period which may have been elected by the Participant under Section 7(c) or approved by the Committee under Sections 7(c) or 7(d).

     (f) The Participant’s account shall be reduced by any payments made to the Participant or his or her beneficiary, estate or representative.

     SECTION 6. Funding Prohibitions. All entries in a Participant’s account shall be bookkeeping entries only and shall not represent a special reserve or otherwise constitute a funding of the Company’s unsecured promise to pay any amounts hereunder. All payments to be made under the Plan shall be paid from the general funds of the Company. Participants and their beneficiaries shall have no right, title or interest in or to any investments which the Company may make to aid it in meeting its obligations under the Plan. All such assets shall be the property solely of the Company and shall be subject to the claims of the Company’s unsecured general creditors. To the extent a Participant or any other person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company and such person shall have only the unsecured promise of the Company that such payments shall be made.

     SECTION 7. Payment. (a) Payment of amounts credited to a Participant’s account shall be made in the manner and at the time or times specified herein. All payments shall be made by Company check. The normal payment schedule will consist of one payment in January of each year.

- 3 -

     (b) When the Participant makes a deferral election for a Deferral Year, he shall also elect the time at which or the event (such as Retirement) after which payment of the amounts credited to the account established for such Deferral Year shall commence. Once made, such election of time of commencement of payment for such Deferral Year shall be irrevocable. Payment of amounts credited to the account for such Deferral Year shall commence within thirty (30) days of the date or the occurrence of the event specified by the Participant in such election.

     (c) When the Participant makes a deferral election he shall also elect to have the balance of his account paid out in one of two methods: (1) a single lump sum or (2) approximately equal annual installments (calculated on the basis of the amount in the Participant’s account and the amounts to be accrued during the installment payment period) over a period of years (selected by the Participant) not to exceed fifteen. Once made, such election of payment method for such Deferral Year shall be irrevocable. Notwithstanding any other provision of the Plan to the contrary, a Participant or beneficiary may withdraw an amount from his account upon a finding by the Committee in its sole discretion that an unanticipated emergency that is caused by an event beyond the control of such Participant or beneficiary has occurred that such emergency would result in severe financial hardship to such Participant or beneficiary if early withdrawal were not permitted. The amount which may be withdrawn pursuant to this Section shall not exceed the amount necessary to meet such financial hardship as determined by the Committee in its sole discretion. The Committee shall have the right to require such Participant or beneficiary to submit such documentation as it deems appropriate for the purpose of determining the existence, cause and extent of such financial hardship.

     (d). Notwithstanding any provision of the Plan to the contrary, in the event of the death of any Participant, the balance in the Participant’s account shall be paid to the Participant’s beneficiary in a single lump sum payment within thirty (30) days after the date of such death.

     Each Participant shall designate a beneficiary to whom any balance in his account under this plan shall be payable on his death. A Participant may also designate an alternate beneficiary to receive such payment in the event that the designated beneficiary cannot receive payment for any reason. In the event no designated or alternate beneficiary can receive such payment for any reason, payment will be made to the Participant’s surviving spouse, if any, or if the Participant has no surviving spouse, then to the following beneficiaries if then living in the following order of priority: (i) to the Participant’s children (including adopted children and stepchildren) in equal shares, (ii) to the Participant’s parents in equal shares, (iii) to the Participant’s brothers and sisters in equal shares, and (iv) to the Participant’s

- 4 -

estate. Each participant may at any time change any beneficiary designation. A change of beneficiary designation must be made in writing and delivered to the Committee or its delegate for such purposes. The interest of any beneficiary who dies before the Participant will terminate unless otherwise specified by the Participant.

     (e) Upon a Participant’s Retirement, payments from the Participant’s account will be made as the Participant specified in the deferral election, pursuant to Section 5(c).

     SECTION 8. Administration. The Plan shall be administered by the Personnel and Nominating Committee of the Board of Directors of the Company. The Personnel and Nominating Committee shall have all powers necessary to carry out the provisions of the Plan, including without limitation, the power to delegate administrative matters to other persons and to interpret the Plan in a manner consistent with its express provisions.

     SECTION 9. Miscellaneous:

     (a) Termination of Plan. The Company may at any time by action of its Board terminate this Plan. Upon termination of the Plan, no further deferrals will be permitted, and the Participant’s Compensation will be restored on a non-deferred basis. Each Participant’s accounts as they then exist will be maintained, credited and paid pursuant to the provisions of this Plan and the Participant’s elections.

     (b) Amendment. The Company may at any time amend this Plan in any respect, (i) in the case of amendments which have a material effect on the cost to the Company of maintaining the Plan, by action of its Board or, (ii) with respect to any other amendments, by action of the Committee; provided, however, that no such amendment shall adversely effect the right of Participants or their beneficiaries to any amounts credited or to be credited to the Participants’ accounts with respect to any Deferral Year which has commenced prior to the adoption of any such amendment.

     (c) No Alienation of Benefits. To the extent permitted by law, Participants and beneficiaries shall not have the right to alienate, anticipate, commute, sell, assign, transfer, pledge, encumber or otherwise convey the right to receive any payments under this Plan, and any payments under this Plan or rights thereto shall not be subject to the debts, liabilities, contracts, engagements or torts of Participants or beneficiaries nor to attachment, garnishment or execution, nor shall they be transferable by operation of law in the event of bankruptcy or insolvency. Any attempt, whether voluntary or involuntary, to effect any such action shall be null, void and of no effect.

-5-

     (d) No Right To Continue As A Director. Nothing contained herein shall be construed as conferring upon a Director the right to continue as a member of the Board of Directors.

     (e) Headings. The headings of paragraphs are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of the Plan.

     (f) Governing Law. The Plan shall be construed and administered under the laws of the State of California.

-6-

EX-10.37

EXHIBIT 10.37

WILLIAM BRANIFF
United States Attorney
Southern District of California
940 Front Street
San Diego, California 92101

(619) 557-5610

Attorney for Plaintiff

ELROY H. WOLFF
Sidley & Austin
1722 Eye Street, N.W.
Washington, D.C. 20006

(202) 429-4000
Attorney for Defendant

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF CALIFORNIA

	)
	)
UNITED STATES OF AMERICA,	)	CIVIL ACTION NO.
	)
Plaintiff,	)
v.	) )	CONSENT DECREE
KAUFMAN AND BROAD HOME CORPORATION,	) )
Defendant.	) )

     WHEREAS plaintiff, the United States of America, commenced this action on           , 1991, by filing the complaint herein; and whereas defendant Kaufman and Broad Home Corporation has waived service of the summons and complaint; and whereas the parties have been represented by the attorneys whose names appear hereafter; and whereas plaintiff and defendant have agreed to settlement of this action upon the following terms and condition and without defendant admitting liability for any of

the violations charged or admitting the accuracy of any of the allegations in the complaint;

     Now on the joint motion of plaintiff and defendant,

     IT IS HEREBY ORDERED, ADJUDGED, AND DECREED as follows:

     1. This Court has jurisdiction of the subject matter herein and of the parties hereto. The complaint states a claim upon which relief may be granted against defendant under Sections 5(1), 9, 13(b) and 16(a)(1) of the Federal Trade Commission Act, 15 U.S.C. §§ 45(1), 49, 53(b) and 56(a)(1).

     2. Defendant is ordered, pursuant to Section 5(1) of the Federal Trade Commission Act, 15 U.S.C § 45(1), to pay a monetary civil penalty in the total amount of $595,000. Such payment shall be by wire transfer of the funds, in accordance with instructions received from the Office of Consumer Litigation, Civil Division, U.S. Department of Justice, Washington, D.C. 20530, to the United States Treasury within ten (10) days of entry of this Consent Decree.

     3. In the event of default in payment, which default continues for ten (10) days beyond the due date of the payment, interest shall be computed pursuant to 28 U.S.C. § 1961(a). Interest shall accrue from the date of default to the date of payment.

     4. Defendant Kaufman and Broad Home Corporation, its successors and assigns, and its officers, agents, representatives, and employees, directly or through any corporation, subsidiary, division, or other device, in connection with the production, advertising, offering for sale or sale of on-site residential housing in or affecting commerce, as

Page 2 of 5

“commerce” is defined in the Federal Trade Commission Act, are hereby enjoined from ever violating any provision of the Commission’s order in FTC Docket No. C-2954, 93 F.T.C. 235 (1979), a copy of which is attached herewith as Appendix A and made a part of this Consent Decree.

     5. This Court shall retain jurisdiction of this matter for the purpose of enabling any of the parties to this Consent Decree to apply to the Court at any time for such further orders or directives as may be necessary or appropriate for the interpretation or modification of this Consent Decree, for the enforcement of the compliance therewith, or for the punishment of the violations thereof.

     JUDGMENT IS THEREFORE ENTERED in favor of plaintiff, the United States of America, and against defendant Kaufman and Broad Home Corporation pursuant to all the terms and conditions recited above.

DATED: 7-2-91

JUDITH N.KEEP  

United States District Judge 

     The parties, by their respective counsel, hereby consent to the terms and conditions of the Consent Decree as set forth above and consent to the entry thereof. Each party shall bear its own costs and attorney’s fees.

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	FOR THE UNITED STATES STUART M. GERSON Assistant Attorney General Civil Division WILLIAM BRANIFF United States Attorney Southern District of California
By:	/s/ JOHN R. NEECE
	JOHN R. NEECE
	Assistant United States Attorney
	/s/ JOHN R. FLEDER
	JOHN R. FLEDER
	Director Office of Consumer Litigation
	/s/ DAVID A. LEVITT
	DAVID A. LEVITT
	Attorney Office of Consumer Litigation Civil Division U.S. Department of Justice Washington, D.C. 20530 (202) 514-6786
	FOR THE FEDERAL TRADE COMMISSION
	/s/ WILLIAM S. SANGER
	WILLIAM S. SANGER
	Associate Director for Enforcement
	/s/ JUSTIN DINGFELDER
	JUSTIN DINGFELDER
	Assistant Director

Page 4 of 5

	/s/ THOMAS D. MASSIE
	THOMAS D. MASSIE
	Attorney
	/s/ ROBERT M. FRISBY
	ROBERT M. FRISBY
	Attorney Division of Enforcement Federal Trade Commission Washington, D.C. 20580 (202) 326-2982
	FOR THE DEFENDANT KAUFMAN AND BROAD HOME CORPORATION:
By:	/s/ ALBERT Z. PRAW
	ALBERT Z. PRAW
	General Counsel and Senior Vice President
	SIDLEY & AUSTIN
By:	/s/ ELROY H. WOLFF
	ELROY H. WOLFF
	A Member of the Firm 1722 Eye Street, N.W. Washington, D.C. 20006 (202) 429-4000
	MORGAN, LEWIS & BOCKIUS
By:	/s/ CASWELL O. HOBBS
	CASWELL O. HOBBS
	A Member of the Firm 1800 M Street, N.W. Washington, D.C. 20036 (202) 467-7200

Page 5 of 5

WILLIAM BRANIFF
United States Attorney
Southern District of California
940 Front Street
San Diego, California 92101

(619) 557-5610

Attorney for Plaintiff

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,	)	CIVIL ACTION NO.
	)
Plaintiff,	)
	)	COMPLAINT FOR CIVIL
v.	)	PENALTIES AND OTHER
	)	RELIEF
KAUFMAN AND BROAD HOME CORPORATION,	)
	)
Defendant.	)

     Plaintiff, the Unites States of America, by its attorney, William Braniff, United States Attorney for the Southern District of California, acting upon notification and authorization to the Attorney General of the United States by the Federal Trade Commission (“Commission”), alleges that:

     1. This is an action brought under Sections 5(l), 9, and 13(b), of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. §§ 45(l), 49, and 53(b), as amended, to recover from defendant monetary civil penalties for violations of a final cease and desist order issued by the Commission and to secure injunctive and other relief.

Jurisdiction and Venue

     2. This Court has jurisdiction over this matter under 28 U.S.C. §§ 1331, 1337(a), 1345, and 1355, under 15 U.S.C. §§ 45(1), 49 and 53(b).

     3. Venue in the Southern District of California is based on 28 U.S.C. §§ 1391(b) and (c) and 1395(a) and on 15 U.S.C. § 53(b).

Defendant and Its Business

     4. Defendant, Kaufman and Broad Home Corporation, is a corporation organized, existing, and doing business under and by virtue of the laws of the State of Delaware and has its office and principal place of business located at 10877 Wilshire Boulevard, Los Angeles, California 90024. Defendant is the successor or assign of Kaufman and Broad, Inc.

     5. At all times material herein, Kaufman and Broad Home Corporation and/or Kaufman and Broad, Inc. have done and transacted business within the Southern District of California.

     6. At all times material herein, Kaufman and Broad Home Corporation and/or Kaufman and Broad, Inc. (hereinafter “K&B) have engaged in the production, advertising, offering for sale, and sale of on-site residential housing in or affecting commerce, as “commerce” is defined in Section 4 of the FTC Act, 15 U.S.C. § 44.

Prior Commission Proceeding

     7. In a Commission proceeding bearing Docket No. C-2954, in which Kaufman and Broad, Inc., was charged with violating Section 5(a)(1) of the FTC Act, 15 U.S.C. § 45(a)(1), the Commission on

Page 2 of 11

February 12, 1979, issued against Kaufman and Broad, Inc., its successors and assigns, a consent order to cease and desist certain business practices, 93 F.T.C. 235 (1979) (“Commission’s Order”). The Commission’s Order was served upon Kaufman and Broad, Inc., on February 23, 1979, and became final and enforceable by operation of law on that date and has remained in full force and effect ever since that date.

     8. Included in the Commission’s Order are the following provisions which have been final and enforceable since on or about February 23, 1979:

I

DEFINITIONS

     “On-site residential housing” shall mean housing structures, including lots, consisting of single family dwelling units or housing structures consisting of multi-family dwelling units (including condominiums) represented and sold by respondents in the United States as completely constructed or partially constructed units.

     An “express warranty” as used in this order shall mean any written affirmation of fact or written promise made or assigned by respondents to a purchaser as part of the transaction of the sale of a unit of on-site residential housing.

     The “HOW warranty” as used in this order shall mean the warranty issued under the Home Owners Warranty Corporation’s national home warranty program.

     A “major construction defect” as used in this order shall mean a “major construction defect” as defined in the Home Owners Warranty Corporation Home Warranty Agreement ...

*      *      *

II

     IT IS ORDERED that respondents Kaufman and Broad, Inc., a corporation, Kaufman and Broad Homes, Inc., a corporation, and Kaufman and Broad Home Sales, Inc., a corporation, their successors and assigns, and their officers, and respondents’ agents, representatives and employees, directly or through

Page 3 of 11

any corporation, subsidiary, division or other device, in connection with the conduct and operation of their business in or affecting commerce as “commerce” is defined in the Federal Trade Commission Act in the production, advertising, offering for sale or sale of a unit of on-site residential housing, do cease and desist from :

     l. Selling and delivering any housing unit for use as on-site residential housing which is not built in accordance with the approved standards or which contains a major construction defect without taking the necessary action to repair, replace, or to pay the cost of repairing or replacing the defect in such housing unit in accordance with the provisions of respondents’ express warranty required under Part III B of this order.

     *     *     *

     6. Failing to repair, replace or to pay the cost of repairing or replacing any major construction defect or any other defect in accordance with the provisions of respondents’ express warranty required under Part III B of this order or in the performance of respondents’ obligations under Part VII of this order within a reasonable time after receipt of written notice of such defect from the purchaser or past purchaser of respondents’ on-site residential housing; provided, however, that:

     (a) Where respondents for any reason are unable to complete such requested repairs within thirty (30) calendar days after receipt of written notice of such defect from the purchaser or past purchaser of respondents’ on-site residential housing, respondents shall furnish to such purchaser or past purchaser (as defined in Part VIII) a written statement setting forth the reason or reasons why such requested repairs cannot be undertaken or completed within such thirty day period and a scheduled date on which the requested repairs are, in fact, to be completed within the next sixty (60) day period.

     (b) Where respondents are or were prevented from completing repairs by scheduled date referred to in subparagraph 6(a) above due to intervening circumstances beyond their control, such as labor strike, supplier or subcontractor failure to deliver materials or perform work, or unsuitable weather conditions, such repairs will be completed within a reasonable period of time not to exceed sixty (60) days from the date of the termination of the intervening circumstance.

     (c) Where respondents for any reason elect not to honor such requests for repairs, respondents shall,

Page 4 of 11

within twenty-one (21) calendar days of receiving such request for repairs, notify the purchaser or past purchaser in writing why respondents will not honor the request.

*       *       *

III

*       *       *

     B. IT IS FURTHER ORDERED that respondents shall furnish purchasers of each unit of respondents’ on-site residential housing with a warranty that is substantially identical to the insurer’s and the warrantor’s undertaking in the Home Owners Warranty Corporation’s Home Warranty Agreement . . . currently in use . . . and incorporated by reference in this order, including the procedures for the settlement of disputes, provided that respondents’ undertaking for major construction defects shall be for a term of at least four years from the commencement date of each such warranty furnished, and provided further that nothing in this order shall relieve respondents from complying with the Magnuson-Moss Warranty Act, Section 101 et seq. (15 U.S.C. §§ 2301 et seq.), the rules promulgated thereunder, and interpretations issued by the Federal Trade Commission in respect thereto.

*       *      *

V

     IT IS FURTHER ORDERED that in connection with the advertising, offering for sale or sale of on-site residential housing, respondents shall make available to each and every prospective purchaser who visits respondents’ sales offices or model homes a brochure or a written statement relating to such housing that will include the following disclosures in a clear, conspicuous and affirmative manner:

     1. For on-site residential housing not covered by the National Flood Insurance Program administered by the U.S. Department of Housing and Urban Development, the identity, address and telephone number of the individual, business firm and government agency that conducted soil tests on land used in the construction of the residential housing offered for sale. In addition, respondents shall require their contractors to state in non-technical language to each prospective purchaser who contacts such contractors whether the land tested is suitable for residential use;

     2. The identity or title, address and telephone number of the responsible public school district authority who will

Page 5 of 11

furnish information relating to the identity and location of schools for the particular housing unit;

     3. Each room or area of the particular housing unit to be purchased that is not insulated to retain the same degree of warmth as rooms designed for use as principal living areas;

     4. Each room or area of the particular housing unit to be purchased that is constructed without waterproofing adequate to render such room or area suitable for use as a habitable living area;

     5. The most recent official tax rate and estimate obtained from the officially responsible tax assessing authority and the identity or title, address and telephone number of such tax assessing authority;

     6. A list containing each and every architectural design, construction feature, appurtenance, optional item or equipment or other characteristic or feature exhibited to the particular purchaser in connection with a model home sample or style offered for sale to such purchaser which characteristic or feature is not included in the model or style of respondents’ housing unit offered for sale to such purchaser at the offered or advertised price;

     7. A list containing each and every construction feature, appurtenance, optional item or equipment or other characteristic or feature exhibited to the particular purchaser in connection with a model home sample or style offered for sale to such purchaser which characteristic or feature cannot be included or duplicated in the particular housing unit offered for sale to such purchaser even upon the payment of an additional charge because of the style, size, location or any other reason associated with the land or the design of the particular housing unit offered;

     8. A notice that plans and specifications for each home being offered for sale are available for inspection by prospective purchasers at respondents’ sales offices during normal business hours; provided that such specifications shall include a full description of the materials and components used by respondents in the construction of their on-site residential housing; and provided further, that such description will be satisfied if it substantially includes the type of information contained in the “Description of Materials” disclosure statements required by the United States Federal Housing Administration (FHA Form 2005, as amended from time to time) or the United States Veterans Administration (VA Form 26-1852, as revised from time to time);

Page 6 of 11

     9. A notice that purchasers of respondents’ housing may select any lending institution of their choice for the purpose of securing a mortgage and are not limited to the lending institution provided by respondents;

     10. A statement setting forth respondents’ arrangement for repairs and the satisfaction of warranties or in lieu thereof, a copy of the warranty required by Part III B of this order that will be furnished with the housing being offered for sale and a statement of the procedure for settlement of disputes under such warranty.

VI

     IT IS FURTHER ORDERED that respondents shall secure a written acknowledgement from each purchaser of respondents’ on-site residential housing which shall state the following information:

     1. That the disclosures referred to in Paragraph V of this order were received.

     2. The date on which the disclosures referred to in Paragraph V of this order were received.

Residential Housing Developments

     9. In the five years immediately preceding the filing of this complaint K&B produced, advertised, offered for sale and sold units of on-site residential housing in 103 residential housing developments in the State of California, including Southridge, a development located in the City of Fontana, County of San Bernardino, State of California.

Plan 3 Homes

     10. Commencing in 1983 and continuing for some period of time thereafter, K&B built and sold a number of substantially identical two story single family homes in Tracts numbered 7503, 17734, 18502 and 18574 located in the City of Riverside, County of Riverside, State of California, and in Tracts numbered 11804

Page 7 of 11

and 12859 located in the City of Corona, County of Riverside, State of California (generally referred to a Plan 3 homes).

First Cause of Action

     11. K&B sold and delivered with a major construction defect a number of the above-described Plan 3 homes for use as on-site residential housing yet failed to take the necessary action to repair, replace, or to pay the cost of repairing or replacing the defect in those housing units in accordance with the provisions of K&B’s express warranty that was required under Part III B of the Commission’s Order, thereby violating Part II 1 of the Commission’s Order.

Second Cause of Action

     12. K&B failed to repair, replace or to pay the cost of repairing or replacing major construction defects under the terms of K&B’s express warranty required under Part III B of the Commission’s Order within a reasonable period of time after receipt of a written request for warranty service from the purchasers of a number of the Plan 3 homes, thereby violating Part II 6 of the Commission’s Order.

Third Cause of Action

     13. K&B failed to repair, replace or to pay the cost of repairing or replacing defects under the terms of K&B’s express warranty required under Part III B of the Commission’s Order within a reasonable period of time after receipt of a written request for warranty service from the purchasers of a substantial number of units of K&B’s on-site residential housing in the

Page 8 of 11

Southridge development, thereby violating Part II 6 of the Commission’s Order.

Fourth Cause of Action

     14. K&B, in connection with the advertising, offering for sale or sale of on-site residential housing, failed to make available to numerous prospective purchasers who visited K&B’s sales offices or model homes in K&B’s on-site residential housing developments the disclosures required under Part V of the Commission’s Order, thereby violating Part V of the Commission’s Order.

Fifth Cause of Action

     15. K&B did not secure from numerous purchasers of K&B’s on-site residential housing in a number of the residential housing developments the written acknowledgement of the receipt of one or more of the disclosures required by Part V of the Commission’s Order, thereby violating Part VI of the Commission’s Order.

Violations Charged

     16. Each unit of on-site residential housing in which K&B in the five years prior to the filing of the complaint failed to comply with the Commission’s Order in one or more of the ways described above, except with respect to the Fourth and Fifth Causes of Action, constitutes a separate violation of the Commission’s Order for which plaintiff seeks a civil penalty.

     17. Each prospective purchaser or purchaser of on-site residential housing with respect to whom K&B in the five years prior to the filing of the complaint failed to comply with the

Page 9 of 11

Commission’s Order in the way described in the Fourth and Fifth Causes of Action constitutes a separate violation of the Commission’s Order for which plaintiff seeks a civil penalty.

Prayer

     WHEREFORE, plaintiff respectfully requests that this Court pursuant to 15 U.S.C §§ 45(1), 49, and 53(b) and the Court’s own equity powers:

     1. Enter judgment against defendant and in favor of plaintiff for each violation charged in this complaint;

     2. Award plaintiff monetary civil penalties from defendant for the violations alleged in this complaint;

     3. Enjoin defendant from further violations of the Commission’s Order in Docket No. C-2954; and

     4. Award plaintiff such other and further relief as the Court may deem just and proper.

Dated: ____________________

	STUART M. GERSON Assistant Attorney General Civil Division WILLIAM BRANIFF United States Attorney Southern District of California
By:	/s/ JOHN R. NEECE
	JOHN R. NEECE
	Assistant United States Attorney Southern District of California 940 Front Street San Diego, California 92101

Page 10 of 11

OF COUNSEL:

	/s/ JOHN R. FLEDER
WILLIAM S. SANGER	JOHN R. FLEDER
Associate Director for	Director
Enforcement	Office of Consumer Litigation
JUSTIN DINGFELDER
Assistant Director	/s/ DAVID LEVITT
Division of Enforcement	DAVID LEVITT
	Attorney
THOMAS D. MASSIE	Office of Consumer Litigation
Attorney	U.S. Department of Justice
Division of Enforcement	P.O. Box 386
	Washington, D.C. 20044
ROBERT M. FRISBY	(202) 514-6786
Attorney
Division of Enforcement
Federal Trade Commission
Washington, D.C. 20580

Page 11 of 11

EX-10.38

EXHIBIT 10.38

KAUFMAN AND BROAD HOME CORPORATION

1988 EMPLOYEE STOCK PLAN
(as amended on January 27, 1994)

     SECTION 1. Purpose. The purpose of the 1988 Employee Stock Plan (the “Plan”) is to promote the success of Kaufman and Broad Home Corporation (the “Company”) by providing a method whereby key employees of the Company and its subsidiaries and certain other individuals may be encouraged to invest in the Common Stock, $1.00 par value, of the Company (“Common Stock”), increase their proprietary interest in its business, remain in the employ of the Company or its subsidiaries, and increase their personal interests in the continued success and progress of the Company.

     SECTION 2. Definitions. As used in this Plan, the following terms shall have the indicated meanings:

     (a) Award: An award of restricted shares under Section 7 and, except for purposes of Section 7, a Stock Unit Award granted pursuant to Section 8.

     (b) Board: The board of directors of Kaufman and Broad Home Corporation.

     (c) Code: The Internal Revenue Code of 1986, as amended.

     (d) Committee: The Personnel, Compensation and Stock Option Committee of the Board.

     (e) Company: Kaufman and Broad Home Corporation and its Subsidiaries.

     (f) Lapsing Formula: With reference to a particular Award under Section 7, a formula or schedule, and such other conditions as may be imposed, determined by the Committee and set forth in a Stock Restriction Agreement, as a basis for establishing the number of shares of Stock which may be released from the restrictions of an Award. A Lapsing Formula may differ from Participant to Participant and from Award to Award.

     (g) Limited Stock Appreciation Right: A right granted pursuant to Section 6(b) to receive cash in certain circumstances with respect to a related Option.

     (h) Option: A right to buy Common Stock granted pursuant to Section 6(a).

     (i) Option Agreement: The agreement reflecting the grant of an Option pursuant to Section 6(a).

     (j) Participant: A key employee or other individual selected to participate in this Plan pursuant to its terms.

     (k) Performance Objectives: With reference to a particular Award under Section 7, the threshold Performance Objective, target Performance Objective and super Performance Objective pertaining thereto, as determined by the Committee and specified in the applicable Stock Restriction Agreement, which objectives are the criteria established by the Committee which may accelerate the release of shares of Common Stock from the restrictions of such Award and its Lapsing Formula. The Performance Objectives may differ from Participant to Participant and from Award to Award.

     (1) Performance Period: With reference to a particular Award under Section 7, the period of time within which the Performance Objectives are to be achieved, as determined by the Committee and specified in the applicable Stock Restriction Agreement. The Performance Period may differ from Participant to Participant and from Award to Award.

     (m) Plan: The Kaufman and Broad Home Corporation 1988 Employee Stock Plan, as it may be amended from time to time.

     (n) Stock Restriction Agreement: With reference to a particular Award, the agreement between the Company and the Participant containing the restrictions set forth in Section 7(e), the Lapsing Formula and the Performance Objectives.

     (o) Stock Unit Award: An award granted under Section 8.

     (p) Subsidiary: A subsidiary of Kaufman and Broad Home Corporation within the meaning of Section 425(f) of the Code.

     (q) Tax Date: The date on which taxes of any kind are required by law to be withheld with respect to shares of Common Stock subject to an Option or Award.

     SECTION 3. Administration.

     (a) The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be issued or adopted by the Board, to grant to eligible persons Awards, Options and Limited Stock Appreciation Rights with respect to shares of Common Stock pursuant to the provisions of the Plan, to fix the exercise price and other terms of such Options, to fix the terms of any Award in a manner consistent with the terms of Section 7, to prescribe, amend and rescind rules and regulations, if any, relating to the Plan, to interpret the provisions of the Plan, Stock Restriction Agreements and Option Agreements issued under the Plan, to amend such Option Agreements and Stock Restriction Agreements from time to time subject to the provisions of the Plan, and to supervise the administration of the Plan. No individual shall become a member of the Committee if he or she shall have been eligible to receive Awards or Options to acquire shares of capital stock of the Company or any subsidiary at any time during the 12-month period prior to becoming a member and no member of the Committee shall be

eligible to receive Awards or Options.

     (b) All decisions made by the Committee pursuant to the provisions of the Plan and related orders or resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, stockholders, employees and optionees.

     (c) Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with any claim, action, suit or proceeding to which he or she may be a party by reason of any action taken or any failure to act under the Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, or as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

     SECTION 4. Shares Subject to the Plan.

     (a) The shares to be delivered upon exercise of Options granted under the Plan or pursuant to Awards may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market or in private transactions.

     (b) Subject to adjustments made pursuant to the provisions of Section 4(c), the aggregate number of shares to be delivered pursuant to Awards and upon exercise of all Options which may be granted under the Plan shall not exceed 3,000,000 shares of Common Stock. If an Option or Award granted under the Plan shall expire or terminate for any reason, other than by reason of the exercise of an associated Limited Stock Appreciation Right, or if an Award is forfeited, the shares subject to but not delivered under such Option or forfeited Award shall be available for other Awards or Options and associated Limited Stock Appreciation Rights granted to the same Participant or other Participants.

     (c) In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available to Participants under this Plan, then the Committee shall, in its sole discretion, subject to approval by the Board, and in such manner as the Committee may deem equitable, adjust any or all of (1) the number and kind of shares which thereafter may be awarded

3

or optioned and sold or made the subject of Limited Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and Awards, and Limited Stock Appreciation Rights, and (3) the option price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant, including to reflect such an event occurring prior to an Award, the grant of which was intentionally deferred in anticipation of such event; provided, however, that the number of shares subject to any Option or Award shall always be a whole number.

     SECTION 5. Eligibility and Extent of Participation.

     (a) The persons eligible to receive Awards, Options and associated Limited Stock Appreciation Rights under the Plan shall consist of key employees of the Company and other individuals who, in the Committee’s judgment, can make substantial contributions to the Company’s long-term profitability and value.

     (b) Subject to the limitations of the Plan, the Committee shall, after such consultation with and consideration of the recommendations of management as the Committee considers desirable, select from eligible persons those Participants to be granted Options and Awards and determine the time when each Option and Award shall be granted, the number of shares subject to each Option and Award and whether Limited Stock Appreciation Rights should be granted in connection with such Option, the number of shares for each Award and the restrictions associated with such Award. Subject to the provisions of Section 4, both Options and Awards may be granted to the same Participant.

     SECTION 6. Grants of Options and Limited Stock Appreciation Rights.

     (a) Grant of Options. Options on shares of Common Stock may be granted to Participants by the Committee from time to time at its sole discretion. Each Option shall be evidenced by an Option Agreement which shall contain such terms and conditions as may be approved by the Committee and shall be signed by an officer of the Company and the optionee. Neither the execution of any Option Agreement nor the granting of any Option evidenced thereby shall constitute or be evidence of any agreement or other understanding, express or implied, on the part of the Company or any Subsidiary to employ an individual for any specific period.

     (b) Grant of Limited Stock Appreciation Rights in the Event of Change of Ownership. If deemed by the Committee to be in the best interests of the Company, any Option granted on or after the effective date of the Plan may include a Limited Stock Appreciation Right at the time of grant of the Option; also, the Committee may grant a Limited Stock Appreciation Right with respect to any unexercised Option at any time after granting such Option prior to the end of its term, provided such Option was

4

granted after the effective date of the Plan. Such Limited Stock Appreciation Rights shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose, provided that:

(1) A Limited Stock Appreciation Right shall be exercisable only during the 91 day period specified in the last sentence of Section 9(a), provided, however, that no Limited Stock Appreciation Right shall be exercisable by an officer of the Company within six months of the date of its grant; and

(2) A Limited Stock Appreciation Right shall, upon its exercise, entitle the optionee to whom such Limited Stock Appreciation Right was granted to receive an amount of cash equal to the amount by which the “Offer Price per Share” (as such term is hereinafter defined) shall exceed the exercise price of the associated Option, multiplied by the number of shares of Common Stock with respect to which such Limited Stock Appreciation Right shall have been exercised. Upon the exercise of a Limited Stock Appreciation Right, any associated Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Stock Appreciation Right was exercised. Upon the exercise or termination of an associated Option, any related Limited Stock Appreciation Right shall terminate to the extent of the shares of Common Stock with respect to which such associated Option was exercised or terminated.

The term “Offer Price per Share” as used in this Section 6(b) shall mean with respect to a Limited Stock Appreciation Right the higher of (i) the fair market value per share of Common Stock on the date of exercise of such Limited Stock Appreciation Right or (ii) the highest price per share for Common Stock paid or to be paid in the transaction, if any, giving rise to the event specified in clauses (1) or (2) (as the case may be) of Section 9(a) which triggered the exercisability of such Limited Stock Appreciation Right. For purposes of clause (ii) above, any securities or property which are part of the consideration paid or to be paid in such transactions shall be valued in determining the Offer Price per Share at the highest of (A) the valuation placed on such securities or property by the company, person or other entity engaging in such transaction, or (B) the valuation placed on such securities or property by the Committee.

(c) Option Price. (1) The price at which each share of Common Stock may be purchased upon exercise of a particular Option shall be as specified by the Committee, in its sole discretion, at the time such Option is granted and shall not be less than 100% of the fair market value of a share of Common Stock at the time such Option is granted, provided, however, that in the event that an optionee is required to make a payment pursuant to paragraph (c)(3) below prior to receiving such Option, the exercise price per share of Common Stock of such

5

Option shall not be less than 100% of the fair market value of a share of Common Stock at the time such Option is granted less the purchase price per share of Common Stock of such Option. The Option exercise price shall be set forth in the applicable Option Agreement.

(2) The Committee may, in its discretion, at any time or from time to time, by the adoption of a written resolution to such effect, reduce the stated exercise or option price for any or all Options then outstanding, but in no event shall such price be so reduced to a price which is less than the fair market value of the shares of Common Stock which are subject to such Option or Options on the date such resolution is adopted.

(3) If the Committee, in its discretion, shall deem it desirable, the grant of an Option may be made conditional upon the receipt of a payment therefore by the optionee. Such condition and the terms and conditions as to its satisfaction shall be set forth in the applicable Option Agreement which may also provide for the reimbursement to the optionee of any part or all of such payment under such circumstances as may be specified in such Option Agreement.

(d) Exercise. (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Option Agreement or thereafter, provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of 15 years from the date of such grant. Subject to the foregoing, each Option Agreement shall specify the effect thereon of the death, retirement or other termination of employment of the optionee. In addition, the Committee may impose such other conditions with respect to the exercise of Options, including without limitation, any relating to the application of Federal or state securities laws, as it may deem necessary or advisable.

(2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the fair market value of any such Common Stock so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. No optionee or the legal representative, legatee or distributee of an optionee, shall be deemed to be a holder of any shares subject to any Option prior to the issuance of such shares upon exercise of such Option.

6

     (e) Transferability of Options. An Option granted under the Plan, and any related Limited Stock Appreciation Right, may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the person to whom granted, may be exercised only by such person.

     SECTION 7. Awards.

     (a) Grant of Restricted Stock Awards.

(1) Selection of Participants. Subject to the terms of this Plan, the Committee shall select those Participants to whom Awards shall be granted for each Performance Period. Awards shall generally be made at the beginning of a Performance Period but may, in the Committee’s discretion, be made from time to time during the term of a Performance Period.

(2) Award of Shares. The Committee shall determine the number of shares of Common Stock covered by each Award. After the close of, and, if appropriate, during the term of, each Performance Period, and at appropriate times based on the Lapsing Formula the Committee shall determine whether the restrictions set forth in Section 7(e) hereof shall lapse with respect to a portion or all of the shares covered by an Award.

(3) Form of Instrument. Each Award shall be made pursuant to a Stock Restriction Agreement in a form prescribed by the Committee. Such instrument shall specify the restrictions set forth in Section 7(e), a Lapsing Formula, a Performance Period and the Performance Objectives which, if achieved during the Performance Period with respect to which they were awarded, shall cause acceleration of the lapsing of restrictions imposed upon all or part of the shares covered by an Award.

     (b) Lapsing Formula and Performance Objectives. Each Award shall be subject to a Lapsing Formula pursuant to which the restrictions set forth in Section 7(e) shall lapse, unless such restrictions have earlier lapsed as to all or part of the shares due to achievement of Performance Objectives during the Performance Period. Each Award shall be subject to Performance Objectives which may be achieved by the Company during the Performance Period With respect to which the Award is made. Performance Objectives may relate to separate performance objectives for the Company or any Subsidiary or for any division, department or operation of the Company or any subsidiary. Notwithstanding anything else in this Plan to the contrary, the restrictions set forth in Section 7(e) shall not lapse with respect to a Restricted Stock Award prior to the third anniversary of the date of grant of such Award; provided, however, that the Committee may determine to have the restrictions set forth in Section 7(e) lapse after the first

7

anniversary of the date of grant of an Award if the Committee has established Performance Objectives for such Award. Subject to the preceding sentence, once established, Performance Objectives and Lapsing Formulas may be changed, adjusted or amended during the term of a Performance Period or thereafter.

     (c) Rights with Respect to Shares. Subject to Section 7(d), each Participant to whom an Award has been made shall have absolute ownership of such shares including the right to vote the same and to receive dividends and other distributions thereon, subject, however, to the terms, conditions and restrictions described in this Plan and in the Stock Restriction Agreement.

     (d) Escrow. Shares of Common Stock issued pursuant to an Award shall be held in escrow by the Company until such time as the Committee shall have determined that the restrictions set forth in Section 7(e) shall have lapsed or until the shares subject to such Award are forfeited pursuant to Section 7(e)(2).

     (e) Restrictions Applicable to Awards. Each Stock Restriction Agreement under this Plan shall contain the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Committee:

Until the restrictions set forth in this Section 7(e) shall lapse pursuant to Section 7(f), shares of Common Stock awarded to a Participant pursuant to each Award:

(1) shall not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, and

(2) except as otherwise set forth in the Stock Restriction Agreement, shall be forfeited and returned to the Company, and all rights of the Participant to such shares shall terminate without any payment of consideration by the Company, If the Participant’s continuous employment with or other service to the Company upon which an Award is based shall terminate with or without cause or as a result of any event or for any other reason.

(f) Lapse of Restrictions.

(1) Lapse of Restrictions Due to Achievement of Performance Objectives. As soon as practicable after the close of each Performance Period or prior thereto, if the Committee in its discretion deems it appropriate, the Committee shall determine whether the Performance Objectives established for such Performance Period have been achieved. Each Participant who has received an Award shall be notified as to whether the Performance Objectives established for the Performance Period have been achieved and the number of shares, if any, of

8

Common Stock with respect to which the restrictions of Section 7(e) have lapsed.

(2) Lapse of Restrictions Based on Lapsing Schedule. As to any shares covered by an Award as to which the restrictions imposed by Section 7(e) have not lapsed pursuant to paragraph (1) of this Section 7(f), such restrictions shall lapse in accordance with the Lapsing Formula for such Award.

     (g) Restrictive Legends. Certificates for shares of Common Stock delivered pursuant to Awards shall bear an appropriate legend referring to the terms, conditions and restrictions described in this Plan and in the applicable Stock Restriction Agreement. Any attempt to dispose of any such shares of Common Stock in contravention of the terms, conditions and restrictions described in this Plan or in the applicable Stock Restriction Agreement shall be ineffective. Any shares of Common Stock of the Company or other property, including cash, received by a Participant as a dividend or as a result of any stock split, combination, exchange of shares, reorganization, merger, consolidation or similar event with respect to shares of Common Stock received pursuant to an Award shall have the same status and bear the same legend and be held in escrow pursuant to Section 7(d) as the shares received pursuant to the Award unless otherwise determined by the Committee at the time of such event.

     (h) Designation of Beneficiaries. A Participant may designate a beneficiary or beneficiaries to receive such Participant’s Common Stock hereunder in the event of such Participant’s death, and may, at any time and from time to time, change any such beneficiary designation. All beneficiary designations and changes therein shall be in writing and shall be effective only if and when delivered to the Committee during the lifetime of the Participant.

     (i) The Committee may make adjustments or modifications, and its determination thereof shall be conclusive, in the Lapsing Formula, Performance Objectives or Performance Period to give effect to the intent of this Plan in connection with any event affecting the performance criteria established as the Performance Objectives, including without limitation, any reorganization, recapitalization, merger, consolidation, offering of additional shares of Common Stock or other change in the Company’s shareholders’ equity by means other than earnings, or any similar event. No such adjustment shall be made if it would reduce the benefits otherwise accruing to existing Participants under the Plan.

     SECTION 8. Stock Unit Awards.

     (a) Grant of Stock Unit Awards. In addition to granting Options, Limited Stock Appreciation Rights and Awards of restricted shares under Section 7, the Committee

9

shall have authority to grant to Participants Stock Unit Awards which can be in the form of Common Stock or units, the value of which is based, in whole or in part, on the value of Common Stock. Subject to the provisions of the Plan, including Section 8(b) below, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules (all of which are sometimes, hereinafter collectively referred to as “rules”) as the Committee may determine in its sole discretion, all such rules applicable to a particular Stock Unit Award to be reflected in writing and furnished to the Participant at the time of grant. The rules need not be identical for each Stock Unit Award.

     (b) Rules. In the sole discretion of the Committee, a Stock Unit Award may be granted subject to the following rules:

(1) Any shares of Common Stock which are part of a Stock Unit Award may not be assigned, sold, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued or, if later, the date provided by the Committee at the time of the Award.

(2) Stock Unit Awards may provide for the payment of cash consideration by the person to whom such Award is granted or provide that the Award, and Common Stock to be issued in connection therewith, if applicable, shall be delivered without the payment of cash consideration, provided that for any Common Stock to be purchased in connection with a Stock Unit Award the purchase price shall be at least 50% of the fair market value of such Common Stock on the date such Award is granted.

(3) Stock Unit Awards may relate in whole or in part to certain performance criteria established by the Committee at the time of grant.

(4) Stock Unit Awards may provide for deferred payment schedules, vesting over a specified period of employment, the payment (on a current or deferred basis) of dividend equivalent amounts, with respect to the number of shares of Common Stock covered by the Award, and elections by the employee to defer the payment of the Award or the lifting of restrictions on the Award, if any.

(5) In such circumstances as the Committee may deem advisable, the Committee may waive or otherwise remove, in whole or in part, any restrictions or limitation to which a Stock Unit Award was made subject at the time of grant.

     SECTION 9. Special Rules.

     (a) Notwithstanding anything to the contrary in this Plan, unless otherwise

10

specifically determined by the Committee at the time of grant, all Options theretofore granted and not fully exercisable shall become exercisable in full and the restrictions on all outstanding Awards shall lapse upon the occurrence of a Change of Ownership. A “Change of Ownership” shall be deemed to have occurred if either (1) individuals who, as of the effective date of this Plan, constitute the Board of Directors of the Company (the “Board of Directors” generally and as of the date hereof the “Incumbent Board”) cease for any reason to constitute at least a majority of the directors constituting the Board of Directors, provided that any person becoming a director subsequent to the effective date of this Plan whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters (3/4) of the then directors who are members of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is (A) in connection with the acquisition by a third person, including a “group” as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Act”), of beneficial ownership, directly or indirectly, of 20% or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company (unless such acquisition of beneficial ownership was approved by a majority of the Board of Directors who are members of the Incumbent Board), or (B) in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-ll of Regulation 14A promulgated under the Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board, or (2) the Board of Directors (a majority of which shall consist of directors who are members of the Incumbent Board) has determined that a Change of Ownership triggering the exercisability of Options and the lapse of restrictions on Awards as described in this Section 9 shall have occurred. Options which become fully exercisable by reason of events specified in clauses (1) or (2) shall remain exercisable for 90 days following the date on which they become so exercisable, after which they will revert to being exercisable in accordance with their original terms, provided, however, that no Option which has previously been exercised or has expired or otherwise terminated shall become exercisable by virtue of this Section nor shall this Section permit exercise of any option during the portion, if any, of such 90 day period which follows the termination Or expiration of any such Option.

     (b) For purposes of this Plan and any Option or Award hereunder, termination of employment shall not be deemed to occur upon the transfer of any optionee from the employ of the Company to the employ of any Subsidiary or affiliate. For purposes of this Plan, “affiliate” means (1) any entity 50% or more of the voting interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, 50% or more of the voting interest in the Company and (2) any entity which owns, directly or indirectly, 50% or more of the voting interest in the Company.

     SECTION 10. Delivery of Shares. No shares of Common Stock shall be delivered

11

pursuant to an Award or any exercise of an Option until the requirements of such laws and regulations as may be deemed by the Committee to be applicable thereto are satisfied.

     SECTION 11. Financing and Withholding.

     (a) Withholding of Taxes. As a condition to the making of an Award, to the lapse of the restrictions pertaining to an Award, or to the delivery of shares in connection with the exercise of an Option, the Company may require the Participant to pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any taxes of any kind required by law to be withheld with respect to such shares of Common Stock.

     (b) Financing. If requested by a Participant who exercises an Option or who has received shares of Common Stock pursuant to an Award, the Committee may in its discretion provide financing to the Participant in a principal amount sufficient for the purchase of shares of Common Stock pursuant to such Option exercise or to pay the amount of taxes required by law to be withheld with respect to such Option exercise or such receipt of shares of Common Stock. Any such loan shall be subject to all legal requirements, and restrictions pertinent thereto, including if applicable, Regulation G promulgated by the Federal Reserve Board. The grant of an Option or Award shall in no way obligate the Company or the Committee to provide any financing whatsoever upon the lapse of restrictions on shares or the exercise of such Option.

     (c) Withholding of Shares.

(1) If requested by a Participant who acquires shares of Common Stock upon the exercise of an Option or who has received Common Stock pursuant to an Award with respect to which the restrictions shall have lapsed, the Committee may in its discretion permit the Participant to satisfy any tax withholding obligations, in whole or in part, by having the Company withhold a portion of such shares with a value equal to the amount of taxes required by law to be withheld.

(2) Requests by a Participant to have shares of Common Stock withheld shall be (A) made prior to the Tax Date and (B) irrevocable. In addition, in the event the Participant is an officer or director of the Company within the meaning of Section 16 of the Act, such requests must be made either six months prior to the Tax Date or in a ten day period beginning on the third day following the release of the Company’s quarterly or annual earnings statement.

     SECTION 12. Amendments, Suspension or Discontinuance. The Board of

12

Directors may amend, suspend or discontinue the Plan. Notwithstanding the foregoing, except as permitted by Section 4(c), the Board may not, without prior approval of the shareholders of the Company, make any amendment which operates (a) to abolish the Committee, change the qualification of its members or withdraw the administration of the Plan from its supervision, (b) to make any material change din the class of eligible persons as defined in the Plan, (c) to increase the total number of shares of Common Stock which may be delivered in respect of Awards or on exercise of Options granted under the Plan, (d) to extend the maximum option period or the period which Options or Awards may be granted under the Plan or (e) to reduce the minimum permissible option exercise price.

     SECTION 13. Term of Plan. The Plan shall become effective on the date it is approved and adopted by the Board, subject to its subsequent approval by shareholders of the Company. No Option or award shall be granted under the Plan after the date that is fifteen (15) years after the date on which the Plan is approved by the Company’s shareholders or after such earlier date as the Committee may decide, in its sole discretion.

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EX-12.1

Exhibit 12.1

KB HOME
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands, Except Ratios)

	Years Ended November 30,
	2007			2006			2005			2004			2003
Earnings
Income (loss) from continuing operations before income taxes	$	(1,460,770	)	$	571,847		$	1,201,534		$	642,184		$	488,510
Add:
Interest incurred		199,550			237,801			164,245			140,602			119,335
Amortization of premiums and discounts related to debt		2,478			2,441			1,550			1,617			1,769
Portion of rent expense considered to be interest		28,464			27,657			19,294			14,073			11,283
Amortization of previously capitalized interest		171,496			143,249			100,971			77,266			68,273
Distribution of earnings of unconsolidated joint ventures, net of equity in income (loss)		194,274			34,383			(2,242	)		(2,302	)		(271	)
Deduct:
Interest capitalized		(186,560	)		(221,074	)		(142,738	)		(121,241	)		(93,676	)
Income (loss) as adjusted	$	(1,051,068	)	$	796,304		$	1,342,614		$	752,199		$	595,223
Fixed charges
Interest incurred	$	199,550		$	237,801		$	164,245		$	140,602		$	119,335
Amortization of premiums and discounts related to debt		2,478			2,441			1,550			1,617			1,769
Portion of rent expense considered to be interest		28,464			27,657			19,294			14,073			11,283
	$	230,492		$	267,899		$	185,089		$	156,292		$	132,387
Ratio of earnings to fixed charges		—			2.97			7.25			4.81			4.50
Coverage deficiency (a)	$	(1,281,560	)	$	—		$	—		$	—		$	—

The ratios of earnings to fixed charges are computed on a consolidated basis excluding the French discontinued operations.

(a) Earnings for the year ended November 30, 2007 were insufficient to cover fixed charges for the period by $1.28 billion.

EX-21

EXHIBIT 21

KB HOME AND CONSOLIDATED SUBSIDIARIES

SUBSIDIARIES OF THE REGISTRANT

The following subsidiaries of KB Home were included in the November 30, 2007 consolidated financial statements:  

	Percentage of
	Voting Securities
	Owned by
	the Registrant
	or a
	Subsidiary of
Name of Company	the Registrant
Arizona
Escoba Insurance Company		100
KB HOME Phoenix Inc.		100
KB HOME Sales — Phoenix Inc.		100
KB HOME Sales — Tucson Inc.		100
KB HOME Tucson Inc.		100
California
Branching Tree Corp.		100
Custom Decor, Inc.		100
Kaufman and Broad Development Group		100
Kaufman and Broad Embarcadero, Inc.		100
Kaufman and Broad International, Inc.		100
Kaufman and Broad — Monterey Bay, Inc.		100
Kaufman and Broad — Moreno/Perris Valleys, Inc.		100
Kaufman and Broad of Utah, Inc.		100
KBASW Mortgage Acceptance Corporation		100
KB Holdings One, Inc.		100
KB HOME Architecture Inc.		100
KB HOME Central Valley Inc.		100
KB HOME City Ranch Inc.		100
KB HOME Coastal Inc.		100
KB HOME Greater Los Angeles Inc.		100
KB HOME Holdings Inc.		100
KB HOME Insurance Agency Inc.		100
KB HOME Sacramento Inc.		100
KB HOME Sales — Northern California Inc.		100
KB HOME Sales — Southern California Inc.		100
KB HOME San Diego Inc.		100
KB HOME South Bay Inc.		100
KBI/Mortgage Acceptance Corporation		100
KBRAC IV Mortgage Acceptance Corporation		100
KB Resale Properties Inc.		100
Lewis Homes Management Corp.		100
Mather Housing Company LLC		100
Colorado
KB HOME Colorado Inc.		100

	Percentage of
	Voting Securities
	Owned by
	the Registrant
	or a
	Subsidiary of
Name of Company	the Registrant
Delaware
Belguim Knight LLC		100
City Ranch, LLC		100
e.KB, Inc.		100
Estes Homebuilding Co.		100
General Homes Corporation		100
General Homes Development LLC		100
HomeSafe Escrow Company		100
International Mortgage Acceptance Corporation		100
Kaufman and Broad Development Company		100
Kaufman and Broad Limited		100
Kaufman & Broad NexGen, LLC		100
KB Brea Development, LLC		100
KB HOME Atlanta LLC		100
KB HOME Charlotte Inc.		100
KB HOME Delaware Inc.		100
KB HOME DelMarVa Inc.		100
KB HOME District of Columbia Inc.		100
KB HOME Florida LLC		100
KB HOME Fort Myers LLC		100
KB HOME Georgia LLC		100
KB HOME Gold Coast LLC		100
KB HOME Gulf Coast Inc.		100
KB HOME Illinois Inc.		100
KB HOME Indiana Inc.		100
KB HOME Jacksonville LLC		100
KB HOME Maryland Inc.		100
KB HOME Mortgage Ventures LLC		100
KB HOME New Orleans Inc.		100
KB HOME North Carolina Inc.		100
KB HOME Orlando LLC		100
KB HOME Raleigh-Durham Inc.		100
KB HOME Sales — Orlando LLC		100
KB HOME/Shaw Louisiana LLC		100
KB HOME South Carolina Inc.		100
KB HOME Tampa LLC		100
KB HOME Treasure Coast LLC		100
KB HOME Virginia Inc.		100
KB HOME Wisconsin LLC		100
KB Urban Inc.		100
LHC Arctic LLC		100
LHE Arctic LLC		100
LHN Arctic LLC		100
LP Arctic LLC		100
Martin Park, LLC		100

	Percentage of
	Voting Securities
	Owned by
	the Registrant
	or a
	Subsidiary of
Name of Company	the Registrant
Rate One Holdings, Inc.		100
rateOne Home Loans, LLC		100
Runkle Canyon, LLC		100
Florida
KB HOME Title Services Inc.		100
Georgia
Colony Homes, L.L.C.		100
KB HOME Sales — Atlanta LLC		100
Village Utilities, LLC		100
Illinois
Kaufman and Broad of Illinois, Inc.		100
KB HOME Mortgage Company		100
Michigan
Keywick, Inc.		100
Nevada
HomeSafe Company		100
KB Durango LLC		100
KB HOME Nevada Inc.		100
KB HOME Reno Inc.		100
KB HOME Sales — Nevada Inc.		100
KB HOME Sales — Reno Inc.		100
KB Stonelake LLC		100
New Mexico
KB HOME New Mexico Inc.		100
KB HOME Sales — New Mexico Inc.		100
New York
KB HOME Long Island Inc.		100
Texas
Clear Brook Crossing Inc.		100
Clear Brook Crossing Development LP		100
FGMC, INC.		100
Hallmark Residential Group, Inc.		100
Kaufman and Broad Development of Texas, L.P.		100
KB HOME Insurance Agency of Texas Holdings, Inc.		100
Kaufman and Broad of Texas, L.P.		100
KB HOME Lone Star Inc.		100
KB HOME Laredo LP		100
KBSA Inc.		100
Quoin Investments, Inc.		100
San Antonio Title Co.		100
Satex Properties, Inc.		100
Vermont
Westview Company		100

EX-23

EXHIBIT 23

KB HOME AND CONSOLIDATED SUBSIDIARIES

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-3 No. 333-14977), as amended, of KB Home,

(2) Registration Statement (Form S-3 No. 333-41549) of KB Home,

(3) Registration Statement (Form S-3 No. 333-51825), as amended, of KB Home,

(4) Registration Statement (Form S-3 No. 333-71630), as amended, of KB Home,

(5) Registration Statement (Form S-3 No. 333-120458) of KB Home,

(6) Registration Statement (Form S-8 No. 33-11692) pertaining to the 1986 Stock Option Plan, and

(7)  Registration Statement (Form S-8 No. 333-129273) pertaining to the 1988 Employee Stock Plan, the 1998 Stock Incentive Plan, the Performance-Based Incentive Plan for Senior Management, the Non-Employee Directors Stock Plan, the 401(k) Savings Plan, the 1999 Incentive Plan, the 2001 Stock Incentive Plan, certain stock grants and the resale of certain shares by officers of the Company;

of our reports dated January 25, 2008 with respect to the consolidated financial statements of KB Home, and the effectiveness of internal control over financial reporting of KB Home, included in this Annual Report (Form 10-K) for the year ended November 30, 2007.

Los Angeles, California

January 28, 2008

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey T. Mezger, certify that:

1.	I have reviewed this annual report on Form 10-K of KB Home;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated January 25, 2008

/s/  JEFFREY T. MEZGER

Jeffrey T. Mezger

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Domenico Cecere, certify that:

1.	I have reviewed this annual report on Form 10-K of KB Home;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated January 25, 2008

/s/  DOMENICO CECERE

Domenico Cecere

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of KB Home (the “Company”) on Form 10-K for the period ended November 30, 2007 (the “Report”), I, Jeffrey T. Mezger, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated January 25, 2008
/s/  JEFFREY T. MEZGER
Jeffrey T. Mezger
President and Chief Executive Officer
(Principal Executive Officer)

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of KB Home (the “Company”) on Form 10-K for the period ended November 30, 2007 (the “Report”), I, Domenico Cecere, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated January 25, 2008
/s/  DOMENICO CECERE
Domenico Cecere
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)